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RULE NO. 424(b)(4)
REGISTRATION NO. 33-53383
13,100,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
LOGO
FERRELLGAS FERRELLGAS PARTNERS, L.P.
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The Common Units offered hereby represent limited partner interests in
Ferrellgas Partners, L.P., a Delaware limited partnership (the "Partnership").
The Partnership was recently formed to acquire and operate the propane
business and assets of Ferrellgas, Inc. ("Ferrellgas"), one of the largest
retail marketers of propane in the United States. Ferrellgas will serve as the
general partner (the "General Partner") of the Partnership.
The Partnership will distribute to its partners, on a quarterly basis, 100%
of its Available Cash, which is generally all of the cash receipts of the
Partnership, adjusted for its cash disbursements and net changes in reserves.
During the Subordination Period, which will generally not end prior to August
1, 1999, each holder of Common Units will generally be entitled to receive
quarterly distributions of $0.50 per Common Unit per quarter, or $2.00 per
Common Unit on an annualized basis, before any distributions are made on the
outstanding Subordinated Units of the Partnership.
PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS DESCRIBED
UNDER "RISK FACTORS" IN EVALUATING AN INVESTMENT IN THE PARTNERSHIP,
INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING:
. FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE
PARTNERSHIP IN MAXIMIZING PROFIT FROM RETAIL PROPANE SALES. PROPANE SALES
ARE AFFECTED BY WEATHER PATTERNS, PRODUCT PRICES AND COMPETITION,
INCLUDING COMPETITION FROM OTHER ENERGY SOURCES.
. CASH DISTRIBUTIONS WILL DEPEND ON FUTURE PARTNERSHIP PERFORMANCE AND WILL
BE AFFECTED BY THE FUNDING OF RESERVES, EXPENDITURES AND OTHER MATTERS
WITHIN THE DISCRETION OF THE GENERAL PARTNER.
. POTENTIAL CONFLICTS OF INTEREST COULD ARISE BETWEEN THE GENERAL PARTNER
AND ITS AFFILIATES, ON THE ONE HAND, AND THE PARTNERSHIP OR ANY PARTNER
THEREOF, ON THE OTHER.
. HOLDERS OF COMMON UNITS WILL HAVE LIMITED VOTING RIGHTS AND THE GENERAL
PARTNER WILL MANAGE AND CONTROL THE PARTNERSHIP.
. THE PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND MODIFIES THE FIDUCIARY
DUTIES OF THE GENERAL PARTNER; HOLDERS OF COMMON UNITS ARE DEEMED TO HAVE
CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT
OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER STATE
LAW.
. PURCHASERS OF THE COMMON UNITS OFFERED HEREBY WILL EXPERIENCE IMMEDIATE
AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE PER COMMON UNIT
FROM THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering there has been no public market for the Common Units.
For the factors considered in determining the initial public offering price,
see "Underwriting." The Common Units have been approved for listing on The New
York Stock Exchange, subject to official notice of issuance, under the trading
symbol "FGP".
(continued on page 3)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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UNDERWRITING
INITIAL PUBLIC DISCOUNTS AND PROCEEDS TO
OFFERING PRICE COMMISSIONS (1) PARTNERSHIP (2)
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Per Common Unit.................. $21.00 $1.365 $19.635
Total (3)........................ $275,100,000 $17,881,500 $257,218,500
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(1) The Partnership, the General Partner and Ferrell Companies, Inc. have
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $1,700,000 payable by the
Partnership.
(3) The Partnership has granted the Underwriters an option for 30 days to
purchase up to an additional 1,965,000 Common Units at the initial public
offering price per unit, less the underwriting discounts and commissions,
solely to cover overallotments. If such option is exercised in full, the
total initial public offering price, underwriting discounts and
commissions and proceeds to the Partnership will be $316,365,000,
$20,563,725, and $295,801,275, respectively. See "Underwriting."
---------------
The Common Units offered hereby are offered severally by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates representing the Common Units will be ready for delivery in New
York, New York, on or about July 5, 1994.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
---------------
The date of this Prospectus is June 27, 1994.
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[ART]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON UNITS
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
UNTIL JULY 22, 1994 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON UNITS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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(continued from page 1)
The sale of the Common Units offered hereby is subject to, among other
things, completion of the public offering of approximately $200 million of
Fixed Rate Senior Notes due 2001 and $50 million of Floating Rate Senior Notes
due 2001 by the Partnership's subsidiary operating partnership.
The Common Units offered hereby will represent a 41.8% limited partner
interest in the Partnership (46.6% if the Underwriters' overallotment option
is exercised in full). The General Partner and its affiliates will own a 2%
general partner interest in the Partnership, as well as 1,000,000 Common Units
(if the Underwriters' overallotment option is exercised in full, all of such
Common Units will be repurchased and retired by the Partnership) and
16,593,721 subordinated limited partner interests (the "Subordinated Units")
representing an aggregate 56.2% limited partner interest in the Partnership
(51.4% if the Underwriters' overallotment option is exercised in full). The
Common Units and the Subordinated Units are collectively referred to herein as
the "Units." Holders of the Common Units and the Subordinated Units are
collectively referred to herein as "Unitholders."
Distributions of Available Cash by the Partnership will generally be made
98% to the Unitholders and 2% to the General Partner, except that if
distributions of Available Cash exceed certain target levels, an affiliate of
the General Partner will receive a percentage of such excess distributions
that will increase to up to 48% of distributions in excess of the highest
target level. During a specified period (the "Subordination Period"),
distributions of Available Cash on Subordinated Units will generally be
subordinated to distributions on Common Units to the extent necessary to
permit distributions of $0.50 per Common Unit for each full quarter (the
"Minimum Quarterly Distribution"). For the period from the closing of this
offering through October 31, 1994, the Minimum Quarterly Distribution will be
adjusted (either upward or downward) based on the actual length of the period.
The Subordination Period will extend from the closing of this offering until
the first day of any quarter beginning on or after August 1, 1999 in respect
of which (i) distributions of Available Cash on the Common Units and the
Subordinated Units equaled or exceeded the Minimum Quarterly Distribution for
each of the three consecutive four-quarter periods immediately preceding such
date and (ii) the Partnership has invested at least $50 million in
acquisitions and capital additions or improvements made to increase the
operating capacity of the Partnership. A total of 5,531,240 Subordinated Units
held by Ferrellgas and its affiliates will convert into Common Units on the
first day of any quarter beginning on or after August 1, 1997 in respect of
which (i) distributions of Available Cash on the Common Units and the
Subordinated Units equaled or exceeded the Minimum Quarterly Distribution for
each of the two consecutive four-quarter periods immediately preceding such
date and (ii) the operating cash generated by the Partnership in each of such
four-quarter periods equaled or exceeded 125% of the Minimum Quarterly
Distribution on all Common Units and all Subordinated Units. Upon the
expiration of the Subordination Period all remaining Subordinated Units will
convert into Common Units and will thereafter participate pro rata with the
other Common Units in distributions of Available Cash. See "Cash Distribution
Policy--Quarterly Distributions of Available Cash."
The Partnership will furnish to record holders of Common Units (i) within
120 days after the close of each fiscal year of the Partnership, an annual
report containing audited financial statements and a report thereon by its
independent public accountants and (ii) within 90 days after the close of each
fiscal quarter (other than the fourth quarter), a quarterly report containing
unaudited summary financial information. The Partnership will also furnish
each Unitholder with tax information within 90 days after the close of each
calendar year.
3
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................. 5
Ferrellgas Partners, L.P. ........ 5
Summary Historical and Pro Forma
Consolidated Financial and
Operating Data................... 12
The Offering...................... 14
Risk Factors...................... 21
Summary of Tax Considerations..... 24
RISK FACTORS....................... 27
Risks Inherent in the
Partnership's Business........... 27
Risks Inherent in an Investment in
the Partnership.................. 29
Conflicts of Interest and
Fiduciary Duties................. 32
Tax Considerations................ 35
THE TRANSACTIONS................... 38
USE OF PROCEEDS.................... 40
CAPITALIZATION..................... 41
DILUTION........................... 42
CASH DISTRIBUTION POLICY........... 43
Quarterly Distributions of
Available Cash................... 44
Distributions of Cash from
Operations during Subordination
Period........................... 45
Distributions of Cash from
Operations after Subordination
Period........................... 45
Incentive Distributions--
Hypothetical Annualized Yield.... 45
Distributions of Cash from
Interim Capital Transactions..... 46
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels.............. 47
Distributions of Cash Upon
Liquidation...................... 48
Pro Forma Available Cash.......... 49
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND
OPERATING DATA.................... 50
MANAGEMENT'S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 52
General........................... 52
Results of Operations............. 53
Liquidity and Capital Resources... 57
Pro Forma Financial Condition..... 58
Tax Audit......................... 61
BUSINESS........................... 63
General........................... 63
Retail Operations................. 63
Industry and Competition.......... 67
Other Operations.................. 68
Employees......................... 69
Governmental Regulation;
Environmental and Safety Matters. 69
Service Marks and Trademarks...... 70
Management Information and Control
Systems.......................... 70
Properties........................ 70
Litigation........................ 71
Transfer of the Partnership
Assets........................... 71
MANAGEMENT......................... 73
Partnership Management............ 73
Directors and Executive Officers
of the General Partner........... 73
Compensation of the General
Partner.......................... 74
Executive Compensation............ 74
Compensation of Directors......... 76
Termination of Employment
Arrangement...................... 76
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Security Ownership of Certain
Beneficial Owners and Management. 77
Certain Relationships and Related
Transactions..................... 77
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITY.................... 79
Transactions of the Partnership
with Ferrellgas and its
Affiliates....................... 79
Conflicts of Interest............. 79
DESCRIPTION OF THE COMMON UNITS.... 84
The Units......................... 84
Transfer Agent and Registrar...... 84
Transfer of Units................. 85
THE PARTNERSHIP AGREEMENT.......... 86
Organization and Duration......... 86
Purpose........................... 86
Capital Contributions............. 86
Power of Attorney................. 86
Restrictions on Authority of the
General Partner.................. 87
Withdrawal or Removal of the
General Partner.................. 87
Transfer of General Partner
Interest......................... 88
Reimbursement for Services........ 88
Change of Management Provisions... 89
Status as Limited Partner or
Assignee......................... 89
Non-citizen Assignees; Redemption. 89
Issuance of Additional Securities. 90
Limited Call Right................ 91
Amendment of Partnership
Agreement........................ 91
Meetings; Voting.................. 92
Indemnification................... 93
Limited Liability................. 94
Books and Reports................. 94
Right to Inspect Partnership Books
and Records...................... 95
Termination and Dissolution....... 95
Liquidation and Distribution of
Proceeds......................... 96
Registration Rights............... 96
UNITS ELIGIBLE FOR FUTURE SALE..... 97
TAX CONSIDERATIONS................. 99
Legal Opinions and Advice......... 99
Changes in Federal Income Tax
Laws............................. 99
Partnership Status................ 100
Limited Partner Status............ 101
Tax Consequences of Unit
Ownership........................ 102
Allocation of Partnership Income,
Gain, Loss and Deduction......... 104
Tax Treatment of Operations....... 105
Disposition of Common Units....... 108
Uniformity of Units............... 110
Tax-Exempt Organizations and
Certain Other Investors.......... 111
Administrative Matters............ 112
Other Tax Considerations.......... 115
INVESTMENT IN THE PARTNERSHIP BY
EMPLOYEE BENEFIT PLANS............ 116
UNDERWRITING....................... 117
VALIDITY OF COMMON UNITS........... 118
EXPERTS............................ 118
ADDITIONAL INFORMATION............. 119
INDEX TO FINANCIAL STATEMENTS...... F-1
APPENDIX A--FORM OF AGREEMENT OF
LIMITED PARTNERSHIP OF FERRELLGAS
PARTNERS, L.P..................... A-1
APPENDIX B--FORM OF APPLICATION FOR
TRANSFER OF COMMON UNITS.......... B-1
APPENDIX C--GLOSSARY OF TERMS...... C-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial statements appearing
elsewhere in this Prospectus and should be read only in conjunction with the
entire Prospectus. Unless otherwise specified, the information in this
Prospectus assumes that the Underwriters' overallotment option is not
exercised. For ease of reference, a glossary of certain terms used in this
Prospectus is included as Appendix C to this Prospectus.
FERRELLGAS PARTNERS, L.P.
Ferrellgas Partners, L.P. (the "Partnership") is a Delaware limited
partnership recently formed to acquire and operate the propane business and
assets of Ferrellgas, Inc. (the "Company" or "Ferrellgas"). Ferrellgas is the
general partner (the "General Partner") of the Partnership and a wholly owned
subsidiary of Ferrell Companies, Inc. ("Ferrell"). Ferrell was founded in 1939
as a single retail propane outlet in Atchison, Kansas, and has grown
principally through the acquisition of retail propane operations throughout the
United States. The Company believes that it is the third largest retail
marketer of propane in the United States, based on gallons sold, serving more
than 600,000 residential, industrial/commercial and agricultural customers in
45 states and the District of Columbia through approximately 416 retail outlets
and 226 satellite locations in 36 states (some outlets serve an interstate
market). The Company's largest market concentrations are in the Midwest, Great
Lakes and Southeast regions of the United States. The Company operates in areas
of strong retail market competition, which has required it to develop and
implement strict capital expenditure and operating standards in its existing
and acquired retail propane operations in order to control operating costs.
This effort has resulted in upgrades in the quality of its field managers, the
application of strong return on asset benchmarks and improved productivity
methodologies.
The Company's retail propane sales volumes were approximately 553 million,
496 million and 482 million gallons during the fiscal years ended July 31,
1993, 1992 and 1991, respectively. Earnings before depreciation, amortization,
interest and taxes ("EBITDA") were $89.4 million, $87.6 million and $99.2
million for the fiscal years ended July 31, 1993, 1992 and 1991, respectively.
EBITDA for the twelve months ended April 30, 1994 was $98.6 million. The
Company's net losses for the fiscal years ended July 31, 1993 and 1992 were
$0.8 million and $11.7 million, respectively, and its net earnings for the
fiscal year ended July 31, 1991 were $2.0 million. Net earnings for the nine
month periods ended April 30, 1994 and 1993 were $19.5 million and $12.8
million, respectively. For a discussion of the seasonality of the Company's
operations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."
BUSINESS STRATEGY
The retail propane industry is a mature one, in which the Company foresees
only limited growth in total demand for the product. Based on information
available from the Energy Information Administration, the Company believes the
overall demand for propane has remained relatively constant over the past
several years, with year to year industry volumes being impacted primarily by
weather patterns. As a result, growth in this industry is accomplished
primarily through acquisitions. Except for a few large competitors, the propane
industry is highly fragmented and principally composed of over 3,000 local and
regional companies. Historically, the Company has been successful in acquiring
independent propane retailers and integrating them into the Company's
operations at what it believes to be attractive returns. In July 1984, the
Company acquired propane operations with annual retail sales volumes of
approximately 33 million gallons at a cost of approximately $13.0 million, and
in December 1986, the Company acquired propane operations with annual retail
sales volumes of approximately 395 million gallons at a cost of approximately
$457.5 million. Since December 1986, and as of April 30, 1994, the Company has
acquired 67 smaller independent propane retailers which the Company
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believes were not individually material. These acquisitions have significantly
expanded and diversified the Company's geographic presence.
The Partnership plans to continue to expand its business principally through
acquisitions in areas in close proximity to the Company's existing operations
so that such newly acquired operations can be efficiently combined with
existing operations and savings can be achieved through the elimination of
certain overlapping functions. An additional goal of these acquisitions will be
to improve the operations and profitability of the businesses the Partnership
acquires by integrating them into its established propane supply network and by
improving customer service. The Partnership also plans to pursue acquisitions
which broaden its geographic coverage. The Company has historically increased
its existing customer base and retained the customers of acquired operations
through marketing efforts that focus on providing quality service to customers.
The General Partner believes that there are numerous local retail propane
distribution companies that are possible candidates for acquisition by the
Partnership and that the Partnership's geographic diversity of operations helps
to create many attractive acquisition opportunities for the Partnership.
The General Partner is unable to predict the amount or timing of future
capital expenditures for acquisitions. Prior to the closing of this offering,
however, the Operating Partnership will enter into a bank credit facility (the
"Credit Facility") providing a maximum $185 million commitment for borrowings
and letters of credit. Under the terms of the Credit Facility at least $60
million will be available solely to finance acquisitions and growth capital
expenditures.In addition to borrowings under the Credit Facility, the
Partnership may fund future acquisitions from internal cash flow or the
issuance of additional Partnership interests. Under the instruments governing
the Senior Notes and the Credit Facility, the Partnership is prohibited from
making distributions to its partners and other Restricted Payments (as defined
in such instruments) unless certain specified targets for capital expenditures
and expenditures for permitted acquisitions have been met. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Pro
Forma Financial Condition."
In addition to growth through acquisitions, the General Partner believes that
the Partnership may also achieve growth within its existing propane operations.
Historically, the Company has experienced modest internal growth in its
customer base. As a result of its experience in responding to competition and
in implementing more efficient operating standards, the General Partner
believes that it has positioned the Partnership to be more successful in direct
competition for customers. The Company currently has marketing programs
underway which focus specific resources toward this effort. See "Business--
Retail Operations--Business Strategy."
GENERAL
Propane, a byproduct of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative forms of stand alone energy sources. In the residential
and commercial markets, propane is primarily used for space heating, water
heating and cooking. In the agricultural market propane is primarily used for
crop drying, space heating, irrigation and weed control. In addition, propane
is used for certain industrial applications, including use as an engine fuel
which is burned in internal combustion engines that power vehicles and
forklifts and as a heating or energy source in manufacturing and drying
processes. Consumption of propane as a heating fuel peaks sharply in winter
months.
The Company sells propane primarily to four specific markets: residential,
industrial/commercial, agricultural and other (principally to other propane
retailers and as an engine fuel). During the fiscal year ended July 31, 1993,
sales to residential customers accounted for 61% of the Company's retail gross
profits, sales to industrial/commercial customers accounted for 26% of the
Company's retail gross profits, sales to agricultural customers accounted for
6% of the Company's retail gross profits
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and sales to other customers accounted for 7% of the Company's retail gross
profits. Residential sales have a greater profit margin and a more stable
customer base and tend to be less sensitive to price changes than the other
markets served by the Company. While the propane distribution business is
seasonal in nature and historically sensitive to variations in weather,
management believes that the geographical diversity of the Company's areas of
operations helps to minimize the Company's exposure to regional weather or
economic patterns. Furthermore, long-term historic weather data from the
National Climatic Data Center indicate that average annual temperatures have
remained relatively constant over the last 30 years, with fluctuations
occurring on a year-to-year basis only. In each of the past five fiscal years,
which include the two warmest winters in the United States since 1953, pro
forma Available Cash would have been sufficient to allow the Partnership to
distribute the Minimum Quarterly Distribution on all Common Units assuming
projected pro forma interest expense and capital expenditure levels.
Profits in the retail propane business are primarily based on the cents-per-
gallon difference between the purchase price and the sales price of propane.
The Company generally purchases propane on a short-term basis; therefore, its
supply costs generally fluctuate with market price fluctuations. Should the
wholesale cost of propane decline in the future, the Company believes that the
Partnership's margins on its retail propane distribution business should
increase in the short-term because retail prices tend to change less rapidly
than wholesale prices. Should the wholesale cost of propane increase, for
similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased. Historically,
the Company has been able to maintain margins on an annual basis following
changes in the wholesale cost of propane. The Company's success in maintaining
its margins is evidenced by the fact that since fiscal 1989 average annual
retail gross margins, measured on a cents-per-gallon basis, have generally
varied by a relatively low percentage. The General Partner is unable to
predict, however, how and to what extent a substantial increase or decrease in
the wholesale cost of propane would affect the Partnership's margins and
profitability.
Propane competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and portability.
Propane serves as an alternative to natural gas in rural and suburban areas
where natural gas is unavailable or portability of product is required. Propane
is generally more expensive than natural gas on an equivalent BTU basis in
locations served by natural gas, although propane is sold in such areas as a
standby fuel for use during peak demand periods and during interruption in
natural gas service. Propane is generally less expensive to use than
electricity for space heating, water heating and cooking. Although propane is
similar to fuel oil in application, market demand and price, propane and fuel
oil have generally developed their own distinct geographic markets, lessening
competition between such fuels.
The retail propane business of the Company consists principally of
transporting propane to its retail distribution outlets and then to tanks
located on its customers' premises. Propane supplies are purchased in the
contract and spot markets, primarily from natural gas processing plants and
major oil companies. In addition, retail propane customers typically lease
their stationary storage tanks from their propane distributors. Approximately
70% of the Company's customers lease their tank from the Company. The lease
terms and, in most states, certain fire safety regulations, restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
The cost and inconvenience of switching tanks minimizes a customer's tendency
to switch among suppliers of propane on the basis of minor variations in price.
The Company is also engaged in the trading of propane and other natural gas
liquids, chemical feedstocks marketing and wholesale propane marketing. In
fiscal year 1993, the Company's annual wholesale and trading sales volume was
approximately 1.2 billion gallons of propane and other natural gas liquids,
approximately 64% of which was propane. Because the Partnership will possess a
large
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distribution system, underground storage capacity and the ability to buy large
volumes of propane, the General Partner believes that the Partnership will be
in a position to achieve product cost savings and avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors.
PARTNERSHIP STRUCTURE AND MANAGEMENT
Ferrellgas will serve as the general partner of the Partnership. Following
this offering the management and employees of Ferrellgas who currently manage
and operate the propane business and assets to be owned by the Partnership will
continue to manage and operate the Partnership's business as officers and
employees of the General Partner. See "Management."
In order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it will conduct business, the Partnership's activities
will be conducted through a subsidiary operating partnership (the "Operating
Partnership"). The Partnership will be the sole limited partner of the
Operating Partnership and the General Partner will serve as general partner of
the Operating Partnership. Unless the context otherwise requires, references
herein to the Partnership include the Partnership and the Operating Partnership
on a combined basis.
The General Partner will receive no management fee in connection with its
management of the Partnership and will receive no remuneration for its services
as general partner of the Partnership other than reimbursement for all direct
and indirect expenses incurred in connection with the Partnership's operations
and all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with the
operation of the Partnership's business. The Partnership Agreement provides
that the General Partner shall determine the fees and expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Because of the broad authority granted to the
General Partner to determine the fees and expenses, including compensation of
the General Partner's officers and other employees, allocable to the
Partnership, certain conflicts of interest could arise between the General
Partner and its affiliates, on the one hand, and the Partnership and its
limited partners, on the other, and the limited partners will have no ability
to control the expenses allocated by the General Partner to the Partnership.
The principal executive offices of the Partnership are located at One Liberty
Plaza, Liberty, Missouri 64068, and its telephone number is (816) 792-1600.
The chart on the following page depicts the organization and ownership of the
Partnership and the Operating Partnership after giving effect to the sale of
the Common Units offered hereby (assuming that the Underwriters' overallotment
option is not exercised). The percentages reflected in the following chart
represent the approximate ownership interest in each of the Partnership and the
Operating Partnership, individually. Except in the following chart, the
ownership percentages referred to in this Prospectus reflect the approximate
effective ownership interest of the holder in the Partnership and the Operating
Partnership on a combined basis.
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(CHART)
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Partnership, the Operating Partnership and
the Unitholders, on the other. Such conflicts could include, without
limitation, conflicts arising from (i) decisions of the General Partner that
affect the amount of Available Cash constituting Cash from Operations, (ii) the
dependence of the Partnership on employees of the General Partner and its
affiliates to conduct the business of the Partnership, (iii) the reimbursement
of the General Partner for expenses incurred by it in connection with the
Partnership's operations, (iv) the General Partner's decision to limit, where
possible, its liability under contractual arrangements entered into by the
Partnership, (v) the inability of the limited partners of the
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Partnership to enforce obligations of the General Partner under agreements it
has entered into with the Partnership, (vi) the fact that the agreements and
arrangements between the Partnership and the General Partner and its affiliates
are not and will not be the result of arms-length negotiations, (vii) the right
of the General Partner to call for and purchase Units as provided in the
Partnership Agreement and (viii) the ability of affiliates of the General
Partner to engage in activities that compete with the business of the
Partnership, other than retail propane sales to end users in the continental
United States. The General Partner will have an audit committee consisting of
independent members of its Board of Directors which will be available at the
General Partner's discretion to review matters involving potential conflicts of
interest.
TRANSACTIONS AT CLOSING
Concurrently with the closing of this offering, Ferrellgas will contribute
all of its propane business and assets to the Partnership in exchange for
1,000,000 Common Units, 16,593,721 Subordinated Units and certain rights to
receive incentive distributions (the "Incentive Distribution Rights") if
distributions of Available Cash exceed certain target levels, as well as a 2%
general partner interest in the Partnership and the Operating Partnership, on a
combined basis (see "Cash Distribution Policy--Quarterly Distributions of
Available Cash"). In connection with the contribution of such business and
assets by Ferrellgas, the Operating Partnership will assume substantially all
of the liabilities, whether known or unknown, associated with such business and
assets (other than income tax liabilities). The Operating Partnership intends
to maintain insurance and reserves at levels that it believes will be adequate
to satisfy such liabilities. In addition, the Operating Partnership will assume
the payment obligations of Ferrellgas under its Series A and Series C Floating
Rate Senior Notes due 1996 (the "Existing Floating Rate Notes"), its Series B
and Series D Fixed Rate Senior Notes (the "Existing Fixed Rate Notes" and,
together with the Existing Floating Rate Notes, the "Existing Senior Notes")
and its 11 5/8% Senior Subordinated Debentures (the "Existing Subordinated
Debentures"). All of this long-term debt will be retired with the net proceeds
from the sale by the Partnership of the Common Units offered hereby (estimated
to be approximately $255.5 million) and the net proceeds from the issuance of
approximately $200 million in aggregate principal amount of 10.0% Fixed Rate
Senior Notes due 2001 (the "Fixed Rate Senior Notes") and $50 million of
Floating Rate Senior Notes due 2001 (the "Floating Rate Senior Notes" and,
together with the Fixed Rate Senior Notes, the "Senior Notes") to be issued by
the Operating Partnership concurrently with the closing of this offering
(estimated to be approximately $244.3 million). The book value of the assets
being contributed to the Partnership will be approximately $83 million less
than the liabilities to be assumed by the Operating Partnership. Immediately
prior to the closing of this offering, the Operating Partnership expects to
enter into the $185 million Credit Facility. The Credit Facility will permit
borrowings of up to $100 million on a senior unsecured revolving line of credit
basis to fund working capital and general partnership requirements (of which
$50 million will be available to support letters of credit). In addition, up to
$85 million of borrowings will be permitted on a senior unsecured basis, at
least $60 million of which will be available solely to finance acquisitions and
growth capital expenditures.
Ferrellgas will retain and will not contribute to the Partnership
approximately $39 million in cash, approximately $17 million in receivables
from affiliates of its parent, Ferrell, and Class B redeemable common stock of
Ferrell (the "Ferrell Class B Stock") with a book value of approximately $36
million. It is anticipated that following the closing of this offering the
Company will loan approximately $25 million to Ferrell and will dividend to
Ferrell the remainder of the cash, receivables and Ferrell Class B Stock, as
well as the Common Units, Subordinated Units and Incentive Distribution Rights
received by the Company in exchange for the contribution of its propane
business and assets to the Partnership.
10
<PAGE>
Concurrently with the closing of this offering, the Company will consummate a
tender offer and consent solicitation with respect to its Existing Subordinated
Debentures. The consent solicitation is necessary to modify the indenture
related to the Existing Subordinated Debentures in order to permit the Company
to consummate the transactions contemplated by this Prospectus. As of the date
of this Prospectus, all of the outstanding Existing Subordinated Debentures
have been tendered and will be retired by the Operating Partnership, as
described above.
Concurrently with the closing of this offering, the Company will mail to the
holders of the Existing Senior Notes a notice of redemption of all outstanding
Existing Senior Notes, pursuant to the optional redemption provisions of the
indenture governing the Existing Senior Notes (the "Existing Senior Notes
Indenture"). The redemption date will be 30 days after the date of mailing of
such notice. The Existing Senior Notes Indenture provides for a redemption
price equal to 100% of the principal amount plus accrued and unpaid interest,
if any, to the redemption date plus, in the case of the Existing Fixed Rate
Notes, a premium which is based on certain yield information for U.S. Treasury
securities as of three business days prior to the redemption date. The
Operating Partnership will deposit with the trustee on the date of closing of
this offering an amount expected to be more than sufficient to pay the
redemption price. As a result of the transactions contemplated hereby, during
the 30-day period prior to the redemption date, an event of default will exist
under the Existing Senior Notes Indenture. The holders of at least 25% of the
principal amount of Existing Senior Notes, therefore, will be entitled, by
notice to the Company and the trustee, to declare the unpaid principal of, and
accrued and unpaid interest and the applicable premium on, the Existing Senior
Notes to be immediately due and payable. The trustee under the Existing Senior
Notes Indenture has advised the Company that it intends to notify the holders
of the Existing Senior Notes of this right. In the event of such a declaration,
the amount already deposited by the Operating Partnership in payment of the
redemption price would be applied to pay the amount so declared immediately due
and payable. The Partnership will incur an extraordinary loss of approximately
$20.4 million related to the retirement of the Existing Senior Notes,
approximately $31.2 million relating to the Existing Subordinated Debentures
resulting from consent and tender offer fees and approximately $11.2 million
relating to the write-off of unamortized financing costs, all in accordance
with generally accepted accounting principles ("GAAP").
At the closing of this offering, it is anticipated that the Operating
Partnership will borrow approximately $15 million under the Credit Facility
which will enable the Partnership to commence operations with an initial cash
balance of at least $20 million. For a description of the Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Financial Condition."
The foregoing description assumes that the Underwriters' overallotment option
is not exercised. If the Underwriters' overallotment option is exercised in
full, the Partnership will issue 1,965,000 additional Common Units. The
Partnership will use the net proceeds from any exercise of the Underwriters'
overallotment option first to repay any amounts borrowed under the Credit
Facility. Any remaining net proceeds from the exercise of the Underwriters'
overallotment option will be used by the Partnership to repurchase for
retirement up to 1,000,000 Common Units held by Ferrell at a price per Unit
equal to the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. Any net proceeds
remaining after such repurchase will be retained by the Partnership for general
partnership purposes.
Immediately following this offering, Ferrellgas will own an effective 2%
general partner interest in the Partnership and the Operating Partnership, on a
combined basis, and Ferrell will own 1,000,000 Common Units (if the
Underwriters' overallotment option is exercised in full, all of such Common
Units will be repurchased and retired by the Partnership) and 16,593,721
Subordinated Units representing an aggregate 56.2% limited partner interest in
the Partnership (51.4% if the Underwriters' overallotment option is exercised
in full) and the Incentive Distribution Rights. See "The Transactions."
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and the dates indicated,
summary historical financial and operating data for the Company and pro forma
financial and operating data for the Partnership after giving effect to the
transactions contemplated by this Prospectus. The summary historical financial
data for the three years ended July 31, 1993 and the nine-month periods ended
April 30, 1993 and 1994, are derived from the audited and unaudited
consolidated financial statements contained elsewhere in this Prospectus. The
historical financial data for the interim period ended April 30, 1993 and the
Partnership's summary pro forma financial data are derived from unaudited
financial information. The Partnership's summary pro forma financial data
should be read in conjunction with the consolidated financial statements and
the pro forma combined financial statements and notes thereto included
elsewhere in this Prospectus. In addition, the propane business is seasonal in
nature with its peak activity during the winter months. Therefore, the results
for the interim periods are not indicative of the results that can be expected
for a full year. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PARTNERSHIP
HISTORICAL PRO FORMA
-------------------------------------------------- --------------
YEAR ENDED JULY 31, YEAR ENDED
-------------------------------------------------- JULY 31,
1989 1990 1991 1992 1993 1993
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA AND RATIO)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues......... $409,953 $467,641 $543,933 $501,129 $541,945 $541,945
Depreciation and
amortization.......... 32,528 33,521 36,151 31,196 30,840 30,840
Operating income....... 53,425 54,388 63,045 56,408 58,553 58,053
Interest expense....... 54,572 55,095 60,507 61,219 60,071 29,220
Earnings (loss) from
continuing operations. (1,506) (347) 1,979 (1,700)(1) 109 28,578
Earnings from
continuing operations
per Unit.............. $ 0.91
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $(39,708) $ 50,456 $ 53,403 $ 67,973 $ 74,408
Total assets........... 487,631 554,580 580,260 598,613 573,376
Payable to (receivable
from) parent and
affiliates............ 13,109 10,743 3,763 2,236 (916)
Long-term debt......... 354,626 465,644 466,585 501,614 489,589
Stockholder's equity... 6,616 11,463 21,687 8,808 11,359
OPERATING DATA:
Retail propane sales
volumes (in gallons).. 498,395 499,042 482,211 495,707 553,413 553,413
Capital
expenditures(2):
Maintenance............ $ 7,271 $ 5,428 $ 7,958 $ 10,250 $ 10,527 $ 10,527
Growth................. 10,062 10,447 2,478 3,342 2,851 2,851
Acquisition............ 14,668 18,005 25,305 10,112 897 897
-------- -------- -------- -------- -------- --------
Total................. $ 32,001 $ 33,880 $ 35,741 $ 23,704 $ 14,275 $ 14,275
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Earnings before
depreciation,
amortization, interest
and taxes(3).......... $ 85,953 $ 87,909 $ 99,196 $ 87,604 $ 89,393 $ 88,893
Fixed charge coverage
ratio(4).............. 3.0x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP
HISTORICAL PRO FORMA
-------------------- -----------------
NINE MONTHS ENDED
APRIL 30, NINE MONTHS ENDED
-------------------- APRIL 30,
1993 1994 1994
-------- -------- -----------------
(IN THOUSANDS, EXCEPT PER UNIT DATA
AND RATIO)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues...................... $468,302 $450,477 $450,477
Depreciation and amortization....... 23,238 21,688 21,688
Operating income.................... 64,708 75,445 75,070
Interest expense.................... 45,056 44,233 21,291
Earnings from continuing operations. 12,785 20,356 53,770
Earnings from continuing operations
per Unit........................... $ 1.72
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital..................... $100,645 $104,164 $ 53,510
Total assets........................ 602,063 600,113 478,460
Payable to (receivable from) parent
and affiliates..................... 2,076 (3,909) 91
Long-term debt...................... 500,227 476,471 272,441
Stockholder's equity................ 21,855 30,848
Partners' capital:
Common unitholders.................. 62,859
Subordinated unitholder............. 74,034
General partner..................... 2,794
OPERATING DATA:
Retail propane sales volumes (in
gallons)........................... 483,489 490,254 490,254
Capital expenditures(2):
Maintenance......................... $ 9,232(5) $ 3,377(5) $ 3,377
Growth.............................. 2,597 2,568 2,568
Acquisition......................... -- 2,472 2,472
-------- -------- --------
Total.............................. $ 11,829 $ 8,417 $ 8,417
======== ======== ========
SUPPLEMENTAL DATA:
Earnings before depreciation,
amortization, interest and
taxes(3)........................... $ 87,946 $ 97,133 $ 96,758
Fixed charge coverage ratio(4)...... 3.3x
</TABLE>
- --------
(1) In August 1991, the Company revised the estimated useful lives of storage
tanks from 20 to 30 years in order to more closely reflect the expected
useful lives of these assets. The effect of the change in accounting
estimates resulted in a favorable impact on net loss from continuing
operations of approximately $3.7 million for the fiscal year ended July 31,
1992.
(2) The Company's capital expenditures fall generally into three categories:
(i) maintenance capital expenditures, which include expenditures for repair
and replacement of property, plant and equipment; (ii) growth capital
expenditures, which include expenditures for purchases of new propane tanks
and other equipment to facilitate expansion of the Company's retail
customer base; and (iii) acquisition capital expenditures, which include
expenditures related to the acquisition of retail propane operations.
Acquisition capital expenditures include a portion of the purchase price
allocated to intangibles associated with the acquired businesses.
(3) EBITDA is calculated as operating income plus depreciation and
amortization. EBITDA is not intended to represent cash flow and does not
represent the measure of cash available for distribution. EBITDA is a non-
GAAP measure, but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution. In
addition, EBITDA is not intended as an alternative to earnings from
continuing operations or net income.
(4) Such ratio is calculated for the preceding four quarter period. Under the
terms of the Indenture (as defined in the glossary), the Operating
Partnership will be prohibited from making any distributions to the
Partnership if the Operating Partnership's Fixed Charge Coverage Ratio (as
defined in the glossary) for the preceding four fiscal quarters does not
exceed 2.25 to 1 after giving effect to such distribution.
(5) The decrease in maintenance capital expenditures from the nine months ended
April 30, 1993 to the nine months ended April 30, 1994 is primarily due to
the purchase of the Company's corporate headquarters in Liberty, Missouri
for its fair market value of $4.1 million in the first nine months of
fiscal 1993.
13
<PAGE>
THE OFFERING
Securities offered.......... 13,100,000 Common Units (15,065,000 Common
Units if the Underwriters' overallotment op-
tion is exercised in full).
Units to be outstanding
after this offering........
14,100,000 Common Units representing a 45.0%
limited partner interest in the Partnership
and 16,593,721 Subordinated Units representing
a 53.0% limited partner interest in the Part-
nership. If the Underwriters' overallotment
option is exercised in full, 1,965,000 addi-
tional Common Units will be issued by the
Partnership and all of the 1,000,000 Common
Units owned by Ferrell will be repurchased by
the Partnership, resulting in 15,065,000 Com-
mon Units and 16,593,721 Subordinated Units
outstanding, representing a 46.6% and 51.4%
limited partner interest in the Partnership,
respectively.
Distributions of Available The Partnership will distribute 100% of its
Cash....................... Available Cash within 45 days after the end of
each January, April, July and October to
Unitholders of record on the applicable record
date and to the General Partner. "Available
Cash" will consist generally of all of the
cash receipts of the Partnership adjusted for
its cash disbursements and net changes in re-
serves. The full definition of Available Cash
is set forth in the Partnership Agreement, the
form of which is included in this Prospectus
as Appendix A. The General Partner has discre-
tion in making cash disbursements and estab-
lishing reserves, thereby affecting the amount
of Available Cash. See "Cash Distribution Pol-
icy." Available Cash will generally be dis-
tributed 98% to the Unitholders and 2% to the
General Partner, except that if distributions
of Available Cash exceed certain target lev-
els, an affiliate of the General Partner will
receive a percentage of such excess distribu-
tions that will increase to up to 48% of dis-
tributions in excess of the highest target
level. See "Cash Distribution Policy--Quar-
terly Distributions of Available Cash--Incen-
tive Distributions--Hypothetical Annualized
Yield."
Distributions to With respect to each quarter during the Subor-
Unitholders................ dination Period, which will generally not end
earlier than August 1, 1999, the Common
Unitholders will generally have the right to
receive the Minimum Quarterly Distribution of
$0.50 per Common Unit, plus any arrearages in
the distribution of the Minimum Quarterly Dis-
tribution on the Common Units for prior quar-
ters, before any distributions of Available
Cash are made to the Subordinated
14
<PAGE>
Unitholders. For the period from the closing
of this offering through October 31, 1994, the
Minimum Quarterly Distribution will be ad-
justed (either upward or downward) based on
the actual length of the period. Subordinated
Units will not accrue distribution arrearages.
Upon the expiration of the Subordination Peri-
od, Common Units will no longer accrue distri-
bution arrearages.
Subordination Period;
Conversion of Subordinated
Units......................
The Subordination Period will extend from the
closing of this offering until the first day
of any quarter beginning on or after August 1,
1999 in respect of which (i) distributions of
Available Cash on the Common Units and the
Subordinated Units equaled or exceeded the
Minimum Quarterly Distribution for each of the
three consecutive four-quarter periods immedi-
ately preceding such date and (ii) the Part-
nership has invested at least $50 million in
acquisitions and capital additions or improve-
ments made to increase the operating capacity
of the Partnership. A total of 5,531,240 Sub-
ordinated Units held by Ferrellgas and its af-
filiates will convert into Common Units on the
first day of any quarter beginning on or after
August 1, 1997 in respect of which (i) distri-
butions of Available Cash on the Common Units
and the Subordinated Units equaled or exceeded
the Minimum Quarterly Distribution for each of
the two consecutive four-quarter periods imme-
diately preceding such date and (ii) the oper-
ating cash generated by the Partnership in
each of such four-quarter periods equaled or
exceeded 125% of the Minimum Quarterly Distri-
bution on all Common Units and all Subordi-
nated Units. Upon the expiration of the Subor-
dination Period, all remaining Subordinated
Units will convert into Common Units. The
Partnership Agreement also provides that if
the General Partner is removed other than for
cause, the Subordination Period will end and
all outstanding Subordinated Units will con-
vert into Common Units. See "Cash Distribution
Policy--Quarterly Distributions of Available
Cash" and "The Partnership Agreement--Change
of Management Provisions."
Incentive distributions..... As an incentive, if quarterly distributions of
Available Cash exceed certain specified target
levels an affiliate of the General Partner
will receive 13%, then 23% and then 48% of
distributions of Available Cash in excess of
such target levels. The target levels are
based on the amounts of Available Cash dis-
tributed, and incentive distributions will not
be made unless the Unitholders have received
distributions at specified levels above the
Minimum Quarterly Distribution. The rights to
receive incentive distributions are referred
to as "Incentive Distribution Rights." See
"Cash Distribution Policy--Quarterly Distribu-
tions of Available Cash."
15
<PAGE>
Adjustment of Minimum
Quarterly Distribution and
target distribution
levels.....................
The Minimum Quarterly Distribution and the tar-
get distribution levels for the incentive dis-
tributions are subject to downward adjustments
in the event that Unitholders receive distri-
butions of Cash from Interim Capital Transac-
tions, as defined in the glossary (which gen-
erally include transactions such as
borrowings, refinancings, sales of securities
or sales or other dispositions of assets con-
stituting a return of capital under the Part-
nership Agreement, as distinguished from cash
from Partnership operations), or in the event
legislation is enacted or existing law is mod-
ified or interpreted in a manner that causes
the Partnership to be treated as an associa-
tion taxable as a corporation or otherwise
taxable as an entity for federal, state or lo-
cal income tax purposes. If the Unitholders
receive a full return of capital as a result
of distributions of Cash from Interim Capital
Transactions, the distributions payable to the
holders of the Incentive Distribution Rights
will increase to 48% of all amounts distrib-
uted thereafter. See "Cash Distribution Poli-
cy--Quarterly Distributions of Available
Cash--Distributions of Cash from Interim Capi-
tal Transactions" and "--Adjustment of Minimum
Quarterly Distribution and Target Distribution
Levels."
Potential for significant
additional dilution in the
future.....................
The Partnership Agreement authorizes the Gen-
eral Partner to 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 es-
tablished by the General Partner in its sole
discretion, without the approval of the
Unitholders, with certain exceptions, includ-
ing the following: prior to the end of the
Subordination Period, the Partnership may not
issue equity securities of the Partnership
ranking prior or senior to the Common Units or
an aggregate of more than 7,000,000 additional
Common Units (excluding Common Units issued
upon the exercise of the Underwriters'
overallotment option and Common Units issued
upon conversion of Subordinated Units) or an
equivalent amount of securities ranking on a
parity with the Common Units, in either case
without the approval of the holders of at
least 66 2/3% of the outstanding Common Units;
provided, however, that the Partnership may
also issue an unlimited number of additional
Common Units or parity securities prior to the
end of the Subordination Period and without
the approval of the Unitholders if (a) such
issuance occurs in connection with or (b) such
issuance occurs within 270 days of, and the
net proceeds from such issuance are used to
16
<PAGE>
repay debt incurred in connection with, a
transaction in which the Partnership acquires
(through an asset acquisition, merger, stock
acquisition or other form of investment) con-
trol over assets and properties that would
have, if acquired by the Partnership as of the
date that is one year prior to the first day
of the quarter in which such transaction is to
be consummated, resulted in an increase in (i)
the amount of Acquisition Pro Forma Available
Cash constituting Cash from Operations (as de-
fined in the glossary) generated by the Part-
nership on a per-Unit basis for all outstand-
ing Units with respect to each of the four
most recently completed quarters over (ii) the
actual amount of Available Cash constituting
Cash from Operations generated by the Partner-
ship on a per-Unit basis for all outstanding
Units with respect to each of such four quar-
ters. After the end of the Subordination Peri-
od, there is no restriction under the Partner-
ship Agreement on the ability of the Partner-
ship to issue additional limited or general
partner interests junior to, on a parity with
or senior to the Common Units. See "Risk Fac-
tors--Risks Inherent in an Investment in the
Partnership--The Partnership May Issue Addi-
tional Units, Diluting Existing Unitholders'
Interests."
Limited call right.......... If at any time the General Partner and its af-
filiates own 80% or more of the issued and
outstanding limited partner interests of any
class, the General Partner may purchase, or
assign to its affiliates or the Partnership
its right to purchase, all, but not less than
all, of the remaining lim-ited partner inter-
ests of such class at a purchase price equal
to the higher of the Current Market Price (the
20 trading day average of the closing prices
on The New York Stock Exchange ("NYSE") ending
three days prior to the call date) and the
highest cash price paid by the General Partner
or any of its affiliates for any limited part-
ner interests of such class within the previ-
ous 90 days. As a consequence, a holder of
such limited partner interests may have his
interests purchased from him even though he
may not desire to sell them, or the price paid
may be less than the amount the holder would
desire to receive upon the sale of his limited
partner interests. See "The Partnership Agree-
ment--Limited Call Right."
Limited voting rights....... Unitholders will not have voting rights except
with respect to the following matters, for
which the Partnership Agreement requires the
approval of at least a majority (and in cer-
tain cases a greater percentage) of the out-
standing Units (excluding in some cases Units
held by the General Partner and its affili-
ates): a sale or exchange of all or substan-
tially all of the Partnership's assets, the
withdrawal or removal of the General Partner,
the election of
17
<PAGE>
a successor General Partner, a dissolution and
plan of liquidation or reconstitution of the
Partnership, a merger of the Partnership, is-
suance of Units in certain circumstances, ap-
proval of certain actions of the General Part-
ner (including the transfer by the General
Partner of its general partner interest under
certain circumstances) and certain amendments
to the Partnership Agreement, including any
amendment that would cause the Partnership to
be treated as an association taxable as a cor-
poration. Subordinated Units will generally
vote as a single class with the Common Units,
although Units owned by the General Partner
and its affiliates are not permitted to vote
on certain issues (such as, the withdrawal of
the General Partner, the approval of certain
amendments to the Partnership Agreement and
the taking of actions that would change the
tax status of the Partnership). See "The Part-
nership Agreement--Restrictions on Authority
of the General Partner," "--Amendment of Part-
nership Agreement," "--Meetings; Voting" and
"--Termination and Dissolution."
Inability to remove general
partner without consent of
Ferrell....................
Subject to certain conditions, the General
Partner may be removed upon the approval of
the holders of at least 66 2/3% of the out-
standing Units. A meeting of the holders of
the Common Units may be called only by the
General Partner or by the holders of 20% or
more of the outstanding Common Units.
Ferrell's ownership of Units representing an
aggregate 56.2% limited partner interest
(51.4% if the Underwriters' overallotment op-
tion is exercised in full) upon the closing of
this offering effectively precludes any vote
to remove Ferrellgas as general partner with-
out the consent of Ferrell. See "The Partner-
ship Agreement-- Withdrawal or Removal of the
General Partner" and "-- Meetings; Voting."
Change of management Any person or group (other than Ferrellgas or
provisions................. its affiliates) that acquires beneficial own-
ership of 20% or more of the Common Units will
lose its voting rights with respect to all of
its Common Units. In addition, if Ferrellgas
is removed as the general partner of the Part-
nership other than for cause, the Subordina-
tion Period will end, and the Subordinated
Units will immediately convert into Common
Units; in such event Ferrell, as a holder of
Common Units issued upon conversion of Subor-
dinated Units, would participate in any dis-
tributions, including distributions in respect
of arrearages in the Minimum Quarterly Distri-
bution, pro rata with other holders of Common
Units. These provisions are intended to dis-
courage a per-
18
<PAGE>
son or group from attempting to remove
Ferrellgas as general partner of the Partner-
ship or otherwise change management of the
Partnership. The effect of these provisions
may be to diminish the price at which the Com-
mon Units will trade under certain circum-
stances. For example, the provisions may make
it unlikely that a third party, in an effort
to remove the General Partner and take over
the management of the Partnership, would make
a tender offer for the Common Units at a price
above their trading market price. See "The
Partnership Agreement--Change of Management
Provisions."
Lack of preemptive rights
of Unitholders.............
The holders of Common Units will not have pre-
emptive rights to acquire additional Common
Units or other partnership interests that may
be issued by the Partnership. See "Risk Fac-
tors--Risks Inherent in an Investment in the
Partnership--The Partnership May Issue Addi-
tional Units, Diluting Existing Unitholders
Interests." Ferrellgas and its affiliates,
however, will have certain rights to acquire
interests in the Partnership in order to main-
tain their percentage interests in the Part-
nership. See "The Partnership Agreement--Issu-
ance of Additional Securities."
Lack of dissenters' rights.. The Common Unitholders are not entitled to dis-
senters' rights of appraisal under the Part-
nership Agreement or applicable Delaware law
in the event of a merger or consolidation of
the Partnership, a sale of substantially all
of the Partnership's assets or any other
event.
Transfer restrictions....... All purchasers of Common Units in this offering
and purchasers of Common Units in the open
market who wish to become Common Unitholders
of record must deliver an executed transfer
application (the "Transfer Application," the
form of which is included in this Prospectus
as Appendix B) before the transfer of such
Common Units will be registered and before
cash distributions and federal income tax al-
locations will be made to the transferee. Any
such transferee who signs a Transfer Applica-
tion will be entitled to cash distributions
and federal income tax allocations without the
necessity of any consent of the General Part-
ner. Persons purchasing Common Units who do
not deliver an executed Transfer Application
will acquire no rights in such Common Units
other than the right to resell such Common
Units. See "Description of the Common Units--
Transfer of Units."
Liquidation preference...... In the event of any liquidation of the Partner-
ship during the Subordination Period, the out-
standing Common Units generally will be enti-
tled to receive a distribution out of the net
assets of the Partnership in preference to
liquidat-
19
<PAGE>
ing distributions on the Subordinated Units.
Following conversion of the Subordinated Units
into Common Units, all Units will be treated
the same upon liquidation of the Partnership.
See "Cash Distribution Policy--Distributions
of Cash Upon Liquidation."
Use of proceeds............. The net proceeds from the sale of the Common
Units (estimated to be approximately $255.5
million after deducting the underwriting dis-
count and expenses of this
offering) will be used by the Partnership to
repay indebtedness. The Partnership will use
the net proceeds from any exercise of the Un-
derwriters' overallotment option first to re-
pay any amounts borrowed under the Credit Fa-
cility or, if no such borrowings have been
made, to establish an initial cash balance of
up to $20 million that will be used for gen-
eral partnership purposes. Any remaining net
proceeds from the exercise of the Underwrit-
ers' overallotment option will be used by the
Partnership to repurchase up to 1,000,000 Com-
mon Units held by Ferrell at a price per Unit
equal to the initial public offering price
less the underwriting discounts and commis-
sions set forth on the cover page of this Pro-
spectus. Any net proceeds remaining after such
repurchase will be retained by the Partnership
for general partnership purposes. See "Use of
Proceeds."
Listing..................... The Common Units have been approved for listing
on the NYSE, subject to official notice of is-
suance.
NYSE symbol................. FGP
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RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Partnership will
be subject are similar to those that would be faced by a corporation engaged in
a similar business. Prospective purchasers of the Common Units should consider
the following factors in evaluating an investment in the Common Units:
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
. Partnership profitability will depend in part on the volumes of propane
the Partnership markets. Demand for propane is affected by weather
patterns, product prices and competition, including competition from
other energy sources.
. Rapid increases in the wholesale price of propane may reduce margins on
retail sales. The Partnership intends to engage in the brokerage and
trading of propane in order to help insure propane supplies. Trading
losses may have an adverse impact on the amount of Available Cash
available for distribution to holders of Common Units. Personnel
responsible for trading activities have an average of over 10 years of
trading experience with the Company.
. Partnership profitability may be affected by competition. There is
intense competition among all participants in the retail propane business
for customers. Moreover, many retail customers tend to develop long-term
relationships with propane suppliers and, therefore, it may be difficult
to obtain new customers other than through the acquisition of other
retail propane businesses. Further, the retail propane industry is a
mature one, in which the Company foresees only limited growth in total
demand for the product. See "Business--Industry and Competition--
Competition."
. The Partnership will transport combustible petroleum products and its
activities will be subject to certain operational hazards, including
explosion and resulting personal injury. Although the Partnership will
carry insurance with respect to certain casualty occurrences, a casualty
occurrence might result in the loss of equipment or life, as well as
injury and extensive property damage. See "Business--Government
Regulation, Environmental and Safety Matters." The General Partner will
neither guarantee nor indemnify the Partnership against any claims,
whether known or unknown, or contingent liabilities.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
. The Partnership will incur indebtedness concurrently with the offering
made hereby. As a result, the Partnership will be significantly leveraged
and will have indebtedness that is substantial in relation to its
partners' equity. Such indebtedness may limit the Partnership's ability
to obtain additional borrowings or to issue additional partnership
interests on favorable terms. The Senior Notes and the Credit Facility
include limitations on the ability of the Operating Partnership to
distribute cash to the Partnership and to incur additional indebtedness.
Payment of principal and interest on such indebtedness, as well as
compliance with the requirements and covenants of such indebtedness, may
limit the Partnership's ability to make distributions to Unitholders.
. Cash distributions are not guaranteed and may fluctuate based upon the
Partnership's performance. Although the Partnership will distribute 100%
of its Available Cash, as defined in the Partnership Agreement, there can
be no assurance regarding the amounts of Available Cash to be generated
by the Partnership. The General Partner may establish reserves that
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<PAGE>
reduce the amount of Available Cash available for distribution. Because
the business of the Partnership will be seasonal, the General Partner
anticipates that it may make additions to reserves during the
Partnership's second and third fiscal quarters in order to fund operating
expenses, interest payments and cash distributions to partners with
respect to the first and fourth fiscal quarters. Although the General
Partner is unable to anticipate the amount of such reserves, its ability
to establish reserves enables it to control the amount of Available Cash
distributed by the Partnership. Because the Partnership may establish
reserves when it is profitable and borrow to make distributions if it does
not generate a profit, cash distributions may not be directly connected
with the Partnership's profitability.
. The Senior Notes provide that if the General Partner is no longer
controlled by James E. Ferrell or his affiliates, except in certain
limited circumstances, the holders of the Senior Notes have the right to
require the Operating Partnership to repurchase any or all of the
outstanding Senior Notes. The Credit Facility also has a change of
control provision which, if triggered, requires the Operating Partnership
to repay all outstanding amounts under the Credit Facility.
. Voting rights of the holders of Common Units are limited. As a result of
such limited voting rights, holders of Common Units will not have the
ability to participate in Partnership governance to the same degree as
holders of capital stock in a corporation.
. The General Partner will manage and operate the Partnership, and holders
of Common Units will have no right to participate in such management and
operation. Holders of Common Units will have no right to elect the
General Partner on an annual or other continuing basis. The control
exercised by the General Partner may make it more difficult for others to
gain control or influence the activities of the Partnership.
. Purchasers of Common Units in this offering will experience substantial
and immediate dilution in the net tangible book value per Common Unit
from the initial public offering price.
. The Partnership may issue additional Units and other interests in the
Partnership, diluting existing Unitholders' interests.
. The Partnership Agreement contains certain change of management
provisions that are intended to discourage a person or group from
attempting to remove Ferrellgas as general partner or otherwise change
management of the Partnership.
. Prior to this offering there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations among the General Partner and the
representatives of the Underwriters.
. The holders of the Common Units have not been represented by counsel in
connection with this offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
. The General Partner and its affiliates may have conflicts of interest
with the Partnership and the holders of Common Units. The Partnership
Agreement permits the General Partner to consider, in resolving conflicts
of interest, the interests of other parties (including Ferrellgas and its
affiliates) in addition to the interests of the Unitholders.
. The Partnership Agreement limits the liability and modifies the fiduciary
duties under Delaware law of the General Partner to the Partnership and
the Unitholders. Holders of Common Units are deemed to have consented to
certain actions that might otherwise be deemed conflicts of interest or a
breach of fiduciary duty.
22
<PAGE>
. The Partnership Agreement permits affiliates of the General Partner to
engage in any activities except for the retail sale of propane to end
users in the continental United States. The General Partner's affiliates
may compete with the Partnership in other propane related activities,
such as trading, transportation, storage and wholesale distribution of
propane. Although the Partnership Agreement does not restrict the ability
of affiliates of the General Partner to trade propane or other natural
gas liquids in competition with the Partnership, they do not intend to
engage in such trading except in association with the conduct of their
other permitted activities.
TAX CONSIDERATIONS
. The availability to a Unitholder of federal income tax benefits of an
investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Based on certain representations by the General Partner,
Andrews & Kurth L.L.P., special counsel to the General Partner and the
Partnership, is of the opinion that, under current law, the Partnership
will be classified as a partnership for federal income tax purposes.
. No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Partnership as a partnership
for federal income tax purposes or any other matter affecting the
Partnership.
. In connection with the formation of the Partnership, the General Partner
will contribute certain customer relationships to the Partnership. The
General Partner intends to treat such customer relationships as
amortizable assets of the Partnership for federal income tax purposes.
The IRS has challenged the Company's amortization of customer
relationships and it is possible that the IRS will challenge the
amortization of customer relationships by the Partnership. If the IRS
were to successfully challenge the amortization of customer relationships
by the Partnership, the amount of amortization available to a Unitholder
and, therefore, the after tax return of a Unitholder with respect to his
investment in the Partnership, could be adversely affected, although the
Partnership does not believe the impact of such effect would be material.
. In the case of taxpayers subject to the passive loss rules, losses
generated by the Partnership, if any, will only be available to offset
future income generated by the Partnership and cannot be used to offset
income from other activities, including passive activities or
investments.
. A Unitholder will be required to pay income taxes on his allocable share
of the Partnership's income, whether or not he receives cash
distributions from the Partnership.
. Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons.
. A Unitholder who disposes of Units following the close of the
Partnership's taxable year but before the close of the Unitholder's
taxable year may be required to report in income for his taxable year his
distributive share of more than one year of Partnership income, gain,
loss and deduction.
. The Partnership has been registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made.
See "Risk Factors," "Conflicts of Interest and Fiduciary Responsibility,"
"Description of the Common Units," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk factors
and conflicts of interest which should be considered in evaluating an
investment in the Common Units.
23
<PAGE>
SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the federal,
state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
acquiring, owning and disposing of Common Units. The following discussion,
insofar as it relates to federal income tax laws, is based in part upon the
opinion of Andrews & Kurth L.L.P., special counsel to the General Partner and
the Partnership, described in "Tax Considerations." This summary is qualified
by the discussion in "Tax Considerations," particularly the qualifications on
the opinions of counsel described therein.
PARTNERSHIP STATUS
In the opinion of Andrews & Kurth L.L.P., the Partnership will be classified
for federal income tax purposes as a partnership, and the beneficial owners of
Common Units will be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Common Unitholder will be
required to report in his federal income tax return his share of the
Partnership's income, gains, losses, deductions and credits. In general, cash
distributions to a Common Unitholder will be taxable only if, and to the extent
that, they exceed such Unitholder's tax basis in his Common Units.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
In general, annual income and loss of the Partnership will be allocated to
the General Partner and the Unitholders for each taxable year in accordance
with their respective percentage interests in the Partnership, as determined
annually and prorated on a monthly basis and subsequently apportioned among the
General Partner and the Unitholders of record as of the opening of the first
business day of the month to which they relate, even though Unitholders may
dispose of their Units during the month in question. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Partnership for each taxable year of the
Partnership ending within or with the taxable year of the Unitholder's whether
or not cash distributions are made to him. As a consequence, a Unitholder's
share of taxable income of the Partnership (and possibly the income tax payable
by him with respect to such income) may exceed the cash, if any, actually
distributed to such Unitholder.
RATIO OF TAXABLE INCOME TO DISTRIBUTION
The General Partner estimates that a purchaser of Common Units in this
offering (i) who holds such Common Units through the record date for the
quarter ended July 31, 1995 will be allocated an amount of federal taxable
income for such period that will be approximately 10% of cash distributed with
respect to such period and (ii) who holds such Common Units through the record
date for the quarter ended July 31, 1999 will be allocated, on a cumulative
basis, no net federal taxable income for such period. The General Partner
anticipates that after July 31, 1999 taxable income allocated to Unitholders
will increase from year to year and will constitute a significantly higher
percentage of cash distributed to Unitholders. These estimates are based upon
the assumption that the gross income from operations will approximate an amount
required to make the Minimum Quarterly Distribution and other assumptions with
respect to capital expenditures, cash flow and anticipated cash distributions.
These estimates and assumptions are subject to, among other things, numerous
business, economic, competitive and political uncertainties beyond the control
of the General Partner. Further, the estimates are based on current tax law and
certain tax reporting positions that the General Partner intends to adopt and
with
24
<PAGE>
which the IRS could disagree. Accordingly, no assurance can be given that the
estimates will prove to be correct. The actual percentages could be higher or
lower than as described and such differences could be material. See "Tax
Considerations--Tax Consequences of Unit Ownership--Ratio of Taxable Income to
Distributions."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Unit will be the amount paid for the
Unit. A Unitholder's basis is generally increased by his share of Partnership
income and decreased by his share of Partnership losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
A Unitholder may deduct his share of Partnership losses only to the extent
the losses do not exceed the basis in his Units or, in the case of taxpayers
subject to the "at risk" rules, the amount the Unitholder is at risk with
respect to the Partnership's activities, if less than such basis. Further, in
the case of taxpayers subject to the passive loss rules, under the passive loss
limitations, Partnership losses, if any, will only be available to offset
future income generated by the Partnership and cannot be used to offset income
from other activities including passive activities or investments. Any losses
unused by virtue of the passive loss rules may be deducted when the Unitholder
disposes of all of his Units in a fully taxable transaction with an unrelated
party.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Internal Revenue Code of 1986, as amended (the "Code"), which will
generally permit a Unitholder to calculate income and deductions by reference
to the portion of his purchase price attributable to each asset of the
Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse debt) and his adjusted basis in such Common Units. A portion of the
amount realized (whether or not representing gain) may be ordinary income.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which a Unitholder resides or in which the Partnership does
business or owns property. A Unitholder will likely be required to file state
income tax returns and to pay taxes in various states and may be subject to
penalties for failure to comply with such requirements. The General Partner
anticipates that a substantial portion of the Partnership's income will be
generated in six states: Georgia, Kentucky, Michigan, Missouri, Ohio and Texas.
Based on the Company's income apportionment for fiscal year 1992 for state
income tax purposes, the General Partner estimates that no other state will
account for more than 4% of the Partnership's income. Of the six states in
which the General Partner anticipates that a substantial portion of the
Partnership's income will be generated, only Texas does not currently impose a
personal income tax. Some of the states may require the Partnership to withhold
a percentage of income from amounts to be distributed to a Unitholder who is
not a resident of the state.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities
of his investment in the Partnership.
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<PAGE>
Accordingly, each prospective Unitholder should consult, and must depend upon,
his own tax counsel or other advisor with regard to those matters. Further, it
is the responsibility of each Unitholder to file all federal, state and local
tax returns that may be required of such Unitholder. Andrews & Kurth L.L.P. has
not rendered an opinion on the state and local tax consequences of an
investment in the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Units by tax-exempt organizations (including individual
retirement accounts and other retirement plans), regulated investment companies
and foreign persons raises issues unique to such persons. Virtually all of the
income derived by a Unitholder which is a tax-exempt organization will be
unrelated business taxable income, and thus will be taxable to such Unitholder;
no significant amount of the Partnerships gross income will be qualifying
income for purposes of determining whether a Unitholder will qualify as a
regulated investment company; and a Unitholder who is a nonresident alien,
foreign corporation or other foreign person will be regarded as being engaged
in a trade or business in the United States as a result of ownership of a Unit
and thus will be required to file federal income tax returns and to pay tax on
such Unitholder's share of Partnership taxable income. See "Tax
Considerations--Tax-Exempt Organizations and Certain Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership will not be
subject to the registration requirement on the basis that it will not
constitute a tax shelter. Nevertheless, the Partnership has registered as a tax
shelter with the IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax Considerations--
Administrative Matters--Registration as a Tax Shelter."
26
<PAGE>
RISK FACTORS
A prospective investor should carefully consider the following investment
considerations and risks, as well as the other information set forth in this
Prospectus, before making a decision to invest in the Common Units:
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
WEATHER CONDITIONS AFFECT THE DEMAND FOR PROPANE
National weather conditions can have a substantial impact on the demand for
propane and, therefore, the results of operations of the Partnership. In
particular, the demand for propane by residential customers is affected by
weather, with peak sales typically occurring during the winter months. Average
winter temperatures as measured by degree days across the Company's operating
areas in fiscal 1991, 1992 and 1993 were warmer than historical standards,
thus lowering demand for propane. Average winter temperatures as measured by
degree days across the Company's operating areas in fiscal 1994 to date have
been slightly colder than historical averages. There can be no assurance that
average temperatures in future years will be close to the historical average.
Agricultural demand is also affected by weather. Wet weather during harvest
season causes an increase in propane used for crop drying and dry weather
during the growing season causes an increase in propane used for irrigation.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
THE RETAIL PROPANE INDUSTRY IS A MATURE ONE
The retail propane industry is a mature one, with only limited growth in
total demand for the product foreseen (the exception being in the case of
motor fuel applications which is being driven by recent environmental
legislation, but for which the opportunity cannot be estimated). Based on
information available from the Energy Information Administration, the Company
believes the overall demand for propane has remained relatively constant over
the past several years, with year to year industry volumes being impacted
primarily by weather patterns. Therefore, the Partnership's ability to grow
within the industry is dependent on the success of its marketing efforts to
acquire new customers and on its ability to acquire other retail distributors.
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISK
An important element of the Company's high retention of retail customers has
been its ability to deliver propane during periods of extreme demand. To help
insure this capability, the Partnership intends to continue engaging in the
brokerage and trading of propane and other natural gas liquids historically
performed by the Company. If the Partnership sustains material losses from its
trading activities, the amount of Available Cash constituting Cash from
Operations available for distribution to the holders of Common Units may be
reduced. The Company has sought to minimize its trading risks through the
enforcement of trading policies, which include total inventory limits and loss
limits. The Partnership intends to continue these policies. Personnel
responsible for trading activities have an average of over 10 years of trading
experience with the Company. See "Business--Other Operations." In addition,
depending on inventory and price outlooks, the Partnership may purchase and
store propane or other natural gas liquids. This activity may subject the
Partnership to losses if the prices of propane or such other natural gas
liquids decline prior to their sale by the Partnership. The Partnership may be
unable to pass rapid increases in the wholesale cost of propane on to its
retail customers, reducing margins on retail sales. In the long term, however,
margins generally have not been materially impacted by rapid increases in the
wholesale cost of propane, as the Company has generally been able to
eventually pass on increases to its retail customers. There can be no
assurance as to whether the Partnership will be able to pass on such costs in
the future.
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<PAGE>
THE RETAIL PROPANE BUSINESS EXPERIENCES COMPETITION FROM OTHER ENERGY SOURCES
AND WITHIN THE INDUSTRY
The Partnership will compete for customers against suppliers of natural gas,
electricity and fuel oil. Because of the significant cost advantage of natural
gas over propane, propane is generally not competitive with natural gas in
those areas where natural gas is readily available. The expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Propane is
generally less expensive to use than electricity for space heating, water
heating and cooking and competes effectively with electricity in those parts
of the country where propane is cheaper than electricity on an equivalent BTU
basis. Although propane is similar to fuel oil in application, market demand
and price, propane and fuel oil have generally developed their own distinct
geographic markets. In addition, given the cost of conversion from fuel oil to
propane, potential customers of propane generally will only switch from fuel
oil if there is a significant price advantage with propane.
Long-standing customer relationships are also typical to the retail propane
industry. Retail propane customers generally lease their storage tanks from
their suppliers. The lease terms and, in most states, certain fire safety
regulations, restrict the refilling of a leased tank solely to the propane
supplier that owns the tank. The cost and inconvenience of switching tanks
minimizes a customer's tendency to switch among suppliers of propane on the
basis of minor variations in price. As a result, the Partnership may
experience difficulty in acquiring new retail customers in areas where there
are existing relationships between potential customers and other propane
distributors.
PARTNERSHIP OPERATIONS ARE SUBJECT TO OPERATING RISKS
The Partnership's operations will be subject to all operating hazards and
risks normally incidental to handling, storing, transporting and otherwise
providing for use by consumers of combustible liquids such as propane. As a
result, the Company is, and the Partnership will be, a defendant in various
legal proceedings and litigation arising in the ordinary course of business.
The Partnership will maintain insurance policies with insurers in such amounts
and with such coverages and deductibles as the General Partner believes are
reasonable and prudent. However, there can be no assurance that such insurance
will be adequate to protect the Partnership from all material expenses related
to potential future claims for personal and property damage or that such
levels of insurance will be available in the future at economical prices.
After taking into account the pending and threatened matters against the
Company that will be assumed by the Partnership and the insurance coverage and
reserves to be maintained by the Partnership, the General Partner is of the
opinion that there are no known contingent claims or uninsured claims that are
likely to have a material adverse effect on the results of operations or
financial condition of the Partnership. See "Business--Litigation." The
General Partner will neither guarantee nor indemnify the Partnership against
any claims, whether known or unknown, or contingent liabilities. The
occurrence of an event not fully covered by insurance, or the occurrence of a
large number of claims that are self-insured, may have a material adverse
effect on the results of operations or financial position of the Partnership.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS
The Company has historically expanded its business through acquisitions. The
Partnership intends to consider and evaluate opportunities for growth through
acquisitions in its industry, although it currently has no material
acquisitions under consideration. There can be no assurance that the
Partnership will find attractive acquisition candidates in the future, or that
the Partnership will be able to acquire such candidates on economically
acceptable terms.
ENERGY EFFICIENCY AND TECHNOLOGY TRENDS MAY AFFECT DEMAND FOR PROPANE
Retail customers primarily use propane as a heating fuel. Increased
technological advances in energy efficiency, including the development of more
efficient heating devices, has slowed the growth of demand for propane by
retail gas customers. The Partnership is unable to predict the effect that any
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<PAGE>
technological advances in energy efficiency, conservation, energy generation
or other devices might have on the Partnership's operations.
THE PARTNERSHIP WILL BE DEPENDENT UPON KEY PERSONNEL OF THE GENERAL PARTNER
The Company believes its success has been, and the Partnership's success
will be, dependent to a significant extent upon the efforts and abilities of
its senior management team, in particular James E. Ferrell, President and
Chairman of the Board of the Company. The failure of the General Partner to
retain Mr. Ferrell and other executive officers could adversely affect the
Partnership's operations. Mr. Ferrell, who has been associated with the
Company for nearly 30 years and who will indirectly own approximately 58.2% of
the Partnership, has indicated to the Company that he intends to continue as
chief executive officer of the General Partner.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
THE OPERATING PARTNERSHIP WILL INCUR SUBSTANTIAL INDEBTEDNESS; SUCH
INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE DISTRIBUTIONS
Upon the closing of the transactions contemplated by this Prospectus, it is
anticipated that the Operating Partnership will be liable for approximately
$268.9 million in indebtedness. As a result, the Partnership will be highly
leveraged and will have indebtedness that is substantial in relation to its
partners' equity. The ability of the Operating Partnership to make principal
and interest payments will depend on future performance, which performance is
subject to many factors, some of which will be outside the Operating
Partnership's control. In addition, such indebtedness will contain restrictive
covenants which limit the ability of the Operating Partnership to distribute
cash to the Partnership and to incur additional indebtedness. Payment of
principal and interest on such indebtedness, as well as compliance with the
requirements and covenants of such indebtedness, may limit the Partnership's
ability to make distributions to Unitholders. For example, the Indenture
prohibits the Operating Partnership from making any distributions to the
Partnership if the Operating Partnership's Fixed Charge Coverage Ratio for the
preceding four fiscal quarters does not exceed 2.25 to 1 after giving effect
to such distribution. The Fixed Charge Coverage Ratio on a pro forma basis for
the four quarter periods ending July 31, 1993 and April 30, 1994 was 3.0 to 1
and 3.3 to 1, respectively.
Immediately following consummation of this offering and related
transactions, the Operating Partnership will have approximately $65 million of
outstanding indebtedness bearing interest at floating rates. In addition,
pursuant to the Credit Facility, the Operating Partnership will have available
an additional $170 million of borrowings, all of which could bear interest at
floating rates. As a result, the Operating Partnership will be subject to
increases in interest rates which, if material, could adversely impact the
Partnership's ability to distribute the Minimum Quarterly Distribution to
Unitholders. In order to mitigate the risk of such interest rate increases,
the General Partner intends, if possible, to cause the Operating Partnership
to enter into appropriate interest rate protection arrangements with respect
to all or a portion of the Senior Notes bearing interest at a floating rate.
There can be no assurance, however, as to whether the Operating Partnership
will be able to enter into such arrangements or whether such arrangements will
be on terms satisfactory to the Operating Partnership.
THE PARTNERSHIP MAY HAVE TO REFINANCE ITS INDEBTEDNESS; THE PARTNERSHIP'S
INDEBTEDNESS MUST BE REPAID UPON THE OCCURRENCE OF CERTAIN CHANGE OF CONTROL
EVENTS
The Senior Notes to be issued by the Operating Partnership concurrently with
the offering made hereby will not contain any sinking fund provision and such
indebtedness will be due in full in 2001. In addition, the Senior Notes
provide that upon the occurrence of certain change of control events
(including the failure by James E. Ferrell and certain affiliates to control
the General Partner, the removal of the General Partner as the general partner
of the Operating Partnership, the liquidation or dissolution of the Operating
Partnership or the General Partner or the transfer of all or substantially all
the assets of the Operating Partnership to an entity not controlled by James
E. Ferrell and certain
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<PAGE>
affiliates), the holders of the Senior Notes have the right to require the
Operating Partnership to repurchase any or all of the outstanding Senior Notes
at 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase. The Credit Facility also contains a
provision requiring the Operating Partnership to repay all outstanding amounts
under the Credit Facility within 30 days after the occurrence of certain
change of control events similar to those contained in the Indenture. In the
case of the Credit Facility, however, there is an additional limitation in
that the failure of James E. Ferrell or his affiliates to own at least 20% of
the outstanding equity of the Partnership also constitutes a change of
control. While it is the present intention of the General Partner to refinance
such indebtedness when it becomes due, there can be no assurance that the
Operating Partnership will be able to refinance the Senior Notes or the Credit
Facility at such time. If the Partnership is unable to refinance such
indebtedness when it becomes due or in connection with a requirement to
repurchase or a default under such indebtedness, there can be no assurance
that the Operating Partnership will be able to repay amounts outstanding under
the Credit Facility or repurchase the Senior Notes at such time. The
Partnership can make no assurance regarding the future affiliation of Mr.
Ferrell with the General Partner. However, Mr. Ferrell, who has been
associated with the Company for nearly 30 years and who will indirectly own
approximately 58.2% of the Partnership, has indicated to the General Partner
that he intends to refrain from taking any action that would trigger the
change of control provisions of the Senior Notes or the Credit Facility while
such provisions remain in effect.
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE
Although the Partnership will distribute 100% of its Available Cash, as
defined in the Partnership Agreement, there can be no assurance regarding the
amounts of Available Cash to be generated by the Partnership. The actual
amounts of Available Cash will depend upon numerous factors, including
profitability, the availability and cost of acquisitions (including related
debt service payments), fluctuations in working capital and other factors
beyond the control of the General Partner. Cash distributions are not
guaranteed and may fluctuate with Partnership performance. The Partnership
Agreement gives the General Partner discretion in establishing reserves for
the proper conduct of its business. These reserves will impact the amount of
Available Cash available for distribution. As a result, there can be no
assurance regarding the actual levels of cash distributions by the
Partnership.
VOTING RIGHTS OF THE HOLDERS OF COMMON UNITS ARE LIMITED
Unlike the holders of common stock in a corporation, holders of outstanding
Units will have only limited voting rights on matters affecting the
Partnership's business. As a result of such limited voting rights, holders of
Common Units will not have the ability to participate in Partnership
governance to the same degree as holders of common stock in a corporation. See
"The Partnership Agreement--Restrictions on Authority of the General Partner,"
"--Withdrawal or Removal of the General Partner," "--Issuance of Additional
Securities," "--Meetings; Voting" and "--Termination and Dissolution."
THE GENERAL PARTNER MAY NOT BE REMOVED WITHOUT THE CONSENT OF FERRELL;
WITHDRAWAL OF THE GENERAL PARTNER; AMENDMENT OF PARTNERSHIP AGREEMENT
The General Partner may not be removed as general partner of the Partnership
except upon approval by the affirmative vote of holders of not less than 66
2/3% of the outstanding Units (including for purposes of such determination
Units owned by the General Partner and its affiliates), subject to the
satisfaction of certain conditions. Upon the closing of this offering and
following a dividend of Units by Ferrellgas to its parent, Ferrell will own
Units representing an aggregate 56.2% limited partner interest in the
Partnership (51.4% if the Underwriter's overallotment option is exercised in
full). Consequently, Ferrell's percentage ownership of limited partner
interests, even if the Underwriters' overallotment option is exercised in
full, will effectively preclude the removal of the General Partner without the
consent of Ferrell. In addition, the General Partner has agreed not to
voluntarily withdraw as general partner prior to July 31, 2004, without the
approval of holders of at least 66 2/3% of the outstanding Units (excluding
for purposes of such determination Units held by the General Partner and its
affiliates). On or after July 31, 2004, the General Partner may withdraw as
general partner by giving
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90 days' written notice (without first obtaining approval from the
Unitholders), and such withdrawal will not constitute a violation of the
Partnership Agreement. See "Partnership Agreement--Withdrawal or Removal of
the General Partner."
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner. With the exception of certain specified
amendments (including, without limitation, certain amendments that may be
adopted solely by the General Partner), proposed amendments must be approved
by holders of at least 66 2/3% of the outstanding Units during the
Subordination Period and a majority of the outstanding Units thereafter. The
authority of the General Partner to propose or consent to amendments, coupled
with Ferrell's percentage ownership of limited partner interests upon the
closing of this offering, will effectively preclude the adoption of such
amendments without the approval of the General Partner and its affiliates. See
"The Partnership Agreement--Amendment of Partnership Agreement."
THE GENERAL PARTNER WILL MANAGE AND OPERATE THE PARTNERSHIP
The General Partner will manage and operate the Partnership. Holders of
Common Units will have no right to elect the General Partner on an annual or
other continuing basis, and the General Partner generally may not be removed
except pursuant to the vote of the holders of not less than 66 2/3% of the
outstanding Units. As a result, holders of Common Units will have limited say
in matters affecting the operation of the Partnership and, if such holders are
in disagreement with the decisions of the General Partner, they may remove the
General Partner only as provided in the Partnership Agreement. The control
exercised by the General Partner may make it more difficult for others to
attempt to gain control or influence the activities of the Partnership. See
"Management."
DILUTION
Purchasers of Common Units in this offering will experience substantial and
immediate dilution in the net tangible book value per Common Unit for
financial accounting purposes. See "Dilution."
THE PARTNERSHIP MAY ISSUE ADDITIONAL UNITS, DILUTING EXISTING UNITHOLDER'S
INTERESTS
During the Subordination Period the Partnership may issue up to 7.0 million
Common Units (excluding Common Units issued in connection with the exercise of
the Underwriters' overallotment option or upon conversion of Subordinated
Units into Common Units) or an equivalent number of securities ranking on a
parity with the Common Units and an unlimited number of partnership interests
junior to the Common Units without a Unitholder vote. The Partnership may also
issue additional Common Units during the Subordination Period in connection
with acquisitions if certain cash flow criteria are met. See "The Partnership
Agreement--Issuance of Additional Securities." The effect of any such issuance
may be to dilute the interests of holders of Units in distributions by the
Partnership.
After the Subordination Period the Partnership Agreement authorizes the
General Partner to cause the Partnership to issue an unlimited number of
additional general and 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 without the
approval of any Unitholders.
The General Partner will have the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase Common Units,
Subordinated Units, Incentive Distribution Rights or other equity securities
of the Partnership from the Partnership whenever, and on the same terms that,
the Partnership issues such securities or rights to persons other than the
General Partner and its affiliates, to the extent necessary to maintain the
percentage interest of the General Partner and its affiliates in the
Partnership that existed immediately prior to each such issuance. See "The
Partnership Agreement--Issuance of Additional Securities."
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THE GENERAL PARTNER WILL HAVE LIMITED CALL RIGHTS WITH RESPECT TO THE COMMON
UNITS
In the event that 20% or less of the then issued and outstanding Common
Units are held by persons other than the General Partner and its affiliates,
the General Partner will have the right to acquire all, but not less than all,
of the remaining Common Units held by such unaffiliated persons. The purchase
price will be the greater of (a) the highest cash price paid by the General
Partner or any of its affiliates for any Common Unit purchased within 90 days
preceding the date on which the General Partner first mails to Unitholders
written notice of its election to call outstanding Common Units and (b)(i) the
average of the closing prices of the Common Units on the NYSE for the 20
trading days ending three days prior to the date on which such notice is first
mailed or (ii) if the Common Units are not listed for trading on an exchange
or quoted by NASDAQ, an amount equal to the fair market value of the Common
Units on the date such notice is first mailed, as determined by the General
Partner using any reasonable method of valuation. As a consequence of the
General Partner's right to purchase outstanding Common Units, a Unitholder may
have his Common Units purchased from him even though he may not desire to sell
them, or the price paid may be less than the amount the Unitholder would
desire to receive upon the sale of his Common Units. See "The Partnership
Agreement--Limited Call Right."
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove Ferrellgas as general
partner or otherwise change management of the Partnership. If any person or
group other than Ferrellgas or its affiliates acquires beneficial ownership of
20% or more of the Common Units, such person or group will lose its voting
rights with respect to all of its Common Units. In addition, if Ferrellgas is
removed as general partner other than for cause the Subordination Period will
end, and any Subordinated Units held by Ferrellgas and its affiliates will
immediately convert into Common Units. As a result, Ferrellgas and such
affiliates, as the holders of Common Units, would participate in any
distributions, including distributions in respect of arrearages in the Minimum
Quarterly Distribution, pro rata with other holders of Common Units.
NO PRIOR PUBLIC MARKET FOR COMMON UNITS; THE COMMON UNIT PRICE WILL BE
DETERMINED THROUGH NEGOTIATIONS
Prior to this offering there has been no public market for the Common Units.
The initial public offering price of the Common Units will be determined
through negotiations among the General Partner
and the representatives of the Underwriters. For a description of the factors
to be considered in determining the initial public offering price, see
"Underwriting." No assurance can be given as to the market prices at which the
Common Units will trade. The Common Units have been approved for listing on
the NYSE, subject to official notice of issuance.
UNITHOLDERS HAVE NOT BEEN REPRESENTED BY ATTORNEYS AND ACCOUNTANTS
As is customary in public securities offerings, the holders of the Common
Units have not been represented by counsel in connection with this offering,
including the preparation of the Partnership Agreement or the other agreements
referred to herein. As a result, counsel whose duty is to represent the
interests of the holders of Common Units has not participated in the
transaction.
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
THE GENERAL PARTNER AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH
THE PARTNERSHIP AND THE HOLDERS OF THE COMMON UNITS
Potential conflicts of interest could arise as a result of the relationships
between the Partnership, on the one hand, and Ferrellgas and its affiliates,
on the other. The directors and officers of Ferrellgas have fiduciary duties
to manage Ferrellgas in a manner beneficial to the shareholders of Ferrellgas.
At
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the same time, Ferrellgas, as general partner, has fiduciary duties to manage
the Partnership in a manner beneficial to the Partnership and the Unitholders.
The Partnership Agreement permits the General Partner to consider, in
resolving conflicts of interest, the interests of other parties in addition to
the interests of the Unitholders, thereby limiting the General Partner's
fiduciary duty to the Unitholders. The duties of Ferrellgas, as general
partner, to the Partnership and the Unitholders, therefore, may come into
conflict with the duties of the directors and officers of Ferrellgas to its
sole shareholder, Ferrell.
Such conflicts of interest might arise in the following situations, among
others:
(i) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there is
sufficient Available Cash constituting Cash from Operations to meet the
Minimum Quarterly Distribution on all Units in a given quarter, make
distributions with respect to the Incentive Distribution Rights, or hasten
the expiration of the Subordination Period or the conversion of
Subordinated Units into Common Units. Although the General Partner
generally must act as a fiduciary to the Partnership and the Unitholders,
the Partnership Agreement provides that it will not constitute a breach of
fiduciary duty if Partnership borrowings are effected that have such
results.
(ii) The Partnership will not have any employees and will rely solely on
employees of the General Partner and its affiliates.
(iii) Under the terms of the Partnership Agreement, the Partnership will
reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Partnership, including costs incurred in
rendering corporate staff and support services to the Partnership.
(iv) Whenever possible, the General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partner or its assets. The Partnership Agreement
provides that any action by the General Partner in so limiting the
liability of the General Partner or that of the Partnership will not be
deemed to be a breach of the General Partner's fiduciary duties, even if
the Partnership could have obtained more favorable terms without such
limitation on liability.
(v) The agreements between the Partnership and Ferrellgas and its
affiliates do not grant to the holders of Common Units, separate and apart
from the Partnership, the right to enforce the obligations of Ferrellgas
and such affiliates in favor of the Partnership. Therefore, Ferrellgas, in
its capacity as the general partner of the Partnership, will be primarily
responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner is
not restricted from causing the Partnership to pay the General Partner or
its affiliates for any services rendered on terms that are fair and
reasonable to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership.
Neither the Partnership Agreement nor any of the other agreements,
contracts and arrangements between the Partnership, on the one hand, and
the General Partner and its affiliates, on the other, are or will be the
result of arms-length negotiations.
(vii) The Partnership Agreement provides that it will not constitute a
breach of fiduciary duty if the General Partner exercises its right to call
for and purchase Units as provided in the Partnership Agreement or assigns
such right to one of its affiliates or to the Partnership.
(viii) The Partnership Agreement provides that it will not constitute a
breach of the General Partner's fiduciary duties to the Partnership or the
Unitholders for affiliates of the General Partner to engage in certain
activities of the type conducted by the Partnership, other than retail
propane sales to end users in the continental United States, even if in
direct competition with the Partnership, and the General Partner and such
affiliates have no obligation to present business
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opportunities to the Partnership. The fiduciary obligations of general
partners is a developing area of the law. The provisions of the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") that allow the
fiduciary duties of a general partner to be waived or restricted by a
partnership agreement have not been tested in a court of law, and the
General Partner has not obtained an opinion of counsel covering the
provisions set forth in the Partnership Agreement that purport to waive or
restrict the fiduciary duties of the General Partner.
The General Partner may retain separate counsel for the Partnership or the
Unitholders in the event of a conflict of interest arising between the General
Partner and its affiliates, on the one hand, and the Partnership or the
Unitholders, on the other, after the sale of the Common Units offered hereby,
depending on the nature of such conflict, but it does not intend to do so in
most cases. The attorneys, independent public accountants and others who have
performed services for the Partnership in connection with this offering have
been retained by the General Partner, its affiliates and the Partnership and
have not been retained to act for the holders of Common Units. They may
continue to be retained by the General Partner, its affiliates and the
Partnership after this offering. Attorneys, independent public accountants and
others who will perform services for the Partnership in the future will be
selected by the General Partner or the Audit Committee and may also perform
services for the General Partner and its affiliates. For a description of the
Audit Committee, see "Management."
The General Partner has agreed not to voluntarily withdraw as general
partner prior to July 31, 2004, without the approval of holders of record of
at least 66 2/3% of the outstanding Units (excluding for purposes of such
determination Units held by the General Partner and its affiliates) and not to
sell its general partner interest (other than to an affiliate and under
certain other limited circumstances) prior to July 31, 2004, without the
approval of holders of record of at least a majority of the outstanding Units
(excluding for purposes of such determination Units owned by the General
Partner and its affiliates). Ferrell may, however, dispose of the capital
stock of the General Partner without the consent of the Unitholders. If the
capital stock of the General Partner is transferred to a third party, but no
transfer is made of its general partner interest in the Partnership, the
General Partner will remain bound by the Partnership Agreement. If, through
share ownership or otherwise, persons not now affiliated with the General
Partner were to acquire its general partner interest in the Partnership or
effective control of the General Partner, management of the Partnership and
resolutions of conflicts of interest, such as those described above, could
change substantially.
THE PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND MODIFIES THE FIDUCIARY
DUTIES UNDER DELAWARE LAW OF THE GENERAL PARTNER TO THE PARTNERSHIP AND THE
HOLDERS OF UNITS; HOLDERS OF COMMON UNITS ARE DEEMED TO HAVE CONSENTED TO
CERTAIN ACTIONS THAT MIGHT BE DEEMED CONFLICTS OF INTEREST.
Certain provisions of the Partnership Agreement contain exculpatory language
purporting to limit the liability of the General Partner to the Partnership
and the Unitholders. For example, the Partnership Agreement provides as
follows:
(i) Borrowings by the Partnership or the approval thereof by the General
Partner shall not constitute a breach of any duty of the General Partner to
the Partnership or the Unitholders whether or not the purpose or effect
thereof is to permit distributions on the Units (and possibly avoiding
subordination of distributions on the Subordinated Units or hastening the
expiration of the Subordination Period or the conversion of Subordinated
Units into Common Units) or to increase distributions with respect to the
Incentive Distribution Rights.
(ii) Any actions taken by the General Partner consistent with the
standards of reasonable discretion set forth in the definitions of
Available Cash and Cash from Operations will be deemed not to breach any
duty of the General Partner to the Partnership or to the Unitholders.
(iii) In the absence of bad faith by the General Partner, the resolution
of any conflicts of interest by the General Partner will not constitute a
breach of the Partnership Agreement or a
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breach of any standard of care or duty. See "Conflicts of Interest and
Fiduciary Responsibility-- Conflicts of Interest--Fiduciary Duties of the
General Partner."
(iv) With certain limited exceptions, it will not constitute a breach of
the General Partner's fiduciary duties to the Partnership or the
Unitholders for affiliates of the General Partner to engage in certain
activities of the type conducted by the Partnership, even if in direct
competition with the Partnership.
Provisions of the Partnership Agreement purport to limit the liability of
the General Partner to the Partnership and the Unitholders. Such provisions
also purport to modify the fiduciary duty standards to which the General
Partner would otherwise be subject under Delaware law, under which a general
partner owes its limited partners the highest duties of good faith, fairness
and loyalty. Such duty of loyalty would generally prohibit a general partner
of a Delaware limited partnership from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement permits the General Partner to exercise the discretion and authority
granted to it thereunder in the management of the Partnership and the conduct
of its operations, so long as its actions are in, or not inconsistent with,
the best interests of the Partnership. In addition, the Partnership Agreement
provides that a purchaser of Common Units is deemed to have consented to
certain conflicts of interest and actions of the General Partner and its
affiliates that might otherwise be prohibited, including engaging in certain
activities of the type conducted by the Partnership, even in direct
competition with the Partnership, and the establishment of certain contractual
arrangements between the General Partner or its affiliates and the
Partnership, and a purchaser of Common Units is also deemed to have agreed
that such conflicts of interest and actions do not constitute a breach by the
General Partner of any duty stated or implied by law or equity. In addition,
the Partnership Agreement limits the liability of the General Partner for
monetary damages by providing that the General Partner and its officers and
directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any actual
omissions if such General Partner and other persons acted in good faith. The
Partnership Agreement also provides for conflicts of interest between the
General Partner or its affiliates, on the one hand, and the Partnership or the
Unitholders, on the other, to be resolved by the General Partner. The General
Partner will not be in breach of its obligations under the Partnership
Agreement or its duties to the Partnership or the Unitholders if the
resolution of such conflict is fair and reasonable to the Partnership. In
resolving such conflict, the General Partner may consider the relative
interests of the parties involved in such conflict in addition to the
Partnership. For a more detailed description of the factors that may be
considered by the General Partner when resolving a conflict of interest and the
circumstances under which a resolution will be deemed to be fair and reasonable
to the Partnership, see "Conflicts of Interest and Fiduciary Responsibility--
Conflicts of Interest--Fiduciary Duties of the General Partner." Such
modifications of state law standards of fiduciary duty may significantly limit a
Unitholder's ability to successfully challenge the actions of the General
Partner as being in breach of what would otherwise have been a fiduciary duty,
but these modifications are believed to be necessary and appropriate to enable
the General Partner to serve as the general partner of the Partnership without
undue risk of liability.
TAX CONSIDERATIONS
For a general discussion of the expected federal income tax consequences of
acquiring, owning and disposing of Units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Unitholder of the federal income tax benefits of an
investment in the Partnership depends, in large part, on the classification of
the Partnership as a partnership for federal income tax
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purposes. Based on certain representations by the General Partner, Andrews &
Kurth L.L.P., special counsel to the General Partner and the Partnership, is
of the opinion that, under current law, the Partnership will be classified as
a partnership for federal income tax purposes. However, no ruling from the IRS
as to such status has been or will be requested, and the opinion of counsel is
not binding on the IRS. Moreover, in order for the Partnership to continue to
be classified as a partnership for federal income tax purposes, at least 90%
of the Partnership's gross income for each taxable year must consist of
qualifying income. See "Tax Considerations--Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates, distributions would generally be taxed to the
Unitholders as corporate distributions, and no income, gain, losses,
deductions or credits would flow through to the Unitholders. Because a tax
would be imposed upon the Partnership as an entity, the cash available for
distribution to the Unitholders would be substantially reduced. Treatment of
the Partnership as an association taxable as a corporation or otherwise as a
taxable entity would result in a material reduction in the anticipated cash
flow and after-tax return to the Unitholders. See "Tax Considerations--
Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity level taxation for federal, state or local income tax purposes,
certain provisions of the Partnership Agreement relating to the subordination
of distributions on Subordinated Units and to the Incentive Distribution
Rights will be subject to change, including a decrease in the amount of the
Minimum Quarterly Distribution to reflect the impact of such law on the
Partnership. See "Cash Distribution Policy."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes or any other
matter affecting the Partnership. Accordingly, the IRS may adopt positions
that differ from counsel's conclusions expressed herein. It may be necessary
to resort to administrative or court proceedings in an effort to sustain some
or all of counsel's conclusions, and some or all of such conclusions
ultimately may not be sustained. The costs of any contest with the IRS will be
borne directly or indirectly by some or all of the Unitholders and the General
Partner.
AMORTIZATION OF CUSTOMER RELATIONSHIPS
In connection with the formation of the Partnership, the General Partner
will contribute certain customer relationships to the Partnership. The General
Partner intends to treat such customer relationships as amortizable assets of
the Partnership for federal income tax purposes. The IRS has challenged the
Company's amortization of customer relationships and it is possible that the
IRS will challenge the amortization of customer relationships by the
Partnership. If the IRS were to successfully challenge the amortization of
customer relationships by the Partnership, the amount of amortization
available to a Unitholder and, therefore, the after tax return of a Unitholder
with respect to his investment in the Partnership, could be adversely
affected, although the Partnership does not believe the impact of such effect
would be material.
DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules, losses generated
by the Partnership, if any, will only be available to offset future income
generated by the Partnership and cannot be used to
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offset income from other activities, including passive activities or
investments. Unused losses may be deducted when the Unitholder disposes of all
of his Units in a fully taxable transaction with an unrelated party. Net
passive income from the Partnership may be offset by a Unitholder's unused
Partnership losses carried over from prior years, but not by losses from other
passive activities, including losses from other publicly traded partnerships.
See "Tax Considerations--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Partnership Losses."
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS OR PROCEEDS FROM DISPOSITIONS OF
UNITS
A Unitholder will be required to pay federal income tax and, in certain
cases, state and local income taxes on his allocable share of the
Partnership's income, whether or not he receives cash distributions from the
Partnership. No assurance can be given that a Unitholder will receive cash
distributions equal to his allocable share of taxable income from the
Partnership. Further, a Unitholder may incur tax liability, in excess of the
amount of cash received, upon the sale of his Units. See "Tax Considerations--
Other Tax Considerations" for a discussion of certain state and local tax
considerations that may be relevant to prospective Unitholders.
BUNCHING OF INCOME
Each Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the fiscal year of the
Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who disposes of Units following the close of the
Partnership's taxable year but before the close of the Unitholder's taxable
year must include his allocable share of Partnership income, gain, loss and
deduction in income for the Unitholder's taxable year with the result that the
Unitholder will be required to report in income for his taxable year his
distributive share of more than one year of Partnership income, gain, loss and
deduction. For example, a Unitholder reporting on a calendar year basis who
acquires Common Units in the offering made hereby and who disposes of such
Common Units after July 31, 1995 but before December 31, 1995 will be required
to include in his 1995 taxable income his allocable share of Partnership
income for the Partnership's fiscal year ending July 31, 1995, plus his
allocable share of Partnership income for the period beginning August 1, 1995
and ending on the date such Common Units are disposed. See "Tax
Considerations--Disposition of Common Units--Allocations Between Transferors
and Transferees."
The Partnership may be required at some future date to adopt a taxable year
ending December 31, rather than its current taxable year ending July 31. In
that event, a Unitholder may be required to include in income for his taxable
year his distributive share of more than one year of Partnership income, gain,
loss and deduction. See "Tax Considerations--Tax Treatment of Operations--
Accounting Method and Taxable Year."
OWNERSHIP OF UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. See "Tax
Considerations--Tax-Exempt Organizations and Certain Other Investors."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership has been registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the IRS or
that tax adjustments will not be made. The rights of a Unitholder owning less
than a 1% profit interest in the Partnership to participate in the income tax
audit process are very limited. Further, any adjustments in the Partnership's
returns will lead to adjustments in the Unitholders' returns and may lead to
audits of Unitholders' returns and adjustments of items unrelated to the
Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholders' personal tax return.
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THE TRANSACTIONS
Concurrently with the closing of this offering, Ferrellgas will contribute
all of its propane business and assets to the Partnership in exchange for
1,000,000 Common Units, 16,593,721 Subordinated Units and the Incentive
Distribution Rights, as well as a 2% general partner interest in the
Partnership and the Operating Partnership, on a combined basis. In connection
with the contribution of such business and assets by Ferrellgas, the Operating
Partnership will assume substantially all of the liabilities, whether known or
unknown, associated with such business and assets (other than income tax
liabilities). The Operating Partnership intends to maintain insurance and
reserves at levels that it believes will be adequate to satisfy such
liabilities. In addition, the Operating Partnership will assume the payment
obligations of Ferrellgas under (i) $50 million of Existing Floating Rate
Notes (bearing interest at 5.5% per annum at April 30, 1994), (ii) $177.6
million of Existing Fixed Rate Notes bearing interest at 12% per annum and
(iii) $246.4 million of Existing Subordinated Debentures bearing interest at
11 5/8% per annum. All of this long-term debt will be retired with the net
proceeds from the sale by the Partnership of the Common Units offered hereby
(estimated to be approximately $255.5 million) and the net proceeds from the
issuance of approximately $250 million in aggregate principal amount of Senior
Notes to be issued by the Operating Partnership concurrently with the closing
of this offering (estimated to be approximately $244.3 million). The book
value of the assets being contributed to the Partnership will be approximately
$83 million less than the liabilities to be assumed by the Operating
Partnership. Immediately prior to the closing of this offering, the Operating
Partnership expects to enter into the $185 million Credit Facility. The Credit
Facility will permit borrowings of up to $100 million on a senior unsecured
basis to fund working capital and general partnership requirements (of which
$50 million will be available to support letters of credit). In addition, up
to $85 million of borrowings will be permitted on a senior unsecured basis, at
least $60 million of which will be available solely to finance acquisitions
and growth capital expenditures.
Ferrellgas will retain and will not contribute to the Partnership
approximately $39 million in cash, approximately $17 million in receivables
from affiliates of Ferrell and Ferrell Class B Stock with a book value of
approximately $36 million. It is anticipated that following the closing of
this offering the Company will loan approximately $25 million to Ferrell and
will dividend to Ferrell the remainder of the cash, receivables and Ferrell
Class B Stock, as well as the Common Units, Subordinated Units and Incentive
Distribution Rights received by the Company in exchange for the contribution
of its propane business and assets to the Partnership.
Concurrently with the closing of this offering, the Company will consummate
a tender offer and consent solicitation with respect to its Existing
Subordinated Debentures. The consent solicitation is necessary to modify the
indenture related to the Existing Subordinated Debentures in order to permit
the Company to consummate the transactions contemplated by this Prospectus. As
of the date of this Prospectus, all of the outstanding Existing Subordinated
Debentures have been tendered and will be retired by the Operating
Partnership, as described above.
Concurrently with the closing of this offering, the Company will mail to the
holders of the Existing Senior Notes a notice of redemption of all outstanding
Existing Senior Notes, pursuant to the optional redemption provisions of the
Existing Senior Notes Indenture. The redemption date will be 30 days after the
date of mailing of such notice. The Existing Senior Notes Indenture provides
for a redemption price equal to 100% of the principal amount plus accrued and
unpaid interest, if any, to the redemption date plus, in the case of the
Existing Fixed Rate Notes, a premium which is based on certain yield
information for U.S. Treasury securities as of three business days prior to
the redemption date. The Operating Partnership will deposit with the trustee
on the date of closing of this offering an amount expected to be more than
sufficient to pay the redemption price. As a result of the transactions
contemplated hereby, during the 30-day period prior to the redemption date, an
event of default will exist under the Existing Senior Notes Indenture. The
holders of at least 25% of the principal amount of Existing Senior Notes,
therefore, will be entitled, by notice to the Company and the trustee, to
declare
38
<PAGE>
the unpaid principal of, and accrued and unpaid interest and the applicable
premium on, the Existing Senior Notes to be immediately due and payable. The
trustee under the Existing Senior Notes Indenture has advised the Company that
it intends to notify the holders of the Existing Senior Notes of this right.
In the event of such a declaration, the amount already deposited by the
Operating Partnership in payment of the redemption price would be applied to
pay the amount so declared immediately due and payable. The Partnership will
incur an extraordinary loss of approximately $20.4 million related to the
retirement of the Existing Senior Notes, approximately $31.2 million relating
to the Existing Subordinated Debentures resulting from consent and tender
offer fees and approximately $11.2 million relating to the write off of
unamortized financing costs, all in accordance with GAAP.
At the closing of this offering, it is anticipated that the Operating
Partnership will borrow approximately $15 million under the Credit Facility
which will enable the Partnership to commence operations with an initial cash
balance of at least $20 million. For a description of the Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Financial Condition."
The foregoing description assumes that the Underwriters' overallotment
option is not exercised. If the Underwriters' overallotment option is
exercised in full, the Partnership will issue 1,965,000 additional Common
Units. The Partnership will use the net proceeds from any exercise of the
Underwriters' overallotment option first to repay any amounts borrowed under
the Credit Facility. Any remaining net proceeds from the exercise of the
Underwriters' overallotment option will be used by the Partnership to
repurchase for retirement up to 1,000,000 Common Units held by Ferrell at a
price per Unit equal to the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. Any net proceeds remaining after such repurchase will be retained
by the Partnership for general partnership purposes.
Immediately following this offering, Ferrellgas will own an effective 2%
general partner interest in the Partnership and the Operating Partnership, on
a combined basis, and Ferrell will own 1,000,000 Common Units (if the
Underwriters' overallotment option is exercised in full all of such Common
Units will be repurchased and retired by the Partnership) and 16,593,721
Subordinated Units representing an aggregate 56.2% limited partner interest in
the Partnership (51.4% if the Underwriters' overallotment option is exercised
in full) and the Incentive Distribution Rights.
39
<PAGE>
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of the Common Units
offered hereby are estimated to be approximately $255.5 million after
deducting the underwriting discount and the expenses of this offering. The net
proceeds of this offering, together with the net proceeds from the issuance of
approximately $250 million in aggregate principal amount of the Senior Notes
(estimated to be approximately $244.3 million), will be used by the
Partnership to repay indebtedness of Ferrellgas. The indebtedness to be repaid
consists of $50 million of Existing Floating Rate Notes, which have a floating
rate of interest (5.5% per annum at April 30, 1994) and mature in August 1996,
$177.6 million of Existing Fixed Rate Notes, which have an interest rate of
12% per annum and mature in August 1996, and up to $246.4 million of Existing
Subordinated Debentures, which have an interest rate of 11 5/8% and mature in
December 2003. See "Capitalization." If the Underwriters' overallotment option
is exercised in full, the estimated additional net proceeds to the Partnership
will be approximately $38.6 million. The Partnership will use the net proceeds
from any exercise of the Underwriters' overallotment option first to repay any
amounts borrowed under the Credit Facility (anticipated to be approximately
$15 million) to enable the Partnership to commence operations with an initial
cash balance of at least $20 million or, if no such borrowings have been made,
to establish an initial cash balance of up to $20 million that will be used
for general partnership purposes. See "The Transactions." Any remaining net
proceeds from the exercise of the Underwriters' overallotment option will be
used by the Partnership to repurchase for retirement up to 1,000,000 Common
Units held by Ferrell at a price per Unit equal to the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. Any net proceeds remaining after such repurchase will
be retained by the Partnership for general partnership purposes.
40
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
Ferrellgas at April 30, 1994, (ii) the pro forma adjustments required to
reflect the transactions to be consummated at the closing of this offering,
including the issuance of Common Units pursuant to the offering made hereby at
the initial offering price of $21.00 per Common Unit, and (iii) the combined
pro forma capitalization of the Partnership at such date after giving effect
thereto. The table should be read in conjunction with the historical and pro
forma consolidated financial statements and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1994
---------------------------------------
FERRELLGAS PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current
portion of long-term
debt................................... $ 1,486 $ -- $ 1,486
======== ========= ========
Long-term debt:
Fixed Rate Senior Notes, interest at
10%, due in 2001..................... 200,000 200,000
Floating Rate Senior Notes, interest
at applicable LIBOR rate plus 3.125%,
due in 2001.......................... 50,000 50,000
Existing floating rate notes, interest
at applicable LIBOR rate plus 2.25%
(5.5% at April 30,1994), due in
August 1996.......................... 50,000 (50,000)
Existing fixed rate notes, interest at
12%, due in August 1996.............. 177,600 (177,600)
Existing subordinated debentures,
interest at 11 5/8%, due in December
2003................................. 246,430 (246,430)
Other long-term debt.................. 2,441 20,000 (2) 22,441
-------- --------- --------
Total long-term debt................ 476,471 (204,030) 272,441
-------- --------- --------
Stockholder's equity.................... 30,848 (30,848)
Partners' capital:
Common Unitholders.................... 62,859 (3) 62,859
Subordinated Unitholder............... 74,034 74,034
General Partner....................... 2,794 2,794
-------- --------- --------
Total stockholder's equity/partners'
capital............................ 30,848 108,839 139,687
-------- --------- --------
Total capitalization................ $507,319 $ (95,191) $412,128
======== ========= ========
</TABLE>
- -------
(1) Reflects the conveyance of the assets of Ferrellgas to the Partnership in
return for the assumption of liabilities and the issuance of 1,000,000
Common Units, 16,593,721 Subordinated Units, the Incentive Distribution
Rights and general partner interests in the Partnership and the Operating
Partnership equal to 2% of the total partners' capital. Ferrellgas will
make a dividend of such Common Units, Subordinated Units and Incentive
Distribution Rights to its parent, Ferrell.
(2) Represents borrowings at April 30, 1994 under the Credit Facility to
enable the Partnership to commence operations with an initial cash balance
of $20 million. The Partnership anticipates it will borrow approximately
$15 million under the Credit Facility at the closing. Actual borrowings
under the Credit Facility at the closing of this offering will depend upon
the Partnership's cash balances at such time and the timing of any
exercise of the Underwriters' overallotment option.
(3) Includes $58.4 million representing limited partnership capital resulting
from the issuance of 13,100,000 Common Units offered hereby. Such limited
partnership capital is less than the estimated net proceeds of the
offering of $255.5 million due to the assets and liabilities contributed
by Ferrellgas to the Partnership being recorded at historical cost by the
Partnership, rather than fair value, in accordance with generally accepted
accounting principles. Total capital of the Partnership is allocated to
the limited partners based on their relative limited partner unit
ownership percentage.
Concurrent with the consummation of the transactions contemplated hereby,
the Operating Partnership will issue $250 million in aggregate principal
amount of the Senior Notes in a registered public offering. It is anticipated
that the Operating Partnership will also enter into the Credit Facility in the
amount of $185 million. For a discussion of the Senior Notes and the Credit
Facility and other capital resources and liquidity of the Partnership, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Financial Condition."
41
<PAGE>
DILUTION
On a pro forma basis as of April 30, 1994, after giving effect to the
transactions contemplated by this Prospectus, the net tangible book value per
Common Unit was $2.366. Purchasers of Common Units in this offering will
suffer substantial and immediate dilution in net tangible book value per
Common Unit for financial accounting purposes, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Initial public offering price per Common Unit.............. $21.000
Net tangible book value per Unit before the offering
(1)(2).................................................... $(6.582)
Increase in book value per Unit attributable to new
investors................................................. 8.948
-------
Less: Pro forma net tangible book value per Unit after the
offering (2)(3)........................................... 2.366
-------
Immediate dilution in net tangible book value per Common
Unit
to new investors.......................................... $18.634
=======
</TABLE>
- --------
(1) Determined by dividing the number of Units (1,000,000 Common Units and
16,593,721 Subordinated Units) assumed to be issued to Ferrellgas for its
contribution of assets and liabilities to the Partnership into the net
tangible book value allocable to such Units.
(2) The net tangible book value does not include intangible assets contributed
to the Partnership with a book value of $65.6 million.
(3) Determined by dividing the total number of Units (14,100,000 Common Units
and 16,593,721 Subordinated Units) assumed to be outstanding after the
offering made hereby, into the pro forma tangible net worth of the
Partnership allocable to such Units, after giving effect to the
application of the net proceeds of this offering (assuming the
Underwriters' overallotment option is not exercised).
The following table sets forth the number of Units issued by the Partnership
and the total consideration to the Partnership contributed by the General
Partner and by purchasers of Common Units in this offering upon the
consummation of the transactions contemplated by this Prospectus:
<TABLE>
<CAPTION>
UNITS ACQUIRED TOTAL CONSIDERATION
--------------------- ------------------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ------------ -------
<S> <C> <C> <C> <C>
General Partner................. 17,593,721(1) 58.2% $(52,595,000)(2) (23.6)%
New investors................... 13,100,000 41.8 275,100,000 123.6
---------- ----- ------------ -----
Total......................... 30,693,721 100.0% $222,505,000 100.0 %
========== ===== ============ =====
</TABLE>
- --------
(1) Upon the consummation of the transactions contemplated by this Prospectus
and assuming the Underwriters' overallotment option is not exercised, the
General Partner and its affiliates will own 1,000,000 Common Units,
16,593,721 Subordinated Units, Incentive Distribution Rights and an
effective 2% general partner interest in the Partnership and the Operating
Partnership on a combined basis. The Common Units and Subordinated Units
generally vote as one class on matters presented to the limited partners,
although Units owned by the General Partner or its affiliates may not vote
with respect to certain matters during the Subordination Period and Common
Units vote as a separate class with respect to certain other matters. See
"The Partnership Agreement."
(2) Total consideration for the General Partner represents the net assets and
liabilities contributed by Ferrellgas at April 30, 1994. The assets and
liabilities contributed by Ferrellgas to the Partnership will be recorded
at historical cost rather than fair value by the Partnership in accordance
with generally accepted accounting principles. Such amount includes $65.6
million, representing intangible assets contributed to the Partnership.
42
<PAGE>
CASH DISTRIBUTION POLICY
A principal objective of the Partnership is to generate cash from
Partnership operations and to distribute Available Cash to its partners in the
manner described herein. "Available Cash" is defined in the glossary and
generally means, with respect to any fiscal quarter of the Partnership, the
sum of all of the cash received by the Partnership from all sources plus
reductions to reserves less all of its cash disbursements and net additions to
reserves.
The General Partner's decisions regarding amounts to be placed in or
released from reserves will have a direct impact on the amount of Available
Cash because increases and decreases in reserves are taken into account in
computing Available Cash. The General Partner may, in its reasonable
discretion (subject to certain limits), determine the amounts to be placed in
or released from reserves each quarter.
Cash distributions will be characterized as either distributions of Cash
from Operations or Cash from Interim Capital Transactions. This distinction
affects the amounts distributed to Unitholders relative to the General
Partner, and under certain circumstances it determines whether holders of
Subordinated Units receive any distributions. See "--Quarterly Distributions
of Available Cash."
Cash from Operations is defined in the glossary and generally refers to the
cash balance of the Partnership on the date the Partnership commences
operations, plus all cash generated by the operations of the Partnership's
business, after deducting related cash expenditures, reserves, debt service
and certain other items.
Cash from Interim Capital Transactions is also defined in the glossary and
will generally be generated only by borrowings (other than for working capital
purposes), sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory, accounts receivable and other
current assets and assets disposed of in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is Cash from Operations or Cash from Interim
Capital Transactions, all Available Cash distributed by the Partnership from
any source will be treated as Cash from Operations until the sum of all
Available Cash distributed as Cash from Operations equals the cumulative
amount of Cash from Operations actually generated from the date the
Partnership commenced operations through the end of the quarter prior to such
distribution. Any excess Available Cash (irrespective of its source) will be
deemed to be Cash from Interim Capital Transactions and distributed
accordingly.
If Cash from Interim Capital Transactions is distributed in respect of each
Common Unit in an aggregate amount per Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), the distinction
between Cash from Operations and Cash from Interim Capital Transactions will
cease, and both types of Available Cash will be treated as Cash from
Operations. The General Partner does not anticipate that there will be
significant amounts of Cash from Interim Capital Transactions distributed.
The Subordinated Units and Incentive Distribution Rights are separate
classes of interests in the Partnership, and the rights of holders of such
interests to participate in distributions to limited partners differ from the
rights of the holders of Common Units. For any given quarter, Available Cash
will be distributed to the General Partner and to the holders of Common Units,
and it may also be distributed to the holders of Subordinated Units and to the
holders of the Incentive Distribution Rights depending upon the amount of
Available Cash for the quarter, amounts distributed in prior quarters, whether
or not the Subordination Period has ended and other factors discussed below.
43
<PAGE>
The discussion below indicates the percentages of cash distributions
required to be made to the General Partner and the Common Unitholders and the
circumstances under which holders of Subordinated Units and holders of
Incentive Distribution Rights are entitled to cash distributions and the
amounts thereof. In the following general discussion of how Available Cash is
distributed, references to Available Cash, unless otherwise stated, mean
Available Cash that constitutes Cash from Operations. For a discussion of
Available Cash constituting Cash from Operations available for distributions
with respect to the Units on a pro forma basis, see "--Pro Forma Available
Cash."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership prior to liquidation in an amount equal to
100% of its Available Cash for such quarter. Distributions will be made within
45 days after the end of each January, April, July and October. With respect
to each quarter during the Subordination Period, to the extent there is
sufficient Available Cash, the holders of Common Units will have the right to
receive the Minimum Quarterly Distribution ($0.50 per Unit), plus any Common
Unit Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. The terms "Subordination Period" and "Common Unit
Arrearages" are defined in the glossary. Common Units will not accrue
arrearages 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 extend from the closing of this offering until
the first day of any quarter beginning on or after August 1, 1999 in respect
of which (i) distributions of Available Cash on the Common Units and the
Subordinated Units equaled or exceeded the Minimum Quarterly Distribution for
each of the three consecutive four-quarter periods immediately preceding such
date (excluding any such Available Cash that is attributable to net increases
in working capital borrowings, net decreases in reserves and any positive
balance in Cash from Operations at the beginning of such four-quarter periods)
and (ii) the Partnership has invested at least $50 million in acquisitions and
capital additions or improvements made to increase the operating capacity of
the Partnership. The Partnership Agreement contains provisions intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Partnership or otherwise change management of the
Partnership. Among them is the provision that if the General Partner is
removed other than for cause, the Subordination Period will end. See "The
Partnership Agreement--Change of Management Provisions." Upon the expiration
of the Subordination Period, the Common Units will no longer accrue
distribution arrearages and the holders of Subordinated Units will participate
pro rata with the holders of Common Units in distributions of Available Cash
up to the Minimum Quarterly Distribution.
A total of 5,531,240 Subordinated Units held by Ferrellgas and its
affiliates will convert into Common Units on the first day of any quarter
beginning on or after August 1, 1997 in respect of which (i) distributions of
Available Cash on the Common Units and the Subordinated Units equaled or
exceeded the Minimum Quarterly Distribution for each of the two consecutive
four-quarter periods immediately preceding such date and (ii) the operating
cash generated by the Partnership in each of such four-quarter periods equaled
or exceeded 125% of the Minimum Quarterly Distribution on all Common Units and
all Subordinated Units (excluding in each case any such Available Cash that is
attributable to net increases in working capital borrowings, net decreases in
reserves and any positive balance in Cash from Operations at the beginning of
such four-quarter periods and including for purposes of (ii) above any net
increases in reserves to provide funds for distributions with respect to Units
and any general partner interests). Upon the expiration of the Subordination
Period all remaining Subordinated Units will convert into Common Units. In
addition, in the event that the General Partner is removed other than for
cause, the Subordinated Units will convert into Common Units and will
therefore participate in distributions in respect of Common Unit Arrearages,
if any. See "The Partnership Agreement--Withdrawal or Removal of the General
Partner."
44
<PAGE>
DISTRIBUTIONS OF CASH FROM OPERATIONS DURING SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash constituting Cash from
Operations with respect to any quarter during the Subordination Period will be
made in the following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Common Unit an
amount equal to the Minimum Quarterly Distribution for such quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Common Unit an
amount equal to any cumulative Common Unit Arrearages on each Common Unit
with respect to any prior quarter;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
Subordinated Unit an amount equal to the Minimum Quarterly Distribution for
such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
The Minimum Quarterly Distribution is subject to adjustment as described
below under "--Distributions of Cash from Interim Capital Transactions" and
"--Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels."
The above references to the 2% of Available Cash constituting Cash from
Operations distributed to the General Partner are references to the amount of
the General Partner's percentage interest in distributions from the
Partnership and the Operating Partnership on a combined basis. The General
Partner will own a 1% general partner interest in the Partnership and a
1.0101% general partner interest in the Operating Partnership. Other
references in this Prospectus to the General Partner's 2% interest or to
distributions of 2% of Available Cash are also references to the amount of the
General Partner's combined percentage interest in the Partnership and the
Operating Partnership.
DISTRIBUTIONS OF CASH FROM OPERATIONS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash constituting Cash from
Operations with respect to any quarter after the Subordination Period will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash is distributed in respect of both
the Common Units and the Subordinated Units in an amount equal to the Minimum
Quarterly Distribution and Available Cash has been distributed on outstanding
Common Units in such amount as may be necessary to eliminate any Common Unit
Arrearages, then any additional Available Cash will be distributed among the
Unitholders, the General Partner and the holders of the Incentive Distribution
Rights in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders with respect to Common Unit Arrearages) a total of $0.55
for such quarter in respect of each Unit (the "First Target Distribution");
second, 85% to all Unitholders, pro rata, 13% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to
any distributions to Common Unitholders with respect to Common Unit
Arrearages) a total of $0.63 for such quarter in respect of each Unit (the
"Second Target Distribution");
45
<PAGE>
third, 75% to all Unitholders, pro rata, 23% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders with respect to Common Unit Arrearages) a total of $0.82
for such quarter in respect of each Unit (the "Third Target Distribution");
and
fourth, 50% to all Unitholders, pro rata, 48% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner.
The following table illustrates the percentage allocation of any such
additional Available Cash among the Unitholders, the General Partner and the
holders of the Incentive Distribution Rights up to the various target
distribution levels and a hypothetical annualized percentage yield to be
realized by a Unitholder at each different level of allocation between the
Unitholders, the General Partner and the holders of the Incentive Distribution
Rights. For purposes of the following table, the annualized percentage yield
is calculated on a hypothetical basis as the annual pretax yield on an
investment in a Common Unit during the first year following the investment
assuming that (i) the Common Unit was purchased at an amount equal to the
initial public offering price of $21.00 per Unit and (ii) the Partnership
distributed each quarter during the first year following the investment the
amount set forth under the column "Quarterly Distribution Amount." The
calculations are also based on the assumption that the quarterly distribution
amounts shown do not include any Common Unit Arrearages. The amounts set forth
under "Marginal Percentage Interest in Distributions" are the percentage
interests of the Unitholders, the General Partner and the holders of the
Incentive Distribution Rights in any Available Cash distributed over and above
the quarterly distribution amount shown, until Available Cash reaches the next
target distribution level, if any. The percentage interests shown for the
Unitholders and the General Partner for the Minimum Quarterly Distribution are
also applicable to quarterly distribution amounts that are less than the
Minimum Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
--------------------------------
HOLDERS OF
QUARTERLY HYPOTHETICAL INCENTIVE
DISTRIBUTION ANNUALIZED DISTRIBUTION GENERAL
AMOUNT YIELD UNITHOLDERS RIGHTS PARTNER
------------ ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.50 9.524% 98% 0% 2%
First Target
Distribution........... $0.55 10.476% 98% 0% 2%
Second Target
Distribution........... $0.63 12.000% 85% 13% 2%
Third Target
Distribution........... $0.82 15.619% 75% 23% 2%
Thereafter.............. -- -- 50% 48% 2%
</TABLE>
The General Partner expects to make distributions of all Available Cash
within 45 days after the end of each fiscal quarter ending January, April,
July and October to holders of record on the applicable record date, which
will generally be between 30 and 35 days after such quarter. The first
distribution for the period from the closing of this offering through October
31, 1994, is expected to be made on or before December 15, 1994, to holders of
record on or about November 30, 1994. The Minimum Quarterly Distribution and
First, Second and Third Target Distribution levels with respect to the period
from the closing of this offering through October 31, 1994, will be adjusted
(either upward or downward) to reflect the actual number of days in such
period. The Minimum Quarterly Distribution and First, Second and Third Target
Distribution levels are also subject to certain other adjustments as described
below under "--Distribution of Cash from Interim Capital Transactions" and "--
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions by the Partnership of Available Cash that constitutes Cash
from Interim Capital Transactions will be made 98% to all Unitholders, pro
rata, and 2% to the General Partner, until the Partnership shall have
distributed, in respect of each Unit, Available Cash constituting Cash from
46
<PAGE>
Interim Capital Transactions in an aggregate amount per Unit equal to the
Initial Unit Price. Thereafter, all distributions that constitute Cash from
Interim Capital Transactions will be distributed as if they were Cash from
Operations.
As Cash from Interim Capital Transactions is distributed, it is treated as
if it were a repayment of the Initial Unit Price. To reflect such repayment,
the Minimum Quarterly Distribution and First, Second and Third Target
Distribution levels will be adjusted downward by multiplying each amount by a
fraction, the numerator of which is the Unrecovered Initial Unit Price (as
defined in the glossary) immediately after giving effect to such repayment and
the denominator of which is the Unrecovered Initial Unit Price immediately
prior to such repayment.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Initial Unit Price is zero, then in effect the Minimum Quarterly
Distribution and the First, Second and Third Target Distribution levels each
will have been reduced to zero. Thereafter, all distributions of Available
Cash from all sources will be treated as if they were Cash from Operations
and, because the Minimum Quarterly Distribution and the First, Second and
Third Target Distributions will have been reduced to zero, the holders of the
Incentive Distribution Rights will be entitled to receive 48% of all
distributions of Available Cash after distributions in respect of Common Unit
Arrearages.
Distributions of Cash from Interim Capital Transactions will not reduce the
Minimum Quarterly Distribution for the quarter with respect to which they are
distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
The Minimum Quarterly Distribution, the First, Second and Third Target
Distribution levels and the Unrecovered Initial Unit Price will be
proportionately adjusted upward or downward, as appropriate, in the event of
any combination or subdivision of Common Units (whether effected by a
distribution payable in Common Units or otherwise), but not by reason of the
issuance of additional Common Units for cash or property. For example, in the
event of a two-for-one split of the Common Units (assuming no prior
adjustments), the Minimum Quarterly Distribution and the First, Second and
Third Target Distribution levels would each be reduced to 50% of its initial
level.
In addition, as noted above under "--Quarterly Distributions of Available
Cash--Distributions of Cash from Interim Capital Transactions," if a
distribution is made of Available Cash constituting Cash from Interim Capital
Transactions, the Minimum Quarterly Distribution and the First, Second and
Third Target Distribution levels will be adjusted downward proportionately, by
multiplying each such amount, as the same may have been previously adjusted,
by a fraction, the numerator of which is the Unrecovered Initial Unit Price
immediately after giving effect to such distribution and the denominator of
which is the Unrecovered Initial Unit Price immediately prior to such
distribution. For example, assuming the Unrecovered Initial Unit Price is
$21.00 per Unit and if Cash from Interim Capital Transactions of $10.50 per
Unit is distributed to Unitholders (assuming no prior adjustments), then the
amount of the Minimum Quarterly Distribution and the First, Second and Third
Target Distribution levels would each be reduced to 50% of its initial level.
If and when the Unrecovered Initial Unit Price is zero, the Minimum Quarterly
Distribution and the First, Second and Third Target Distribution levels each
will have been reduced to zero, and the holders of the Incentive Distribution
Rights will be entitled to receive 48% of all distributions of Available Cash
after distributions in respect of Common Unit Arrearages.
The Minimum Quarterly Distribution and First, Second and Third Target
Distribution levels may also be adjusted if legislation is enacted or if
existing law is modified or interpreted in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and First, Second,
and Third Target Distribution levels for each quarter thereafter would be
reduced to an amount equal to the product of (i) each of the Minimum Quarterly
Distribution and First, Second and Third Target Distribution levels multiplied
by (ii) one minus the sum of (x) the
47
<PAGE>
maximum marginal federal income tax rate to which the Partnership is subject
as an entity plus (y) any increase that results from such legislation in the
effective overall state and local income tax rate to which the Partnership is
subject as an entity for the taxable year in which such quarter occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes). For
example, assuming the Partnership was not previously subject to state and
local income tax, if the Partnership were to become taxable as an entity for
federal income tax purposes and the Partnership became subject to a maximum
marginal federal, and effective state and local, income tax rate of 38%, then
the Minimum Quarterly Distribution and the First, Second and Third Target
Distribution levels would each be reduced to 62% of the amount thereof
immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of and the partners'
capital account balances will be adjusted to reflect any resulting gain or
loss. The proceeds of such liquidation will, first, be applied to the payment
of creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders, the General Partner and the holders of the Incentive Distribution
Rights in accordance with their respective capital account balances, as so
adjusted.
Partners are entitled to liquidation distributions in accordance with
capital account balances. Although operating losses are allocated to all
Unitholders pro rata, the allocations of gains and losses attributable to
liquidation are intended to entitle the holders of outstanding Common Units to
a preference over the holders of outstanding Subordinated Units upon the
liquidation of the Partnership, to the extent of the Unrecovered Initial Unit
Price plus any Common Unit Arrearages. However, no assurance can be given that
the gain or loss upon liquidation of the Partnership will be sufficient to
achieve this result. The manner of such adjustment is as provided in the
Partnership Agreement, the form of which is included as Appendix A to this
Prospectus. Any gain (or unrealized gain attributable to assets distributed in
kind) will be allocated to the partners as follows:
first, to the General Partner and the holders of Units that have negative
balances in their capital accounts to the extent of and in proportion to
such negative balance;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the Unrecovered Initial Unit Price in respect of such Common Unit plus any
Common Unit Arrearages in respect of such Common Units;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Subordinated Unit is
equal to the Unrecovered Subordinated Unit Capital (as defined in the
glossary) in respect of a Subordinated Unit;
fourth, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been allocated under this clause fourth an amount per Unit
equal to (a) the excess of the First Target Distribution per Unit over the
Minimum Quarterly Distribution per Unit for each quarter of the
Partnership's existence, less (b) the amount per Unit of any distributions
of Available Cash constituting Cash from Operations in excess of the
Minimum Quarterly Distribution per Unit that was distributed 98% to the
Unitholders, pro rata, and 2% to the General Partner, for any quarter of
the Partnership's existence;
fifth, 85% to all Unitholders, pro rata, 13% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner,
until there has been allocated under this clause fifth an amount per Unit
equal to (a) the excess of the Second Target Distribution per Unit over the
First Target Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Unit of any distributions of Available
Cash constituting Cash from Operations in excess of the First Target
Distribution per Unit that was distributed 85% to the Unitholders, pro
rata, 13% to the holders of the Incentive Distribution Rights, pro rata,
and 2% to the General Partner, for any quarter of the Partnership's
existence;
48
<PAGE>
sixth, 75% to all Unitholders, pro rata, 23% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner,
until there has been allocated under this clause sixth an amount per Unit
equal to (a) the excess of the Third Target Distribution per Unit over the
Second Target Distribution per unit for each quarter of the Partnership's
existence, less (b) the amount per Unit of any distributions of Available
Cash constituting Cash from Operations in excess of the Second Target
Distribution per Unit that was distributed 75% to the Unitholders, pro
rata, 23% to the holders of the Incentive Distribution Rights, pro rata,
and 2% to the General Partner, for any quarter of the Partnership's
existence; and
thereafter, 50% to all Unitholders, pro rata, 48% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner.
Any loss or unrealized loss will be allocated to the General Partner and the
Unitholders as follows: first, 98% to the Subordinated Unitholders in
proportion to the positive balances in their respective capital accounts, and
2% to the General Partner, until the positive balances in such Subordinated
Unitholders' respective capital accounts have been reduced to zero, second,
98% to the Common Unitholders in proportion to the positive balances in their
respective capital accounts, and 2% to the General Partner, until the positive
balances in such Common Unitholders' respective capital accounts have been
reduced to zero; and thereafter, to the General Partner.
PRO FORMA AVAILABLE CASH
On a pro forma basis, Available Cash constituting Cash from Operations for
the fiscal year ended July 31, 1993 and the nine months ended April 30, 1994
(calculated using actual net cash flows for such fiscal year and nine-month
period, adjusted for changes in working capital and assuming the Credit
Facility was in place during such fiscal year and nine-month period) would
have been sufficient to allow the Partnership to distribute the Minimum
Quarterly Distribution on all of the Common Units and approximately 90% of the
Minimum Quarterly Distribution on all of the Subordinated Units with respect
to such fiscal year and to distribute the Minimum Quarterly Distribution on
all of the Common Units and all of the Subordinated Units with respect to such
nine-month period. If the transactions to be consummated at the closing of
this offering had been completed on August 1, 1993, the Company believes that
pro forma Available Cash constituting Cash from Operations for the fiscal year
ending July 31, 1994 (calculated using actual net cash flows for the nine
months ended April 30, 1994, adjusted for changes in working capital and
assuming the Credit Facility was in place during such fiscal year), would be
sufficient to allow the Partnership to distribute the Minimum Quarterly
Distribution on all of the Common Units and all of the Subordinated Units with
respect to such fiscal year.
Based on the assumptions discussed below, the General Partner believes that
the Partnership will generate Available Cash constituting Cash from Operations
sufficient to allow the Partnership to distribute at least the Minimum
Quarterly Distribution on all of the Common Units and all of the Subordinated
Units with respect to each full fiscal quarter through the quarter ending July
31, 1995, although no assurance can be given respecting such distributions.
This belief is based on the General Partner's opinions regarding the future
business prospects of the Partnership, the assumption that normal weather
patterns will be experienced and on other assumptions that the General Partner
believes are reasonable. The General Partner's estimates of Available Cash
constituting Cash from Operations are based upon a number of assumptions
beyond the control of the General Partner and which cannot be predicted with
certainty, including assumptions concerning weather, market and economic
conditions and other factors, such as estimates of propane prices and retail
gross margins. See "Risk Factors." If the General Partners assumptions prove
to be incorrect, Available Cash constituting Cash from Operations generated by
the Partnership could be insufficient to permit the Partnership to make the
distributions estimated as described above. Accordingly, no assurance can be
given that distributions at those levels will be made.
49
<PAGE>
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and the dates indicated,
selected historical financial and operating data for the Company and selected
pro forma financial and operating data for the Partnership after giving effect
to the transactions contemplated by this Prospectus. The selected historical
income statement and balance sheet data of the Company for the five years
ended July 31, 1993, and for the nine months ended April 30, 1994 is derived
from financial statements which have been audited by Deloitte & Touche,
independent auditors, certain of which appear elsewhere in this Prospectus.
The historical financial data for the nine-month period ended April 30, 1993,
has been derived from the unaudited financial statements appearing herein,
and, in the opinion of management of the Company, contain all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the Company's results of operation and financial condition.
The Partnership's selected pro forma financial data should be read in
conjunction with such consolidated financial statements and the pro forma
combined financial information and notes thereto included elsewhere in this
Prospectus. The propane industry is seasonal in nature with its peak activity
during the winter months. Therefore, the results for the interim period are
not indicative of the results that can be expected for a full fiscal year. The
following should be read in conjunction with the Financial Statements and
Notes to Financial Statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PARTNERSHIP
HISTORICAL PRO FORMA
-------------------------------------------------- -----------
YEAR ENDED JULY 31, YEAR ENDED
-------------------------------------------------- JULY 31,
1989 1990 1991 1992 1993 1993
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues........... $409,953 $467,641 $543,933 $501,129 $541,945 $541,945
Depreciation and
amortization............ 32,528 33,521 36,151 31,196 30,840 30,840
Operating income......... 53,425 54,388 63,045 56,408 58,553 58,053
Interest expense......... 54,572 55,095 60,507 61,219 60,071 29,220
Earnings (loss) from
continuing operations... (1,506) (347) 1,979 (1,700)(1) 109 28,578
Earnings from continuing
operations per Unit..... $ 0.91
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital.......... $(39,708) $ 50,456 $ 53,403 $ 67,973 $ 74,408
Total assets............. 487,631 554,580 580,260 598,613 573,376
Payable to (receivable
from) parent and
affiliates.............. 13,109 10,743 3,763 2,236 (916)
Long-term debt........... 354,626 465,644 466,585 501,614 489,589
Stockholder's equity..... 6,616 11,463 21,687 8,808 11,359
OPERATING DATA:
Retail propane sales
volumes (in gallons).... 498,395 499,042 482,211 495,707 553,413 553,413
Capital expenditures(2):
Maintenance.............. $ 7,271 $ 5,428 $ 7,958 $ 10,250 $ 10,527 $ 10,527
Growth................... 10,062 10,447 2,478 3,342 2,851 2,851
Acquisition.............. 14,668 18,005 25,305 10,112 897 897
-------- -------- -------- -------- -------- --------
Total................... $ 32,001 $ 33,880 $ 35,741 $ 23,704 $ 14,275 $ 14,275
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Earnings before
depreciation,
amortization, interest
and taxes(3)............ $ 85,953 $ 87,909 $ 99,196 $ 87,604 $ 89,393 $ 88,893
Fixed charge coverage ra-
tio(4).................. 3.0x
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP
HISTORICAL PRO FORMA
---------------------------------- --------------------
NINE MONTHS ENDED NINE MONTHS
APRIL 30, ENDED
---------------------------------- APRIL 30,
1993 1994 1994
--------------- --------------- --------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA AND RATIO)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues......... $468,302 $450,477 $ 450,477
Depreciation and
amortization.......... 23,238 21,688 21,688
Operating income....... 64,708 75,445 75,070
Interest expense....... 45,056 44,233 21,291
Earnings from
continuing operations. 12,785 20,356 53,770
Earnings from
continuing operations
per Unit.............. $ 1.72
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 100,645 $104,164 $ 53,510
Total assets........... 602,063 600,113 478,460
Payable to (receivable
from) parent and
affiliates............ 2,076 (3,909) 91
Long-term debt......... 500,227 476,471 272,441
Stockholder's equity... 21,855 30,848
Partners' capital:
Common unitholders..... 62,859
Subordinated
unitholder............ 74,034
General partner........ 2,794
OPERATING DATA:
Retail propane sales
volumes (in gallons).. 483,489 490,254 490,254
Capital
expenditures(2):
Maintenance............ $ 9,232(5) $ 3,377(5) $ 3,377
Growth................. 2,597 2,568 2,568
Acquisition............ -- 2,472 2,472
--------------- --------------- ---------------
Total................. $ 11,829 $ 8,417 $ 8,417
=============== =============== ===============
SUPPLEMENTAL DATA:
Earnings before
depreciation,
amortization, interest
and taxes(3).......... $ 87,946 $ 97,133 $ 96,758
Fixed charge coverage
ratio(4).............. 3.3x
</TABLE>
- --------
(1) In August 1991, the Company revised the estimated useful lives of storage
tanks from 20 to 30 years in order to more closely reflect expected useful
lives of the assets. The effect of the change in accounting estimates
resulted in a favorable impact on net loss from continuing operations of
approximately $3.7 million for the fiscal year ended July 31, 1992.
(2) The Company's capital expenditures fall generally into three categories:
(i) maintenance capital expenditures, which include expenditures for
repair and replacement of property, plant and equipment; (ii) growth
capital expenditures, which include expenditures for purchases of new
propane tanks and other equipment to facilitate expansion of the Company's
retail customer base; and (iii) acquisition capital expenditures, which
include expenditures related to the acquisition of retail propane
operations. Acquisition capital expenditures include a portion of the
purchase price allocated to intangibles associated with the acquired
businesses.
(3) EBITDA is calculated as operating income plus depreciation and
amortization. EBITDA is not intended to represent cash flow and does not
represent the measure of cash available for distribution. EBITDA is a non-
GAAP measure, but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution. In
addition, EBITDA is not intended as an alternative to earnings from
continuing operations or net income.
(4) Such ratio is calculated for the preceding four quarter period. Under the
terms of the Indenture, the Operating Partnership will be prohibited from
making any distributions to the Partnership if the Operating Partnership's
Fixed Charge Coverage Ratio for the preceding four fiscal quarters does
not exceed 2.25 to 1 after giving effect to such distribution.
(5) The decrease in maintenance capital expenditures from the nine months
ended April 30, 1993 to the nine months ended April 30, 1994 is primarily
due to the purchase of the Company's corporate headquarters in Liberty,
Missouri for its fair market value of $4.1 million in the first nine
months of fiscal 1993.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the historical and pro forma financial
condition and results of operations of the Company and the Partnership. The
discussion should be read in conjunction with the historical and pro forma
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
GENERAL
The Partnership was recently formed to acquire and operate the business and
assets of the Company. The Company is engaged in the sale, distribution,
marketing and trading of propane and other natural gas liquids. The Company's
revenue is derived primarily from the retail propane marketing business. The
Company believes it is the third largest retail marketer of propane in the
United States, based on gallons sold, serving more than 600,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 416 retail outlets and 226 satellite
locations. The Company's annual retail propane sales volume was approximately
553 million, 496 million and 482 million gallons during the fiscal years ended
July 31, 1993, 1992 and 1991, respectively.
The retail propane business of the Company consists principally of
transporting propane purchased in the contract and spot markets, primarily
from major oil companies, to its retail distribution outlets and then to tanks
located on the customers' premises as well as to portable propane cylinders.
In the residential and commercial markets, propane is primarily used for space
heating, water heating and cooking. In the agricultural market propane is
primarily used for crop drying, space heating, irrigation and weed control. In
addition, propane is used for certain industrial applications, including use
as an engine fuel which is burned in internal combustion engines that power
vehicles and forklifts and as a heating or energy source in manufacturing and
drying processes.
The retail market for propane is seasonal because of its primary use for
heating in residential and commercial buildings. In addition, sales volumes
have traditionally been affected by various factors, including competitive
conditions, demand for product, variations in weather and fluctuations in
propane prices. The Company's results for its first fiscal quarter (August,
September and October) and fourth fiscal quarter (May, June and July) are
typically lower than the second and third fiscal quarters, primarily as a
result of warmer weather in its first and fourth fiscal quarters. The
following tables set forth historical unaudited revenues and operating income
for the Company for the period from August 1, 1991 to July 31, 1993, for each
quarter in fiscal years 1992 and 1993:
QUARTERLY REVENUES
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1992 % 1993 %
----------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Quarter ended:
October 31................................ $114,263 22.8 $116,497 21.5
January 31................................ 193,652 38.6 191,499 35.3
April 30.................................. 122,658 24.5 160,306 29.6
July 31................................... 70,556 14.1 73,643 13.6
-------- ----- -------- -----
Total................................... $501,129 100.0 $541,945 100.0
======== ===== ======== =====
</TABLE>
52
<PAGE>
QUARTERLY OPERATING INCOME
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1992 % 1993 %
----------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Quarter ended:
October 31.............................. $ 5,488 9.7 $ 3,823 6.5
January 31.............................. 39,194 69.5 39,186 66.9
April 30................................ 16,777 29.7 21,699 37.1
July 31................................. (5,051) (8.9) (6,155) (10.5)
------- ----- ------- -----
Total................................. $56,408 100.0 $58,553 100.0
======= ===== ======= =====
</TABLE>
The Company is also engaged in the trading of propane and other natural gas
liquids, chemical feedstocks marketing and wholesale propane marketing.
Through its natural gas liquids trading operations and wholesale marketing,
the Company has become one of the largest independent traders of propane and
natural gas liquids in the United States. In fiscal year 1993, the Company's
annual wholesale and trading sales volume was approximately 1.2 billion
gallons of propane and other natural gas liquids, approximately 64% of which
was propane. This volume, when combined with the Company's retail volume,
makes the Company one of the largest purchasers of propane, which the General
Partner believes will help assure the Partnership favorable prices and supply
of propane during times of increased demand. For the fiscal years ended July
31, 1993, 1992 and 1991, the Company had net revenues of $6.7 million, $4.9
million and $9.9 million, respectively, from its trading activities.
RESULTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1994 VERSUS APRIL 30, 1993
Total Revenues. Total revenues decreased 3.8% to $450,477,000 as compared
with $468,302,000 for the prior year period. The overall decrease was
attributable to revenues from other operations (net trading operations,
wholesale propane marketing and chemical feedstocks marketing) decreasing
23.1% to $56,237,000, and revenues from retail operations decreasing 0.2% to
$394,240,000.
The decrease in revenues from other operations was primarily due to higher
sales of chemical feedstocks in the prior period resulting from sales of
chemical feedstocks that were designated for storage but were sold due to
storage limitations. Additional decreases were the result of lower product
costs for chemical feedstocks and wholesale propane marketing and decreased
net trading results due to reduced market volatility relative to the prior
period.
The decrease in revenues from retail operations was primarily due to a
decrease in selling price partially offset by an increase in sales volume due
to cooler temperatures than those which existed in the prior period. The
volume of gallons sold, excluding acquisitions, increased revenues by
$3,339,000. Fiscal year 1994 and 1993 acquisitions increased revenues in the
nine months ended April 30, 1994 by $1,659,000. These increases were offset by
a $6,775,000 decrease in sales price due to lower product costs.
Gross Profit. Gross profit increased 4.5% to $221,151,000 as compared with
$211,566,000 for the prior period, primarily due to an increase in retail
operations gross profit. Retail operations results improved due to increased
sales volume as discussed previously and to margin increases as a result of
favorable changes in the competitive pressures of the industry and to normal
fluctuations in the Company's product mix.
Operating Expenses. Operating expenses increased 0.1% to $112,687,000 as
compared with $112,553,000, for the prior period, primarily due to (i) an
increase in incentive compensation expense, and (ii) an increase in overtime,
variable labor and vehicle expenses due to increased sales volume. These
increases were primarily offset by a decrease in general liability and workers
compensation expense due to improved claims administration and decreased sales
and use tax audit assessments.
General and Administrative Expenses. General and administrative expenses
increased 10.1% to $8,128,000 as compared with $7,385,000 for the prior period
due to increased incentive compensation
53
<PAGE>
expense. This increase was partially offset by a reduction in facilities rent
expense in the second and third quarters of fiscal year 1993 due to the
purchase of the Liberty, Missouri, corporate offices.
Depreciation and Amortization. Depreciation expense decreased 6.7% to
$21,688,000 as compared with $23,238,000 for the prior period due primarily to
extending the use of the Company's vehicles beyond the depreciable life and to
the reduction in the number of Company owned vehicles.
Net Interest Expense. Net interest expense decreased 3.0% to $41,442,000 as
compared with $42,723,000 for the prior period due to the reacquisition of
$11,900,000 and $10,500,000 of senior notes in the third quarter of fiscal
1994 and in the fourth quarter of fiscal year 1993, respectively, offset by
increased non-cash amortization of financing costs.
Net Earnings. Net earnings increased 52.4% to $19,489,000 as compared with
$12,785,000 for the prior period primarily due to the increase in retail
operations sales volume and margins offset by increased operating and general
and administrative expenses and the fiscal 1994 extraordinary loss from early
extinguishment of debt.
FISCAL YEAR ENDED JULY 31, 1993 VERSUS JULY 31, 1992
Total Revenues. Total revenues increased 8.1% to $541,945,000 as compared
with $501,129,000 for the prior year. This increase was attributable to an
increase in revenues from retail operations of 10.6% to $451,966,000 partially
offset by a decrease in revenues from other operations (net trading
operations, chemical feedstocks marketing and wholesale propane marketing) of
2.6% to $89,979,000.
The increase in revenues attributable to retail operations resulted from
increased sales volume. The sales volume increase was mainly due to a surge in
agricultural business from crop drying in farm belt states and cooler
temperatures than those which existed in the prior year. The volume of gallons
sold, excluding the effects of acquisitions, increased revenues by
$42,648,000. This increase was offset by a decrease in selling price which
reduced revenues by $3,326,000. Acquisitions completed in fiscal 1993 and 1992
increased revenues by $3,172,000.
Total revenues attributable to other operations decreased 2.6% to
$89,979,000. Wholesale propane marketing revenues decreased as a result of a
change in focus and marketing strategy. This decrease was offset by an
increase in net trading operations as a result of increased market volatility
relative to the prior year.
Gross Profit. Gross profit increased 4.3% to $243,912,000 as compared with
$233,850,000 for the prior year. The increase was primarily due to an increase
in retail operations' sales volume and an increase in net trading and
wholesale marketing operating results. These increases were offset by a
decrease in retail operations' margins due to competitive pricing pressures in
the industry.
Operating Expenses. Operating expenses increased 4.1% to $139,617,000 as
compared with $134,165,000 for the prior year, due to (i) an increase in
personnel costs from increased sales volume and accrued incentive compensation
expense, (ii) an increase in vehicle expenses from increased sales volume,
(iii) an increase in other expenses from sales and use tax assessments on
prior year purchases and leases, and (iv) general increases in the cost of
doing business. These increases were partially offset by a decrease in general
liability expense due to improved claims administration and to a decrease in
bad debt expense due to improved credit and collections administration.
Depreciation and Amortization. Depreciation and amortization expense
decreased 1.1% to $30,840,000 as compared with $31,196,000 for the prior year
due to retirements and fully depreciated assets.
General and Administrative Expenses. General and administrative expenses
increased 33.3% to $10,079,000 as compared with $7,561,000 for the prior year
period due to an increase in compensation expense related to the long-term
incentive plan and an increase in non-capitalized software maintenance costs.
54
<PAGE>
Net Interest Expense. Net interest expense of $56,805,000 remained
essentially unchanged as compared with $56,818,000 for the prior year.
Decreases in interest expense due to lower effective interest rates were
offset by a decrease in interest income as a result of lower interest rates on
short-term investments.
Extraordinary Loss. The extraordinary loss of $886,000, net of $543,000
income tax benefit, was due to the early extinguishment of $10,500,000 of the
senior notes as discussed in the notes to the consolidated financial
statements.
Net Loss. Net loss decreased to $777,000 as compared with a loss of
$11,679,000 for the prior year due to a $9,093,000 decrease in the
extraordinary loss from the early extinguishment of debt and to an increase in
net operating results.
FISCAL YEAR ENDED JULY 31, 1992 VERSUS JULY 31, 1991
Total Revenues. Total revenues decreased 7.9% to $501,129,000 as compared
with $543,933,000 for the prior year. This decrease was attributable to a
decrease in revenues from retail operations of 8.1% to $408,781,000 and a
decrease in revenues from other operations (net trading operations, chemical
feedstocks marketing and wholesale propane marketing) of 6.8% to $92,348,000.
The decrease in revenues attributable to retail operations resulted mainly
from a decrease in selling price related to the end of the Persian Gulf crisis
and to competitive pressures within the industry. In fiscal 1991, selling
prices were increased in response to product cost increases brought about by
the Persian Gulf crisis. The volume of gallons sold, excluding the effects of
acquisitions, decreased due to temperatures being warmer than normal and
warmer than the prior year in the primary heating months, along with
competitive pressures within the industry. The decrease in selling price and
volumes reduced total revenues by $45,080,000 and $1,727,000, respectively.
Acquisitions in fiscal 1991 and 1992 increased fiscal 1992 revenues by
$10,120,000.
The decrease in revenues attributable to other operations resulted from
declines in net trading operations and wholesale propane marketing revenues
offset by an increase in revenues from chemical feedstocks marketing. Net
trading operations decreased due to a less volatile market than that which
existed in fiscal 1991 during the Persian Gulf crisis. Wholesale propane
marketing revenues decreased as a result of changes in marketing strategy and
focus of the business and a decrease in selling price and volumes for the
reasons noted above for retail operations. Chemical feedstocks marketing
revenues increased due to additional emphasis on butane sales.
Gross Profit. Gross profit decreased 4.9% to $233,850,000 as compared with
$245,965,000 for the prior year. Approximately half of the decrease was
attributable to retail operations as a result of competitive pressures in the
industry and warmer than normal and warmer than prior year temperatures in the
primary heating months. The remaining decrease was attributable to net trading
operations and wholesale propane marketing.
Operating Expenses. Operating expenses increased 3.5% to $134,165,000 as
compared with $129,684,000 for the prior year. This increase was primarily due
to an increase in payroll expenses, general liability and workers'
compensation insurance and an increase in expenses due to acquisitions in
fiscal 1992 and 1991. These increases were partially offset by a reduction in
incentive compensation expense.
Depreciation and Amortization. Depreciation and amortization expense
decreased 13.7% to $31,196,000 as compared with $36,151,000 for the prior year
due primarily to a change in the useful lives of certain assets as discussed
in the notes to the consolidated financial statements. The change was based on
the expected useful lives of the assets and industry practice.
General and Administrative Expenses. General and administrative expenses
decreased 41.6% to $7,561,000 as compared with $12,953,000 for the prior year
due primarily to a reversal of expense previously provided related to the
long-term incentive plan and the elimination of certain management positions.
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Net Interest Expense. Net interest expense increased 0.3% to $56,818,000 as
compared with $56,666,000 for the prior year. In connection with the
refinancing of the subordinated debt, the Company borrowed an additional
$40,000,000. The impact of this additional borrowing on interest expense was
offset by a lower effective interest rate on the new subordinated debt and the
investment of the excess cash proceeds from the refinancing.
Extraordinary Loss. The extraordinary loss of $9,979,000, net of income tax
benefit, was due to the refinancing of the subordinated debt as discussed in
the notes to the consolidated financial statements.
Net Earnings (Loss). Net earnings decreased to a net loss of $11,679,000 as
compared with net earnings of $1,979,000 for the prior year due primarily to
the decrease in gross profit and the extraordinary loss on the refinancing of
subordinated debt.
FISCAL YEAR ENDED JULY 31, 1991 VERSUS JULY 31, 1990
Total Revenues. Total revenues increased 16.3% to $543,933,000 as compared
with $467,641,000 for the prior year. This increase was attributable to (i) an
increase in revenues from retail operations of 12.6% to $444,886,000 and (ii)
an increase in revenues from other operations (wholesale propane marketing,
chemical feedstocks marketing and net trading operations) of 36.3% to
$99,047,000.
The increase in revenues from retail operations resulted primarily from an
increase in selling prices in response to an increase in product costs brought
about by the Persian Gulf crisis. Selling prices were increased in order to
maintain normal operating margins. Increased retail selling prices resulted in
a $62,505,000 revenue variance. The acquisitions of retail propane businesses
increased revenues by approximately $18,484,000. A reduction in residential,
motor fuel applications and reseller sales volumes decreased revenues
approximately $30,236,000. Retail operations volumes decreased 3.4% compared
to the prior year due to temperatures being warmer than the prior year and
warmer than normal in addition to customers requesting smaller volume
deliveries while propane selling prices remained high.
The increase in revenues from other operations resulted from increases in
all areas of other operations. Wholesale propane and chemical feedstocks
marketing revenues increased due primarily to an increase in selling prices in
response to increased product costs as noted above. Net trading operations
revenues increased due to increased volatility in the market generating a
larger volume of trades. Other operations volumes increased 35.2% compared to
the prior year.
Gross Profit. Gross profit increased 10.4% to $245,965,000 as compared with
$222,834,000 for the prior year. This increase was attributed to the
acquisitions of retail propane businesses in fiscal year 1991 and 1990 and an
increase in retail operations margins. Retail margins from existing business
increased to cover the increased costs of product delivery resulting from
smaller volume deliveries and increased carrying costs involved with higher
inventory and receivables balance. Also, gross profit for fiscal year 1990 was
adversely impacted by high product costs from inventory purchased in January
1990. Gross profit from other operations also increased primarily due to
increased wholesale propane marketing margins resulting from focusing
marketing efforts on higher margin sales and increased net trading operations
volume and margins resulting from the volatile propane market.
Operating Expenses. Operating expenses increased 13.1% to $129,684,000 as
compared with $114,639,000 for the prior period primarily due to (i) an
increase in full time payroll, incentive compensation expense and the related
payroll taxes as a result of increased retail operations margins and other
operations, (ii) an increase in vehicle expenses and in plant and office
expenses primarily from increases in vehicle fuel costs and customers
requesting more frequent, smaller volume deliveries and (iii) acquisitions of
retail propane businesses during fiscal year 1991 and 1990.
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General and Administrative Expenses. General and administrative expenses
decreased 19.6% to $12,953,000 as compared with $16,113,000 for the prior
period. A cost reduction program which was implemented March 1990 included
reductions of staff in non-critical areas and cuts in non-essential projects.
The results of this program and a reversal of expense previously provided
related to the long-term incentive plan contributed to the general and
administrative expense decrease.
Net Interest Expense. Net interest expense increased 6.0% to $56,666,000 as
compared with $53,463,000 due to the issuance of senior notes in July of 1990.
The excess cash proceeds from the issuance of the senior notes were invested
to offset interest expense incurred.
Net Earnings (Loss). Net earnings increased to $1,979,000 as compared with a
net loss of $3,814,000 for the prior period due to the increase in gross
profit which was offset partially by an increase in operating expenses and net
interest expense. Also in 1990, earnings were unfavorably impacted by an
extraordinary loss from refinancing of debt.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended April 30, 1994 and the twelve months ended July
31, 1993, the Company's operating cash flow provided from operations (as
measured by operating income before depreciation and amortization, interest
and taxes) was sufficient to (i) make interest payments and required
reductions to existing debt and (ii) make purchases of property, plant and
equipment.
Cash Flows from Operating Activities. Cash provided by operating activities
increased to $58,246,000 for the nine months ended April 30, 1994, as compared
with $47,081,000 for the prior period. This increase was primarily
attributable to an increase in net earnings and accounts payable, which were
offset by increases in inventory and accounts and notes receivable. Cash
provided by operating activities increased to $36,961,000 for the twelve
months ended July 31, 1993, as compared with $22,965,000 for the prior period.
This increase was primarily attributable to an increase in earnings and a
decrease in inventory purchases in anticipation of future propane
requirements, offset by a decrease in accounts payable.
Cash Flows From Investing Activities. During the nine months ended April 30,
1994, the Company made aggregate expenditures for intangible assets and
property, plant and equipment of $8,417,000. During the twelve months ended
July 31, 1993, the Company made aggregate expenditures for intangible assets
and property, plant and equipment of $14,275,000. Total capital expenditures
are essentially governed by the cash interest coverage ratio covenants
contained in the various debt agreements. These covenants limited capital
expenditures depending upon the amount of cash flow and cash interest expense
of the Company.
The Company maintains its vehicle and transportation equipment fleet by
leasing light and medium duty trucks and tractors. The Company believes
vehicle leasing is a cost effective method for financing transportation
equipment. Capital requirements for repair and maintenance of property, plant
and equipment are relatively low since technological change is limited and the
useful lives of propane tanks and cylinders, the Company's principal physical
assets, are generally long.
The Company invested in U.S. Treasury Bills and U.S. government obligations
with remaining maturities, as of April 30, 1994, ranging from four to ten
months. These investments are presented as short-term investments in the
Company's consolidated financial statements.
Cash Flows From Financing Activities. The Company currently has a $50
million bank credit facility which terminates July 31, 1995. The facility
provides for a working capital facility and a letter of credit facility. At
April 30, 1994, there were no borrowings outstanding under the working capital
facility
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and letters of credit outstanding under the letter of credit facility, which
are used primarily to secure obligations under certain insurance and leasing
arrangements, totaled $32,778,000, resulting in an available bank credit
facility of $17,222,000. The Company does not have any significant commitments
for fixed asset acquisitions, unusual working capital commitments or
contingent liabilities which might materially affect short-term liquidity.
Effects of Inflation. In the past the Company has been able to adjust its
sales price of product in response to market demand, cost of product,
competitive factors and other industry trends. Consequently, changing prices
as a result of inflationary pressures have not had a material adverse effect
on profitability although revenues may be affected. Inflation has not
materially impacted the results of operations and the Company does not believe
normal inflationary pressures will have a material adverse effect on the
profitability of the Partnership in the future.
Adoption of New Accounting Standards. The Company provides postretirement
medical benefits to a closed group of approximately 400 retired employees and
their spouses. The plan requires the Company to provide primary medical
benefits to the participants until age 65, at which time the Company only pays
a fixed amount of $55 per month per participant for medical benefits.
Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106--Employers' Accounting for Postretirement
Benefits Other Than Pensions which requires accrual of postretirement benefits
(such as health care benefits) during the years an employee provides services.
The Company elected to amortize the postretirement benefit obligation over a
period not to exceed the average remaining life expectancy of the plan
participants (since all of the plan participants are retired). The cumulative
effect as of August 1, 1993, and impact for the nine months ended April 30,
1994, of adopting this statement was not material to the financial statements
of the Company. See Note L to the consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 112--Employers' Accounting For Postemployment
Benefits which is effective for fiscal years beginning after December 15,
1993. This statement requires that employers recognize over the service lives
of employees the costs of postemployment benefits if certain conditions are
met. The General Partner does not believe that adoption of the statement will
have a material impact on the results of operations or financial condition of
the Partnership.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115--Accounting for Certain Investments in Debt and
Equity Securities, which is effective for fiscal years beginning after
December 15, 1993. The statement addresses the accounting and reporting for
certain investments in debt and equity securities and expands the use of fair
value accounting for those securities but retains the use of the amortized
cost method for investments that the Company has the positive intent and
ability to hold to maturity. The General Partner does not believe that the
adoption of this statement will have a material effect on the results of
operations or financial condition of the Partnership.
PRO FORMA FINANCIAL CONDITION
The ability of the Partnership to satisfy its obligations will be dependent
upon future performance, which will be subject to prevailing economic
conditions and to financial, business and weather conditions and other
factors, many of which are beyond its control. For the fiscal year ending July
31, 1995, the General Partner believes that the Partnership will generate
sufficient Available Cash constituting Cash from Operations to meet its
obligations and enable it to distribute the Minimum Quarterly Distribution on
all Common Units and Subordinated Units. See "Cash Distribution Policy--
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Pro Forma Available Cash." Future capital needs of the Partnership are
expected to be provided by future operations, existing cash balances and the
working capital facility. The Partnership may incur additional indebtedness or
issue additional Units in order to fund possible future acquisitions.
Concurrent with the closing of the sale of the Common Units offered hereby,
the Operating Partnership will sell in a registered public offering
approximately $250 million aggregate principal amount of Senior Notes, the net
proceeds of which, along with the estimated $255.5 million net proceeds of the
offering of Common Units, will be used to retire substantially all of the
approximately $481.5 million of indebtedness of the Company to be assumed by
the Operating Partnership. The sale of the Common Units offered hereby is
subject to, among other things, the sale of the Senior Notes. Upon the
consummation of the transactions contemplated by this Prospectus, the
Partnership will have total indebtedness of approximately $268.9 million. See
"The Transactions."
The Senior Notes. The following is a summary of the terms of the Senior
Notes, which will be issued pursuant to an Indenture (the "Indenture"), the
form of which is filed as an exhibit to the registration statement of which
this Prospectus is a part. The Senior Notes will be unsecured general
obligations of the Operating Partnership and will be recourse to the General
Partner in its capacity as the general partner of the Operating Partnership.
The $200 million aggregate principal amount of Fixed Rate Senior Notes will
bear interest from the date of issuance at the rate of 10.0% per annum,
payable semi-annually in arrears. The $50 million aggregate principal amount
of Floating Rate Senior Notes will bear interest from the date of issuance at
the three-month LIBOR rate plus 3 1/8%, adjusted quarterly, payable quarterly
in arrears. The Senior Notes will mature on August 1, 2001. The Fixed Rate
Senior Notes will not require any mandatory redemption or sinking fund payment
prior to maturity. The Floating Rate Senior Notes require sinking fund
payments of $5.0 million in each of 1999 and 2000, calculated to retire an
aggregate of 20% of the Floating Rate Senior Notes prior to maturity. The
Fixed Rate Senior Notes are redeemable at the option of the Operating
Partnership, in whole or in part, at any time on or after August 1, 1998 at
redemption prices specified in the Indenture, plus accrued and unpaid interest
to the date of redemption. The Floating Rate Senior Notes are redeemable at
the option of the Operating Partnership on or after August 1, 1995, in whole
or in part, at a redemption price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date. Upon the
occurrence of certain events constituting a "Change of Control" (as defined in
the Indenture), including if James E. Ferrell or his affiliates do not control
the General Partner, other than in certain limited circumstances, holders of
the Senior Notes will have the right to require the Operating Partnership to
purchase each such holder's Senior Notes, in whole or in part, at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The Indenture will contain customary covenants applicable to the Operating
Partnership and its subsidiaries, including limitations on the ability of the
Operating Partnership and its subsidiaries to, among other things, incur
additional indebtedness (other than certain permitted indebtedness) and issue
preferred interests, create liens, incur dividend and other payment
restrictions affecting subsidiaries, enter into mergers, consolidations or
sales of all or substantially all assets, make asset sales and enter into
transactions with affiliates. Under the Indenture, the Operating Partnership
will be permitted to make cash distributions in an amount in such fiscal
quarter not to exceed Available Cash (as defined in the Indenture) of the
Operating Partnership for the immediately preceding fiscal quarter plus the
amount of any Available Cash of the Operating Partnership for the first 45
days of such fiscal quarter so long as the amount of such Available Cash so
included does not exceed the amount of unused available working capital
indebtedness that the Operating Partnership could have incurred on the last
day of the immediately preceding fiscal quarter; provided, however, that the
Operating Partnership will be prohibited from making any distribution to the
Partnership (i) if a default or event of default exists or would exist upon
making such distribution, (ii) if the Operating Partnership's Fixed Charge
Coverage Ratio for the preceding four fiscal quarters does not exceed 2.25 to
1 after giving effect to such distribution or (iii) unless the Operating
Partnership and its subsidiaries shall have in the aggregate (a) acquired,
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improved or repaired property, plant or equipment which is accounted for as a
capital expenditure in accordance with GAAP or (b) acquired, through merger or
otherwise, all or substantially all of the outstanding stock or other capital
interests, or all or substantially all of the assets, of any entity engaged in
the business in which the Operating Partnership is engaged on the date of the
Indenture (each of the transactions referred to in clauses (a) and (b) above,
a "Capital Investment") for Aggregate Consideration since the date of the
Indenture which, when added to all cash reserves established and funded by the
Operating Partnership (the proceeds of which shall be used solely for Capital
Investments), is no less than the amounts set forth in the table below, if
such distribution is made in the 12-month period beginning August 1 of the
years indicated.
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1994 $ 0
1995............................ $ 15 million
1996............................ $ 30 million
1997............................ $ 45 million
1998............................ $ 70 million
1999............................ $ 95 million
2000............................ $120 million
</TABLE>
For purposes of the foregoing, "Aggregate Consideration" with respect to
Capital Investments shall mean at any date all cash paid in connection with
all Capital Investments consummated on or prior to such date, the fair market
value of all partnership interests of the Partnership or the Operating
Partnership (determined by the General Partner in good faith with reference
to, among other things, the trading price of such partnership interests, if
then traded on any national securities exchange or automated quotation system)
constituting all or a portion of the purchase price for all Capital
Investments consummated on or prior to such date and the aggregate principal
amount of all indebtedness incurred or assumed by the Operating Partnership in
connection with all Capital Investments consummated on or prior to such date.
As of April 30, 1994 the Fixed Charge Coverage Ratio for the preceding four
fiscal quarters was 3.3 to 1 on a pro forma basis. The payment restrictions in
the Indenture are not anticipated to preclude the Partnership from making
distributions of at least the Minimum Quarterly Distribution on all Common
Units in each quarter during the Subordination Period.
Credit Facility. Immediately prior to the closing of this offering, the
Operating Partnership expects to enter into a $185 million Credit Facility
with Bank of America National Trust & Savings Association ("BofA"), a portion
of which will be syndicated to a group of financial institutions (together
with BofA, the "Banks"). The form of the loan agreement which will govern the
Credit Facility is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Credit Facility will permit borrowings of up to
$100 million on a senior unsecured revolving line of credit basis (the
"Working Capital Facility") and up to $85 million on a senior unsecured basis
(the "Expansion Facility").
The Credit Facility will be committed for up to a three-year period, at
which time the Working Capital Facility will expire. The Expansion Facility
may be converted, at the option of the Operating Partnership, to a three year
term loan at the end of the initial three-year period. Under the Working
Capital Facility, up to $100 million will be available to fund working capital
and general partnership requirements (of which up to $50 million will be
available to support letters of credit). Under the Expansion Facility, up to
$25 million will be available to retire existing indebtedness of the General
Partner which will be assumed by the Operating Partnership, and up to $60
million (plus any unused amount from the retirement of the existing assumed
indebtedness and any amount repaid with the proceeds from the exercise of the
Underwriters' overallotment option) will be available solely to finance
acquisitions and for growth capital expenditures.
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At the Operating Partnership's option, borrowings under the Credit Facility
may bear interest either at the Base Rate (i.e., the higher of the Federal
funds rate plus 1/2% per annum or BofA's reference rate) or the London
Interbank Offered Rate, in each case plus the applicable margin. The
applicable margin will vary from 62.5 basis points to 125 basis points for
LIBOR and between zero basis points and 25 basis points for the Base Rate,
depending upon the Operating Partnership's "Leverage Ratio," which is defined
generally as the ratio of all debt for borrowed money to EBITDA. At the time
of the closing of the Credit Facility, the Operating Partnership anticipates
that, based upon the then applicable Leverage Ratio, its applicable LIBOR
margin will be 112.5 basis points and its applicable Base Rate margin will be
12.5 basis points. There can be no guarantee that the Operating Partnership
will be able to continue to maintain the Leverage Ratio which it anticipates
will exist at closing.
The loan agreement for the Credit Facility will contain restrictive
covenants substantially similar to those for the Senior Notes including
restrictions on the Operating Partnership's ability to make cash
distributions, the requirement that the Operating Partnership make "Capital
Reinvestments" as described under "--The Senior Notes" and the requirement
that the Operating Partnership repay all outstanding amounts under the Credit
Facility within 30 days after the occurrence of a change of control. See "--
The Senior Notes." In the case of the Credit Facility, however, there is an
additional limitation in that the occurrence of any transaction which results
in James E. Ferrell and his affiliates beneficially owning less than 20% of
the equity interests of the Partnership will constitute a "change of control,"
requiring repayment of the Credit Facility. The Credit Facility also includes
certain additional covenants and restrictions relating to the activities of
the Operating Partnership which are customary for similar credit facilities
and are not expected to affect materially and adversely the conduct of the
Partnership's business as described in this Prospectus.
In connection with the transactions to be consummated at the closing of the
offering made hereby, the Partnership may borrow up to $25 million under the
Expansion Facility. The Partnership estimates that it will borrow
approximately $15 million at the closing of the transactions contemplated
hereby to enable the Partnership to commence operations with an initial cash
balance of at least $20 million. Actual borrowings under the Credit Facility
at the closing of this offering will depend upon the Partnership's cash
balances at such time and the timing of any exercise of the Underwriters'
overallotment option. If the Underwriters' overallotment option is exercised
subsequent to the closing, the Partnership will use the net proceeds therefrom
first to repay any amounts borrowed under the Expansion Facility.
The closing of the Credit Facility is conditioned upon, among other things,
the successful public offering of the Common Units and the Senior Notes, the
cancellation of Ferrellgas' current $50 million revolving credit facility and
there having been no material adverse change in the financial markets in
general or the financial condition of Ferrellgas, Inc. or the Operating
Partnership prior to the closing of the Credit Facility.
TAX AUDIT
The IRS has examined Ferrell's consolidated income tax returns for the years
ended July 31, 1987 and 1986, and has proposed to disallow $90 million of
deductions for amortization of customer relationships taken or to be taken on
Ferrell's consolidated income tax returns. On April 20, 1993, the United
States Supreme Court held in Newark Morning Ledger v. United States that a
taxpayer may amortize customer-based intangibles if that taxpayer can prove
such intangibles are capable of being valued and the value diminishes over
time. The Company contends it has met this burden of proof and feels this
recent Supreme Court decision supports the positions taken during the
Company's allocation of purchase price to customer relationships.
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The Company was originally made aware of the audit based on a letter
received from the IRS dated April 24, 1989. The Company received a closing
conference letter of the proposed adjustments on December 6, 1990, and
finally, a 60-day letter to act dated August 5, 1991. The 60-day letter has
been extended through December 31, 1994.
The Company intends to vigorously defend against these proposed adjustments
and is in the process of protesting these adjustments through the appeals
process of the IRS. At this time, it is not possible to determine the ultimate
resolution of this matter.
In connection with the formation of the Partnership, the Company will
contribute the customer relationships that are the subject of the IRS audit
together with additional customer relationships to the Partnership. The
General Partner intends to treat such customer relationships as amortizable
assets of the Partnership for federal income tax purposes. It is possible that
the IRS will challenge that treatment. If the IRS were to successfully
challenge the amortization of customer relationships by the Partnership, the
amount of amortization available to a Unitholder and, therefore, the after tax
return of a Unitholder with respect to his investment in the Partnership could
be adversely affected, although the Partnership does not believe the impact of
such effect will be material. See "Tax Considerations--Tax Consequences of
Unit Ownership--Ratio of Taxable Income to Distributions."
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BUSINESS
GENERAL
The Partnership will be engaged in the sale, distribution, marketing and
trading of propane and other natural gas liquids. The discussion that follows
focuses on the Company's retail operations and its other operations, which
consist of propane and natural gas liquids trading operations, chemical
feedstocks marketing and wholesale propane marketing, all of which will be
conveyed to the Partnership. The Company believes it is the third largest
retail marketer of propane in the United States (as measured by gallons sold),
serving approximately 600,000 residential, commercial, agricultural and
industrial customers in 45 states and the District of Columbia through
approximately 416 retail outlets with 226 satellite locations in 36 states
(some outlets serve interstate markets). For the fiscal years ended July 31,
1993, 1992 and 1991, the Company's annual retail propane sales volumes were
approximately 553 million, 496 million and 482 million gallons, respectively.
EBITDA was $89.4 million, $87.6 million and $99.2 million for the fiscal years
ended July 31, 1993, 1992 and 1991, respectively. EBITDA for the twelve months
ended April 30, 1994 was $98.6 million. The Company's net losses for the
fiscal years ended July 31, 1993 and 1992 were $0.8 million and $11.7 million,
respectively, and its net earnings for the fiscal year ended July 31, 1991
were $2.0 million. Net earnings for the nine month periods ended April 30,
1994 and 1993 were $19.5 million and $12.8 million, respectively. The retail
propane business of the Company consists principally of transporting propane
purchased through various suppliers to its retail distribution outlets, then
to tanks located on its customers' premises, as well as to portable propane
cylinders. The Company also believes it is a leading natural gas liquids
trading company. The Company's annual propane and natural gas liquids trading,
chemical feedstocks and wholesale propane sales volumes were approximately 1.2
billion, 1.3 billion and 1.1 billion gallons during the fiscal years ended
July 31, 1993, 1992 and 1991, respectively.
RETAIL OPERATIONS
FORMATION
Ferrell, the parent of the Company, was founded in 1939 as a single retail
propane outlet in Atchison, Kansas and was incorporated in 1954. In 1984, a
subsidiary was formed under the name Ferrellgas, Inc. to operate the retail
propane business previously conducted by Ferrell. Ferrell is owned by James E.
Ferrell and his family. The Company's initial growth was largely the result of
small acquisitions in the rural areas of eastern Kansas, northern and central
Missouri, Iowa, Western Illinois, Southern Minnesota, South Dakota and Texas.
In July 1984, the Company acquired propane operations with annual retail sales
volumes of approximately 33 million gallons and in December 1986, the Company
acquired propane operations with annual retail sales volumes of approximately
395 million gallons. These major acquisitions and many other smaller
acquisitions have significantly expanded and diversified the Company's
geographic coverage.
BUSINESS STRATEGY
The Partnership's business strategy will be to continue the Company's
historical focus on residential and commercial retail propane operations and
to expand its operations through strategic acquisitions of smaller retail
propane operations located throughout the United States and through increased
competitiveness and efforts to acquire new customers. The propane industry is
relatively fragmented, with the ten largest retail distributors possessing
less than 35% of the total retail propane market and much of the industry
consisting of over 3,000 local or regional companies. The Company's retail
operations account for approximately 6% of the retail propane purchased in the
United States, as measured by gallons sold. Since 1986, and as of April 30,
1994, the Company has acquired 67 smaller independent propane retailers which
the Company believes were not individually material. For the fiscal years
ended July 31, 1989 to 1993 the Company spent approximately $14.7 million,
$18.0 million, $25.3 million, $10.1 million and $0.9 million, respectively,
for acquisitions of operations with annual retail sales of approximately 7.3
million, 11.3 million, 18.0 million, 8.6 million and 0.7 million gallons of
propane, respectively. The General Partner believes that approximately $7.5
million of capital expenditures will
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<PAGE>
be required on an annual basis to maintain the current business to be acquired
by the Partnership and that approximately $2.5 million in additional capital
expenditures will be required on an annual basis to sustain the modest level
of growth historically experienced by the business to be acquired.
The Partnership intends to initially concentrate its acquisition activities
in geographical areas in close proximity to the Company's existing operations
to acquire propane retailers that can be efficiently combined with such
operations to provide an attractive return on the Partnership's investment
after taking into account the efficiencies which may result from such
combination. The Partnership will, however, also pursue acquisitions which
broaden its geographic coverage. The Partnership's goal in any acquisition
will be to improve the operations and profitability of these smaller companies
by integrating them into the Partnership's established supply network and by
improving customer service. The Company regularly evaluates a number of
propane distribution companies which may be candidates for acquisition. The
General Partner believes that there are numerous local retail propane
distribution companies that are possible candidates for acquisition by the
Partnership and that the Partnership's geographic diversity of operations
helps to create many attractive acquisition opportunities for the Partnership.
The Partnership intends to fund acquisitions through internal cash flow,
external borrowings or the issuance of additional Partnership interests. The
Partnership's ability to accomplish these goals will be subject to the
continued availability of acquisition candidates at prices attractive to the
Partnership. There is no assurance the Partnership will be successful in
increasing the level of acquisitions or that any acquisitions that are made
will prove beneficial to the Partnership.
In addition to growth through acquisitions, the Company believes that it can
be successful in competing for new customers. Since 1989, the Company has
experienced modest internal growth in its customer base. During that same
period of time the quality of field management has been improved and
improvements in operating efficiencies have been implemented. The residential
and commercial retail propane distribution business has been characterized by
a relatively stable customer base, primarily due to the expense of switching
to alternative fuels, as well as the quality of service and personal
relations. In addition, since safety regulations adopted in most states in
which the Company operates prohibit propane retailers from filling tanks owned
by other retailers, customers that lease tanks generally develop long-term
relationships with their suppliers. The cost and inconvenience of switching
tanks minimizes a customer's tendency to switch among suppliers of propane and
among alternative fuels on the basis of minor variations in price. Based on
its market surveys, the Company believes that within the retail propane
industry approximately 12% of all residential propane users switch suppliers
annually. The Partnership's aim will be to minimize losses of existing
customers while attracting as many new customers as possible. To achieve this
objective extensive market research was conducted by the Company to determine
the critical factors that cause customers to value their propane supplier.
Based upon the results of such surveys, the Company has designed and
implemented a monthly process of assessing customer satisfaction in each of
its local retail markets. The Company believes that these surveys give it an
advantage over its competitors, none of whom it is believed conduct comparable
surveys. By highlighting specific areas of customer satisfaction, the Company
believes that it can move quickly to both retain existing customers who are at
risk, and gain new customers. Specific measures have been and are continuing
to be designed to take advantage of the information gained regarding customer
satisfaction. The Company has also begun the process of upgrading computer
equipment and software in order to improve customer service and achieve
efficiencies that enable local market personnel to direct more efforts towards
sales activities.
Approximately 70% of the Company's customers lease their tanks from the
Company, as compared to approximately 60% of all propane customers nationwide.
The Company believes there is a significant growth opportunity in marketing to
the 40% of propane users that own their own tank. As a result, the Company has
directly sought to identify locations where it can achieve rapid growth by
marketing more effectively to these potential customers. The Company believes
that since the commencement of this effort in August 1992, it has added
thousands of new customers that own their
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<PAGE>
own tank. For both customers who lease their tank, and customers that own
their tank, the Partnership's continued ability to deliver propane to
customers when needed and during periods of extreme demand, especially in
remote areas and during inclement weather, will be critical to maintaining
margins, maintaining the loyalty of its retail customers and expanding its
customer base.
MARKETING
Natural gas liquids are derived from petroleum products and sold in
compressed or liquefied form. Propane, the predominant type of natural gas
liquid, is typically extracted from natural gas or separated during crude oil
refining. Although propane is gaseous at normal pressures, it is compressed
into liquid form at relatively low pressures for storage and transportation.
Propane is a clean-burning energy source, recognized for its transportability
and ease of use relative to alternative forms of stand alone energy sources.
The retail propane marketing business generally involves large numbers of
small volume deliveries averaging approximately 200 gallons each. The market
areas are generally rural but also include suburban areas where natural gas
service is not available. In the residential and commercial markets, propane
is primarily used for space heating, water heating and cooking. In the
agricultural market propane is primarily used for crop drying, space heating,
irrigation and weed control. In addition, propane is used for certain
industrial applications, including use as engine fuel, which is burned in
internal combustion engines that power vehicles and forklifts and as a heating
or energy source in manufacturing and drying processes.
Profits in the retail propane business are primarily based on the cents-per-
gallon difference between the purchase price and the sales price of propane.
The Company generally purchases propane on a short-term basis; therefore, its
supply costs fluctuate with market price fluctuations. Should wholesale
propane prices decline in the future, the Company believes that the
Partnership's margins on its retail propane distribution business should
increase in the short-term because retail prices tend to change less rapidly
than wholesale prices. Should the wholesale cost of propane increase, for
similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased. The Company
historically has been able to maintain margins on an annual basis despite
propane supply cost changes. The General Partner is unable to predict,
however, how and to what extent a substantial increase or decrease in the
wholesale cost of propane would affect the Partnership's margins and
profitability.
The Company has a network of approximately 416 retail outlets and 226
satellite locations marketing propane under the "Ferrellgas" trade name to
approximately 600,000 customers located in 45 states and the District of
Columbia. The Company's largest market concentrations are in the Midwest,
Great Lakes and Southeast regions of the United States. The Company operates
in areas of strong retail market competition, which has required it to develop
and implement strict capital expenditure and operating standards in its
existing and acquired retail propane operations in order to control operating
costs.
The Company utilizes marketing programs targeting both new and existing
customers. The Company emphasizes its superior ability to deliver propane to
customers as well as its training and safety programs. During the fiscal year
ended July 31, 1993, sales to residential customers accounted for 44% of the
Company's retail propane sales volume, sales to industrial and other
commercial customers accounted for 33% of the Company's retail propane sales
volume, sales to agricultural customers accounted for 13% of the Company's
retail propane sales volume and sales to other customers accounted for 10% of
the Company's retail propane sales volume. Residential sales have a greater
profit margin, more stable customer base and tend to be less sensitive to
price changes than the other markets served by the Company. No single customer
of Ferrellgas accounts for 10% or more of the Company's consolidated revenues.
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<PAGE>
The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings. Consequently, sales and
operating profits are concentrated in the second and third fiscal quarters
(November through April). Cash inflows from these quarters will be realized in
the third and fourth quarters and to the extent necessary the Partnership will
reserve cash inflows from the third and fourth quarters for distribution to
Unitholders in the first and second fiscal quarters. In addition, sales volume
traditionally fluctuates from year to year in response to variations in
weather, prices and other factors, although the Company believes that the
broad geographic distribution of the Company's operations helps to minimize
the Company's exposure to regional weather or economic patterns. Long-term,
historic weather data from the National Climatic Data Center indicate that the
average annual temperatures have remained relatively constant over the last 30
years with fluctuations occurring on a year-to-year basis only. In each of the
past five fiscal years, which include the two warmest winters in the United
States since 1953, pro forma Available Cash would have been sufficient to
enable the Partnership to distribute the Minimum Quarterly Distribution on all
Common Units assuming projected pro forma interest expense and capital
expenditure levels. During times of colder-than-normal winter weather, such as
the conditions experienced by certain regions served by the Company in the
second and third quarters of fiscal year 1994, the Company has been able to
take advantage of its larger and more efficient distribution network to help
avoid supply disruptions such as those experienced by some of its competitors,
thereby broadening its long-term customer base.
The following chart illustrates the impact of annual variations in weather
on the Company's sales volumes. Set forth are (i) the average national degree
days (population weighted) (a measure of the relative warmth of a particular
year in which a larger number indicates a colder year), (ii) degree days as a
percentage of the average normal degree days as of 1993 (100.0% represents a
normal year with larger percentages representing colder-than-normal years and
smaller percentages representing warmer-than-normal years), (iii) the annual
retail propane sales volumes of the Company, and (iv) a retail gross margin
index for the Company (demonstrating changes in retail gross margins from a
base year of 100.0% in 1989) for the five fiscal years ended July 31, 1989 to
1993 and the nine months ended April 30, 1993 and 1994. The average degree
days in regions served by the Company have historically varied on an annual
basis by a greater amount than the average national degree days.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEAR ENDED JULY 31, APRIL 30,
--------------------------------- ------------
1989 1990 1991 1992 1993 1993 1994
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
National Degree Days.......... 4,673 4,549 4,211 4,303 4,663 4,444 4,526
Degree Days as % of 1993 Nor-
mal
Degree Days(1)............... 99.7% 97.0% 89.8% 91.8% 99.4% 99.3% 101.1%
Sales Volumes (in millions of
gallons)(2).................. 498 499 482 496 553 483 490
Retail gross margin index(3).. 100.0% 98.4% 114.5% 109.7% 101.1% 102.1% 105.8%
</TABLE>
- --------
(1) The normal average national degree days as of the fiscal year ended July
31, 1993 were 4,689 and the normal average national degree days as of the
nine months ended April 30, 1994 were 4,477.
(2) From 1989 through 1993, 49 acquisitions were completed at a total cost of
approximately $69.0 million. The aggregate annual sales volumes
attributable to these acquisitions (measured with respect to each
acquisition on the date of the acquisition) were estimated to be 7.3
million gallons, 11.3 million gallons, 18.0 million gallons, 8.6 million
gallons and 0.7 million gallons for the fiscal years ended July 31, 1989
through 1993, respectively.
(3) The Company's average retail gross margins, on a cents per gallon basis,
are measured as a percentage of fiscal 1989 retail gross margins. Average
retail gross margins in fiscal 1991 were affected by the Persian Gulf
crisis.
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SUPPLY AND DISTRIBUTION
The Company purchases propane primarily from major domestic oil companies.
Supplies of propane from these sources have traditionally been readily
available, although no assurance can be given that supplies of propane will be
readily available in the future. As a result of (i) the Company's ability to
buy large volumes of propane and (ii) the Company's large distribution system
and underground storage capacity, the Company believes that it is in a
position to achieve product cost savings and avoid shortages during periods of
tight supply to an extent not generally available to other retail propane
distributors. The Company is not dependent upon any single supplier or group
of suppliers, the loss of which would have a material adverse effect on the
Company. For the year ended July 31, 1993, no supplier at any single delivery
point provided more than 10% of the Company's total domestic propane supply. A
portion of the Company's propane inventory is purchased under supply contracts
which typically have a one year term and a fluctuating price relating to spot
market prices. Certain of the Company's contracts specify certain minimum and
maximum amounts of propane to be purchased thereunder. The Company may
purchase and store inventories of propane in order to help insure
uninterrupted deliverability during periods of extreme demand. The Company
owns three underground storage facilities with an aggregate capacity of
approximately 168 million gallons. Currently, approximately 80 million gallons
of this capacity is leased to third parties, and approximately 6 million
gallons of capacity is exchanged with another company for approximately 6
million gallons of storage capacity at Bumstead, Arizona. The remaining space
is available for the Company's own use.
Propane is generally transported from natural gas processing plants and
refineries, pipeline terminals and storage facilities to retail distribution
outlets and wholesale customers by railroad tank cars leased by the Company
and highway transport trucks owned or leased by the Company. The Company
operates a fleet of 62 transport trucks to transport propane from refineries,
natural gas processing plants or pipeline terminals to the Company's retail
distribution outlets. Common carrier transport trucks may be used during the
peak delivery season in the winter months or to provide service in areas where
economic considerations favor common carrier use. Propane is then transported
from the Company's retail distribution outlets to customers by the Company's
fleet of 1,059 bulk delivery trucks, which are fitted generally with 2,000 to
3,000 gallon propane tanks. Propane storage tanks located on the customers'
premises are then filled from the delivery truck. Propane is also delivered to
customers in portable cylinders.
INDUSTRY AND COMPETITION
INDUSTRY
Based upon information contained in the Energy Information Administration's
Annual Energy Review 1993 magazine, propane accounts for approximately 3.0% of
household energy consumption in the United States, an average level which has
remained relatively constant for the past 10 years. It competes primarily with
natural gas, electricity and fuel oil as an energy source principally on the
basis of price, availability and portability. Propane serves as an alternative
to natural gas in rural and suburban areas where natural gas is unavailable or
portability of product is required. Propane is generally more expensive than
natural gas on an equivalent BTU basis in locations served by natural gas,
although propane is often sold in such areas as a standby fuel for use during
peak demands and during interruption in natural gas service. The expansion of
natural gas into traditional propane markets has historically been inhibited
by the capital costs required to expand distribution and pipeline systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in the neighborhoods affected, the Company believes that new
opportunities for propane sales arise as more geographically remote
neighborhoods are developed. Propane is generally less expensive to use than
electricity for space heating, water heating and cooking and competes
effectively with electricity in those parts of the country where propane is
cheaper than electricity on an equivalent BTU basis.
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<PAGE>
Although propane is similar to fuel oil in application, market demand and
price, propane and fuel oil have generally developed their own distinct
geographic markets. Because residential furnaces and appliances that burn
propane will not operate on fuel oil, a conversion from one fuel to the other
requires the installation of new equipment. The Partnership's residential
retail propane customers, therefore, will have an incentive to switch to fuel
oil only if fuel oil becomes significantly less expensive than propane.
Likewise, the Partnership may be unable to expand its customer base in areas
where fuel oil is widely used, particularly the Northeast, unless propane
becomes significantly less expensive than fuel oil. Alternatively, many
industrial customers who use propane as a heating fuel have the capacity to
switch to other fuels, such as fuel oil, on the basis of availability or minor
variations in price. Propane generally is becoming increasingly favored over
fuel oil and other alternative sources of fuel as an environmentally preferred
energy source.
COMPETITION
In addition to competing with marketers of other fuels, the Company competes
with other companies engaged in the retail propane distribution business.
Competition within the propane distribution industry stems from two types of
participants: the larger multi-state marketers, and the smaller, local
independent marketers. Based upon information contained in the National
Propane Gas Association's LP-Gas Market Facts and the June 1993 issue of LP
Gas magazine, the Company believes that the ten largest multi-state retail
marketers of propane, including the Company, account for less than 35% of the
total retail sales of propane in the United States. Based upon information
contained in industry publications, the Company also believes no single
marketer has a greater than 10% share of the total market in the United States
and that the Company is the third largest retail marketer of propane in the
United States, with a market share of approximately 6.0% as measured by volume
of national retail propane sales.
Most of the Company's retail distribution outlets compete with three or more
marketers or distributors. The principal factors influencing competition among
propane marketers are price and service. The Company competes with other
retail marketers primarily on the basis of reliability of service and
responsiveness to customer needs, safety and price. Each retail distribution
outlet operates in its own competitive environment because retail marketers
locate in close proximity to customers to lower the cost of providing service.
The typical retail distribution outlet has an effective marketing radius of
approximately 25 miles.
OTHER OPERATIONS
The other operations of the Company consist of: (1) trading, (2) chemical
feedstocks marketing, and (3) wholesale propane marketing. The Company,
through its natural gas liquids trading operations and wholesale marketing,
has become one of the largest independent traders of propane and natural gas
liquids in the United States. The Company owns no properties that are material
to these operations, but leases 371 railroad tank cars for use in its chemical
feedstocks marketing operations.
TRADING
The Company's traders are engaged in trading propane and other natural gas
liquids for the Company's account and for supplying the Company's retail and
wholesale propane operations. The Company primarily trades products purchased
from its over 200 suppliers, however, it also conducts transactions on the New
York Mercantile Exchange. Trading activity is conducted primarily to generate
a profit independent of the retail and wholesale operations, but is also
conducted to insure the availability of propane during periods of short
supply. Propane represents over 65% of the Company's total trading volume,
with the remainder consisting of various other natural gas liquids. The
Company attempts to minimize trading risk through the enforcement of its
trading policies, which include total
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<PAGE>
inventory limits and loss limits, and attempts to minimize credit risk through
credit checks and application of its credit policies. However, there can be no
assurance that historical experience or the existence of such policies will
prevent trading losses in the future. For the fiscal years ended July 31,
1993, 1992 and 1991, the Company had net revenues of $6.7 million, $4.9
million and $9.9 million, respectively, from its trading activities.
CHEMICAL FEEDSTOCKS MARKETING
The Company is also involved in the marketing of refinery and petrochemical
feedstocks. Petroleum by-products are purchased from refineries and sold to
petrochemical plants. The Company had revenues of $54.0 million, $50.6 million
and $31.8 million from such activities for the fiscal years ended July 31,
1993, 1992 and 1991, respectively.
WHOLESALE MARKETING
The Company engages in the wholesale distribution of propane to other retail
propane distributors. During the fiscal years ended July 31, 1993, 1992 and
1991 the Company sold 73 million, 95 million and 129 million gallons,
respectively, of propane to wholesale customers and had revenues attributable
to such sales of $29.3 million, $37.7 million and $57.4 million, respectively.
EMPLOYEES
At April 30, 1994, the Company had 2,342 full-time employees and 990
temporary and part-time employees. The number of temporary and part-time
employees is generally higher by approximately 500 people during the winter
heating season. At April 30, 1994, the Company's full-time employees were
employed in the following areas:
<TABLE>
<S> <C>
Retail Market Locations............................................. 1,979
Transportation and Storage.......................................... 115
Field Services...................................................... 56
Corporate Offices (Liberty & Houston)............................... 192
-----
Total............................................................. 2,342
=====
</TABLE>
Approximately two percent of the Company's employees are represented by nine
local labor unions, which are all affiliated with the International
Brotherhood of Teamsters. The Company has not experienced any significant work
stoppages or other labor problems.
The Company's supply, trading, chemical feedstocks marketing, distribution
scheduling and product accounting functions are operated out of the Company's
offices located in Houston, Texas, by a total full time corporate staff of 60
people (which includes four traders as well as necessary support staff).
GOVERNMENTAL REGULATION; ENVIRONMENTAL AND SAFETY MATTERS
From August 1971 until January 1981, the United States Department of Energy
regulated the price and allocation of propane. The Company is no longer
subject to any similar regulation.
Propane is not a hazardous substance within the meaning of federal and state
environmental laws. In connection with all acquisitions of retail propane
businesses that involve the purchase of real estate, the Company conducts a
due diligence investigation to attempt to determine whether any substance
other than propane has been sold from or stored on any such real estate prior
to its purchase. Such due diligence includes questioning the sellers,
obtaining representations and warranties concerning the sellers' compliance
with environmental laws and visual inspections of the properties, whereby
Company employees look for evidence of hazardous substances or the existence
of underground storage tanks.
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<PAGE>
With respect to the transportation of propane by truck, the Company is
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation. National Fire
Protection Association Pamphlet No.58, which establishes a set of rules and
procedures governing the safe handling of propane, or comparable regulations,
have been adopted as the industry standard in a majority of the states in
which the Company operates. There are no material environmental claims pending
and the Company complies in all material respects with all material
governmental regulations and industry standards applicable to environmental
and safety matters.
SERVICE MARKS AND TRADEMARKS
The Company markets retail propane under the "Ferrellgas" tradename and uses
the tradename "Ferrell North America" for its other operations. In addition,
the Company has a trademark on the name "Ferrellmeter," its patented gas leak
detection device. The Company will contribute all of its right, title and
interest in such tradenames and trademark in the continental United States to
the Partnership. The Company will have an option to purchase such tradenames
and trademark from the Partnership for a nominal value if the Company is
removed as general partner of the Partnership other than for cause. If the
Company ceases to serve as the general partner of the Partnership for any
other reason, it will have the option to purchase such tradenames and
trademark from the Partnership for fair market value.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
The Company has, in each of its retail outlets, a computer-based information
and control system. This system provides for remote billing of, and
collections from, customers and is designed to enhance the local outlets'
responsiveness to customers. Each outlet can be monitored by headquarters to
determine volume of sales, selling price and gross margin.
PROPERTIES
At April 30, 1994, the Company owned or leased the following transportation
equipment which was utilized primarily in retail operations, except for
railroad tank cars, which are used primarily by chemical feedstocks
operations:
The highway transport trailers have an average capacity of approximately
9,000 gallons. The bulk delivery trucks are generally fitted with 2,000 to
3,000 gallon propane tanks. Each railroad tank car has a capacity of
approximately 30,000 gallons.
<TABLE>
<CAPTION>
OWNED LEASED TOTAL
----- ------ -----
<S> <C> <C> <C>
Truck tractors............................................ 15 47 62
Transport trailers........................................ 69 -- 69
Bulk delivery trucks...................................... 442 617 1,059
Pickup and service trucks................................. 399 574 973
Railroad tank cars........................................ -- 371 371
</TABLE>
A typical retail distribution outlet is located on one to three acres of
land and includes a small office, a workshop, bulk storage capacity of 18,000
gallons to 60,000 gallons and a small inventory of stationary customer storage
tanks and portable propane cylinders that the Company provides to its retail
customers for propane storage. The Company owns the land and buildings of
about 50% of its retail outlets and leases the remaining facilities on terms
customary in the industry and in the applicable local markets.
Approximately 500,000 propane tanks are owned by the Company, most of which
are located on customer property and leased to those customers. The Company
also owns approximately 545,000 portable propane cylinders, most of which are
leased to industrial and commercial customers for use
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<PAGE>
in manufacturing and processing needs, including forklift operations, and to
residential customers for home heating and cooking, and to local dealers who
purchase propane from the Company for resale.
Ferrellgas owns underground storage facilities at Hutchinson, Kansas;
Adamana, Arizona; and Moab, Utah. At April 30, 1994, the capacity of these
facilities approximated 73 million gallons, 88 million gallons and 7 million
gallons, respectively (an aggregate of approximately 168 million gallons).
Currently, approximately 80 million gallons of this capacity is leased to
third parties, and approximately 6 million gallons of capacity is exchanged
with another company for approximately 6 million gallons of storage capacity
at Bumstead, Arizona. The remaining space is available for the Company's own
use.
The Company purchased, in fiscal year 1993, the land and two buildings
(50,245 square feet of office space) comprising its corporate headquarters in
Liberty, Missouri, from Ferrell Leasing Corp. The Company leases the 18,124
square feet of office space in Houston, Texas, where its trading, chemical
feedstocks marketing and wholesale marketing operations are located.
The Company believes that it has satisfactory title to or valid rights to
use all of its material properties and, although some of such properties are
subject to liabilities and leases and, in certain cases, liens for taxes not
yet currently due and payable and immaterial encumbrances, easements and
restrictions, the Company does not believe that any such burdens will
materially interfere with the continued use of such properties by the
Partnership in its business, taken as a whole. In addition, the Company
believes that it has, or is in the process of obtaining, all required material
approvals, authorizations, orders, licenses, permits, franchises and consents
of, and has obtained or made all required material registrations,
qualifications and filings with, the various state and local governmental and
regulatory authorities which relate to ownership of the Company's properties
or the operations of its business.
LITIGATION
Propane is a flammable, combustible gas. Serious personal and property
damage can occur in connection with its transportation, storage or use. The
Company, in the ordinary course of business, is threatened with or is named as
a defendant in various lawsuits which, among other items, seek actual and
punitive damages for products liability, personal injury and property damage.
The Company maintains liability insurance policies with insurers in such
amounts and with such coverages and deductibles as management of the Company
believes is reasonable and prudent. However, there can be no assurance that
such insurance will be adequate to protect the Company from material expenses
related to such personal injury or property damage or that such levels of
insurance will continue to be available in the future at economical prices. It
is not possible to determine the ultimate disposition of these matters
discussed above; however, after taking into consideration the Company's
insurance coverage and existing reserves, management is of the opinion that
there are no known uninsured claims or known contingent claims that are likely
to have a material adverse effect on the results of operations or financial
condition of the Company. When the Partnership assumes all outstanding
liabilities relating to the business, it will assume such liabilities, whether
or not asserted against or known by the Company at the time of the transfer.
TRANSFER OF THE PARTNERSHIP ASSETS
The Company will transfer its right, title and interest in its propane
business and assets to the Partnership at or shortly before the closing of
this offering, subject to the following. The assets include the Company's
interests in leases covering several types of assets, including railcars,
trucks and retail distribution centers. Many of these leases are transferable
to the Partnership only with the consent of the lessor. The Company expects to
obtain, prior to the closing of this offering, third party consents which are
sufficient to enable the Company to transfer to the Partnership the assets
necessary to
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<PAGE>
enable the Partnership to conduct the Company's propane business in all
material respects as described in this Prospectus. In the event any such
consents are not obtained, the Company will enter into other agreements,
including the lease or purchase of other assets, in order to insure that the
Partnership has the assets necessary to enable it to conduct the Company's
propane business in all material respects as described in this Prospectus. In
addition, certain of the Company's licenses, permits and other similar rights
relating to the assets to be assigned to the Partnership are not transferable
or are transferable only with the consent of third parties. Such transferable
rights will not be transferred to the Partnership at the closing of this
offering unless applicable consents have been obtained. In the case of non-
transferable rights or rights where no consent has been obtained by the
closing, the Company will seek to obtain such consents in the normal course of
business after the closing or seek to have comparable rights granted to the
Partnership prior to the closing. Numerous licenses, permits and rights will
be required for the operation of the Partnership's business, and no assurance
can be given that the Partnership will obtain all licenses, permits and rights
which are required in connection with the ownership and operation of its
business. Although failure by the Partnership to obtain such licenses, permits
or rights could have a material adverse effect on the Partnership, the Company
believes that the Partnership will have the licenses, permits and rights which
will enable the Partnership to conduct its propane business in a manner which
is similar in all material respects to that which was conducted by the Company
prior to the closing of this offering and that any such failure to obtain
licenses, permits or rights will not have a material adverse impact on the
business of the Partnership as described in this Prospectus. The Operating
Partnership will be responsible for the payment of any transfer taxes and fees
owing as a result of the transfer of the Company's assets, but the Company
believes that the amount of any such taxes will not be material.
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<PAGE>
MANAGEMENT
PARTNERSHIP MANAGEMENT
The General Partner will manage and operate the activities of the
Partnership, and the General Partner anticipates that its activities will be
limited to such management and operation. Unitholders will not directly or
indirectly participate in the management or operation of the Partnership. The
General Partner will owe a fiduciary duty to the Unitholders. See "Conflicts
of Interest and Fiduciary Responsibility." Notwithstanding any limitation on
obligations or duties, the General Partner will be liable, as the general
partner of the Partnership, for all the debts of the Partnership (to the
extent not paid by the Partnership), except to the extent that indebtedness
incurred by the Partnership is made specifically non-recourse to the General
Partner.
The General Partner will appoint two persons who are neither officers nor
employees of the General Partner or any affiliate of the General Partner to
serve on a committee of the Partnership (the "Audit Committee") with the
authority to review, at the request of the General Partner, specific matters
as to which the General Partner believes there may be a conflict of interest
in order to determine if the resolution of such conflict proposed by the
General Partner is fair and reasonable to the Partnership. The Audit Committee
members will be elected no later than three months after the date of this
Prospectus. The Audit Committee will only review matters relating to conflicts
of interest at the request of the General Partner, and the General Partner has
sole discretion to determine which matters, if any, to submit to the Audit
Committee. Any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to the Partnership, approved by all partners
of the Partnership and not a breach by the General Partner of any duties it
may owe the Partnership or the Unitholders.
The Partnership will not directly employ any of the persons responsible for
managing or operating the Partnership. The current management and workforce of
Ferrellgas will continue to manage and operate the Partnership's business as
officers and employees of the General Partner. At April 30, 1994, 2,342 full-
time and 990 temporary and part-time individuals were employed by the General
Partner.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
directors and executive officers of the Company. Each of the persons named
below is elected to their respective office or offices annually. The executive
officers are not subject to employment agreements with their respective
employer or employers. The General Partner intends to promptly add additional
members to its Board of Directors, including at least two independent members.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION
---- --- -------- --------
<S> <C> <C> <C>
James E. Ferrell........... 54 1984 President, Chairman of the Board and a
Director of the Company
Bradley A. Cochennet....... 40 -- Executive Vice President and Chief
Operating Officer of the Company
Danley K. Sheldon.......... 35 -- Vice President and Chief Financial
Officer/Treasurer of the Company
Rhonda E. Smiley........... 38 -- Vice President of Legal Affairs
Brian M. Smith(1).......... 43 -- Vice President of Marketing and
Communications
</TABLE>
- --------
(1) Mr. Smith has indicated his intention to resign from the Company effective
July 31, 1994.
James E. Ferrell--Mr. Ferrell has been with Ferrell or its predecessors and
its affiliates in various executive capacities since 1965.
Bradley A. Cochennet--Mr. Cochennet has been Chief Operating Officer since
January 1993 and has been a Vice President of the Company since 1985. Mr.
Cochennet joined the Company in 1980.
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<PAGE>
Danley K. Sheldon--Mr. Sheldon has been Chief Financial Officer of the
Company since January 1994 and has served as Treasurer since 1989. He joined
the Company in 1986.
Rhonda E. Smiley--Ms. Smiley joined the Company in 1991 as Director of Legal
Affairs and has been a Vice President of the Company since April 1994. Prior
to joining the Company, Ms. Smiley practiced law with Shook, Hardy & Bacon for
ten years, the last five years as a partner.
Brian M. Smith--Mr. Smith joined the Company in 1991 as Managing Director of
Marketing and Communications and has been a Vice President of the Company
since April 1994. Prior to joining the Company, Mr. Smith was President and
owner of The Smith Group, Inc., a marketing communications firm.
COMPENSATION OF THE GENERAL PARTNER
The General Partner will receive no management fee or similar compensation
in connection with its management of the Partnership and will receive no
remuneration other than:
(i) distributions in respect of its 2% general partner interest, on a
combined basis, in the Partnership and the Operating Partnership; and
(ii) reimbursement for all direct and indirect costs and expenses
incurred on behalf of the Partnership, all selling, general and
administrative expenses incurred by the General Partner for or on behalf of
the Partnership and all other expenses necessary or appropriate to the
conduct of the business of, and allocable to, the Partnership.
In addition, Ferrell, the parent of the General Partner, will receive
1,000,000 Common Units, 16,593,721 Subordinated Units and the Incentive
Distribution Rights in connection with the transactions described in this
Prospectus and will be entitled to distributions thereon, as described under
"Cash Distributions Policy" above.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual salary, bonuses and all other
compensation awards and payouts to the Chief Executive Officer and to named
executive officers of the Company, for the fiscal years ended July 31, 1991,
1992 and 1993.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- ------------------- ---------
OTHER
ANNUAL RESTRICTED STOCK LONG-TERM ALL OTHER
COMPEN- STOCK OPTIONS/ INCENTIVE COMPEN-
NAME AND SALARY BONUS SATION AWARDS SARS PAYOUTS SATION
POTENTIAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ------- ------ ------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James E. Ferrell........ 1993 480,000 -- -- -- -- 1,502,080(1) 25,489(2)
Chairman and Chief 1992 480,000 13,000 -- -- -- -- 32,401
Executive Officer 1991 246,000 20,000 -- -- -- -- 18,439
Bradley A. Cochennet.... 1993 150,000 -- -- -- 2,762 -- 9,315(3)
Vice President and 1992 150,000 -- -- -- -- -- 12,317
Chief Operating Officer 1991 151,667 -- -- -- -- -- 18,373
Geoffrey H. Ramsden (4). 1993 120,000 -- -- -- 9,566 -- 7,453(3)
Vice President and 1992 120,000 -- -- -- -- -- 12,000
Chief Financial Officer 1991 120,000 -- -- -- -- -- 17,550
</TABLE>
- --------
(1) Early purchase of all the employee's 64,000 Equity Units under Ferrell's
Long-Term Incentive Plan at a price per unit of $23.47.
(2) Includes (i) Company contributions of $13,787 to the employee's 401(k) and
profit sharing plans and (ii) compensation of $11,702 resulting from the
Company's payment of split dollar life insurance premiums.
(3) Company contributions to the employee's 401(k) and profit sharing plans.
(4) Mr. Ramsden resigned in January 1994.
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<PAGE>
STOCK OPTION TABLES
The Board of Directors of Ferrell adopted the 1992 Key Employee Stock Option
Plan (the "Option Plan") on June 26, 1992. The Option Plan reserves 100,000
shares of Class M Common Stock of Ferrell for the purpose of allowing Ferrell
to offer options on the Class M Common Stock to officers and key employees of
Ferrell and the Company. The value of each share of Class M Common Stock is
determined by the Board of Directors of Ferrell and shall not be less than
fair market value of such stock on the date the option is granted. The
following table sets forth the option grants for the fiscal year ended July
31, 1993:
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
-----------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK APPRECIATIONS
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED IN FISCAL YEAR ($/SH) DATE 5% 10%
---- ---------- --------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bradley A. Cochennet.... 2,762 22% $36.20 12/30/02 $29,000 $106,000
Geoffrey H. Ramsden..... 3,836(1) 31% $36.20 12/30/02 $41,000 $147,000
Geoffrey H. Ramsden..... 5,730(1) 47% $89.36 01/08/03 -- --
</TABLE>
- --------
(1) Options terminated as a result of Mr. Ramsden's resignation in January
1994.
(2) These dollar amounts represent the potential realizable value of each
grant of options assuming that the market price of the Class M Common
Stock appreciates in value from the date of grant at 5% and 10% annual
rates and are not intended to forecast possible future appreciation, if
any, of the price of the Class M Common Stock.
The following table lists information on the named executive officer's
exercised/unexercised options for the fiscal year ended July 31, 1993:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
------------- ----------------
NUMBER OF
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED ($) UNEXERCISABLE UNEXERCISABLE($)
---- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Bradley A. Cochennet.... -- -- 2,762/-- $57,357/--
Geoffrey H. Ramsden(1).. -- -- 9,566/-- 79,674/--
</TABLE>
- --------
(1) Options terminated as a result of Mr. Ramsden's resignation in January
1994.
LONG-TERM INCENTIVE PLAN AWARDS
The goal of Ferrell's Long-Term Incentive Plan (the "Plan") is to attract
and retain officers and key executives needed for the continued growth and
success of Ferrell and its affiliates through long-term incentives in the form
of units ("Equity Units"). The plan is administered by the Compensation
Committee (the "Committee") of the Board of Directors of Ferrell. The
Committee members who hold an award under the Plan are ineligible to vote on
matters relating to the Plan. The Committee has the authority to determine,
within the express provisions of the Plan, the individuals to whom awards will
be granted; the amount, size and terms of each such award; the time when
awards will be granted; and the objectives and conditions for earning such
awards. The Committee has the full and final authority to interpret the
provisions of the Plan, to decide all questions of fact arising upon its
application and to make all other determinations necessary or advisable for
the administration of the plan.
The Equity Units awarded under the Plan, which were 100% vested as of July
31, 1993, are subject to purchase by Ferrell at a cash price related to the
increased value of Ferrell's common stock from 1986, as determined pursuant to
(i) an appraisal conducted by a nationally recognized investment
75
<PAGE>
banking firm, (ii) the mean of the closing bid and asked price of a class of
Ferrell's common stock if a class of Ferrell's common stock is publicly
traded, or (iii) in certain limited circumstances, including if the appraisal
referred to in (i) is more than 90 days old or if there is no public market as
referred to in (ii), the Committee shall determine the value of the Equity
Units. Unless purchased earlier, Ferrell will purchase all of the issued and
outstanding Equity Units as of July 31, 1996. The value of the Equity Units as
of July 31, 1996 will be the value of Ferrell's common stock as of such date,
determined in accordance with the valuation methods described above, less the
"deemed" value of Ferrell's common equity as of August 1, 1986.
As of July 31, 1993, a total of 60,000 Equity Units, awarded in previous
years, were outstanding to the group of executive officers named in the
Summary Compensation Table as follows: Geoffrey H. Ramsden--30,000 Equity
Units and Bradley A. Cochennet--30,000 Equity Units. When Mr. Ramsden resigned
in January 1994, all of his Equity Units were fully vested and were
subsequently repurchased by Ferrell. During fiscal 1993, James E. Ferrell had
a total of 64,000 Equity Units repurchased by Ferrell. No additional Equity
Units were awarded under the Plan in fiscal 1993, therefore, no long-term
incentive plan awards table is presented.
Compensation expense of $720,000 and $80,000 was recorded for the nine
months ended April 30, 1994 and for the fiscal year ended July 31, 1993,
respectively pursuant to the Plan for the benefit of the Equity Unit holders.
As of April 30, 1994, a liability totaling approximately $2,145,000 is
recorded in the financial statements of Ferrell as a result of the grants
under this Plan.
PROFIT SHARING PLAN
The Ferrell Profit Sharing Plan is a qualified defined contribution plan
(the "Profit Sharing Plan"). All full-time employees of Ferrell or any of its
direct or indirect wholly owned subsidiaries with at least one year of service
are eligible to participate in the Profit Sharing Plan. The Board of Directors
of Ferrell determines the amount of the annual contribution to the Profit
Sharing Plan, which is purely discretionary. This decision is based on the
operating results of Ferrell for the previous fiscal year and anticipated
future cash needs of the Company and Ferrell. The contributions are allocated
to the Profit Sharing Plan participant's based on each participant's wages or
salary as compared to the total of all participants' wages and salaries.
Historically, the annual contribution to the Profit Sharing Plan has been 2%
to 7% of each participant's annual wage or salary. The Profit Sharing Plan
also has a cash-or-deferred, or 401(k), feature allowing plan participants to
specify a portion of their pre-tax and/or after-tax compensation to be
contributed to the Profit Sharing Plan.
COMPENSATION OF DIRECTORS
The Company pays no additional remuneration to its employees (or employees
of, or legal counsel to, a direct or indirect wholly-owned subsidiary) for
serving as directors. Directors who are not employees of the Company, a direct
or indirect wholly-owned subsidiary, or counsel to any of the foregoing,
receive a fee per meeting of $500, plus reimbursement for out-of-pocket
expenses.
TERMINATION OF EMPLOYMENT ARRANGEMENT
On January 3, 1991, Warren Gfeller resigned as President of the Company and
as Director of Ferrell. In connection with such resignation, a severance
agreement was executed by and among Mr. Gfeller, the Company and Ferrell,
whereby Mr. Gfeller would receive $2.5 million, payable in four equal annual
installments commencing on or before January 11, 1991. As consideration for
these payments, Mr. Gfeller agreed not to compete with the Company and to the
termination and release of his participation in the Ferrell Long-Term
Incentive Plan and all bonus or performance plans maintained by the Company
and Ferrell.
76
<PAGE>
In connection with Geoffrey H. Ramsden's resignation in January 1994,
Ferrell and Mr. Ramsden entered into a severance agreement dated March 23,
1994. Pursuant to the terms of the agreement, Mr. Ramsden received
approximately $500,000 in exchange for the repurchase of his Class M Stock and
Equity Units and the termination of all rights under Ferrell's bonus and
performance plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly owned subsidiary of Ferrell. The following table
sets forth the beneficial ownership of the outstanding capital stock of
Ferrell by beneficial owners of five percent or more of any class of capital
stock of Ferrell, by directors of Ferrell and by all directors and officers of
Ferrell as a group as of May 31, 1994.
<TABLE>
<CAPTION>
SHARES
TITLE OF BENEFICIALLY PERCENT
CLASS NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS
-------- ------------------------------------- ------------ --------
<S> <C> <C> <C>
Class A Common Stock.... James E. Ferrell(2) 2,562,680(3) 99.6%
All Directors and Officers as a Group 2,562,680 99.6%
Class M Common Stock(4). James E. Ferrell -- --
Bradley A. Cochennet 2,770 17.9%
All Directors and Officers as a Group 4,325 27.9%
</TABLE>
- --------
(1) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Under
that rule a person is generally considered to be the beneficial owner of a
security if he has or shares the power to vote or direct the voting
thereof ("Voting Power") or to impose or direct the disposition thereof
("Investment Power") or has the right to acquire either of those powers
within 60 days.
(2) The address for James E. Ferrell is c/o Ferrell Companies, Inc., One
Liberty Plaza, Liberty, Missouri 64068.
(3) James E. Ferrell has sole Voting and Investment Power with respect to
1,525,817 shares of Class A Common Stock held by Mr. Ferrell as Trustee of
the James E. Ferrell Revocable Trust. Mr. Ferrell shares Voting and
Investment Power with respect to 1,036,823 shares of Class A Common Stock
held by himself and his wife, Elizabeth J. Ferrell, as joint tenants with
rights of survivorship.
(4) The shares of Class M Common Stock are restricted to eligible employees of
Ferrell and the Company and are non-voting and non-transferable. Ferrell
will repurchase all of the shares of Class M Common Stock owned by such
employees upon their death, disability, retirement, voluntary or
involuntary termination of employment or bankruptcy. The purchase price
for such shares is based on valuation formulas set forth in the Class M
Stock Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a discussion of certain relationships and related
transactions among affiliates of the Company. Upon the consummation of the
transactions contemplated hereby, the indebtedness set forth below will be
repaid and will no longer be outstanding.
In the second and third quarter of fiscal year 1993, Ferrell Leasing Corp.,
a subsidiary of Ferrell Properties, Inc., sold to the Company for the fair
market value of $4,100,000, the land and two buildings comprising the
Company's corporate headquarters in Liberty, Missouri. The purchase price was
based on an independent appraisal. The land and building were acquired by
Ferrell Leasing Corp. in December 1989. James E. Ferrell, a director and
executive officer of the Company, owns all of the issued and outstanding stock
of Ferrell Properties, Inc. Prior to the purchase of the buildings, the
Company paid total rent to Ferrell Leasing of $403,000.
77
<PAGE>
In fiscal year 1993, the Company received a capital contribution from
Ferrell. The contribution consisted of (i) the forgiveness of a $3,015,000
long-term note payable to an affiliate, including interest, and (ii) a
$262,000 note receivable from an affiliate.
During the three fiscal years ended July 31, 1993, the directors and
executive officers of the Company listed below have, or corporations in which
such directors or executive officers beneficially own ten percent or more of
any class of equity securities have, from time to time, been indebted to the
Company, Ferrell and/or their respective subsidiaries or affiliates in an
amount in excess of $60,000 as follows:
<TABLE>
<CAPTION>
HIGHEST AMOUNT AMOUNT
OUTSTANDING SINCE OUTSTANDING AT
NAME RELATIONSHIP AUGUST 1, 1990 APRIL 30, 1994
- ---- ----------------- ----------------- --------------
<S> <C> <C> <C>
James E. Ferrell(1)......... Executive Officer $8,895,810 $8,895,810
and Director
Ferrell Development,
Inc.(2).................... Affiliate $1,500,000 $1,500,000
One Liberty Plaza, Inc.(2).. Affiliate $3,000,000 $3,000,000
Ferrell Properties, Inc.(2). Affiliate $1,757,946 $ 262,199
</TABLE>
- --------
(1) All loans or advances to Mr. Ferrell are cash loans made by the Company
for Mr. Ferrell's personal use. The loans or advances did not arise as a
result of any transactions with the Company. All loans or advances to Mr.
Ferrell are represented by a demand note which bears interest at the prime
rate. The interest rate charged on this loan was 6% during fiscal 1993,
ranged from 6% to 8.5% during fiscal 1992, and 8.5% to 10% during fiscal
1991.
(2) Ferrell Development, Inc., and One Liberty Plaza, Inc. are wholly owned
subsidiaries of Ferrell Properties, Inc. The indebtedness of Ferrell
Development and One Liberty Plaza arose as a result of cash loans made by
the Company. The indebtedness of Ferrell Properties, which was contributed
to the Company by Ferrell in fiscal 1993, arose as a result of cash loans
made by Ferrell. The loans did not arise as a result of any transactions
with the Company or Ferrell. The terms of the loans, as fixed by the loan
documents, are as favorable as could be obtained from a third party and
the loans were approved by a majority of the Company's or Ferrell's
independent directors. The interest income generated from the loans, which
bear interest of the prime rate plus 1.375%, is not material to the
Company or Ferrell.
78
<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
TRANSACTIONS OF THE PARTNERSHIP WITH FERRELLGAS AND ITS AFFILIATES
The Partnership will have extensive ongoing relationships with Ferrellgas
and its affiliates. These relationships will include Ferrellgas serving as
general partner of the Partnership. In addition, the Partnership Agreement
provides that Ferrellgas will indemnify the Partnership for liabilities
arising from certain historical and future non-Partnership operations of
Ferrellgas and that the Partnership will indemnify Ferrellgas and Ferrell for
liabilities arising in connection with the ongoing conduct of the Partnership
business. The Partnership will be responsible for all tax liabilities, other
than federal and state income tax liabilities but including liabilities for
state franchise taxes, associated with the business Ferrellgas conducted prior
to this offering. All costs and expenses in connection with this offering will
be borne by the Partnership.
CONFLICTS OF INTEREST
The General Partner will make all decisions relating to the management of
the Partnership. Ferrell owns all the capital stock of Ferrellgas, the General
Partner. Upon the closing of this offering, Ferrellgas will own a 2% general
partner interest in the Partnership, and Ferrell will own 1,000,000 Common
Units (if the Underwriters' overallotment option is exercised in full all of
such 1,000,000 Common Units will be repurchased by the Partnership) and
16,593,721 Subordinated Units representing in the aggregate an approximate
56.2% limited partner interest in the Partnership (51.4% if the Underwriters'
overallotment option is exercised in full) and the Incentive Distribution
Rights. Certain conflicts of interest could arise as a result of the
relationships among the General Partner, Ferrell, Ferrell's affiliates and the
Partnership. The directors and officers of both Ferrell and Ferrellgas have
fiduciary duties to manage their companies, including their investments in its
subsidiaries and affiliates, in a manner beneficial to their shareholders. In
general, the General Partner has a fiduciary duty to manage the Partnership in
a manner beneficial to the Partnership and the Unitholders. The Partnership
Agreement contains provisions that allow the General Partner to take into
account the interests of parties in addition to the Partnership in resolving
conflicts of interest, thereby limiting its fiduciary duty to the Partners, as
well as provisions that may restrict the remedies available to Unitholders for
actions taken that might, without such limitations, constitute breaches of
fiduciary duty. The duty of the directors and officers of Ferrellgas to the
shareholder of Ferrellgas may, therefore, come into conflict with the duties
of the General Partner to the Partnership and the Unitholders. The Audit
Committee of the Board of Directors of the General Partner will, at the
request of the General Partner, review conflicts of interest that may arise
between Ferrellgas or its affiliates, on the one hand, and the Partnership, on
the other. See "Management--Partnership Management" and "--Fiduciary Duties of
the General Partner."
Potential conflicts of interest could arise in the situations described
below, among others:
CERTAIN ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH
AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS, ENABLE AN AFFILIATE OF THE
GENERAL PARTNER TO RECEIVE DISTRIBUTIONS WITH RESPECT TO THE INCENTIVE
DISTRIBUTION RIGHTS OR HASTEN THE RIGHT TO CONVERT SUBORDINATED UNITS
The General Partner (as general partner of the Partnership) and Ferrell (as
the holder of Common Units, Subordinated Units and Incentive Distribution
Rights) have certain varying percentage interests and priorities with respect
to Available Cash. See "Cash Distribution Policy." Because of the definitions
of Available Cash and Cash from Operations set forth under the caption "Cash
Distribution Policy" and in the glossary, decisions of the General Partner
with respect to the amount and timing of cash expenditures, borrowings,
issuance of additional Units and reserves in any quarter may affect whether,
or the extent to which, there is sufficient Available Cash constituting Cash
from Operations to meet the Minimum Quarterly Distribution on all Units in
such quarter or subsequent quarters or to make distributions with respect to
the Incentive Distribution Rights. In addition, the decisions of the General
Partner regarding the Partnership's participation in proposed capital projects
may have the same effect.
79
<PAGE>
Borrowings and issuances of additional Units for cash also increase the amount
of Available Cash. The Partnership Agreement provides that any borrowings by
the Partnership or the approval thereof by the General Partner shall not
constitute a breach of any duty owed by the General Partner to the Partnership
or the Unitholders, including borrowings that have the purpose or effect,
directly or indirectly, of (i) enabling the Partnership to make distributions
with respect to the Incentive Distribution Rights or (ii) hastening the
expiration of the Subordination Period or the conversion of the Subordinated
Units into Common Units. The Partnership Agreement provides that the
Partnership may make loans to and borrow funds from the General Partner and
its affiliates. Further, any actions taken by the General Partner consistent
with the standards of reasonable discretion set forth in the definitions of
Available Cash, Cash from Operations and Cash from Interim Capital
Transactions will be deemed not to breach any duty of the General Partner to
the Partnership or the Unitholders. See "Risk Factors--Conflicts of Interest
and Fiduciary Duties" and "Cash Distribution Policy."
EMPLOYEES OF THE GENERAL PARTNER AND ITS AFFILIATES WHO PROVIDE SERVICES TO
THE PARTNERSHIP WILL ALSO PROVIDE SERVICES TO OTHER BUSINESSES
The Partnership will not have any employees and will rely on employees of
the General Partner and its affiliates. The General Partner and its affiliates
will conduct business and activities of their own in which the Partnership
will have no economic interest. There may be competition between the
Partnership and the affiliates of the General Partner for the time and effort
of employees who provide services to both the Partnership and such affiliates.
Certain officers of affiliates of the General Partner will divide their time
between the business of the Partnership and the business of the affiliates and
will not be required to spend any specified percentage or amount of their time
on the business of the Partnership.
THE PARTNERSHIP WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR
CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Partnership for certain expenses incurred
on behalf of the Partnership, including costs incurred in providing corporate
staff and support services to the Partnership. See "Management."
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT TO THE
PARTNERSHIP'S OBLIGATIONS
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractural arrangements to all or particular assets of the
Partnership, with the other party thereto to have no recourse against the
General Partner or its assets. The Partnership Agreement provides that any
action by the General Partner in so limiting the liability of the General
Partner or that of the Partnership will not be deemed to be a breach of the
General Partner's fiduciary duties, even if the Partnership could have
obtained more favorable terms without such limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
The Partnership will acquire or provide many services from or to Ferrellgas
and their affiliates on an ongoing basis, including those described above. The
agreements relating thereto do not grant to the holders of the Common Units,
separate and apart from the Partnership, the right to enforce the obligations
of Ferrellgas and its affiliates in favor of the Partnership. Therefore, the
General Partner will be primarily responsible for enforcing such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE GENERAL PARTNER
AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS
Under the terms of the Partnership Agreement, the General Partner is not
restricted from paying Ferrell, Ferrellgas or their affiliates for any
services rendered (provided such services are rendered on
80
<PAGE>
terms fair and reasonable to the Partnership) or entering into additional
contractual arrangements with any of them on behalf of the Partnership.
Neither the Partnership Agreement nor any of the other agreements, contracts
and arrangements between the Partnership, on the one hand, and Ferrell,
Ferrellgas and their affiliates, on the other, are or will be the result of
arm's-length negotiations. All of such transactions entered into after the
sale of the Common Units offered hereby are to be on terms which are fair and
reasonable to the Partnership, provided that any transaction shall be deemed
fair and reasonable if (i) such transaction is approved by the Audit
Committee, (ii) its terms are no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership), the transaction is fair to the Partnership.
The General Partner and its affiliates will have no obligation to permit the
Partnership to use any facilities or assets of the General Partner and such
affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation of
the General Partner and its affiliates to enter into any such contracts.
COMMON UNITHOLDERS HAVE NOT BEEN REPRESENTED BY COUNSEL
As is customary in many types of public securities offerings, the Common
Unitholders have not been represented by counsel in connection with the
preparation of the Partnership Agreement or other agreements referred to
herein or in establishing the terms of this offering made hereby. The
attorneys, accountants and others who have performed services for the
Partnership in connection with this offering have been employed by the General
Partner and its affiliates and may continue to represent the General Partner
and its affiliates. Attorneys, accountants and others who will perform
services for the Partnership in the future will be selected by the General
Partner or the Audit Committee and may also perform services for the General
Partner and its affiliates. The General Partner may retain separate counsel
for the Partnership or the Unitholders after the sale of the Common Units
offered hereby, depending on the nature of the conflict that arises, but it
does not intend to do so in most cases.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT
The Partnership Agreement provides that it will not constitute a breach of
the General Partners fiduciary duties if the General Partner exercises its
right to call for and purchase Units as provided in the Partnership Agreement
or assign this right to its affiliates or to the Partnership. The General
Partner thus may use its own discretion, free of fiduciary duty restrictions,
in determining whether to exercise such right. As a consequence, a Common
Unitholder may have his Common Units purchased from him even though he may not
desire to sell them, and the price paid may be less than the amount the holder
would desire to receive upon sale of his Common Units. For a description of
such right, see "The Partnership Agreement--Limited Call Right."
AFFILIATES OF THE GENERAL PARTNER MAY COMPETE WITH THE PARTNERSHIP
Following the sale of the Common Units offered hereby, affiliates of the
General Partner will not be restricted from engaging in any business
activities other than the retail sales of propane to end users in the
continental United States, even if they are in competition with the
Partnership. As a result, conflicts of interest may arise between affiliates
of the General Partner, on the one hand, and the Partnership, on the other.
The Partnership Agreement expressly provides that, subject to certain limited
exceptions, it shall not constitute a breach of the General Partner's
fiduciary duties to the Partnership or the Unitholders for affiliates of the
General Partner to engage in direct competition with the Partnership, other
than with respect to the retail sale of propane to end users within the
continental United States. Such competition may include the trading,
transportation, storage and wholesale distribution of propane. The Partnership
Agreement also provides that the General Partner and its affiliates have no
obligation to present business opportunities to the Partnership. The General
Partner
81
<PAGE>
anticipates that there may be competition between the Partnership and
affiliates of the General Partner. Although the Partnership Agreement does not
restrict the ability of affiliates of the General Partner to trade propane or
other natural gas liquids in competition with the Partnership, they do not
intend to engage in such trading except in association with the conduct of
their other permitted activities.
FIDUCIARY DUTIES OF THE GENERAL PARTNER
The General Partner will be accountable to the Partnership and the
Unitholders as a fiduciary. Consequently, the General Partner must exercise
good faith and integrity in handling the assets and affairs of the
Partnership. In contrast to the relatively well developed law concerning
fiduciary duties owed by officers and directors to the shareholders of a
corporation, the law concerning the duties owed by general partners to other
partners and to partnerships is relatively undeveloped. The Delaware Act does
not define with particularity the fiduciary duties owed by general partners,
but fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty would
generally prohibit a general partner of a Delaware limited partnership from
taking any action or engaging in any transaction as to which it has a conflict
of interest. However, the Delaware Act has been amended to clarify that
Delaware limited partnerships may, in their partnership agreements, restrict
or expand the fiduciary duties that might otherwise be applied by a court in
analyzing the standard duty owed by general partners to limited partners. In
order to induce the General Partner to manage the business of the Partnership,
the Partnership Agreement, as permitted by the Delaware Act, contains various
provisions that have the effect of restricting the fiduciary duties that might
otherwise be owed by the General Partner to the Partnership and its partners
and waiving or consenting to conduct by the General Partner and its affiliates
that might otherwise raise issues as to compliance with fiduciary duties or
applicable law.
The Partnership Agreement provides that whenever a conflict of interest
arises between the General Partner or its affiliates, on the one hand, and the
Partnership or any other partner, on the other, the General Partner shall
resolve such conflict. The General Partner shall not be in breach of its
obligations under the Partnership Agreement or its duties to the Partnership
or the Unitholders if the resolution of such conflict is fair and reasonable
to the Partnership, and any resolution shall conclusively be deemed to be fair
and reasonable to the Partnership if such resolution is (i) approved by the
Audit Committee (although no party is obligated to seek such approval and the
General Partner may adopt a resolution or course of action that has not
received such approval), (ii) on terms no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties or (iii) fair to the Partnership, taking into account the totality of
the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership). In
resolving such conflict, the General Partner may (unless the resolution is
specifically provided for in the Partnership Agreement) consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
or engineering practices or principles and such other factors as it deems
relevant. Thus, unlike the strict duty of a fiduciary who must act solely in
the best interests of his beneficiary, the Partnership Agreement permits the
General Partner to consider the interests of all parties to a conflict of
interest, including the interests of the General Partner. In connection with
the resolution of any conflict that arises, unless the General Partner has
acted in bad faith, the action taken by the General Partner shall not
constitute a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other applicable law.
The Partnership Agreement also provides that in certain circumstances the
General Partner may act in its sole discretion, in good faith or pursuant to
other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has failed to institute
the action or where an effort to cause the general partner to do so is not
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likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited as required to permit the
General Partner and its officers and directors to act under the Partnership
Agreement or any other agreement contemplated therein and to make any decision
pursuant to the authority prescribed in the Partnership Agreement so long as
such action is reasonably believed by the General Partner to be in, or not
inconsistent with, the best interests of the Partnership. Further, the
Partnership Agreement provides that the General Partner and its officers and
directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, the Partnership is
required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, agents and trustees, to the fullest extent
permitted by law, against liabilities, costs and expenses incurred by the
General Partner or other such persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Partnership.
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a
general partner to be waived or restricted by a partnership agreement have not
been tested in a court of law, and the General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the General
Partner. Unitholders should consult their own legal counsel concerning the
fiduciary responsibilities of the General Partner and its officers and
directors and the remedies available to the Unitholders.
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DESCRIPTION OF THE COMMON UNITS
The Common Units will be registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, and the Partnership will be subject to the reporting
and certain other requirements of the Exchange Act. The Partnership will be
required to file periodic reports containing financial and other information
with the Securities and Exchange Commission (the "Commission").
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) will be
required to execute Transfer Applications, the form of which is included as
Appendix B to this Prospectus. Purchasers may hold Common Units in nominee
accounts, provided that the broker (or other nominee) executes and delivers a
Transfer Application and becomes a limited partner. The Partnership will be
entitled to treat the nominee holder of a Common Unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those
that it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance, under the trading symbol "FGP".
THE UNITS
Generally, the Common Units and the Subordinated Units represent limited
partner interests in the Partnership, which entitle the holders thereof to
participate in Partnership distributions and exercise the rights or privileges
available to limited partners under the Partnership Agreement. For a
description of the relative rights and preferences of holders of Common Units
and holders of Subordinated Units in and to Partnership distributions,
together with a description of the circumstances under which Subordinated
Units may convert into Common Units, see "Cash Distribution Policy." For a
description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
The First National Bank of Boston, N. A. will act as a registrar and
transfer agent (the "Transfer Agent") for the Common Units and will receive a
fee from the Partnership for serving in such capacities. All fees charged by
the Transfer Agent for transfers of Common Units will be borne by the
Partnership and not by the holders of Common Units, except for fees similar to
those customarily paid by stockholders for surety bond premiums to replace
lost or stolen certificates, taxes and other governmental charges, special
charges for services requested by a holder of a Common Unit and other similar
fees or charges will be borne by the affected holder. There will be no charge
to holders for disbursements of the Partnership's cash distributions. The
Partnership will indemnify the Transfer Agent, its agents and each of their
respective shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in respect of its
activities as such, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
RESIGNATION OR REMOVAL
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the General Partner of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
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TRANSFER OF UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
The transfer of the Common Units to persons that purchase directly from the
Underwriters will be accomplished through the completion, execution and
delivery of a Transfer Application by such purchaser in connection with such
purchase. Any subsequent transfers of a Common Unit will not be recorded by
the Transfer Agent or recognized by the Partnership unless the transferee
executes and delivers a Transfer Application. By executing and delivering a
Transfer Application (the form of which is set forth as Appendix B to this
Prospectus and which is also set forth on the reverse side of the certificate
representing Common Units), the transferee of Common Units (i) becomes the
record holder of such Units and shall constitute an assignee until admitted
into the Partnership as a substituted limited partner, (ii) automatically
requests admission as a substituted limited partner in the Partnership, (iii)
agrees to be bound by the terms and conditions of, and executes, the
Partnership Agreement, (iv) represents that such transferee has the capacity,
power and authority to enter into the Partnership Agreement, (v) grants powers
of attorney to the General Partner and any liquidator of the Partnership as
specified in the Partnership Agreement and (vi) makes the consents and waivers
contained in the Partnership Agreement. An assignee will become a substituted
limited partner of the Partnership in respect of the transferred Common Units
upon the consent of the General Partner and the recordation of the name of the
assignee on the books and records of the Partnership. Such consent may be
withheld in the sole discretion of the General Partner. Common Units are
securities and are transferable according to the laws governing transfer of
securities. In addition to other rights acquired upon transfer, the transferor
gives the transferee the right to request admission as a substituted limited
partner in the Partnership in respect of the transferred Common Units. A
purchaser or transferee of Common Units who does not execute and deliver a
Transfer Application obtains only (a) the right to assign the Common Units to
a purchaser or other transferee and (b) the right to transfer the right to
seek admission as a substituted limited partner in the Partnership with
respect to the transferred Common Units. Thus, a purchaser or transferee of
Common Units who does not execute and deliver a Transfer Application will not
receive cash distributions unless the Common Units are held in a nominee or
"street name" account and the nominee or broker has executed and delivered a
Transfer Application with respect to such Common Units, and may not receive
certain federal income tax information or reports furnished to record holders
of Common Units. The transferor of Common Units will have a duty to provide
such transferee with all information that may be necessary to obtain
registration of the transfer of the Common Units, but a transferee agrees, by
acceptance of the certificate representing Common Units, that the transferor
will not have a duty to insure the execution of the Transfer Application by
the transferee and will have no liability or responsibility if such transferee
neglects or chooses not to execute and forward the Transfer Application to the
Transfer Agent. See "The Partnership Agreement--Status as Limited Partner or
Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of certain provisions of the
Partnership Agreement. The form of the Partnership Agreement for the
Partnership is included in this Prospectus as Appendix A. The form of
Partnership Agreement for the Operating Partnership (the "Operating
Partnership Agreement") is included as an exhibit to the Registration
Statement of which this Prospectus constitutes a part. The Partnership will
provide prospective investors with a copy of the form of the Operating
Partnership Agreement upon request at no charge. The following discussion is
qualified in its entirety by reference to the Partnership Agreements for the
Partnership and for the Operating Partnership. The Partnership will be the
sole limited partner of the Operating Partnership, which will own, manage and
operate the Partnership's business. The General Partner will serve as the
general partner of the Partnership and of the Operating Partnership,
collectively owning a 2% general partner interest in the business and
properties owned by the Partnership and the Operating Partnership on a
combined basis. Unless specifically described otherwise, references herein to
the term "Partnership Agreement" constitute references to the Partnership
Agreements of the Partnership and the Operating Partnership, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to various transactions
and relationships of the Partnership with the General Partner and its
affiliates, see "Risk Factors--Conflicts of Interest and Fiduciary Duties" and
"Conflicts of Interest and Fiduciary Responsibility." With regard to the
management of the Partnership, see "Management." With regard to the transfer
of Units, see "Description of the Common Units." With regard to distributions
of Available Cash, see "Cash Distribution Policy." With regard to allocations
of taxable income and taxable loss, see "Tax Considerations." Prospective
investors are urged to review these sections of this Prospectus and the
Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were recently organized as
Delaware limited partnerships. The General Partner is the general partner of
the Partnership and the Operating Partnership. Upon the sale of the Common
Units offered hereby, the General Partner will hold an aggregate 2% interest
as general partner, and the Unitholders (including Ferrell as an owner of
Common Units, Subordinated Units and Incentive Distribution Rights) will hold
a 98% interest as limited partners in the Partnership and the Operating
Partnership on a combined basis. The Partnership will dissolve on July 31,
2084, unless sooner dissolved pursuant to the terms of the Partnership
Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited to
serving as the limited partner of the Operating Partnership and engaging in
any business activity that may be engaged in by the Operating Partnership or
is approved by the General Partner. The Operating Partnership Agreement
provides that the Operating Partnership may engage in any activity engaged in
by Ferrellgas immediately prior to this offering, any activities that are, in
the sole judgment of the General Partner, reasonably related thereto and any
other activity approved by the General Partner.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Partnership.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of
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the Partnership has been appointed, such liquidator, a power of attorney to,
among other things, execute and file certain documents required in connection
with the qualification, continuance or dissolution of the Partnership, or the
amendment of the Partnership Agreement in accordance with the terms thereof
and to make consents and waivers contained in the Partnership Agreement.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER
The authority of the General Partner is limited in certain respects under
the Partnership Agreement. The General Partner is prohibited, without the
prior approval of holders of record of at least a majority of the Units (other
than Units owned by the General Partner and its affiliates) during the
Subordination Period, or a majority of all of the outstanding Units
thereafter, from, among other things, selling or exchanging all or
substantially all of the Partnership's assets in a single transaction or a
series of related transactions (including by way of merger, consolidation or
other combination) or approving on behalf of the Partnership the sale,
exchange or other disposition of all or substantially all of the assets of the
Partnership, provided that the Partnership may mortgage, pledge, hypothecate
or grant a security interest in all or substantially all of the Partnership's
assets without such approval. The Partnership may also sell all or
substantially all of its assets pursuant to a foreclosure or other realization
upon the foregoing encumbrances without such approval. The Common Unitholders
are not entitled to dissenters' rights of appraisal under the Partnership
Agreement or applicable Delaware law in the event of a merger or consolidation
of the Partnership, a sale of substantially all of the Partnership's assets or
any other event. Except as provided in the Partnership Agreement and generally
described below under "--Amendment of Partnership Agreement," any amendment to
a provision of the Partnership Agreement generally will require the approval
of the holders of at least 66 2/3% of the outstanding Units.
In general, the General Partner may not take any action, or refuse to take
any reasonable action, without the consent of the holders of at least 66 2/3%
of each class of outstanding Units, including the consent of at least 66 2/3%
of the outstanding Common Units (other than Common Units owned by the General
Partner and its affiliates), the effect of which would be to cause the
Partnership to be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to voluntarily withdraw as general
partner of the Partnership and the Operating Partnership prior to July 31,
2004 (with limited exceptions described below), without obtaining the approval
of at least 66 2/3% of the outstanding Units (excluding for purposes of such
determination Units held by the General Partner and its affiliates) and
furnishing an opinion of counsel that such withdrawal (following the selection
of a successor general partner) will not result in the loss of the limited
liability of the limited partners of the Partnership or cause the Partnership
to be treated as an association taxable as a corporation or otherwise taxed as
an entity for federal income tax purposes (an "Opinion of Counsel"). On or
after July 31, 2004, the General Partner may withdraw as general partner by
giving 90 days' written notice (without first obtaining approval from the
Unitholders), and such withdrawal will not constitute a violation of the
Partnership Agreement. Notwithstanding the foregoing, the General Partner may
withdraw without Unitholder approval upon 90 days' notice to the limited
partners if more than 50% of the outstanding Units are held or controlled by
one person and its affiliates (other than the General Partner and its
affiliates). In addition, the Partnership Agreement permits the General
Partner (in certain limited instances) to sell all of its general partner
interest in the Partnership and permits the parent corporation of the General
Partner to sell all or any portion of the capital stock of the General Partner
to a third party without the approval of the Unitholders. See "--Transfer of
General Partner Interest." Upon the withdrawal of the General Partner under
any circumstances (other than as a result of a transfer by the General Partner
of all or a part of its general partner interest in the Partnership), the
holders of a majority of the outstanding Units (excluding for purposes of such
determination Units held by the General Partner and its affiliates) may select
a successor to such withdrawing General Partner. If such a successor is not
elected, or is elected but an Opinion of Counsel cannot be obtained, the
Partnership will be dissolved, wound up and liquidated,
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unless within 180 days after such withdrawal a majority of the Unitholders
agree in writing to continue the business of the Partnership and to the
appointment of a successor General Partner. See "--Termination and
Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units and
the Partnership receives an Opinion of Counsel. Any such removal is also
subject to the approval of a successor general partner by the vote of the
holders of not less than a majority of the outstanding Units.
Removal or withdrawal of the General Partner of the Partnership also
constitutes removal or withdrawal, as the case may be, of the General Partner
as general partner of the Operating Partnership.
In the event of withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement or removal of the General Partner by the
limited partners under circumstances where cause exists, a successor general
partner will have the option to purchase the general partner interest of the
departing General Partner (the "Departing Partner") in the Partnership and the
Operating Partnership for a cash payment equal to the fair market value of
such interest. Under all other circumstances where the General Partner
withdraws or is removed by the limited partners, the Departing Partner will
have the option to require the successor general partner to purchase such
general partner interest of the Departing Partner for such amount. In each
case such fair market value will be determined by agreement between the
Departing Partner and the successor general partner, or if no agreement is
reached, by an independent investment banking firm or other independent
experts selected by the Departing Partner and the successor general partner
(or if no expert can be agreed upon, by the expert chosen by agreement of the
experts selected by each of them). In addition, the Partnership would also be
required to reimburse the Departing Partner for all amounts due the Departing
Partner, including without limitation, all employee related liabilities,
including severance liabilities, incurred in connection with the termination
of the employees employed by the Departing Partner for the benefit of the
Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interest in the partnership will be converted into
Common Units equal to the fair market value of such interest as determined by
an investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
TRANSFER OF GENERAL PARTNER INTEREST
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Partnership to an affiliate or in
connection with the merger or consolidation of the General Partner with or
into another entity or the transfer by the General Partner of all or
substantially all of its assets to another person or entity, the General
Partner may not transfer all or any part of its general partner interest in
the Partnership to another person or entity prior to July 31, 2004, without
the approval of holders of at least a majority of the outstanding Units
(excluding any Units held by such General Partner or its affiliates), provided
that, in each case such transferee assumes the rights and duties of the
General Partner, agrees to be bound by the provisions of the Partnership
Agreement and furnishes an Opinion of Counsel and agrees to purchase all (or
the appropriate portion thereof, as applicable) of the General Partner's
partnership interest in the Operating Partnership.
REIMBURSEMENT FOR SERVICES
The Partnership Agreement provides that the General Partner is not entitled
to receive any compensation for its services as general partner of the
Partnership; the General Partner is, however, entitled to be reimbursed on a
monthly basis (or such other basis as the General Partner may reasonably
determine) for all direct and indirect expenses it incurs or payments it makes
on behalf of the Partnership, and all other necessary or appropriate expenses
allocable to the Partnership or
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otherwise reasonably incurred by the General Partner in connection with the
operation of the Partnership's business. The Partnership Agreement provides
that the General Partner shall determine the fees and expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove Ferrellgas as general
partner of the Partnership or otherwise change management of the Partnership.
If any person or group other than Ferrellgas and its affiliates acquires
beneficial ownership of 20% or more of the Common Units, such person or group
loses voting rights with respect to all of its Common Units. In addition, if
Ferrellgas is removed as General Partner other than for cause, the
Subordination Period will end and any Subordinated Units held by Ferrellgas
and any of its affiliates will immediately convert into Common Units. As a
result, Ferrellgas and such affiliates, as the holders of Common Units issued
upon conversion of Subordinated Units, would participate in any distributions
pro rata with the other holders of Common Units, including distributions in
respect of Common Unit Arrearages.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described below under "--Limited Liability," the Units will be
fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
Each purchaser of Common Units offered hereby must execute a Transfer
Application (the form of which is attached as Appendix B to this Prospectus)
whereby such purchaser requests admission as a substituted limited partner in
the Partnership, makes certain representations and agrees to certain
provisions. If such action is not taken, a purchaser will not be registered as
a record holder of Common Units on the books of the Transfer Agent or issued a
Common Unit. Purchasers may hold Common Units in nominee accounts. See
"Description of the Common Units--Transfer Agent and Registrar" and "--
Transfer of Units" for a more complete description of the requirements for the
transfer of Common Units.
An assignee, subsequent to executing and delivering a Transfer Application,
but pending its admission as a substituted limited partner in the Partnership,
is entitled to an interest in the Partnership equivalent to that of a limited
partner with respect to the right to share in allocations and distributions
from the Partnership, including liquidating distributions. The General Partner
will vote and exercise other powers attributable to Common Units owned by an
assignee who has not become a substituted limited partner at the written
direction of such assignee. See "--Meetings; Voting." Transferees who do not
execute and deliver a Transfer Application will be treated neither as
assignees nor as record holders of Common Units, and will not receive cash
distributions, federal income tax allocations or reports furnished to record
holders of Common Units. The only right such transferees will have is the
right to negotiate such Common Units to a purchaser or other transferee and
the right to transfer the right to request admission as a substituted limited
partner in respect of the transferred Common Units to a purchaser or other
transferee who executes a Transfer Application in respect of the Common Units.
A nominee or broker who has executed a Transfer Application with respect to
Common Units held in street name or nominee accounts will receive such
distributions and reports pertaining to such Common Units.
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner,
create a substantial risk of cancellation or forfeiture of any property in
which the Partnership has an interest because of the nationality, citizenship
or other related status of any limited partner or assignee, the Partnership
may redeem the Units held by such
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limited partner or assignee at their Current Market Price (as defined in the
glossary). In order to avoid any such cancellation or forfeiture, the General
Partner may require each limited partner or assignee to furnish information
about his nationality, citizenship, residency or related status. If a limited
partner or assignee fails to furnish information about such nationality,
citizenship, residency or other related status within 30 days after a request
for such information, such limited partner or assignee may be treated as a
non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted limited
partner, a Non-citizen Assignee does not have the right to direct the voting
of his Units and may not receive distributions in kind upon liquidation of the
Partnership. See "--Status as Limited Partner or Assignee."
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the General Partner to 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 without the approval of any limited
partners, with certain exceptions, including the following: prior to the end
of the Subordination Period, the Partnership may not issue equity securities
of the Partnership ranking prior or senior to the Common Units or an aggregate
of more than 7,000,000 additional Common Units (excluding Common Units issued
in connection with the exercise of the Underwriters' overallotment option and
Common Units issued upon conversion of Subordinated Units) or an equivalent
amount of securities ranking on a parity with the Common Units, in either case
without the approval of the holders of at least 66 2/3% of the outstanding
Common Units; provided, however, that the Partnership may also issue an
unlimited number of additional Common Units or parity securities prior to the
end of the Subordination Period and without the approval of the Unitholders if
(a) such issuance occurs in connection with or (b) such issuance occurs within
270 days of, and the net proceeds from such issuance are used to repay debt
incurred in connection with, a transaction in which the Partnership acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over assets and properties that would have, if acquired by
the Partnership as of the date that is one year prior to the first day of the
quarter in which such transaction is to be consummated, resulted in an
increase in (i) the amount of Acquisition Pro Forma Available Cash
constituting Cash from Operations generated by the Partnership on a per-Unit
basis with respect to all outstanding Units with respect to each of the four
most recently completed quarters over (ii) the actual amount of Available Cash
constituting Cash from Operations generated by the Partnership on a per-Unit
basis for all outstanding Units with respect to each of such four quarters.
The issuance, during the Subordination Period, of any equity securities of the
Partnership with rights as to distributions and allocations or in liquidation
ranking prior or senior to the Common Units, will require the approval of the
holders of at least 66 2/3% of the outstanding Common Units. After the
Subordination Period, the General Partner, without a vote of the Unitholders,
may cause the Partnership to issue additional Common Units or other equity
securities of the Partnership on a parity with or senior to the Common Units.
After the end of the Subordination Period, there is no restriction under the
Partnership Agreement on the ability of the Partnership to issue additional
limited or general partner interests having rights to distributions or rights
in liquidation on a parity with or senior to the Common Units. In accordance
with Delaware law and the provisions of the Partnership Agreement, the General
Partner may cause the Partnership to issue additional partnership interests
that, in its sole discretion, may have special voting rights to which the
Common Units are not entitled.
The General Partner will have the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase Common Units,
Subordinated Units, Incentive Distribution Rights or other equity securities
of the Partnership from the Partnership whenever, and on the same terms that,
the Partnership issues such securities or rights to persons other than the
General Partner and its affiliates, to the extent necessary to maintain the
percentage interest of the General Partner and its affiliates in the
Partnership that existed immediately prior to each such issuance.
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LIMITED CALL RIGHT
If at any time less than 20% of the then issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right, which it
may assign and transfer to any of its affiliates or to the Partnership, to
acquire all, but not less than all, of the remaining limited partner interests
of such class held by such unaffiliated persons as of a record date to be
selected by the General Partner, on at least 10 but not more than 60 days'
notice. The purchase price in the event of such purchase shall be the greater
of (a) the highest price paid by the General Partner or any of its affiliates
for any limited partner interests of such class purchased within the 90 days
preceding the date on which the General Partner first mails notice of its
election to purchase such limited partner interests and (b)(i) the average of
the closing prices of the limited partner interests of such class for the 20
trading days ending three days prior to the date on which such notice is first
mailed or (ii) if such limited partner interests are not listed for trading on
an exchange or quoted by NASDAQ, an amount equal to the fair market value of
such limited partner interests as of three days prior to the date such notice
is first mailed, as determined by the General Partner using any reasonable
method of valuation. As a consequence of the General Partner's right to
purchase outstanding limited partner interests, a holder of limited partner
interests may have his limited partner interests purchased from him even
though he may not desire to sell them, or the price paid may be less than the
amount the holder would desire to receive upon the sale of his limited partner
interests.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner. In order to adopt a proposed amendment, the
General Partner is required to seek written approval of the holders of the
number of Units required to approve such amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below. Proposed amendments (other than those described below) must
be approved by holders of at least 66 2/3% of the outstanding Units during the
Subordination Period and a majority of the outstanding Units thereafter,
except that no amendment may be made which would (i) enlarge the obligations
of any limited partner, without its consent, (ii) enlarge the obligations of
the General Partner, without its consent, which may be given or withheld in
its sole discretion, (iii) restrict in any way any action by or rights of the
General Partner as set forth in the Partnership Agreement, (iv) modify the
amounts distributable, reimbursable or otherwise payable by the Partnership to
the General Partner, (v) change the term of the Partnership, or (vi) give any
person the right to dissolve the Partnership other than the General Partner's
right to dissolve the Partnership with the approval of at least 66 2/3% of the
Units during the Subordination Period, or a majority of the outstanding Units
thereafter or change such right of the General Partner in any way.
The General Partner may make amendments to the Partnership Agreement without
the approval of any limited partner or assignee of the Partnership to reflect
(i) a change in the name of the Partnership, the location of the principal
place of business of the Partnership, the registered agent or the registered
office of the Partnership, (ii) admission, substitution, withdrawal or removal
of partners in accordance with the Partnership Agreement, (iii) a change that,
in the sole discretion of the General Partner, is necessary or appropriate to
qualify or continue the qualification of the Partnership as a partnership in
which the limited partners have limited liability or that is necessary or
advisable in the opinion of the General Partner to ensure that the Partnership
will not be treated as an association taxable as a corporation or otherwise
subject to taxation as an entity for federal income tax purposes, (iv) an
amendment that is necessary, in the opinion of counsel to the Partnership, to
prevent the Partnership or the General Partner or its respective directors or
officers from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or proposed,
(v) subject to the limitations on the issuance of additional
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Common Units or other limited or general partner interests described above, an
amendment that in the sole discretion of the General Partner is necessary or
desirable in connection with the authorization of additional limited or
general partner interests, (vi) any amendment expressly permitted in the
Partnership Agreement to be made by the General Partner acting alone, (vii) an
amendment effected, necessitated or contemplated by a merger agreement that
has been approved pursuant to the terms of the Partnership Agreement, (viii)
any amendment that, in the sole discretion of the General Partner, is
necessary or desirable in connection with the formation by the Partnership of,
or its investment in, any corporation, partnership or other entity (other than
the Operating Partnership) as otherwise permitted by the Partnership
Agreement, (ix) a change in the fiscal year and taxable year of the
Partnership and changes related thereto, and (x) any other amendments
substantially similar to the foregoing.
In addition, the General Partner may make amendments to the Partnership
Agreement without such consent if such amendments (i) do not adversely affect
the limited partners in any material respect, (ii) are necessary or desirable
to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute, (iii) are
necessary or desirable to implement certain tax-related provisions of the
Partnership Agreement, (iv) are necessary or desirable to facilitate the
trading of the Units or to comply with any rule, regulation, guideline or
requirement of any securities exchange on which the Units are or will be
listed for trading, compliance with any of which the General Partner deems to
be in the best interests of the Partnership and the Unitholders or (v) are
required or contemplated by the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel as
to the tax consequences or the possible effect on limited liability of
amendments described in the two immediately preceding paragraphs. No other
amendments to the Partnership Agreement will become effective without the
approval of at least 95% of the Units unless the Partnership obtains an
Opinion of Counsel to the effect that such amendment will not cause the
Partnership to be treated as an association taxable as a corporation or
otherwise cause the Partnership to be subject to entity level taxation for
federal income tax purposes and will not affect the limited liability of any
limited partner in the Partnership or the limited partner of the Operating
Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types of classes of limited partner interests or the general partner
interests will require the approval of at least a majority of the type or
class of limited partner interests so affected (excluding any such limited
partner interests held by the General Partner and its affiliates).
MEETINGS; VOTING
Except as described below with respect to a person or group owning 20% or
more of all Common Units, Unitholders or assignees who are record holders of
Units on the record date set pursuant to the Partnership Agreement will be
entitled to notice of, and to vote at, meetings of limited partners of the
Partnership and to act with respect to matters as to which approvals may be
solicited. With respect to voting rights attributable to Common Units that are
owned by an assignee who is a record holder but who has not yet been admitted
as a limited partner, the General Partner shall be deemed to be the limited
partner with respect thereto and shall, in exercising the voting rights in
respect of such Common Units on any matter, vote such Common Units at the
written direction of such record holder. Absent such direction, such Common
Units will not be voted (except that, in the case of Units held by the General
Partner on behalf of Non-citizen Assignees, the General Partner shall
distribute the votes in respect of such Units in the same ratios as the votes
of limited partners in respect of other Units are cast).
The General Partner does not anticipate that any meeting of limited partners
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the limited partners may be
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taken either at a meeting of the limited partners or without a meeting if
consents in writing setting forth the action so taken are signed by holders of
such number of limited partner interests as would be necessary to authorize or
take such action at a meeting of the limited partners. Meetings of the limited
partners of the Partnership may be called by the General Partner or by limited
partners owning at least 20% of the outstanding Units of the class for which a
meeting is proposed. Limited partners may vote either in person or by proxy at
meetings. Two-thirds (or a majority, if that is the vote required to take
action at the meeting in question) of the outstanding limited partner
interests of the class for which a meeting is to be held (excluding, if such
are excluded from such vote, limited partner interests held by the General
Partner and its affiliates) represented in person or by proxy will constitute
a quorum at a meeting of limited partners of the Partnership.
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having
special voting rights could be issued by the General Partner. See "--Issuance
of Additional Securities." However, Common Units owned beneficially by any
person and its affiliates (other than Ferrell and its affiliates) that own
beneficially 20% or more of all Common Units may not be voted on any matter
and will not be considered to be outstanding when sending notices of a meeting
of limited partners, calculating required votes, determining the presence of a
quorum or for other similar Partnership purposes. The Partnership Agreement
provides that Units held in nominee or street name account will be voted by
the broker (or other nominee) pursuant to the instruction of the beneficial
owner unless the arrangement between the beneficial owner and his nominee
provides otherwise. Except as otherwise provided in the Partnership Agreement,
Subordinated Units will vote together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Units (whether or not such record
holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the
Partnership or by the Transfer Agent at the request of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partner, any Departing Partner and any Person who is or was an officer
or director of the General Partner or any Departing Partner, any person who is
or was an affiliate of the General Partner or any Departing Partner, any
Person who is or was an employee, partner, agent or trustee of the General
Partner or any Departing Partner or any affiliate of the General Partner or
any Departing Partner, or any Person who is or was serving at the request of
the General Partner or any affiliate of the General Partner or any Departing
Partner as an officer, director, employee, partner, agent, or trustee of
another Person ("Indemnitees"), to the fullest extent permitted by law, from
and against any and all losses, claims, damages, liabilities (joint or
several) expenses (including, without limitation, legal fees and expenses),
judgments, fines, penalties, interest, settlements and other amounts arising
from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise, by
reason of its status as (i) the General Partner, Departing Partner or
affiliate of either, (ii) an officer, director, employee, partner, agent or
trustee of the General Partner, Departing Partner or affiliate of either or
(iii) a person serving at the request of the Partnership in another entity in
a similar capacity, provided that in each case the Indemnitee acted in good
faith and in a manner which such Indemnitee reasonably believed to be in or
not opposed to the best interests of the Partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Any indemnification under these provisions will be only out of the
assets of the Partnership, and the General Partner shall not be personally
liable for, or have any obligation to contribute or loan funds or assets to
the Partnership to enable it to effectuate, such indemnification. The
Partnership is authorized to purchase (or to reimburse the General Partner or
its affiliates for the cost of) insurance against liabilities asserted
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against and expenses incurred by such persons in connection with the
Partnerships activities, whether or not the Partnership would have the power
to indemnify such person against such liabilities under the provisions
described above.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Units plus his share of any undistributed
profits and assets of the Partnership. However, if it were determined that the
right or exercise of the right by the limited partners as a group to remove or
replace the General Partner, to approve certain amendments to the Partnership
Agreement or to take other action pursuant to the Partnership Agreement
constituted "participation in the control" of the Partnerships business for
the purposes of the Delaware Act, then the limited partners could be held
personally liable for the Partnership's obligations under the laws of the
State of Delaware to the same extent as the General Partner. Under the
Delaware Act, a limited partnership may not make a distribution to a partner
to the extent that at the time of the distribution, after giving effect to the
distribution, all liabilities of the partnership, other than liabilities to
partners on account of their partnership interests and nonrecourse
liabilities, exceed the fair value of the assets of the limited partnership.
For the purpose of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of property subject
to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds
that nonrecourse liability. The Delaware Act provides that a limited partner
who receives such a distribution and knew at the time of the distribution that
the distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years from
the date of the distribution. Under the Delaware Act, an assignee who becomes
a substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
the assignee is not obligated for liabilities unknown to him at the time he
became a limited partner and which could not be ascertained from the
partnership agreement.
It is contemplated that the Operating Partnership will conduct business in
at least 45 and possibly other states. Maintenance of limited liability may
require compliance with legal requirements in such jurisdictions in which the
Operating Partnership conducts business, including qualifying the Operating
Partnership to do business therein. Limitations on the liability of limited
partners for the obligations of a limited partnership have not been clearly
established in many jurisdictions. If it were determined that the Partnership
was, by virtue of its limited partner interest in the Operating Partnership or
otherwise, conducting business in any state without compliance with the
applicable limited partnership statute, or that the right or exercise of the
right by the limited partners as a group to remove or replace the General
Partner, to approve certain amendments to the Partnership Agreement, or to
take other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Partnership's business for the purposes
of the statutes of any relevant jurisdiction, then the limited partners could
be held personally liable for the Partnership's obligations under the law of
such jurisdiction to the same extent as the General Partner. The Partnership
will operate in such manner as the General Partner deems reasonable and
necessary or appropriate to preserve the limited liability of Unitholders.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership is August 1 to July 31.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish each record holder of
Units (as of a record date selected by the General
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Partner) with an annual report containing audited financial statements of the
Partnership for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the fourth quarter), the
General Partner will furnish each record holder of Units (as of a record date
selected by the General Partner) a report containing unaudited financial
statements of the Partnership with respect to such quarter and such other
information as may be required by law.
The General Partner will use all reasonable efforts to furnish each record
holder of a Unit information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year. Such information is
expected to be furnished in summary form so that certain complex calculations
normally required of partners can be avoided. The General Partner's ability to
furnish such summary information to Unitholders will depend on the cooperation
of such Unitholders in supplying certain information to the General Partner.
Every Unitholder (without regard to whether he supplies such information to
the General Partner) will receive information to assist him in determining his
federal and state tax liability and filing his federal and state income tax
returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner can for a purpose
reasonably related to such limited partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Partnerships tax returns, (iii) information as to the amount of cash,
and a description and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Partnership's business and financial
condition and (vi) such other information regarding the affairs of the
Partnership as is just and reasonable. The General Partner may, and intends
to, keep confidential from the limited partners trade secrets or other
information the disclosure of which the General Partner believes in good faith
is not in the best interests of the Partnership or which the Partnership is
required by law or by agreements with third parties to keep confidential.
TERMINATION AND DISSOLUTION
The Partnership will continue until July 31, 2084, unless sooner terminated
pursuant to the Partnership Agreement. The Partnership will be dissolved upon
(i) the election of the General Partner to dissolve the Partnership, if
approved by at least a majority of the Units (other than Units owned by the
General Partner and its affiliates) during the Subordination Period, or a
majority of all of the outstanding Units thereafter, (ii) the sale of all or
substantially all of the assets and properties of the Partnership and the
Operating Partnership, (iii) the entry of a decree of judicial dissolution of
the Partnership or (iv) withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer in accordance with the Partnership Agreement or
withdrawal or removal following approval of a successor), provided that the
Partnership shall not be dissolved upon an event described in clause (iv) if
within 90 days after such event the partners agree in writing to continue the
business of the Partnership and to the appointment, effective as of the date
of such event, of a successor General Partner. Upon a dissolution pursuant to
clause (iv), the holders of at least a majority of the Units may also elect,
within certain time limitations, to reconstitute the Partnership and continue
its business on the same terms and conditions set forth in the Partnership
Agreement by forming a new limited partnership on terms identical to those set
forth in the Partnership Agreement and having as a general partner an entity
approved by at least the holders of a majority of the Units, subject to
receipt by the Partnership of an opinion of counsel that the exercise of such
right will not result in the loss of the limited liability of Unitholders or
cause the Partnership or the reconstituted limited partnership to be treated
as an association taxable as a corporation or otherwise subject to taxation as
an entity for federal income tax purposes.
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LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up
the affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the general partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as follows: (i)
first towards the payment of all creditors of the Partnership and the creation
of a reserve for contingent liabilities and (ii) then to all partners in
accordance with the positive balance in their respective capital accounts.
Under certain circumstances and subject to certain limitations, the Liquidator
may defer liquidation or distribution of the Partnership's assets for a
reasonable period of time or distribute assets to partners in kind if it
determines that a sale would be impractical or would cause undue loss to the
partners.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for
resale under the Securities Act of 1933 and applicable state securities laws
any Units (or other securities of the Partnership) proposed to be sold by the
General Partner (or its affiliates) if an exemption from such registration
requirements is not otherwise available for such proposed transaction. The
Partnership is obligated to pay all expenses incidental to such registration,
excluding underwriting discounts and commissions.
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, Ferrell will own
1,000,000 Common Units (if the Underwriters' overallotment option is exercised
in full, all of such Common Units will be repurchased by the Partnership). In
addition, Ferrell will hold 16,593,721 Subordinated Units, 5,531,240 of which
may convert into Common Units after July 31, 1997 and all of which may convert
into Common Units after termination of the Subordination Period, subject in
each case to the satisfaction of certain conditions. The sale of these Common
Units could have an adverse impact on the price of the Common Units or on any
trading market that may develop. For a discussion of the transactions whereby
Ferrell acquired the Common Units in connection with the organization of the
Partnership, see "The Transactions."
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Units owned by an "affiliate" of the Partnership (as that term is
defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in an offering to be sold into the market in an amount
that does not exceed, during any three-month period, the greater of (i) 1% of
the total number of such securities outstanding or (ii) the average weekly
reported trading volume of the Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Units for at least three years, would
be entitled to sell such Units under Rule 144 without regard to the public
information requirements, volume limitations, manner of sale provisions or
notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common
Units or an aggregate of more than 7,000,000 additional Common Units
(excluding Common Units issued in connection with the exercise of the
Underwriters' overallotment option or Common Units issued upon conversion of
Subordinated Units) or an equivalent amount of securities ranking on a parity
with the Common Units, in either case without the approval of the holders of
at least 66 2/3% of the outstanding Common Units; provided, however, that the
Partnership may also issue an unlimited number of additional Common Units or
parity securities prior to the end of the Subordination Period and without the
approval of the Unitholders if (a) such issuance occurs in connection with or
(b) such issuance occurs within 270 days of, and the net proceeds from such
issuance are used to repay debt incurred in connection with, a transaction in
which the Partnership acquires (through an asset acquisition, merger, stock
acquisition or other form of investment) control over assets and properties
that would have, if acquired by the Partnership as of the date that is one
year prior to the first day of the quarter in which such transaction is to be
consummated, resulted in an increase in (i) the amount of Acquisition Pro
Forma Available Cash constituting Cash from Operations generated by the
Partnership on a per-Unit basis for all outstanding Units with respect to each
of the four most recently completed quarters over (ii) the actual amount of
Available Cash constituting Cash from Operations generated by the Partnership
on a per-Unit basis for all outstanding Units with respect to each of such
four quarters. After the Subordination Period, the General Partner, without a
vote of the Unitholders, may cause the Partnership to issue additional Common
Units or other equity securities of the Partnership on a parity with or senior
to the Common Units. The Partnership Agreement does not impose any restriction
on the Partnership's ability to issue equity securities ranking junior to the
Common Units at any time. Any issuance of additional Units would result in a
corresponding decrease in the proportionate ownership interest in the
Partnership represented by, and could adversely affect the cash distributions
to and market price of, Common Units then outstanding.
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the
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Securities Act the offer and sale of any Units held by such party. Subject to
the terms and conditions of the Partnership Agreement such registration rights
allow the General Partner and its affiliates, or their assignees, holding any
Units to require registration of any such Units and to include any such Units
in a registration by the Partnership of other Units, including Units offered
by the Partnership or by any Unitholder. Such registration rights will
continue in effect for two years following any withdrawal or removal of the
General Partner as the general partner of the Partnership. In connection with
any such registration, the Partnership will indemnify each holder of Units
participating in such registration and its officers, directors and controlling
persons from and against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or prospectus. The
Partnership will bear the reasonable costs of any such registration. In
addition, the General Partner and its affiliates may sell their Units in
private transactions at any time, in accordance with applicable law.
The Partnership has agreed not to offer, sell, contract to sell or otherwise
dispose of any Common Units or Subordinated Units, or any securities
substantially similar to the Common Units or Subordinated Units, including but
not limited to any securities that are convertible into or exchangeable for or
that represent the right to receive Common Units or Subordinated Units or any
such substantially similar securities, for a period of 180 days after the date
of this Prospectus without the prior written consent of the Underwriters,
except for the Common Units offered in connection with this offering and
except for any Common Units which may be issued in connection with
acquisitions by the Partnership. In addition, Ferrell has agreed that for a
period of 24 months from the date of this Prospectus it will not offer, sell,
contract to sell or otherwise dispose of any Common Units or Subordinated
Units or any securities substantially similar to the Common Units or
Subordinated Units, including but not limited to any securities that are
convertible into or exchangeable for or that represent the right to receive
Common Units or Subordinated Units or any such substantially similar
securities, without the prior written consent of the Underwriters, except (i)
pursuant to the repurchase of a portion of such Common Units in connection
with the exercise of the Underwriters' overallotment option, (ii) transfers to
James E. Ferrell or his spouse, lineal descendants or brothers or sisters,
entities controlled by James E. Ferrell or his spouse, lineal descendants or
brothers or sisters or trusts for the benefit of James E. Ferrell or his
spouse, lineal descendants or brothers or sisters, (iii) in connection with
the sale of the Partnership or substantially all of its assets, (iv) as
collateral in connection with good faith borrowing, (v) gifts of up to 20% of
such Units to charitable organizations or (vi) in the event of the death or
permanent disability of James E. Ferrell, provided, however, that in the case
of (ii) above the transferee shall enter into an agreement with the
Underwriters agreeing to comply with the above restrictions for the remainder
of the 24 month period.
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TAX CONSIDERATIONS
This section is a summary of certain federal income tax considerations that
may be relevant to prospective Unitholders and, to the extent set forth below
under "--Legal Opinions and Advice," represents the opinion of Andrews & Kurth
L.L.P., special counsel to the General Partner and the Partnership
("Counsel"), insofar as it relates to matters of law and legal conclusions.
This section is based upon current provisions of the Internal Revenue Code of
1986, as amended ("Code"), existing and proposed regulations thereunder and
current administrative rulings and court decisions, all of which are subject
to change. Subsequent changes may cause the tax consequences to vary
substantially from the consequences described below. Unless the context
otherwise requires, references in this section to "Partnership" are references
to both the Partnership and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to
corporations, estates, trusts or non-resident aliens. Accordingly, each
prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences to
him of the purchase, ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the representations and
subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Partnership will be treated
as a partnership, and (ii) owners of Common Units (with certain exceptions, as
described in "--Limited Partner Status" below) will be treated as partners of
the Partnership (but not the Operating Partnership). In addition, all
statements as to matters of law and legal conclusions contained in this
section, unless otherwise noted, reflect the opinion of Counsel. Counsel has
also advised the General Partner that, based on current law, the following
general description of the principal federal income tax consequences that
should arise from the purchase, ownership and disposition of Common Units,
insofar as it relates to matters of law and legal conclusions, addresses all
material tax consequences to Unitholders who are individual citizens or
residents of the United States.
No ruling has been requested from the Internal Revenue Service (the "IRS")
with respect to the foregoing issues or any other matter affecting the
Partnership or the Unitholders. An opinion of counsel represents only such
counsel's best legal judgment and does not bind the IRS or the courts. Thus,
no assurance can be provided that the opinions and statements set forth herein
would be sustained by a court if contested by the IRS. The costs of any
contest with the IRS will be borne directly or indirectly by the Unitholders
and the General Partner. Furthermore, no assurance can be given that the
treatment of the Partnership or an investment therein will not be
significantly modified by future legislative or administrative changes or
court decisions. Any such modification may or may not be retroactively
applied.
CHANGES IN FEDERAL INCOME TAX LAWS
On August 10, 1993 the Omnibus Budget Reconciliation Act of 1993 (the "1993
Budget Act") was enacted. The 1993 Budget Act increases the top marginal
income tax rate for individuals from 31% to 36% and imposes a 10% surtax on
individuals with taxable income in excess of $250,000 per year. The surtax is
computed by applying a 39.6% rate to taxable income in excess of the
threshold. Net capital gains remain subject to a maximum 28% tax rate. The
increased rates are effective for taxable years beginning after December 31,
1992. It is not anticipated that the 1993 Budget Act will have any adverse
impact on the Partnership or its operations.
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Proposed legislation introduced in the Congress as part of the Tax
Simplification Bill of 1993 (the "1993 Bill") and adopted by the Ways and
Means Committee on November 16, 1993, would alter the tax reporting system and
the deficiency collection system applicable to large partnerships (generally
defined as partnerships with more than 250 partners) and would make certain
additional changes to the treatment of large partnerships, such as the
Partnership. Certain of the proposed changes are discussed later in this
section. The 1993 Bill is generally intended to simplify the administration of
the tax rules governing large partnerships.
As of the date of this Prospectus, it is not possible to predict whether any
of the changes set forth in the 1993 Bill or any other changes in the federal
income tax laws that would impact the Partnership and the Unitholders will
ultimately be enacted, or if enacted, what form they will take, what the
effective dates will be, and what, if any, transition rules will be provided.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss, deduction and credit of the
Partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of any cash distributed is
in excess of the partners adjusted basis in his partnership interest.
No tax ruling has been sought from the IRS as to the status of the
Partnership as a partnership for federal income tax purposes. Instead the
Partnership has relied on the opinion of Counsel that, based upon the Code,
the regulations thereunder, published revenue rulings and court decisions, the
Partnership will be classified as a partnership for federal income tax
purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the General Partner, including:
(a) With respect to the Partnership and the Operating Partnership, the
General Partner, at all times while acting as general partner of the
relevant partnership, will have a net worth, computed on a fair market
value basis, excluding its interests in the Partnership and the Operating
Partnership and any notes or receivables due from such partnerships, equal
to $25 million;
(b) The Partnership will be operated in accordance with (i) all
applicable partnership statutes, (ii) the Partnership Agreement and (iii)
this Prospectus;
(c) The Operating Partnership will be operated in accordance with (i) all
applicable partnership statutes, (ii) the limited partnership agreement for
the Operating Partnership and (iii) the description thereof in this
Prospectus;
(d) The General Partner will at all times act independently of the
limited partners; and
(e) For each taxable year, less than 10% of the gross income of the
Partnership will be derived from sources other than (i) the exploration,
development, production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products thereof
or (ii) other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
Counsel's opinion as to the partnership classification of the Partnership in
the event of a change in the general partner is based upon the assumption that
the new general partner will satisfy the foregoing representations.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." "Qualifying income" includes income and gains
derived from the
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transportation and marketing of crude oil, natural gas, and products thereof.
Counsel is of the opinion that qualifying income also includes the wholesale
and retail marketing of propane. The General Partner has represented that in
excess of 90% of the Partnership's gross income will be derived from these
sources. Thus, based upon that representation at least 90% of the
Partnership's gross income will constitute "qualifying income." The General
Partner estimates that less than 7% of the Partnership's gross income will not
constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure determined by the IRS to be inadvertent which is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in such corporation, and then
distributed such stock to the partners in liquidation of their interests in
the Partnership. This contribution and liquidation should be tax-free to
Unitholders and the Partnership, so long as the Partnership, at such time,
does not have liabilities in excess of the basis of its assets. Thereafter,
the Partnership would be treated as a corporation for federal income tax
purposes.
If the Partnership were treated as an association or otherwise taxable as a
corporation in any taxable year, as a result of a failure to meet the
Qualifying Income Exception or otherwise, its items of income, gain, loss,
deduction and credit would be reflected only on its tax return rather than
being passed through to the Unitholders, and its net income would be taxed at
the Partnership level at corporate rates. In addition, any distribution made
to a Unitholder would be treated as either taxable dividend income (to the
extent of the Partnerships current or accumulated earnings and profits), in
the absence of earnings and profits as a nontaxable return of capital (to the
extent of the Unitholders basis in his Common Units) or taxable capital gain
(after the Unitholders basis in the Common Units is reduced to zero).
Accordingly, treatment of either the Partnership or the Operating Partnership
as an association taxable as a corporation would result in a material
reduction in a Unitholder's cash flow and after-tax return.
The discussion below is based on the assumption that the Partnership will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners will be treated as partners of
the Partnership for federal income tax purposes. Moreover, the IRS has ruled
that assignees of partnership interests who have not been admitted to a
partnership as partners, but who have the capacity to exercise substantial
dominion and control over the assigned partnership interests, will be treated
as partners for federal income tax purposes. On the basis of this ruling,
except as otherwise described herein, Counsel is of the opinion that (a)
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners and (b) Unitholders whose Common Units
are held in street name or by another nominee and who have the right to direct
the nominee in the exercise of all substantive rights attendant to the
ownership of their Common Units will be treated as partners of the Partnership
for federal income tax purposes. As this ruling does not extend, on its facts,
to assignees of Common Units who are entitled to execute and deliver Transfer
Applications and thereby become entitled to direct the exercise of attendant
rights, but who fail to execute and deliver Transfer Applications, Counsel's
opinion does not extend to these persons. Income, gain, deductions, losses or
credits would not appear to be reportable by such a Unitholder, and any cash
distributions received by such a Unitholder would therefore be fully taxable
as ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Partnership for federal income tax
purposes. A purchaser or other transferee of Common Units who does not execute
and deliver a Transfer Application may not receive certain federal income tax
information or reports furnished to record holders of Common Units unless the
Common Units are held in a nominee or street name account and the nominee or
broker has executed and delivered a Transfer Application with respect to such
Common Units.
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A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as
a partner with respect to such Common Units for federal income tax purposes.
See "--Tax Treatment of Operations--Treatment of Short Sales" below.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership although he has not received a cash distribution in respect of
such income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's basis generally will be considered
to be gain from the sale or exchange of the Common Units, taxable in
accordance with the rules described under "--Disposition of Common Units"
below. Any reduction in a Unitholder's share of the Partnership's liabilities
for which no partner, including the General Partner, bears the economic risk
of loss ("nonrecourse liabilities") will be treated as a distribution of cash
to such Unitholder.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The General Partner estimates that a purchaser of Common Units pursuant to
this offering (i) who holds such Common Units through the record date for the
last quarter of the Partnership's fiscal year ending July 31, 1995 (assuming
the Minimum Quarterly Distribution is made for each quarter or portion thereof
during that period) will be allocated an amount of federal taxable income for
such period that will be approximately 10% of the amount of cash distributed
to such Unitholder with respect to such period and (ii) who holds such Common
Units through the record date for the last quarter of the Partnership's fiscal
year ending July 31, 1999 will be allocated, on a cumulative basis, no net
federal taxable income for such period (assuming the Minimum Quarterly
Distribution is made for each quarter or portion thereof during that period).
The General Partner anticipates that after July 31, 1999 taxable income
allocated to Unitholders will increase from year to year and will constitute a
significantly higher percentage of cash distributed to Unitholders. The
foregoing estimates are based upon the assumption that gross income from
operations will approximate the amount required to make the Minimum Quarterly
Distribution and other assumptions with respect to capital expenditures, cash
flow and anticipated cash distributions. These estimates and assumptions are
subject to, among other things, numerous business, economic, regulatory,
political and competitive uncertainties which are beyond the control of the
General Partner or the Partnership. Accordingly, no assurance can be given
that the estimates will prove to be correct. The actual percentages could be
higher or lower than as described above, and any such differences could be
material. Further, the estimates are based on certain tax reporting positions
that the General Partner intends to adopt and with which the IRS could
disagree, including the amortization of customer relationships. In connection
with the formation of the Partnership, the General Partner will contribute
certain customer relationships to the Partnership. The General Partner intends
to treat such customer relationships as amortizable assets of the Partnership
for federal income tax purposes. The IRS has challenged the Company's
amortization of customer relationships and it is possible that the IRS will
challenge the amortization of customer relationships by the Partnership. If
the IRS were to successfully challenge the amortization of customer
relationships by the Partnership, the amount of amortization available to a
Unitholder and, therefore, the after tax return
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of a Unitholder with respect to his investment in the Partnership could be
adversely affected, although the General Partner does not believe the impact
of such effect will be material.
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for his Common Units will be the amount
paid for the Common Unit. The initial tax basis for a Common Unit will be
increased by the Unitholder's share of Partnership income. The basis for a
Common Unit will be decreased (but not below zero) by distributions from the
Partnership by the Unitholder's share of Partnership losses and by the
Unitholder's share of expenditures of the Partnership that are not deductible
in computing its taxable income and are not required to be capitalized.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
To the extent losses are incurred by the Partnership, a Unitholder's share
of deductions for the losses will be limited to the tax basis of the
Unitholder's Units or, in the case of an individual Unitholder or a corporate
Unitholder if more than 50% in the value of its stock is owned directly or
indirectly by five or fewer individuals or certain tax-exempt organizations,
to the amount which the Unitholder is considered to be "at risk" with respect
to the Partnership's activities, if that is less than the Unitholder's basis.
A Unitholder must recapture losses deducted in previous years to the extent
that Partnership distributions cause the Unitholder's at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a
Unitholder or recaptured as a result of these limitations will carry forward
and will be allowable to the extent that the Unitholder's basis or at risk
amount (whichever is the limiting factor) is increased.
In general, a Unitholder will be at risk to the extent of the purchase price
of his Units. A Unitholder's at risk amount will increase or decrease as the
basis of the Unitholder's Units increases or decreases.
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely held corporations and personal service corporations
can only deduct losses from passive activities (generally, activities in which
the taxpayer does not materially participate) that are not in excess of the
taxpayer's income from such passive activities or investments. The passive
loss limitations are to be applied separately with respect to each publicly-
traded partnership. Consequently, the losses generated by the Partnership, if
any, will only be available to offset future income generated by the
Partnership and will not be available to offset income from other passive
activities or investments (including other publicly-traded partnerships) or
salary or active business income. Passive losses which are not deductible
because they exceed the Unitholder's income generated by the Partnership may
be deducted in full when the Unitholder disposes of his entire investment in
the Partnership in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships. The IRS has
announced that Treasury Regulations will be issued which characterize net
passive income from a publicly-traded partnership as investment income for
purposes of the limitations on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the
Unitholder's share of the Partnership's portfolio income will be treated as
investment income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment, (ii) a
partnership's interest expense attributed to portfolio income and (iii) the
portion of interest expense
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incurred to purchase or carry an interest in a passive activity to the extent
attributable to portfolio income. The computation of a Unitholder's investment
interest expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a Unit to the extent
attributable to portfolio income of the Partnership. Net investment income
includes gross income from property held for investment and amounts treated as
portfolio income pursuant to the passive loss rules less deductible expenses
(other than interest) directly connected with the production of investment
income, but for taxable years beginning after 1992 net investment income
generally does not include gains attributable to the disposition of property
held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
The Partnership Agreement provides that a capital account be maintained for
each partner, that the capital accounts generally be maintained in accordance
with the applicable tax accounting principles set forth in applicable Treasury
Regulations and that all allocations to a partner be reflected by an
appropriate increase or decrease in his capital account. Distributions upon
liquidation of the Partnership generally are to be made in accordance with
positive capital account balances.
In general, if the Partnership has a net profit, items of income, gain, loss
and deduction will be allocated among the General Partner and the Unitholders
in accordance with their respective Percentage Interests in the Partnership. A
class of Unitholders that receives more cash than another class, on a per Unit
basis, with respect to a year, will be allocated additional income equal to
that excess. If the Partnership has a net loss, items of income, gain, loss
and deduction will generally be allocated for both book and tax purposes (1)
first, to the General Partner and the Unitholders in accordance with their
respective Percentage Interests to the extent of their positive capital
accounts; and (2) second, to the General Partner. In addition, all items of
Partnership income, gain, loss and deduction for the period beginning on the
date of the closing of the offering made hereby and ending on July 31, 1994,
will be allocated to the General Partner. An amount of items of income, gain,
loss or deduction equal to 98% of any net income or net loss so allocated to
the General Partner will be allocated to the Limited Partners, in accordance
with their respective percentage interests, for the taxable year of the
Partnership beginning August 1, 1994. The General Partner believes that the
Partnership will generate a net taxable loss for the period beginning on the
date of the closing of the offering made hereby and ending on July 31, 1994.
Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of Partnership income, deduction, gain and loss will be
specially allocated to account for the difference between the tax basis and
fair market value of property contributed to the Partnership by the General
Partner ("Contributed Property"). In addition, certain items of recapture
income will be allocated to the extent possible to the partner allocated the
deduction giving rise to the treatment of such gain as recapture income in
order to minimize the recognition of ordinary income by some Unitholders, but
these allocations may not be respected. If these allocations of recapture
income are not respected, the amount of the income or gain allocated to a
Unitholder will not change but instead a change in the character of the income
allocated to a Unitholder would result. Finally, although the Partnership does
not expect that its operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of
Partnership income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of Partnership income, gain,
loss, deduction or credit, other than an allocation required by Section 704(c)
of the Code to eliminate the disparity between a partner's "book" capital
account (credited with the fair market value of Contributed Property) and
"tax" capital account (credited with the tax basis of Contributed Property)
(the "Book-Tax Disparity"), will generally be given effect for federal income
tax purposes in determining a partner's distributive share of an item of
income, gain, loss or deduction only if the allocation has substantial
economic effect. In any other case, a partner's distributive share of an item
will be determined on the
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basis of the partner's interest in the partnership, which will be determined
by taking into account all the facts and circumstances, including the
partner's relative contributions to the partnership, the interests of the
partners in economic profits and losses, the interests of the partners in cash
flow and other nonliquidating distributions and rights of the partners to
distributions of capital upon liquidation.
Under the Code, the partners in a partnership cannot be allocated more
depreciation, gain or loss than the total amount of any such item recognized
by that partnership in a particular taxable period (the "ceiling limitation").
To the extent the ceiling limitation is or becomes applicable, the Partnership
Agreement will require that certain items of income and deduction be allocated
in a way designed to effectively "cure" this problem and eliminate the impact
of the ceiling limitation. Such allocations will not have substantial economic
effect because they will not be reflected in the capital accounts of the
Unitholders. Recently released Temporary Regulations under Section 704(c) of
the Code permit a partnership to make reasonable curative allocations to
reduce or eliminate Book-Tax Disparities. Counsel believes the curative
allocations provided in the Partnership Agreement are reasonable and will be
respected for federal income tax purposes.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the Treasury Regulations relating to
allocations of partnership income, and investors should be aware that some of
the allocations in the Partnership Agreement may be successfully challenged by
the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership will use the fiscal year ending July 31 as its taxable year
and will adopt the accrual method of accounting for federal income tax
purposes. Each Unitholder will be required to include in income his allocable
share of Partnership income, gain, loss and deduction for the fiscal year of
the Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who disposes of Units following the close of the
Partnership's taxable year but before the close of the Unitholder's taxable
year must include his allocable share of Partnership income, gain, loss and
deduction in income for the Unitholder's taxable year with the result that
that Unitholder will be required to report in income for his taxable year his
distributive share of more than one year of Partnership income, gain, loss and
deduction. For example, a Unitholder reporting on a calendar year basis who
acquires Common Units in the offering made hereby and who disposes of such
Common Units after July 31, 1995 but before December 31, 1995 will be required
to include in his 1995 taxable income his allocable share of Partnership
income for the Partnership's fiscal year ending July 31, 1995, plus his
allocable share of Partnership income for the period beginning August 1, 1995
and ending on the date such Common Units are disposed. See "Disposition of
Common Units--Allocations Between Transferors and Transferees" below.
The Partnership may be required at some future date to adopt a taxable year
ending December 31, rather than its current taxable year ending July 31. In
that event, a Unitholder may be required to include in income for his taxable
year his distributive share of more than one year of Partnership income, gain,
loss and deduction.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis established for the various assets of the Partnership will be
used for purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition
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of such assets. The Partnership assets will initially have an aggregate tax
basis equal to the tax basis of the assets in the hands of the General Partner
immediately prior to their contribution to the Partnership.
To the extent allowable, the General Partner may elect to use the
depreciation and cost recovery methods that will result in the largest
depreciation deductions in the early years of the Partnership. Property
subsequently acquired or constructed by the Partnership may be depreciated
using accelerated methods permitted by the Code.
If the Partnership disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required
to recapture such deductions upon a sale of his interest in the Partnership.
See "--Allocation of Partnership Income, Gain, Loss and Deduction" above and
"--Disposition of Common Units--Recognition of Gain or Loss" below.
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units must be capitalized and cannot be
deducted currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be
amortized.
The 1993 Budget Act added Section 197 to the Code which generally permits a
taxpayer who after August 10, 1993 acquires an interest in goodwill, going
concern value and certain other intangible property including customer
relationships which are held in connection with the conduct of a trade or
business or the production of income (an "amortizable Section 197 intangible")
to amortize the adjusted basis of such amortizable Section 197 intangible
ratably over a 15-year period. The IRS is currently challenging deductions for
amortization claimed by the General Partner with respect to certain customer
relationships. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Tax Audit." In connection with the
formation of the Partnership, the General Partner will contribute those
customer relationships and other customer relationships to the Partnership.
The application of Section 197 of the Code to customer relationships held by
the Partnership is unclear. The General Partner, however, intends to treat
such customer relationships as amortizable assets of the Partnership for
federal income tax purposes. It is possible that the IRS will challenge that
treatment. If the IRS were to successfully challenge the amortization of
customer relationships by the Partnership, the amount of amortization
available to a Unitholder and, therefore, the after tax return of a Unitholder
with respect to his investment in the Partnership could be adversely affected,
although the Partnership does not believe the impact of such effect will be
material. See "--Tax Consequences of Unit Ownership--Ratio of Taxable Income
to Distributions" above.
SECTION 754 ELECTION
The Partnership will make the election permitted by Section 754 of the Code,
which election is irrevocable without the consent of the IRS. The election
will generally permit a purchaser of Common Units to adjust his share of the
basis in the Partnership's properties ("inside basis") pursuant to Section
743(b) of the Code to fair market value (as reflected by his Unit price). The
Section 743(b) adjustment is attributed solely to a purchaser of Common Units
and is not added to the bases of the Partnership's assets associated with all
of the Unitholders. (For purposes of this discussion, a partner's inside basis
in the Partnership's assets will be considered to have two components: (1) his
share of the Partnership's actual basis in such assets ("Common Basis") and
(2) his Section 743(b) adjustment allocated to each such asset.)
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Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Common
Unit. Similarly, the legislative history of Section 197 indicates that the
Section 743(b) adjustment attributable to an amortizable Section 197
intangible should be treated as a newly-acquired asset placed in service in
the month when the purchaser acquires the Common Unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable
to property subject to depreciation under Section 167 of the Code rather than
cost recovery deductions under Section 168 is generally required to be
depreciated using either the straight-line method or the 150% declining
balance method. The depreciation and amortization methods and useful lives
associated with the Section 743(b) adjustment, therefore, may differ from the
methods and useful lives generally used to depreciate the Common Bases in such
properties. Pursuant to the Partnership Agreement, the General Partner is
authorized to adopt a convention to preserve the uniformity of Units even if
such convention is not consistent with Treasury Regulation Section 1.167(c)-
1(a)(6) or the legislative history of Section 197 of the Code. See "--
Uniformity of Units" below.
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property (to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the Common Basis of such property, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 of the Code. If the Partnership determines that such position
cannot reasonably be taken, the Partnership may adopt a depreciation or
amortization convention under which all purchasers acquiring Units in the same
month would receive depreciation or amortization, whether attributable to
Common Basis or Section 743(b) basis, based upon the same applicable rate as
if they had purchased a direct interest in the Partnership's property. Such an
aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders. See "--
Uniformity of Units" below.
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles,
the IRS may seek to reallocate some or all of any Section 743(b) adjustment
not so allocated by the Partnership to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than the Partnership's
tangible assets. Alternatively, it is possible that the IRS might seek to
treat the portion of such Section 743(b) adjustment attributable to the
Underwriters' discount as if allocable to a non-deductible syndication cost.
A Section 754 election is advantageous if the transferee's basis in his
Units is higher than such Units' share of the aggregate basis to the
Partnership of the Partnership's assets immediately prior to the transfer. In
such case, pursuant to the election, the transferee would take a new and
higher basis in his share of the Partnership's assets for purposes of
calculating, among other items, his depreciation deductions and his share of
any gain or loss on a sale of the Partnership's assets. Conversely, a Section
754 election is disadvantageous if the transferee's basis in such Units is
lower than such Units share of the aggregate basis of the Partnership's assets
immediately prior to the transfer. Thus, the amount which a Unitholder will be
able to obtain upon the sale of his Common Units may be affected either
favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions attributable to them will not be disallowed or
reduced. Should the IRS require a different basis adjustment to be made, and
should, in the General Partner's opinion, the expense of compliance exceed the
benefit of the election, the General Partner may seek
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permission from the IRS to revoke the Section 754 election for the
Partnership. If such permission is granted, a purchaser of Units subsequent to
such revocation probably will incur increased tax liability.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain or loss for purposes of the
alternative minimum tax. A portion of the Partnership's depreciation
deductions may be treated as an item of tax preference for this purpose.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The 1993 Budget Act increases the
minimum tax rate applicable to noncorporate Unitholders from 24% to 26% on the
first $175,000 of alternative minimum taxable income in excess of the
exemption amount and to 28% on any additional alternative minimum taxable
income. Prospective Unitholders should consult with their tax advisors as to
the impact of an investment in Common Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, ownership and
disposition of Units will depend in part on estimates by the General Partner
of the relative fair market values, and determinations of the initial tax
basis, of the assets of the Partnership. Although the General Partner may from
time to time consult with professional appraisers with respect to valuation
matters, many of the relative fair market value estimates will be made solely
by the General Partner. These estimates and determinations of basis are
subject to challenge and will not be binding on the IRS or the courts. If the
estimates of fair market value or determinations of basis are subsequently
found to be incorrect, the character and amount of items of income, gain,
loss, deductions or credits previously reported by Unitholders might change,
and Unitholders might be required to amend their previously filed tax returns
or to file claims for refunds.
TREATMENT OF SHORT SALES
It would appear that a Unitholder whose Units are loaned to a "short seller"
to cover a short sale of Units would be considered as having transferred
beneficial ownership of those Units and would, thus, no longer be a partner
with respect to those Units during the period of the loan. As a result, during
this period, any Partnership income, gain, deduction, loss or credit with
respect to those Units would appear not to be reportable by the Unitholder,
any cash distributions received by the Unitholder with respect to those Units
would be fully taxable and all of such distributions would appear to be
treated as ordinary income. The IRS may also contend that a loan of Units to a
"short seller" constitutes a taxable exchange. If this contention were
successfully made, the lending Unitholder may be required to recognize gain or
loss. Unitholders desiring to assure their status as partners should modify
their brokerage account agreements, if any, to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of partnership interests.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Partnership
nonrecourse liabilities. Since the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale
of Units may result in a tax liability in excess of any cash received from
such sale.
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Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit held for more than one year will generally be
taxable as long-term capital gain or loss. A substantial portion of this gain
or loss, however, will be separately computed and taxed as ordinary income or
loss under Section 751 of the Code to the extent attributable to assets giving
rise to depreciation recapture or other "unrealized receivables" or to
"substantially appreciated inventory" owned by the Partnership. Inventory is
considered to be "substantially appreciated" if its value exceeds 120% of its
adjusted basis to the Partnership. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, substantially appreciated inventory
and depreciation recapture may exceed net taxable gain realized upon the sale
of the Unit and may be recognized even if there is a net taxable loss realized
on the sale of the Unit. Thus, a Unitholder may recognize both ordinary income
and a capital loss upon a disposition of Units. Net capital loss may offset no
more than $3,000 of ordinary income in the case of individuals and may only be
used to offset capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of such aggregate tax basis
must be allocated to the interests sold on the basis of some equitable
apportionment method. The ruling is unclear as to how the holding period is
affected by this aggregation concept. If this ruling is applicable to the
holders of Common Units, the aggregation of tax bases of a holder of Common
Units effectively prohibits him from choosing among Common Units with varying
amounts of unrealized gain or loss as would be possible in a stock
transaction. Thus, the ruling may result in an acceleration of gain or
deferral of loss on a sale of a portion of a Unitholder's Common Units. It is
not clear whether the ruling applies to publicly-traded partnerships, such as
the Partnership, the interests in which are evidenced by separate interests,
and accordingly Counsel is unable to opine as to the effect such ruling will
have on the Unitholders. A Unitholder considering the purchase of additional
Common Units or a sale of Common Units purchased at differing prices should
consult his tax advisor as to the possible consequences of such ruling.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually and will be prorated on a monthly basis and subsequently apportioned
among the Unitholders in proportion to the number of Units owned by them as of
the opening of the first business day of the month to which they relate.
However, gain or loss realized on a sale or other disposition of Partnership
assets other than in the ordinary course of business shall be allocated among
the Unitholders of record as of the opening of the New York Stock Exchange on
the first business day of the month in which such gain or loss is recognized.
As a result of this monthly allocation, a Unitholder transferring Units in the
open market may be allocated income, gain, loss, deduction and credit accrued
after the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between the
transferors and the transferees of Common Units. If a monthly convention is
not allowed by the Treasury Regulations (or only applies to transfers of less
than all of the Unitholder's interest), taxable income or losses of the
Partnership might be reallocated among the Unitholders. The General Partner is
authorized to revise the Partnership's method of allocation between
transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted by
future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a distribution with respect to
such quarter will be allocated items of Partnership income and gain
attributable to such quarter during which such Units were owned but will not
be entitled to receive such cash distribution.
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NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of such sale or exchange within 30 days of the sale or
exchange and in any event no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of such transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker.
Additionally, a transferor and a transferee of a Unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, which set forth the
amount of the consideration received for such Unit that is allocated to
goodwill or going concern value of the Partnership. Failure to satisfy such
reporting obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
constructive termination results in the closing of a partnership's taxable
year for all partners and the partnership properties are regarded as having
been distributed to the partners and reconveyed to the partnership, which is
then treated as a new partnership. Such a termination could result in the non-
uniformity of Units for federal income tax purposes. A constructive
termination of the Partnership will cause a termination of the Operating
Partnership. Such a termination could also result in penalties or loss of
basis adjustments under Section 754 of the Code if the Partnership were unable
to determine that the termination had occurred. (Under the 1993 Bill,
termination of a large partnership such as the Partnership would not occur by
reason of the sale or exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending July 31, the closing of a tax year of the Partnership may result
in more than 12 months' taxable income or loss of the Partnership being
includable in its taxable income for the year of termination. In addition,
each Unitholder will realize taxable gain to the extent that any money
constructively distributed to him exceeds the adjusted basis of his Units. New
tax elections required to be made by the Partnership, including a new election
under Section 754 of the Code, must be made subsequent to the constructive
termination. A constructive termination could also result in a deferral of
Partnership deductions for depreciation. In addition, a termination might
either accelerate the application of or subject the Partnership to any tax
legislation enacted with effective dates after the closing of this offering.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or the General
Partner or former Unitholder, the General Partner is authorized to pay such
taxes from Partnership funds. Such payments, if made, will be deemed current
distributions of cash to the Unitholders and the General Partner. The General
Partner is authorized to amend the Partnership Agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of Units and
to adjust subsequent distributions so that after giving effect to such deemed
distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Partnership as described above could give rise to
an overpayment of tax on behalf of an individual partner in which event, the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Since the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units
to a purchaser of such Common Units must
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be maintained. In the absence of uniformity, compliance with a number of
federal income tax requirements, both statutory and regulatory, could be
substantially diminished. A lack of uniformity can result from a literal
application of Proposed Treasury Regulation Section 1.168-2(n) and Treasury
Regulation Section 1.167(c)-1 (a) (6) or the legislative history of Section
197 and from the application of the "ceiling limitation" on the Partnership's
ability to make allocations to eliminate Book-Tax Disparities attributable to
Contributed Properties and Partnership property that has been revalued and
reflected in the partners' capital accounts ("Adjusted Properties"). Any such
non-uniformity could have a negative impact on the value of a Unitholder's
interest in the Partnership.
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common
Basis of such property, despite its inconsistency with Proposed Treasury
Regulation Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)
(6) or the legislative history of Section 197. See "--Tax Treatment of
Operations--Section 754 Election" above. If the Partnership determines that
such a position cannot reasonably be taken, the Partnership may adopt a
depreciation and amortization deductions convention under which all purchasers
acquiring Common Units in the same month would receive depreciation and
amortization deductions, whether attributable to common basis or Section
743(b) basis, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain Unitholders and risk
the loss of depreciation and amortization deductions not taken in the year
that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the
Unitholders. If the Partnership chooses not to utilize this aggregate method,
the Partnership may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any Common Units that would not have a material adverse effect on the
Unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were to be
sustained, the uniformity of Common Units might be affected.
Items of income and deduction will be specially allocated in a manner that
is intended to preserve the uniformity of intrinsic tax characteristics among
all Units, despite the application of the "ceiling limitation" to Contributed
Properties and Adjusted Properties. Such special allocations will be made
solely for federal income tax purposes. See "--Tax Consequences of Unit
Ownership" and "--Allocation of Partnership Income, Gain, Loss and Deduction"
above.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts and other retirement
plans) are subject to federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
qualify as such income.
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Non-resident aliens and foreign corporations, trusts or estates which
acquire Units will be considered to be engaged in business in the United
States on account of ownership of Units and as a consequence will be required
to file federal tax returns in respect of their distributive shares of
Partnership income, gain, loss, deduction or credit and pay federal income tax
at regular rates on such income. Generally, a partnership is required to pay a
withholding tax on the portion of the partnerships income which is effectively
connected with the conduct of a United States trade or business and which is
allocable to the foreign partners, regardless of whether any actual
distributions have been made to such partners. However, under rules applicable
to publicly-traded partnerships, the Partnership will withhold (currently at
the rate of 31%) on actual cash distributions made quarterly to foreign
Unitholders. Each foreign Unitholder must obtain a taxpayer identification
number from the IRS and submit that number to the Transfer Agent of the
Partnership on a Form W-8 in order to obtain credit for the taxes withheld.
Subsequent adoption of Treasury Regulations or the issuance of other
administrative pronouncements may require the Partnership to change these
procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a Unitholder may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits
(as adjusted for changes in the foreign corporation's "U.S. net equity") which
are effectively connected with the conduct of a United States trade or
business. Such a tax may be reduced or eliminated by an income tax treaty
between the United States and the country with respect to which the foreign
corporate Unitholder is a "qualified resident." In addition, such a Unitholder
is subject to special information reporting requirements under Section 6038C
of the Code.
Assuming that the Units are regularly traded on an established securities
market, a foreign Unitholder who sells or otherwise disposes of a Unit and who
has not held more than 5% in value of the Units at any time during the five-
year period ending on the date of the disposition will not be subject to
federal income tax on gain realized on the disposition that is attributable to
real property held by the Partnership, but (regardless of a foreign
Unitholder's percentage interest in the Partnership or whether Units are
regularly traded) such Unitholder may be subject to federal income tax on any
gain realized on the disposition that is treated as effectively connected with
a United States trade or business of the foreign Unitholder. A foreign
Unitholder will be subject to federal income tax on gain attributable to real
property held by the Partnership if the holder held more than 5% in value of
the Units during the five-year period ending on the date of the disposition or
if the Units were not regularly traded on an established securities market at
the time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder within 90 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's allocable share of the Partnership's
income, gain, loss, deduction and credit for the preceding Partnership taxable
year. In preparing this information, which will generally not be reviewed by
counsel, the General Partner will use various accounting and reporting
conventions, some of which have been mentioned in the previous discussion, to
determine the respective Unitholders' allocable share of income, gain, loss,
deduction and credits. There is no assurance that any such conventions will
yield a result which conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. The General Partner cannot assure
prospective Unitholders that the IRS will not successfully contend in court
that such accounting and reporting conventions are impermissible.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to file an amended tax return, and possibly may result in an audit
of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
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Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit are determined at the partnership
level in a unified partnership proceeding rather than in separate proceedings
with the partners. The Code provides for one partner to be designated as the
"Tax Matters Partner" for these purposes. The Partnership Agreement appoints
the General Partner as the Tax Matters Partner.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1%
profits interest in the Partnership to a settlement with the IRS unless such
Unitholder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek
judicial review (to which all the Unitholders are bound) of a final
Partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any Unitholder having at
least 1% interest in the profits of the Partnership and by the Unitholders
having in the aggregate at least a 5% profits interest. However, only one
action for judicial review will go forward, and each Unitholder with an
interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on its federal income tax return that is not consistent with the
treatment of the item on the Partnership's return to avoid the requirement
that all items be treated consistently on both returns. Intentional or
negligent disregard of the consistency requirement may subject a Unitholder to
substantial penalties. Under the 1993 Bill, partners in large partnerships,
such as the Partnership, would be required to treat all partnership items in a
manner consistent with the partnership return.
Under the reporting provisions of the 1993 Bill, each partner of a large
partnership, such as the Partnership, would take into account separately his
share of the following items, determined at the partnership level: (1) taxable
income or loss from passive loss limitation activities; (2) taxable income or
loss from other activities (such as portfolio income or loss); (3) net capital
gains to the extent allocable to passive loss limitation activities and other
activities; (4) a net alternative minimum tax adjustment separately computed
for passive loss limitation activities and other activities; (5) general
credits; (6) low-income housing credit; (7) rehabilitation credit; (8) for
certain partnerships, tax-exempt interest; and (9) for certain partnerships,
foreign taxes paid and foreign source partnership items.
The 1993 Bill would also make a number of changes to the tax compliance and
administrative rules relating to partnerships. One provision would require
that each partner in a large partnership, such as the Partnership, take into
account his share of any adjustments to partnership items in the year such
adjustments are made. Under current law, adjustments relating to partnership
items for a previous taxable year are taken into account by those persons who
were partners in the previous taxable year. Alternatively, under the 1993 Bill
a partnership could elect to or, in some circumstances, could be required to,
directly pay the tax resulting from any such adjustments. In either case,
therefore, Unitholders could bear significant economic burdens associated with
tax adjustments relating to periods predating their acquisition of Units.
It cannot be predicted whether or in what form the 1993 Bill, or other tax
legislation that might affect Unitholders, will be enacted. However, if tax
legislation is enacted which includes provisions similar to those discussed
above, a Unitholder might experience a reduction in cash distributions.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owners and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any wholly
owned agency or
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instrumentality of either of the foregoing or (iii) a tax-exempt entity; (c)
the amount and description of Units held, acquired or transferred for the
beneficial owners; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Partnership.
The nominee is required to supply the beneficial owner of the Units with the
information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Partnership will not be subject to the registration requirement on the
basis that it will not constitute a tax shelter. However, the General Partner,
as a principal organizer of the Partnership, has registered the Partnership as
a tax shelter with the IRS in the absence of assurance that the Partnership
will not be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is required and
not undertaken. The Partnership has applied for a tax shelter registration
number with the IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the
registration number to the Unitholders, and a Unitholder who sells or
otherwise transfers a Unit in a subsequent transaction must furnish the
registration number to the transferee. The penalty for failure of the
transferor of a Common Unit to furnish such registration number to the
transferee is $100 for each such failure. The Unitholders must disclose the
tax shelter registration number of the Partnership on Form 8271 to be attached
to the tax return on which any deduction, loss, credit or other benefit
generated by the Partnership is claimed or income of the Partnership is
included. A Unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for such failure, will be
subject to a $250 penalty for each such failure. Any penalties discussed
herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause
for such portion and that the taxpayer acted in good faith with respect to
such portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that does not appear to include the Partnership. If any
Partnership item of income, gain, loss, deduction or credit included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the Partnership will
make a reasonable effort to furnish sufficient information for Unitholders to
make adequate disclosure on their returns to avoid liability for this penalty.
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A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property.
Although an analysis of those various taxes cannot be presented here, each
prospective Unitholder should consider their potential impact on his
investment in the Partnership. The Partnership will own property and conduct
business in 45 states of the United States. A Unitholder may be required to
file state income tax returns and to pay taxes in various states and may be
subject to penalties for failure to comply with such requirements. The General
Partner anticipates that approximately 46% of the Partnerships income will be
generated in approximately six states. Based on the Company's income
apportionment for 1992 state income tax purposes, the General Partner
estimates that no other state will account for more than 4% of the
Partnership's income. Of the six states in which the General Partner
anticipates that a substantial portion of the Partnership's U.S. income will
be generated, only Texas does not currently impose a personal income tax. In
certain states, tax losses may not produce a tax benefit in the year incurred
(if, for example, the Partnership has no income from sources within that
state) and also may not be available to offset income in subsequent taxable
years. Some of the states may require the Partnership to withhold a percentage
of income from amounts to be distributed to a Unitholder who is not a resident
of the state. Withholding, the amount of which may be greater or less than a
particular Unitholder's income tax liability to the state, generally does not
relieve the non-resident Unitholder from the obligation to file an income tax
return. Amounts withheld will be treated as if distributed to Unitholders for
purposes of determining the amounts distributed by the Partnership. Based on
current law and its estimate of future Partnership operations, the General
Partner anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor
with regard to those matters. Further, it is the responsibility of each
Unitholder to file all state and local, as well as federal, tax returns that
may be required of such Unitholder. Counsel has not rendered an opinion on the
state or local tax consequences of an investment in the Partnership.
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INVESTMENT IN THE PARTNERSHIP
BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA, (b) whether in making such investment, such
plan will satisfy the diversification requirement of Section 404(a)(1)(C) of
ERISA; and (c) whether such investment will result in recognition of unrelated
business taxable income by such plan and, if so, the potential after-tax
investment return. See "Tax Considerations--Tax Exempt Organizations and
Certain Other Investors." The person with investment discretion with respect
to the assets of an employee benefit plan (a "fiduciary") should determine
whether an investment in the Partnership is authorized by the appropriate
governing instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Partnership, be deemed to
own an undivided interest in the assets of the Partnership, with the result
that the General Partner also would be a fiduciary of such plan and the
operations of the Partnership would be subject to the regulatory restrictions
of ERISA, including its prohibited transaction rules, as well as the
prohibited transaction rules of the Code.
The Department of Labor issued final regulations on November 13, 1986
providing guidance with respect to whether the assets of an entity in which
employee benefit plans acquire equity interests would be deemed "plan assets"
under certain circumstances. Pursuant to these regulations, an entity's assets
would not be considered to be "plan assets" if, among other things, (a) the
equity interest acquired by employee benefit plans are publicly offered
securities--i.e., the equity interests are widely held by 100 or more
investors independent of the issuer and each other, freely transferable and
registered pursuant to certain provisions of the federal securities laws, (b)
the entity is an "operating company"--i.e., it is primarily engaged in the
production or sale of a product or service other than the investment of
capital either directly or through a majority owned subsidiary or subsidiaries
or (c) there is no significant investment by benefit plan investors, which is
defined to mean that less than 25% of the value of each class of equity
interest (disregarding certain interests held by the General Partner, its
affiliates, and certain other persons) is held by the employee benefit plans
referred to above, Individual Retirement Accounts and other employee benefit
plans not subject to ERISA (such as governmental plans). The Partnership's
assets should not be considered "plan assets" under these regulations because
it is expected that the investment will satisfy the requirements in (a) and
(b) above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Units should consult with their
own counsel regarding the consequences under ERISA and the Code in light of
the serious penalties imposed on persons who engage in prohibited transactions
or other violations.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Partnership has agreed to sell to each of the Underwriters named below,
and each of the Underwriters has severally agreed to purchase from the
Partnership, the respective number of Common Units set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON UNITS
----------- ------------
<S> <C>
Goldman, Sachs & Co.......................................... 2,620,000
Donaldson, Lufkin & Jenrette Securities Corporation.......... 2,620,000
A. G. Edwards & Sons, Inc.................................... 2,620,000
PaineWebber Incorporated..................................... 2,620,000
Smith Barney Inc............................................. 2,620,000
----------
Total...................................................... 13,100,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of such Common Units
offered hereby, if any are taken.
The Underwriters propose to offer the Common Units in part directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus, and in part to certain securities dealers at such price less
a concession of $0.80 per Common Unit. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per Common Unit to
certain brokers and dealers. After the Common Units are released for sale to
the public, the offering price and other selling terms may from time to time
be varied by the representatives.
The Partnership has granted to the Underwriters an option exercisable for 30
days after the closing of this offering to purchase up to an aggregate of
1,965,000 additional Common Units to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Common Units to be purchased by
each of them, as shown in the foregoing table, bears to the 13,100,000 Common
Units offered. The Underwriters may exercise such option only to cover
overallotments in connection with the sale of the 13,100,000 Common Units
offered hereby.
The Partnership has agreed not to offer, sell, contract to sell or otherwise
dispose of any Common Units or Subordinated Units, or any securities
substantially similar to the Common Units or Subordinated Units, including but
not limited to any securities that are convertible into or exchangeable for or
that represent the right to receive Common Units or Subordinated Units or any
such substantially similar securities, for a period of 180 days after the date
of this Prospectus without the prior written consent of the Underwriters,
except for the Common Units offered in connection with this offering and
except for any Common Units which may be issued in connection with
acquisitions by the Partnership. In addition, Ferrell has agreed that for a
period of 24 months from the date of this Prospectus it will not offer, sell,
contract to sell or otherwise dispose of any Common Units or Subordinated
Units or any securities substantially similar to the Common Units or
Subordinated Units, including but not limited to any securities that are
convertible into or exchangeable for or that represent the right to receive
Common Units or Subordinated Units or any such substantially similar
securities, without the prior written consent of the Underwriters, except (i)
pursuant to the repurchase of a portion of such Common Units in connection
with the exercise of the Underwriters' overallotment option, (ii) transfers to
James E. Ferrell or his spouse, lineal descendants or brothers or sisters,
entities controlled by James E. Ferrell or his spouse, lineal descendants or
brothers or sisters or trusts for the benefit of James E. Ferrell or his
spouse, lineal descendants or brothers or sisters, (iii) in connection with
the sale of the Partnership or substantially all of its assets, (iv) as
collateral in connection with good faith borrowing, (v) gifts of up to 20% of
such Units to charitable organizations or (vi) in the event of the death or
permanent disability
117
<PAGE>
of James E. Ferrell, provided, however, that in the case of (ii) above the
transferee shall enter into an agreement with the Underwriters agreeing to
comply with the above restrictions for the remainder of the 24 month period.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Common Units offered hereby as interests in a direct
participation program, the offering is being made in compliance with Appendix
F of the NASD's Rules of Fair Practice. Investor suitability of the Common
Units should be judged similarly to the suitability of other securities that
are listed for trading on a national securities exchange. The Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority without the prior written approval of the transaction
by the customer.
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price has been negotiated among the
Partnership and the Underwriters. Among the factors considered in determining
the initial public offering price of the Common Units, in addition to
prevailing market conditions, were the historical performance of Ferrellgas,
the proposed capital structure, assets and liabilities of the Partnership, the
General Partner's estimates of the business potential and earnings prospects
of the Partnership, an assessment of the Partnership's management and the
consideration of the above factors in relation to market valuation of
companies in related businesses.
The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance. In order to meet one of the requirements for
listing the Common Units on the NYSE, the Underwriters have undertaken to sell
lots of 100 or more Common Units to a minimum of 2,000 beneficial holders.
The Partnership, the General Partner and Ferrell have agreed to indemnify
the several Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933.
Each of Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette Securities
Corporation is acting as an underwriter in connection with the concurrent
offering of Senior Notes by the Operating Partnership and will receive
underwriting discounts in connection therewith. See "The Transactions." In
addition, the Company has retained Donaldson, Lufkin & Jenrette Securities
Corporation as Dealer/Manager for the consent solicitation and tender offer
with respect to its Existing Subordinated Debentures. Donaldson, Lufkin &
Jenrette Securities Corporation has also acted as financial advisor to
Ferrellgas in connection with various matters for which it has received
customary fees.
VALIDITY OF COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., New York, New York, and for the Underwriters by
Sullivan & Cromwell, New York, New York.
EXPERTS
The consolidated financial statements of Ferrellgas, Inc. as of April 30,
1994 and July 31, 1993 and 1992 and for the nine months ended April 30, 1994
and for each of the three years in the period ended July 31, 1993 included in
this Prospectus and the related financial statement schedules included
elsewhere in the Registration Statement have been audited by Deloitte &
Touche, independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement (which reports expressed an
unqualified opinion and included an explanatory paragraph concerning an
uncertainty involving an income tax matter) and have been so included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
118
<PAGE>
The balance sheet of Ferrellgas Partners, L.P. as of April 27, 1994,
included in this Prospectus has been audited by Deloitte & Touche, independent
auditors, as stated in their report appearing herein, and has been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The pro forma financial information of Ferrellgas Partners, L.P. included in
this Prospectus has been examined by Deloitte & Touche, independent
accountants, as stated in their report appearing herein, and has been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting.
ADDITIONAL INFORMATION
The Partnership has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Form S-1 Registration Statement under the Securities
Act, for the registration of the securities to be offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits relating thereto for further information concerning the
Partnership and the General Partner and the securities to which this
Prospectus relates. Statements contained herein concerning the provisions of
any document are not necessarily complete and in each instance reference is
made to the copy of the document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by this reference.
The Registration Statement and the exhibits thereto are available for
inspection in the principal office of the commission in Washington, D.C. and
photostatic copies of such material may be obtained from the Commission upon
payment of the fees prescribed by the Commission.
The Partnership intends to furnish to holders of the Common Units annual
reports containing audited financial statements and an opinion thereon by its
independent accountants and quarterly reports containing unaudited financial
information on the first three quarters of each fiscal year.
119
<PAGE>
FERRELLGAS PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Ferrellgas Partners, L.P. Pro Forma Combined Financial Statements:
Independent Accountants' Report......................................... F-2
Pro Forma Combined Balance Sheet--April 30, 1994........................ F-3
Pro Forma Combined Statement of Earnings--Nine Months Ended April 30,
1994 and Year Ended July 31, 1993...................................... F-4
Notes to Pro Forma Combined Financial Statements........................ F-5
Ferrellgas Partners, L.P. Historical Balance Sheet:
Independent Auditors' Report............................................ F-7
Balance Sheet--April 27, 1994........................................... F-8
Note to Balance Sheet................................................... F-9
Ferrellgas, Inc. Historical Consolidated Financial Statements:
Independent Auditors' Report............................................ F-10
Consolidated Balance Sheet--April 30, 1994 and July 31, 1993 and 1992... F-11
Consolidated Statement of Operations--Nine Months Ended April 30, 1994
and 1993
(Unaudited) and Years Ended July 31, 1993, 1992 and 1991............... F-12
Consolidated Statement of Stockholder's Equity--Nine Months Ended April
30, 1994 and Years Ended July 31, 1993, 1992 and 1991.................. F-13
Consolidated Statement of Cash Flows--Nine Months Ended April 30, 1994
and 1993
(Unaudited) and Years Ended July 31, 1993, 1992 and 1991............... F-14
Notes to Consolidated Financial Statements.............................. F-15
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Ferrellgas Partners, L.P.
Liberty, Missouri
We have examined the pro forma adjustments reflecting the proposed
transactions described in the Notes to Pro Forma Combined Financial Statements
and the application of those adjustments to the historical amounts in the
accompanying pro forma combined balance sheet of Ferrellgas Partners, L.P. as
of April 30, 1994, and the related pro forma combined statement of earnings
for the nine-month period ended April 30, 1994, and the year ended July 31,
1993. The historical financial statements are derived from the historical
financial statements of Ferrellgas, Inc. and subsidiaries, which were audited
by us (on which we have issued our report dated June 3, 1994, which expressed
an unqualified opinion and included an explanatory paragraph concerning an
uncertainty involving an income tax matter) that appear elsewhere herein. Such
pro forma adjustments are based upon management's assumptions described in the
Notes to Pro Forma Combined Financial Statements. Our examination was made in
accordance with standards established by the American Institute of Certified
Public Accountants and, accordingly, included such procedures as we considered
necessary in the circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been
had the proposed transactions occurred at an earlier date. However, the Pro
Forma Combined Financial Statements are not necessarily indicative of the
results of operations or related effects on financial position that would have
been attained had the above-mentioned proposed transactions actually occurred
earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-
mentioned proposed transactions described in the Notes to Pro Forma Combined
Financial Statements, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma column reflects the proper
application of those adjustments to the historical financial statement amounts
in the Pro Forma Combined Balance Sheet of Ferrellgas Partners, L.P. as of
April 30, 1994, and the related Pro Forma Combined Statement of Earnings for
the nine-month period ended April 30, 1994, and the year ended July 31, 1993.
DELOITTE & TOUCHE
Kansas City, Missouri
June 3, 1994
F-2
<PAGE>
FERRELLGAS PARTNERS, L.P.
PRO FORMA COMBINED BALANCE SHEET
APRIL 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term invest-
ments......................... $ 88,151 $ 255,520 (A) $ 20,886
(254,001)(B)
(29,679)(C)
(39,105)(D)
Accounts and notes receivable.. 55,869 (500)(D) 55,369
Inventories.................... 29,781 -- 29,781
Prepaid expenses and other cur-
rent assets................... 3,272 -- 3,272
-------- --------- --------
TOTAL CURRENT ASSETS......... 177,073 (67,765) 109,308
Property, plant and equipment.. 295,423 -- 295,423
Intangible assets.............. 65,569 -- 65,569
Investment in Class B redeem-
able common stock of parent... 36,031 (36,031)(D) --
Other assets................... 22,017 (13,857)(B),(C),(D) 8,160
Note receivable from parent.... 4,000 (4,000)(D) --
-------- --------- --------
TOTAL ASSETS................. $600,113 $(121,653) $478,460
======== ========= ========
LIABILITIES AND SPONSOR
EQUITY/PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable............... $ 34,266 $ -- $ 34,266
Current portion of long-term
debt.......................... 1,486 -- 1,486
Accrued interest expense....... 17,237 (17,111)(B),(C) 126
Other current liabilities...... 19,829 -- 19,829
Payable to parent.............. 91 -- 91
-------- --------- --------
TOTAL CURRENT LIABILITIES.... 72,909 (17,111) 55,798
Long-term debt................. 476,471 (204,030)(B),(C) 272,441
Other liabilities.............. 10,534 -- 10,534
Deferred income taxes.......... 9,351 (9,351)(D) --
SPONSOR EQUITY/PARTNERS' CAPITAL:
Equity of sponsor.............. 30,848 255,520 (A) --
(24,641)(B)
(38,597)(C)
(83,443)(D)
(139,687)(E)
PARTNERS' CAPITAL:
Common unitholders............. -- 62,859 (E) 62,859
Subordinated unitholder........ -- 74,034 (E) 74,034
General partner................ -- 2,794 (E) 2,794
-------- --------- --------
TOTAL SPONSOR
EQUITY/PARTNERS' CAPITAL.... 30,848 108,839 139,687
-------- --------- --------
TOTAL LIABILITIES AND SPONSOR
EQUITY/PARTNERS' CAPITAL.... $600,113 $(121,653) $478,460
======== ========= ========
</TABLE>
See notes to pro forma combined financial statements.
F-3
<PAGE>
FERRELLGAS PARTNERS, L.P.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1993 NINE MONTHS ENDED APRIL 30, 1994
------------------------------------ ------------------------------------
COMPANY PARTNERSHIP COMPANY PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gas liquids and
related product
sales................ $516,891 $ -- $516,891 $430,401 $ -- $430,401
Other................. 25,054 -- 25,054 20,076 -- 20,076
-------- ------- -------- -------- ------- --------
Total revenues...... 541,945 -- 541,945 450,477 -- 450,477
COSTS AND EXPENSES:
Cost of product sold.. 298,033 -- 298,033 229,326 -- 229,326
Operating............. 139,617 -- 139,617 112,687 -- 112,687
Depreciation and
amortization......... 30,840 -- 30,840 21,688 -- 21,688
General and
administrative....... 10,079 500 (F) 10,579 8,128 375 (F) 8,503
Vehicle leases........ 4,823 -- 4,823 3,203 -- 3,203
-------- ------- -------- -------- ------- --------
Total costs and
expenses........... 483,392 500 483,892 375,032 375 375,407
-------- ------- -------- -------- ------- --------
OPERATING INCOME........ 58,553 (500) 58,053 75,445 (375) 75,070
Loss on disposal of
assets............... (1,153) -- (1,153) (888) -- (888)
Interest income....... 3,266 (2,368)(G) 898 2,791 (1,912)(G) 879
Interest expense...... (60,071) 30,851 (H) (29,220) (44,233) 22,942 (H) (21,291)
-------- ------- -------- -------- ------- --------
EARNINGS BEFORE INCOME
TAXES AND EXTRAORDINARY
ITEM................... 595 27,983 28,578 33,115 20,655 53,770
Income tax expense...... 486 (486)(I) -- 12,759 (12,759)(I) --
-------- ------- -------- -------- ------- --------
EARNINGS FROM CONTINUING
OPERATIONS (BEFORE
EXTRAORDINARY ITEM).... $ 109 $28,469 28,578 $ 20,356 $33,414 53,770
======== ======= ======== =======
GENERAL PARTNER'S
INTEREST IN EARNINGS
FROM CONTINUING
OPERATIONS............. 572 1,075
-------- --------
LIMITED PARTNERS'
INTEREST IN NET
EARNINGS FROM
CONTINUING OPERATIONS.. $ 28,006 $ 52,695
======== ========
EARNINGS FROM CONTINUING
OPERATIONS PER UNIT.... $ 0.91 $ 1.72
======== ========
WEIGHTED AVERAGE NUMBER
OF UNITS OUTSTANDING... 30,694 30,694
======== ========
RATIO OF EARNINGS TO
FIXED CHARGES.......... 1.0x 1.7x
======== ========
</TABLE>
See notes to pro forma combined financial statements.
F-4
<PAGE>
FERRELLGAS PARTNERS, L.P. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1994 AND YEAR ENDED JULY 31, 1993
The pro forma combined financial statements are based upon the historical
financial position and results of operations of Ferrellgas, Inc. and its
subsidiaries ("Ferrellgas"). The propane business of Ferrellgas will be owned
and operated by a newly formed limited partnership (the "Partnership") and
through a separate Operating Partnership (the "Operating Partnership"). Unless
the context otherwise requires, references herein to the Partnership include
the Partnership and the Operating Partnership.
At the closing of the sale of the Common Units offered hereby, Ferrellgas
will convey substantially all of its assets to the Partnership (excluding
cash, receivables from parent and affiliates and an investment in the Class B
Stock of parent) and the Partnership will assume all of the liabilities,
whether known or unknown, associated with the business that are reflected or
should be reflected on the balance sheet of the Company prepared in accordance
with generally accepted accounting principles (excluding income tax
liabilities). In connection with the acquisition of the propane business, the
Partnership will issue Common Units, Subordinated Units and Incentive
Distribution Rights to Ferrellgas, as well as general partner interests in the
Partnership and the Operating Partnership. Ferrellgas will make a dividend of
the Common Units, Subordinated Units and Incentive Distribution Rights to its
parent, Ferrell Companies, Inc.
The Operating Partnership has also agreed with Ferrellgas to be primarily
responsible for all obligations of Ferrellgas under the approximately
$477,957,000 of Ferrellgas long-term debt outstanding as of April 30, 1994.
Substantially all of this long-term debt will be retired with the net proceeds
from the sale by the Partnership of the Common Units offered hereby (estimated
to be approximately $255,520,000), and the net proceeds from the issuance of
$200,000,000 aggregate principal amount of 10.0% Fixed Rate Senior Notes due
2001 (the "Fixed Rate Senior Notes") and $50,000,000 aggregate principal
amount of Floating Rate Senior Notes due 2001 (the "Floating Rate Senior
Notes" and, together with the Fixed Rate Senior Notes, the "Senior Notes")
(estimated to be approximately $244,250,000) to be issued by the Operating
Partnership concurrent with the closing of this offering.
The following pro forma adjustments have been prepared as if the
transactions to be effected at the closing of this offering (assuming that the
Underwriters' overallotment option is not exercised) had taken place on April
30, 1994, in the case of the pro forma consolidated balance sheet, or as of
August 1, 1992, in the case of the pro forma consolidated statement of income
for the year ended July 31, 1993, or as of August 1, 1993 in the case of the
pro forma consolidated statement of income for the nine months ended April 30,
1994. The adjustments are based upon currently available information and
certain estimates and assumptions, and therefore the actual adjustments may
differ from the pro forma adjustments. However, management believes that the
assumptions provide a reasonable basis for presenting the significant effects
of the transactions as contemplated and that the pro forma adjustments give
appropriate effect to those assumptions and are properly applied in the pro
forma financial information.
(A) Reflects the net proceeds to the Partnership of approximately
$255,520,000 from the issuance and sale of 13,100,000 Common Units at an
offering price of $21.00 per Common Unit, net of the Underwriters' discount
(estimated to be $17,881,500) and offering expenses (estimated to be
$1,700,000).
(B) Reflects the retirement of $227,600,000 in aggregate principal amount of
Existing Senior Notes and the related accrued interest of $6,051,000 and
defeasance interest of $814,000, from the net proceeds from the sale by the
Partnership of the Common Units and existing cash balances of the Partnership.
The early extinguishment of the Existing Senior Notes results in an
extraordinary loss of approximately $24,641,000, resulting from prepayment
premiums of $19,536,000, the write-off of unamortized financing costs of
$4,291,000, and defeasance interest of $814,000.
F-5
<PAGE>
(C) Reflects the net proceeds to the Partnership of approximately
$244,250,000 from the issuance of $250,000,000 of Senior Notes, net of the
Underwriters' discount (estimated to be $5,000,000) and offering expenses
(estimated to be $750,000) by the Partnership concurrent with the offering
made hereby, and the proceeds from term loan borrowings on the Partnership's
Credit Facility of approximately $20,000,000 (anticipated to be approximately
$15,000,000 at closing). The net proceeds from the issuance of the Senior
Notes and existing cash balances of the Partnership are used to retire the
$250,000,000 face amount (carrying amount of $246,430,000) Existing
Subordinated Debentures and related accrued interest of $11,060,000. The early
extinguishment of the Existing Subordinated Debentures results in an
extraordinary loss of approximately $38,597,000 resulting from subordinated
bondholder consent solicitation and tender offer fees of $31,250,000, write-
off of unamortized note discount of $3,570,000, and write-off of unamortized
financing costs of $3,777,000. The Operating Partnership will incur estimated
additional financing costs of approximately $6,369,000 in connection with the
issuance of the Senior Notes and entrance into the Credit Facility, each of
which will be deferred and amortized over the term of the indebtedness.
(D) Reflects elimination of the assets, liabilities and equity of the
Company that will not be conveyed to the Partnership, including approximately
$39,105,000 of cash, receivables from parent and affiliates of $17,658,000,
investment in Class B Stock of Ferrell of $36,031,000, income tax liabilities
of $9,351,000 and equity of the Company of $83,443,000.
(E) Reflects the allocation of Partnership equity resulting from the
completion of the transactions associated with the closing of this offering,
using the following relative partnership interests: (1) effective general
partner interest in the Partnership equal to 2% of total partners' capital;
(2) Common Units equal to an approximate 45.0% limited partner interest; and
(3) Subordinated Units equal to an approximate 53.0% limited partner interest
in the Partnership.
(F) Reflects estimated incremental general and administrative costs (e.g.
costs of tax return preparation and annual and quarterly reports to
Unitholders, investor relations and registrar and transfer agent fees)
associated with the Partnership at an annual rate of $500,000.
(G) Reflects the reduction of interest income to the Partnership as a result
of the reduction in cash balances available for short-term investment
opportunity.
(H) Reflects the adjustment to interest expense resulting from the
transactions described in (B) and (C) above, reconciled as follows (in
thousands):
<TABLE>
<CAPTION>
NINE
YEAR MONTHS
ENDED ENDED
JULY 31, APRIL 30,
1993 1994
-------- ---------
<S> <C> <C>
Historical interest expense attributable to retired debt:
Interest expense on senior notes......................... $ 26,741 $18,923
Interest expense on subordinated debentures.............. 29,063 21,797
Amortization of note discount and financing costs........ 2,577 2,157
-------- -------
58,381 42,877
-------- -------
Pro forma interest expense applicable to the Partnership:
Weighted average interest rate of 9.56% per annum on the
Senior Notes............................................ (23,906) (17,921)
Amortization of note discount and financing costs on all
indebtedness............................................ (1,056) (792)
Interest expense attributable to Credit Facility......... (2,568) (1,222)
-------- -------
(27,530) (19,935)
-------- -------
Pro forma interest expense reductions.................... $ 30,851 $22,942
======== =======
</TABLE>
(I) Reflects the elimination of the provision for current and deferred
income taxes as income taxes will be borne by the partners and not the
Partnership.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas Partners, L.P.
Liberty, Missouri
We have audited the accompanying balance sheet of Ferrellgas Partners, L.P.,
as of April 27, 1994. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Ferrellgas Partners, L.P. as of April 27,
1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Kansas City, Missouri
April 27, 1994
F-7
<PAGE>
FERRELLGAS PARTNERS, L.P.
BALANCE SHEET
APRIL 27, 1994
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $1,000
------
Total Assets........................................................ $1,000
======
PARTNERS' CAPITAL
General Partner....................................................... $ 10
Limited Partner....................................................... 990
------
Total Partners' Capital............................................. $1,000
======
</TABLE>
See note to balance sheet.
F-8
<PAGE>
FERRELLGAS PARTNERS, L.P.
NOTE TO BALANCE SHEET
APRIL 27, 1994
Ferrellgas Partners, L.P. (the "Partnership") was formed April 19, 1994 as a
Delaware limited partnership. The Partnership was formed to acquire, own and
operate substantially all of the assets of Ferrellgas, Inc. through
Ferrellgas, L.P. (the "Operating Partnership") in which the Partnership will
hold a 98.9899% limited partner interest and Ferrellgas, Inc. holds a 1.0101%
general partner interest. Ferrellgas, Inc. will convey substantially all of
its assets to the Operating Partnership (excluding cash, receivables from
parent and affiliates and an investment in the Class B Stock of Parent) and
all of the liabilities, whether known or unknown, associated with such assets
(other than income tax liabilities). The Partnership has not commenced
operations. The Partnership intends to offer Common Units, representing
limited partner interests in the Partnership, to third parties and to
concurrently issue Common Units, Subordinated Units and Incentive Distribution
Rights, representing additional limited partner interests in the Partnership,
to the general partner of the Partnership, Ferrellgas, Inc.
Ferrellgas, Inc., as general partner, contributed $10 and the organizational
limited partner contributed $990 to the Partnership on April 27, 1994. There
have been no other transactions involving the Partnership as of April 27,
1994.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas, Inc.
Liberty, Missouri
We have audited the accompanying consolidated balance sheet of Ferrellgas,
Inc. (a wholly owned subsidiary of Ferrell Companies, Inc.) and subsidiaries
as of April 30, 1994 and July 31, 1993 and 1992, and the related consolidated
statements of operations, stockholder's equity and cash flows for the nine
months ended April 30, 1994 and for each of the three years in the period
ended July 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ferrellgas, Inc. and
subsidiaries as of April 30, 1994 and July 31, 1993 and 1992, and the results
of their operations and their cash flows for the nine months ended April 30,
1994 and for each of the three years in the period ended July 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note J to the consolidated financial statements, the
Internal Revenue Service has proposed certain adjustments to the Company's
consolidated income tax returns for the years ended July 31, 1987 and 1986.
The ultimate outcome of this matter cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of this
matter has been made in the accompanying consolidated financial statements.
DELOITTE & TOUCHE
Kansas City, Missouri
June 3, 1994
F-10
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
APRIL 30, ------------------
ASSETS 1994 1993 1992
------ --------- -------- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 58,806 $ 32,706 $ 27,959
Short-term investments......................... 29,345 25,040 23,165
Accounts and notes receivable including related
party
(1994--$500; 1993--$500; 1992--$1,000), less
allowance for doubtful accounts (1994--$884;
1993--$607; 1992--$837)....................... 55,869 52,190 53,802
Inventories.................................... 29,781 23,652 33,881
Prepaid expenses and other current assets...... 3,272 1,898 3,020
Receivable from parent and affiliate........... -- 916 26
-------- -------- --------
TOTAL CURRENT ASSETS......................... 177,073 136,402 141,853
Property, plant and equipment.................... 295,423 303,816 313,126
Intangible assets................................ 65,569 72,537 82,448
Other assets, including notes receivable from
related parties
(1994--$13,158; 1993--$10,909; 1992--$10,088)... 22,017 21,833 23,137
Investment in Class B redeemable common stock of
parent.......................................... 36,031 36,031 32,813
Deferred income taxes............................ -- 2,757 2,094
Note receivable from parent...................... 4,000 -- 3,142
-------- -------- --------
TOTAL ASSETS................................. $600,113 $573,376 $598,613
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................... $ 34,266 $ 32,946 $ 44,864
Other current liabilities...................... 38,552 29,048 29,016
Payable to parent.............................. 91 -- --
-------- -------- --------
TOTAL CURRENT LIABILITIES.................... 72,909 61,994 73,880
Long-term debt................................... 476,471 489,589 501,614
Other liabilities................................ 10,534 10,434 8,907
Payable to parent................................ -- -- 2,542
Note and accrued interest payable to parent and
affiliate....................................... -- -- 2,862
Deferred income taxes............................ 9,351 -- --
STOCKHOLDER'S EQUITY:
Common stock, one dollar par value; 10,000
shares authorized; 990 shares issued.......... 1 1 1
Additional paid-in capital..................... 32,863 32,863 29,535
Accumulated deficit............................ (2,016) (21,505) (20,728)
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY................... 30,848 11,359 8,808
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY... $600,113 $573,376 $598,613
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED JULY
ENDED 31,
---------------------- ----------------------------
APRIL 30, APRIL 30,
1994 1993 1993 1992 1991
--------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Gas liquids and related
products.............. $430,401 $448,269 $516,891 $480,088 $515,507
Other.................. 20,076 20,033 25,054 21,041 28,426
-------- -------- -------- -------- --------
Total revenues....... 450,477 468,302 541,945 501,129 543,933
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products sold.. 229,326 256,736 298,033 267,279 297,968
Operating.............. 112,687 112,553 139,617 134,165 129,684
Depreciation and amor-
tization.............. 21,688 23,238 30,840 31,196 36,151
General and administra-
tive.................. 8,128 7,385 10,079 7,561 12,953
Vehicle leases......... 3,203 3,682 4,823 4,520 4,132
-------- -------- -------- -------- --------
Total costs and ex-
penses.............. 375,032 403,594 483,392 444,721 480,888
-------- -------- -------- -------- --------
OPERATING INCOME......... 75,445 64,708 58,553 56,408 63,045
Loss on disposal of
assets.................. (888) (947) (1,153) (1,959) (2,842)
Interest income,
including related
parties ($787 and $539
at April 30, 1994 and
1993, respectively;
$725, $890, and $696 at
July 31, 1993, 1992 and
1991, respectively)..... 2,791 2,333 3,266 4,401 3,841
Interest expense,
including parent and
affiliate ($114 at April
30, 1993; $153, $180 and
$238 at July 31, 1993,
1992, and 1991,
respectively)........... (44,233) (45,056) (60,071) (61,219) (60,507)
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes and
extraordinary loss...... 33,115 21,038 595 (2,369) 3,537
Income tax expense (bene-
fit).................... 12,759 8,253 486 (669) 1,558
-------- -------- -------- -------- --------
Earnings (loss) before
extraordinary loss...... 20,356 12,785 109 (1,700) 1,979
Extraordinary loss on
early extinguishment of
debt, net of income
taxes ($531 at April 30,
1994; $543 and $6,116 at
July 31, 1993 and 1992,
respectively)........... 867 -- 886 9,979 --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS)...... $ 19,489 $ 12,785 $ (777) $(11,679) $ 1,979
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES STOCK CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AUGUST 1, 1990... 990 $ 1 $22,490 $(11,028) $ 11,463
Capital contribution from
parent................... -- -- 6,687 -- 6,687
Capital transaction--
Ferrell Companies, Inc.
Long-Term Incentive
Plan.................... -- -- 1,558 -- 1,558
Net earnings............. -- -- -- 1,979 1,979
--- ------ ------- -------- --------
BALANCE JULY 31, 1991.... 990 1 30,735 (9,049) 21,687
Capital transaction--
Ferrell Companies, Inc.
Long-Term Incentive
Plan.................... -- -- (1,200) -- (1,200)
Net loss................. -- -- -- (11,679) (11,679)
--- ------ ------- -------- --------
BALANCE JULY 31, 1992.... 990 1 29,535 (20,728) 8,808
Capital contribution from
parent.................. -- -- 3,277 -- 3,277
Capital transaction --
Ferrell Companies, Inc.
Long-Term Incentive
Plan.................... -- -- 51 -- 51
Net loss................. -- -- -- (777) (777)
--- ------ ------- -------- --------
BALANCE JULY 31, 1993.... 990 1 32,863 (21,505) 11,359
Net earnings............. -- -- -- 19,489 19,489
--- ------ ------- -------- --------
BALANCE APRIL 30, 1994... 990 $ 1 $32,863 $ (2,016) $ 30,848
=== ====== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEAR ENDED JULY 31,
--------------------- -----------------------------
APRIL 30, APRIL 30,
1994 1993 1993 1992 1991
--------- ----------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Earnings (loss) before
extraordinary loss..... $20,356 $12,785 $ 109 $ (1,700) $ 1,979
Reconciliation of
earnings (loss) to net
cash provided by
operating activities:
Depreciation and
amortization......... 21,688 23,238 30,840 31,196 36,151
Other................. 4,127 4,664 5,236 7,007 8,141
Decrease (increase) in
assets:
Accounts and notes
receivable......... (4,610) (4,023) (252) (1,475) (10,001)
Inventories......... (6,129) 13,730 10,229 (12,447) (4,620)
Prepaid expenses and
other current
assets............. (1,374) 206 977 (801) (218)
Increase (decrease) in
liabilities:
Accounts payable.... 1,320 (23,323) (11,918) 3,742 7,851
Other current
liabilities........ 10,278 11,959 1,729 (1,912) 9,780
Other liabilities... (49) 151 131 325 871
Deferred income
taxes.............. 12,639 7,694 (120) (970) 1,006
------- ------- -------- --------- --------
Net cash provided by
operating activities..... 58,246 47,081 36,961 22,965 50,940
------- ------- -------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.... (8,330) (11,816) (14,188) (20,392) (25,942)
Net short-term
investment activity.... (4,305) (25,894) (1,875) (23,165) --
Proceeds from asset
sales.................. 643 1,670 1,983 3,040 1,315
Net additions to
intangible assets...... (62) (1) (82) (3,175) (9,619)
Net reductions
(additions) to other
assets................. (271) (2) 1 (520) (14)
------- ------- -------- --------- --------
Net cash used in investing
activities............... (12,325) (36,043) (14,161) (44,212) (34,260)
------- ------- -------- --------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Additions to long-term
debt................... -- -- 81 246,804 3,202
Reductions of long-term
debt................... (13,336) (1,863) (12,796) (212,637) (2,964)
Additional payments to
retire debt............ (1,190) -- (1,195) (11,983) --
Additions to financing
costs.................. (53) (24) (627) (4,918) (644)
Investment in Class B
redeemable common stock
of parent.............. -- (3,218) (3,218) (9,092) (7,249)
Net advances to related
party.................. (2,249) 585 (59) (3,832) (2,756)
Net advances from (to)
parent and affiliates.. (2,993) (274) (239) (2,907) 718
------- ------- -------- --------- --------
Net cash provided by (used
in) financing activities. (19,821) (4,794) (18,053) 1,435 (9,693)
------- ------- -------- --------- --------
Increase (decrease) in
cash and cash
equivalents.............. 26,100 6,244 4,747 (19,812) 6,987
Cash and cash
equivalents--beginning of
year..................... 32,706 27,959 27,959 47,771 40,784
------- ------- -------- --------- --------
CASH AND CASH
EQUIVALENTS--END OF
PERIOD................... $58,806 $34,203 $ 32,706 $ 27,959 $ 47,771
======= ======= ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
A. BASIS OF PRESENTATION:
The accompanying consolidated financial statements and related notes present
the consolidated financial position, results of operations and cash flows of
Ferrellgas, Inc. (the "Company") and its subsidiaries. The Company is a
wholly-owned subsidiary of Ferrell Companies, Inc. ("Ferrell" or "Parent").
These consolidated financial statements are prepared in connection with the
proposed public offering of limited partner interests in Ferrellgas Partners,
L.P. (the "Partnership"), as described in Note B.
B. INITIAL PUBLIC OFFERING OF COMMON UNITS AND OTHER TRANSACTIONS
The Partnership was formed April 19, 1994, as a Delaware limited
partnership. The Partnership was formed to acquire, own and operate the
propane business and substantially all of the assets of the Company. In order
to simplify the Partnership's obligations under the laws of several
jurisdictions in which the Partnership will conduct business, the
Partnership's activities will be conducted through a subsidiary operating
partnership, Ferrellgas, L.P. (the "Operating Partnership"). The Company will
convey substantially all of the assets to the Partnership (excluding cash,
payables to or receivables from parent and affiliates and an investment in
Class B Stock of Parent) and all of the liabilities, whether known or unknown,
associated with such assets (other than income tax liabilities).
The Partnership intends to offer 13,100,000 Common Units, representing
limited partner interests in the Partnership, to third parties and to
concurrently issue Common Units, Subordinated Units and Incentive Distribution
Rights, representing additional limited partner interests in the Partnership,
to the Company, as well as a 2% general partner interest in the Partnership
and the Operating Partnership, on a combined basis. The Company will make a
dividend of such Common Units, Subordinated Units and Incentive Distribution
Rights to its parent, Ferrell.
The Operating Partnership will assume the payment obligations of the Company
under its Series A and Series C Floating Rate Senior Notes due 1996 (the
"Existing Floating Rate Notes"), its Series B and Series D Fixed Rate Senior
Notes (the "Existing Fixed Rate Notes" and together with the Existing Floating
Rate Notes the "Existing Senior Notes") and its 11 5/8% Senior Subordinated
Debentures (the "Existing Subordinated Debentures"). All of this long-term
debt will be retired with the net proceeds from the sale by the Partnership of
the Common Units offered and the net proceeds from the issuance of
approximately $250,000,000 in aggregate principal amount of Senior Notes due
2001 to be issued by the Operating Partnership concurrently with the closing
of this offering.
Concurrent with the closing of the offering of Common Units, the Company
will consummate a tender offer and consent solicitation with respect to the
Existing Subordinated Debentures. The consent solicitation is necessary to
modify the indenture related to the Existing Subordinated Debentures in order
to permit the Company to consummate the transactions contemplated by this
Prospectus. As of June 3, 1994, all of the outstanding Existing Subordinated
Debentures have been tendered for repurchase and will be retired by the
Operating Partnership, as described above.
F-15
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
Concurrent with the closing of this offering, the Company will mail to the
holders of the Existing Senior Notes a notice of redemption of all outstanding
Existing Senior Notes, pursuant to the optional redemption provisions of the
indenture governing the Existing Senior Notes (the "Existing Senior Notes
Indenture"). The redemption date will be 30 days after the date of mailing of
such notice. The Existing Senior Notes Indenture provides for a redemption
price equal to 100% of the principal amount plus accrued and unpaid interest,
if any, to the redemption date plus, in the case of the Existing Fixed Rate
Notes, a premium which is based on certain yield information for U.S. Treasury
securities as of three business days prior to the redemption date. The
Operating Partnership will deposit with the trustee on the date of closing of
this offering an amount expected to be more than sufficient to pay the
redemption price. As a result of the transactions contemplated hereby, during
the 30-day period prior to the redemption date, an event of default will exist
under the Existing Senior Notes Indenture. The holders of at least 25% of the
principal amount of Existing Senior Notes, therefore, will be entitled, by
notice to the Company and the trustee, to declare the unpaid principal of, and
accrued and unpaid interest and the applicable premium on, the Existing Senior
Notes to be immediately due and payable. In the event of such a declaration,
the amount already deposited by the Operating Partnership in payment of the
redemption price would be applied to pay the amount so declared immediately
due and payable.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany profits, transactions and
balances have been eliminated.
The interim financial data for the nine months ended April 30, 1994, is
audited. The interim financial data for the nine months ended April 30, 1993,
is unaudited; however, in the opinion of management, the 1993 interim data
reflects all adjustments, consisting only of normal, recurring adjustments,
necessary for a fair statement of the results of the interim period presented.
The propane industry is seasonal in nature with peak activity during the
winter months. Therefore, the results of operations for the nine months ended
April 30, 1994 and 1993, are not indicative of the results to be expected for
a full fiscal year.
(2) RECLASSIFICATIONS:
Certain reclassifications have been made to the 1992 consolidated balance
sheet and the 1993, 1992 and 1991 consolidated statement of cash flows in
order to conform with the 1994 and 1993 presentation.
(3) SHORT-TERM INVESTMENTS:
Short-term investments consist of U.S. Treasury Bills and U.S. government
obligations with remaining maturities as of April 30, 1994, ranging from
approximately four to ten months. Short-term investments are carried at cost
which approximates market value.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115--Accounting for Certain Investments in Debt and
Equity Securities, which is
F-16
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
effective for fiscal years beginning after December 15, 1993. The statement
addresses the accounting and reporting for certain investments in debt and
equity securities and expands the use of fair value accounting for those
securities but retains the use of the amortized cost method for investments
that the Company has the positive intent and ability to hold to maturity. The
Company does not believe that the adoption of this statement will have a
material effect on the results of operations or financial condition of the
Company.
(4) INVENTORIES:
Inventories are stated at the lower of cost or market using average cost and
actual cost methods.
The Company enters into forward purchase/sale agreements and options
involving propane and related products which are for trading purposes. To the
extent such contracts are entered into at fixed prices and thereby subject the
Company to market risk, the contracts are accounted for on a mark-to-market
basis.
(5) PROPERTY, PLANT AND EQUIPMENT AND OTHER NONCURRENT ASSETS:
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed by
the straight-line method over the estimated useful lives of the assets ranging
from two to thirty years. Expenditures for maintenance and routine repairs are
expensed as incurred.
On August 1, 1991, the Company revised the estimated useful lives of storage
tanks from twenty to thirty years in order to more closely reflect expected
useful lives of the assets. The effect of this change in accounting estimate
resulted in a favorable impact on loss before extraordinary loss of $3,763,000
for the year ended July 31, 1992.
Intangible assets, consisting primarily of customer location values and
goodwill, are stated at cost, net of amortization computed on the straight-
line method over fifteen years for customer location values and forty years
for goodwill. The Company evaluates its intangible assets for impairment by
calculating the anticipated cash flow attributable to each acquisition over
its expected remaining life. Such expected cash flows, on an undiscounted
basis, are compared to the carrying value of the tangible and intangible
assets, and if impairment is indicated, the carrying value of the intangible
assets are adjusted. Accumulated amortization of intangible assets totaled
$66,211,000 as of April 30, 1994, and $59,181,000 and $49,188,000 as of July
31, 1993 and 1992, respectively.
Other assets consist primarily of non-current notes receivable and deferred
financing costs. The deferred financing costs are amortized using the
effective interest method over the terms of the respective debt agreements.
Accumulated amortization of other assets totaled $9,401,000 as of April 30,
1994 and $7,592,000 and $5,286,000 as of July 31, 1993 and 1992, respectively.
F-17
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
(6) INCOME TAXES:
The Company files a consolidated Federal income tax return with its parent
and affiliates. Income taxes are computed as though each company filed its own
income tax return in accordance with the Company's tax sharing agreement.
Deferred income taxes are provided as a result of temporary differences
between financial and tax reporting as described in NOTE I.
Effective August 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109--Accounting for Income Taxes. The adoption
of this statement changed the Company's method of accounting for income taxes
from the deferred method, under APB 11, to the asset/liability method. Under
SFAS No. 109, deferred income taxes are recognized for the tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. The statement was adopted on a
prospective basis and prior year amounts are not restated. The fiscal year
1993 and cumulative effects of adopting the statement as of August 1, 1992,
did not have a material impact on earnings or cash flow and is therefore not
disclosed separately.
(7) CONSOLIDATED STATEMENT OF CASH FLOWS:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid, debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Interest paid totaled $35,062,000 and $35,853,000 for the nine months ended
April 30, 1994 and 1993, respectively, and $57,563,000, $59,054,000, and
$51,518,000 for the three fiscal years ended July 31, 1993, 1992 and 1991,
respectively.
In 1993 and 1991, the Company received capital contributions, as described
in NOTE M, from its parent.
In connection with the early extinguishment of certain senior notes in 1994
and 1993 and the refinancing of subordinated debentures in 1992, as described
in NOTE H, the Company recorded noncash extraordinary losses from the write-
off of financing costs, net of income tax benefits, of $129,000, $145,000 and
$2,550,000, respectively.
D. INVENTORIES:
<TABLE>
<CAPTION>
APRIL JULY 31,
30, ---------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Liquified propane gas and related products............. $25,055 $19,378 $29,658
Appliances, parts and supplies......................... 4,726 4,274 4,223
------- ------- -------
$29,781 $23,652 $33,881
======= ======= =======
</TABLE>
In addition to inventories on hand, the Company enters into contracts to buy
product for supply purposes. All such contracts have terms of less than one
year and call for payment based on market prices at date of delivery.
F-18
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
E. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
JULY 31,
APRIL -----------------
30, 1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements................................ $ 18,517 $ 18,459 $ 17,150
Buildings and improvements........................... 22,860 23,001 20,339
Vehicles............................................. 37,229 37,564 39,205
Furniture and fixtures............................... 17,368 16,402 14,194
Bulk equipment and market facilities................. 33,276 33,612 32,051
Tanks and customer equipment......................... 316,801 314,127 313,634
Other................................................ 2,846 1,456 99
-------- -------- --------
448,897 444,621 436,672
Less accumulated depreciation and amortization....... 153,474 140,805 123,546
-------- -------- --------
$295,423 $303,816 $313,126
======== ======== ========
</TABLE>
F. INVESTMENT IN CLASS B REDEEMABLE COMMON STOCK OF PARENT:
The investment in Class B redeemable common stock of parent represents all
of the authorized and issued shares of the parent's Class B redeemable common
stock. All shares were purchased from unrelated parties and are recorded at
historical cost. It is the intent of the parent to repay the Company the full
amount of its investment in Class B redeemable common stock with funds from
sources other than the Company. Upon redemption by the parent, the difference,
if any, between the Company's cost and the redemption amount received from the
parent will be recorded as a capital contribution from or dividend to the
parent.
G. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
APRIL JULY 31,
30, ---------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt...................... $ 1,486 $ 1,766 $ 1,912
Accrued insurance...................................... 7,996 8,846 10,515
Accrued interest....................................... 17,237 10,374 10,759
Accrued payroll........................................ 7,924 3,273 2,122
Other.................................................. 3,909 4,789 3,708
------- ------- -------
$38,552 $29,048 $29,016
======= ======= =======
</TABLE>
F-19
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
H. LONG-TERM DEBT:
<TABLE>
<CAPTION>
APRIL JULY 31,
30, -----------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed rate senior notes, interest at 12%, due in
August 1996........................................ $177,600 $189,500 $200,000
Floating rate senior notes, interest at applicable
LIBOR rate plus 2.25% (5.5% at April 30, 1994), due
in August 1996..................................... 50,000 50,000 50,000
Senior subordinated debentures, interest at 11 5/8%,
$250,000,000 face amount, due in December 2003..... 246,430 246,293 246,293
Notes payable, including approximately $2,329,000,
$2,975,000 and $3,848,000 secured by property and
equipment, interest rates ranging from noninterest-
bearing to 12%, due on various dates through 2001.. 3,927 5,562 7,233
-------- -------- --------
477,957 491,355 503,526
Less current portion................................ 1,486 1,766 1,912
-------- -------- --------
$476,471 $489,589 $501,614
======== ======== ========
</TABLE>
For the nine months ended April 30, 1994, the Company reacquired $11,900,000
of its fixed rate senior notes, at an approximate price of 110.00% of face
value together with accrued interest. The early extinguishment of senior notes
resulted in an extraordinary loss from debt premium and write-off of financing
costs of approximately $867,000, net of income tax benefit of $531,000.
In fiscal year 1993, the Company reacquired $10,500,000 of its fixed rate
senior notes, at an approximate aggregate price of 111.35% of face value,
together with accrued interest. The early extinguishment of senior notes
resulted in an extraordinary loss from debt premium and write-off of financing
costs of approximately $886,000, net of income tax benefit of $543,000.
In December 1991, the Company issued, at 98.418% of face value, $250,000,000
of 11 5/8% senior subordinated debentures due 2003. A portion of the proceeds
was used to acquire the Company's existing subordinated debt, together with a
prepayment premium, leaving the remainder available to finance future
acquisitions and for additional working capital purposes. The refinancing of
the subordinated debt resulted in an extraordinary loss from prepayment
premium and write-off of financing costs of approximately $9,979,000, net of
income tax benefit of $6,116,000.
The Company currently has a $50,000,000 bank credit facility which
terminates July 31, 1995. The facility provides for a working capital facility
and a letter of credit facility. At April 30, 1994, there were no borrowings
outstanding under the working capital facility and letters of credit
outstanding under the letter of credit facility, which are used primarily to
secure obligations under certain insurance and leasing arrangements, totaled
$32,778,000. Such letters of credit reduce the amount otherwise available for
borrowings under the facility.
The various agreements for the senior notes and bank credit facility have
similar requirements for maintaining certain working capital and net worth
amounts and meeting interest coverage tests. These
F-20
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
loan agreements and the senior subordinated debentures also place various
limitations on the Company, the most restrictive relating to additional
indebtedness and guarantees, sale and disposition of assets, intercompany
transactions, common stock issuance, and essentially prohibit the payment of
dividends. The Company is in compliance with all requirements, tests,
limitations and covenants related to the senior notes and bank credit
facility. The senior notes and bank credit agreement are collateralized by the
stock of the Company.
Annual principal payments on long-term debt for each of the next five fiscal
years are $1,486,000 in 1995, $1,022,000 in 1996, $227,884,000 in 1997,
$125,000 in 1998 and $94,000 in 1999.
I. INCOME TAXES:
Income tax expense (benefit) consists of (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED
APRIL 30, JULY 31,
--------------- ----------------------
1994 1993 1993 1992 1991
------- ------ ----- ------- ------
<S> <C> <C> <C> <C> <C>
Current.................................. $ 120 $ 559 $ 606 $ 301 $ 552
Deferred................................. 12,108 7,694 (663) (7,086) 1,006
------- ------ ----- ------- ------
$12,228 $8,253 $ (57) $(6,785) $1,558
======= ====== ===== ======= ======
Allocated to:
Operating activities................... $12,759 $8,253 $ 486 $ (669) $1,558
Extraordinary loss..................... (531) -- (543) (6,116) --
------- ------ ----- ------- ------
$12,228 $8,253 $ (57) $(6,785) $1,558
======= ====== ===== ======= ======
</TABLE>
Deferred taxes result from temporary differences in the recognition of
income and expense for tax and financial statement purposes. The significant
temporary differences and related deferred tax provision (benefit) are as
follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR ENDED JULY
APRIL 30, 31,
--------------- --------------------------
1994 1993 1993 1992 1991
------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Depreciation expense.............. $ (49) $1,175 $ 1,568 $ 7,010 $ 19,555
Net operating loss................ 12,584 6,712 (1,975) (9,055) (15,539)
Net cash, accrual and other
differences...................... (794) (564) (752) (5,427) (3,260)
Amortization...................... 367 371 496 386 250
------- ------ ------- ------- --------
$12,108 $7,694 $ (663) $(7,086) $ 1,006
======= ====== ======= ======= ========
</TABLE>
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $187,000,000 at April 30, 1994 available to
offset future taxable income. These net operating loss carryforwards expire at
various dates through 2009.
F-21
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
A reconciliation between the effective tax rate and the statutory Federal
rate follows (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL
30, FOR THE YEAR ENDED JULY 31,
-------------------------- ------------------------------------------
1994 1993 1993 1992 1991
------------- ----------- ------------- -------------- -----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ---- ------ ---- ------ ----- ------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax expense (ben-
efit) at statutory
rate................... $11,100 35.0 $7,153 34.0 $(284) (34.0) $(6,278) (34.0) $1,202 34.0
Statutory surtax........ (317) (1.0) -- -- -- -- -- -- -- --
State income taxes, net
of Federal benefit..... 1,402 4.4 970 4.6 182 21.8 (518) (2.7) 310 8.7
Nondeductible meal and
entertainment expense.. 30 .1 27 .1 36 4.3 42 .2 41 1.2
Other................... 13 -- 103 .5 9 1.1 (31) (.2) 5 .1
------- ---- ------ ---- ----- ----- ------- ----- ------ ----
$12,228 38.5 $8,253 39.2 $ (57) (6.8) $(6,785) (36.7) $1,558 44.0
======= ==== ====== ==== ===== ===== ======= ===== ====== ====
</TABLE>
The significant components of the net deferred tax asset (liability)
included in the Consolidated Balance Sheets are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL
30, JULY 31,
1994 1993
-------- --------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property and
intangible assets....................................... $(98,788) $(86,533)
Other.................................................... -- (3,267)
-------- --------
Total deferred tax liabilities......................... (98,788) (89,800)
DEFERRED TAX ASSETS:
Operating loss carryforwards............................. 72,871 85,790
Reserves not currently deductible........................ 14,764 6,767
Other.................................................... 1,802 --
-------- --------
Total deferred tax assets.............................. 89,437 92,557
-------- --------
Net deferred tax asset (liability)......................... $ (9,351) $ 2,757
======== ========
</TABLE>
J. CONTINGENCIES AND COMMITMENTS:
The Company is threatened with or named as a defendant in various lawsuits
which, among other items, claim damages for product liability. It is not
possible to determine the ultimate disposition of these matters; however,
after taking into consideration the Company's insurance coverage and its
existing reserves, management is of the opinion that there are no known
uninsured claims or known contingent claims that are likely to have a material
adverse effect on the results of operations or financial condition of the
Company.
The Internal Revenue Service ("IRS") has examined the Company's consolidated
income tax returns for the years ended July 31, 1987 and 1986, and has
proposed certain adjustments which relate principally to the purchase price
allocations for an acquisition made during 1987. The IRS has proposed to
disallow $61 million of deductions taken or to be taken for depreciation of
customer tanks
F-22
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
for which the Company asserts the methods and principles used during the
valuation of the customer tanks are defensible. Also, the IRS has proposed to
disallow $90 million of deductions for amortization of customer relationships
taken or to be taken in the Company's consolidated income tax returns. On
April 20, 1993, the United States Supreme Court held in Newark Morning Ledger
v. United States that a taxpayer may amortize customer based intangibles if
that taxpayer can prove such intangibles are capable of being valued and the
value diminishes over time. The Company contends it has met this burden of
proof and feels this recent Supreme Court decision supports the positions
taken during the Company's allocation of purchase price to customer
relationships. The Company intends to vigorously defend against these proposed
adjustments and is in the process of protesting these adjustments through the
appeals process of the IRS. At this time, it is not possible to determine the
ultimate resolution of this matter.
Certain property and equipment is leased under noncancellable operating
leases which require fixed monthly rental payments and which expire at various
dates through 2016. Rental expense under these leases totalled $7,822,000 and
$8,379,000 for the nine months ended April 30, 1994 and 1993, respectively,
and $10,903,000, $10,317,000, and $9,334,000 for the three fiscal years ended
July 31, 1993, 1992 and 1991. Future minimum lease commitments for such leases
are $7,939,000 in 1995, $5,703,000 in 1996, $3,694,000 in 1997, $1,707,000 in
1998, and $441,000 in 1999.
K. EMPLOYEE BENEFITS:
The Company and its parent have a defined contribution profit-sharing plan
which covers substantially all employees with more than one year of service.
Contributions are made to the plan at the discretion of the parent's Board of
Directors. This plan also provides for matching contributions under a cash or
deferred arrangement (401(k) plan) based upon participant salaries and
employee contributions to the plan. Company contributions under the profit
sharing provision of the plan were $1,200,000 and $1,000,000, for the nine
months ended April 30, 1994 and 1993, respectively, and were $1,000,000,
$2,711,000 and $2,200,000, for the three fiscal years ended July 31, 1993,
1992 and 1991, respectively. Company matching contributions to the plan under
the 401(k) provision of the plan were $1,153,000 and $1,175,000 for the nine
months ended April 30, 1994 and 1993, respectively, and were $1,541,000,
$1,420,000 and $1,398,000 for the three fiscal years ended July 31, 1993, 1992
and 1991, respectively.
The Company has a defined benefit plan that provides participants who were
covered under a previously terminated plan with a guaranteed retirement
benefit at least equal to the benefit they would have received under the
terminated plan. Benefits under the terminated plan are determined by years of
credited service and salary levels. The Company's funding policy for this plan
is to contribute amounts deductible for Federal income tax purposes. Plan
assets consist primarily of corporate stocks and bonds, U.S. Treasury bonds
and short-term cash investments.
F-23
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
The following table sets forth the plan's projected funded status for the
respective periods based on the most recent actuarial valuations:
ACTUARIALLY COMPUTED PENSION EXPENSE INCLUDES THE FOLLOWING COMPONENTS:
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEAR ENDED
APRIL 30, JULY 31,
------------------ ----------------------
1994 1993 1993 1992 1991
-------- -------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service cost....................... $ 184 $ 213 $ 285 $ 318 $ 361
Interest on obligations............ 277 284 378 407 407
Actual return on plan assets....... 109 (500) (448) (320) 92
Amortization and deferral of:
Prior service cost............... (23) (23) (31) 1 1
Gain............................. (139) (74) (98) (98) (83)
Deferred asset (gain)/loss....... (347) 282 157 108 (310)
-------- -------- ------ ------ ------
ACTUARIALLY COMPUTED PENSION
EXPENSE........................... $ 61 $ 182 $ 243 $ 416 $ 468
======== ======== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
APRIL 30, ----------------
1994 1993 1992
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Vested benefit obligation........................ $ 2,917 $ 2,215 $ 1,840
======= ======= =======
Accumulated benefit obligation................... $$3,520 $ 2,747 $ 2,378
======= ======= =======
Projected benefit obligation..................... $ 5,556 $ 4,917 $ 4,981
Less: plan assets at fair value.................. (3,142) (3,605) (2,727)
------- ------- -------
Benefit obligation in excess of plan assets...... 2,414 1,312 2,254
Unrecognized prior service cost.................. 306 329 (12)
Unrecognized gain................................ 1,454 2,573 2,054
------- ------- -------
ACCRUED BENEFIT OBLIGATION......................... $ 4,174 $ 4,214 $ 4,296
======= ======= =======
</TABLE>
The actuarial computations assumed a discount rate, annual salary increase
and expected long-term rate of return on plan assets of 7.5%, 5% and 9.5%,
respectively, for the nine months ended April 30, 1994, 8%, 5% and 9.5%,
respectively, for fiscal year 1993 and 1992 and 8.5%, 5.5% and 9.5%,
respectively, for fiscal year 1991.
In fiscal 1987, Ferrell Companies, Inc. (Ferrell) established the Ferrell
Companies, Inc. Long-Term Incentive Plan (the Plan). The Plan provides long-
term incentives to officers and executives of Ferrell and its subsidiaries in
the form of units (Equity Units). The Plan provides for the redemption of the
Equity Units after July 31, 1996, based upon the excess of an appraised value
as of July 31, 1996, over a minimum value established at Plan inception.
Earned awards are 100% vested by the participants at July 31, 1993.
Because the participants are primarily employees of Ferrellgas, compensation
expense charges (credits) representing increases (decreases) in the estimated
value of the vested Equity Units are
F-24
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
recorded by the Company. Compensation expense charged (credited) to income was
$720,000 and $0 for the nine months ended April 30, 1994 and 1993,
respectively, and was $80,000, $(1,934,000) and $2,508,000, respectively, for
the three fiscal years ended July 31, 1993, 1992 and 1991.
L. EMPLOYEE BENEFITS OTHER THAN PENSIONS:
The Company provides postretirement medical benefits to a closed group of
approximately 400 retired employees and their spouses. The plan requires the
Company to provide primary medical benefits to the participants until age 65,
at which time the Company only pays a fixed amount of $55 per month per
participant for medical benefits. Effective August 1, 1993, the Company
adopted Statement of Financial Accounting Standards No. 106--Employers'
Accounting for Postretirement Benefits Other Than Pensions which requires
accrual of postretirement benefits (such as health care benefits) during the
years an employee provides services. The Company elected to amortize the
postretirement benefit obligation over a period not to exceed the average
remaining life expectancy of the plan participants (since all of the plan
participants are retired). The cumulative effect as of August 1, 1993, and
impact for the nine months ended April 10, 1994, of adopting this statement
was not material to the financial statements of the Company.
The Company has expensed $560,000, $471,000 and $532,000 for the years ended
July 31, 1993, 1992 and 1991, respectively, on a pay-as-you-go-basis relative
to this postretirement benefit obligation.
The actuarial liabilities for these postretirement benefits, none of which
have been funded, are as follows at April 30, 1994:
<TABLE>
<S> <C>
Accumulated Postretirement Benefit Obligation--Retirees....... $2,270,000
Fair Value of Assets.......................................... 0
----------
Accrued Liability............................................. $2,270,000
==========
</TABLE>
Net periodic postretirement benefit cost for the nine months ended April 30,
1994, included the following components:
<TABLE>
<S> <C>
Interest Cost on Obligation..................................... $145,647
Amortization of Transition Obligation........................... 171,320
--------
Net Periodic Postretirement Benefit Cost........................ $316,967
========
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.75% and a health care cost trend rate of 10% in fiscal year
1994, 8% in fiscal years 1995 through 1997 and 5% thereafter for any
individuals who have not attained the age of 65 by such cut-off dates.
Benefits relate to a closed group of retirees whose benefits convert to a
fixed monthly supplement at age 65. Because of the nature of this group, a 1%
change in the assumed health care cost trend
F-25
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
rates does not have a significant impact on net periodic postretirement
benefit cost or the accumulated postretirement benefit obligation.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 112--Employers' Accounting For Postemployment
Benefits which is effective for fiscal years beginning after December 15,
1993. This statement requires that employers recognize over the service lives
of employees the costs of postemployment benefits if certain conditions are
met. The Company does not believe that adoption of the statement will have a
material impact on results of operations or financial condition of the
Company.
M. TRANSACTIONS WITH RELATED PARTIES:
All notes receivable from related parties bear interest at the prime rate
plus 1.375% (8.125% at April 30, 1994) except for one note totaling $8,896,000
which bears interest at the prime rate (6.75% at April 30, 1994).
In 1993 and 1991, the Company received capital contributions from its
Parent. In 1993, the contribution consisted of (i) the forgiveness of a
$3,015,000 long-term note payable to affiliate, including interest, and (ii) a
$262,000 note receivable from affiliate. In 1991, the contribution consisted
of forgiveness of $6,687,000 long-term note payable to Parent, including
interest.
In the second and third quarter of fiscal year 1993, Ferrell Leasing
Corporation, a subsidiary of Ferrell Properties, Inc., sold to the Company for
the fair market value of $4,100,000, the land and two buildings comprising the
Company's corporate headquarters in Liberty, Missouri. James E. Ferrell, a
director and executive officer in the Company, owns all of the issued and
outstanding stock of Ferrell Properties, Inc. Prior to the purchase of the
buildings, the Company paid rent to Ferrell Leasing of $403,000, $692,000 and
$661,000 in fiscal years 1993, 1992 and 1991, respectively.
A. Andrew Levison, a director of the parent, is a Managing Director of
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). DLJ acted as
placement agent with regard to the senior subordinated notes issued in
December 1991 and was paid fees of $3,545,000.
The law firm of Smith, Gill, Fisher & Butts, a Professional Corporation, is
general counsel to the Company, the parent and their respective subsidiaries
and affiliates. David S. Mouber, a director of the Parent, is a member of such
law firm. The Company, the Parent and their respective subsidiaries paid such
firm fees of $987,000 and $899,000 for the nine months ended April 30, 1994
and 1993, respectively, and paid fees of $1,381,000, $2,189,000 and $2,776,000
during the three fiscal years ended July 31, 1993, 1992 and 1991,
respectively.
N. DISCLOSURES ABOUT OFF BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL
INSTRUMENTS:
In fiscal year 1993, the Company adopted Statement of Financial Accounting
Standards No. 107--Disclosures about Fair Value of Financial Instruments which
requires disclosing the fair value of financial instruments which can be
reasonably determined.
F-26
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Current Assets. The carrying amount of cash and cash equivalents and
short-term investments approximates fair value because of the short
maturity of those instruments.
Long-term Debt. The estimated fair value of the Company's long-term debt
was $505,597,000 and $539,651,000 as of April 30, 1994 and July 31, 1993,
respectively. The fair value is estimated based on quoted market prices and
discounted cash flows.
The Company is a party to certain option and forward contracts in connection
with its trading activities involving various liquified petroleum products.
Contracts are executed with private counter-parties and to a lesser extent on
national mercantile exchanges. Open contract positions are summarized as
follows:
AS OF APRIL 30, 1994
(IN THOUSANDS EXCEPT PRICE PER GALLON DATA)
<TABLE>
<CAPTION>
MARKET
VOLUME PRICE MATURITY CONTRACT VALUE OF UNREALIZED
(IN GALLONS) (PER GALLON) DATES AMOUNTS CONTRACTS GAIN/(LOSS)
------------ ------------ ----------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exchange Traded Option
Contracts to Buy....... 2,730 $0.26 June-July 1994 $ 723 $ 820 $ 97
Forward Contracts to
Buy.................... 61,893 $.19 to $.34 May-December 1994 15,717 16,093 376
Forward Contracts to
(Sell)................. (30,142) $.29 to $.37 May-December 1994 (10,180) (9,588) 592
------- -------- ------- ------
Total.................. 34,481 $ 6,260 $ 7,325 $1,065
======= ======== ======= ======
</TABLE>
Risks related to these contracts arise from the possible inability of
counterparties to meet the terms of their contracts and changes in underlying
product prices. The Company attempts to minimize market risk through the
enforcement of its trading policies, which include total inventory limits and
loss limits, and attempts to minimize credit risk through application of its
credit policies.
In connection with its trading activities, at July 31, 1993, the Company had
open forward and option contracts to buy $10,394 and sell ($11,347) of various
liquified petroleum products expressed in dollars based on contract prices. At
July 31, 1992, similar contracts to buy were $7,582 and to sell ($4,986). Net
unrealized gains/(losses) on those open position were $281 and $0,
respectively, at July 31, 1993 and 1992.
F-27
<PAGE>
FERRELLGAS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF FERRELL COMPANIES, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED APRIL 30, 1994 AND 1993 (UNAUDITED)
AND FOR THE YEARS ENDED JULY 31, 1993, 1992 AND 1991
O. SUMMARIZED FINANCIAL DATA--FERRELL COMPANIES, INC. AND SUBSIDIARIES:
The Company is the sole operating subsidiary of Ferrell Companies, Inc.
Summarized consolidated financial information for Ferrell Companies, Inc. and
subsidiaries is presented below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEAR ENDED JULY
APRIL 30, 31,
-------------------- ----------------------------
1994 1993 1993 1992 1991
----------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Operating revenues......... $450,482 $468,308 $542,116 $501,297 $544,021
Operating expenses......... 375,332 403,840 483,782 445,048 481,246
Earnings (loss) before ex-
traordinary loss.......... 20,142 12,784 174 (1,653) 2,102
Extraordinary loss......... (867) -- (886) (9,979) --
Net earnings (loss)........ 19,275 12,784 (712) (11,632) 2,102
<CAPTION>
JULY 31,
APRIL 30, ------------------
1994 1993 1992
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
SUMMARY OF FINANCIAL
POSITION:
Current assets............. $180,648 $136,373 $142,161
Non-current assets......... 384,095 401,702 423,906
Current liabilities........ 72,924 62,804 74,517
Non-current liabilities and
equity.................... 491,819 475,271 491,550
</TABLE>
F-28
<PAGE>
APPENDIX A
FORM OF
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
FERRELLGAS PARTNERS, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I--ORGANIZATIONAL MATTERS.......................................... A-1
1.1 Formation.......................................................... A-1
1.2 Name............................................................... A-1
1.3 Registered Office; Principal Office................................ A-1
1.4 Power of Attorney.................................................. A-1
1.5 Term............................................................... A-3
1.6 Possible Restrictions on Transfer.................................. A-3
</TABLE>
ARTICLE II--DEFINITIONS
<TABLE>
<S> <C>
"Acquisition"............................................................ A-3
"Additional Limited Partner"............................................. A-3
"Adjusted Capital Account"............................................... A-3
"Adjusted Property"...................................................... A-4
"Affiliate".............................................................. A-4
"Agreed Allocation"...................................................... A-4
"Agreed Value"........................................................... A-4
"Agreement".............................................................. A-4
"Assignee"............................................................... A-4
"Associate".............................................................. A-4
"Audit Committee"........................................................ A-4
"Available Cash"......................................................... A-4
"Book-Tax Disparity"..................................................... A-5
"Business Day"........................................................... A-5
"Capital Account"........................................................ A-6
"Capital Additions and Improvements"..................................... A-6
"Capital Contribution"................................................... A-6
"Capital Interests"...................................................... A-6
"Carrying Value"......................................................... A-6
"Cash from Interim Capital Transactions"................................. A-6
"Cash from Operations"................................................... A-6
"Cause".................................................................. A-7
"Certificate"............................................................ A-7
"Certificate of Limited Partnership"..................................... A-7
"Citizenship Certification".............................................. A-7
"Claim".................................................................. A-7
"Closing Date"........................................................... A-8
"Closing Price".......................................................... A-8
"Code"................................................................... A-8
"Combined Interest"...................................................... A-8
"Commission"............................................................. A-8
"Common Unit"............................................................ A-8
"Common Unit Arrearage".................................................. A-8
"Contributed Property"................................................... A-8
"Contribution Agreement"................................................. A-8
"Cumulative Common Unit Arrearage"....................................... A-8
"Curative Allocation".................................................... A-8
"Current Market Price"................................................... A-8
"Delaware Act"........................................................... A-8
"Departing Partner"...................................................... A-8
"Economic Risk of Loss".................................................. A-8
"Eligible Citizen"....................................................... A-8
</TABLE>
A-(i)
<PAGE>
<TABLE>
<S> <C>
"Event of Withdrawal"................................................... A-9
"Ferrell"............................................................... A-9
"Ferrellgas"............................................................ A-9
"First Liquidation Target Amount"....................................... A-9
"First Target Distribution"............................................. A-9
"General Partner"....................................................... A-9
"Group"................................................................. A-9
"Holder"................................................................ A-9
"IDR"................................................................... A-9
"Incentive Distribution"................................................ A-9
"Indemnified Persons"................................................... A-9
"Indemnitee"............................................................ A-9
"Initial Limited Partners".............................................. A-9
"Initial Offering"...................................................... A-9
"Initial Unit Price".................................................... A-9
"Interim Capital Transactions".......................................... A-10
"Issue Price"........................................................... A-10
"Limited Partner"....................................................... A-10
"Liquidation Date"...................................................... A-10
"Liquidator"............................................................ A-10
"Maintenance Capital Expenditures"...................................... A-10
"Merger Agreement"...................................................... A-10
"Minimum Quarterly Distribution"........................................ A-10
"National Securities Exchange".......................................... A-10
"Net Agreed Value"...................................................... A-11
"Net Income"............................................................ A-11
"Net Loss".............................................................. A-11
"Net Termination Gain".................................................. A-11
"Net Termination Loss".................................................. A-11
"Non-citizen Assignee".................................................. A-11
"Nonrecourse Built-in Gain"............................................. A-11
"Nonrecourse Deductions"................................................ A-12
"Nonrecourse Liability"................................................. A-12
"Notice of Election to Purchase"........................................ A-12
"Operating Partnership"................................................. A-12
"Operating Partnership Agreement"....................................... A-12
"Opinion of Counsel".................................................... A-12
"Organizational Limited Partner"........................................ A-12
"Outstanding"........................................................... A-12
"Overallotment Option".................................................. A-12
"Partners".............................................................. A-12
"Partner Nonrecourse Debt".............................................. A-12
"Partner Nonrecourse Debt Minimum Gain"................................. A-12
"Partner Nonrecourse Deductions"........................................ A-12
"Partnership"........................................................... A-12
"Partnership Interest".................................................. A-12
"Partnership Minimum Gain".............................................. A-12
"Partnership Securities"................................................ A-13
"Per Unit Capital Amount"............................................... A-13
"Percentage Interest"................................................... A-13
"Person"................................................................ A-13
"Purchase Date"......................................................... A-13
</TABLE>
A-(ii)
<PAGE>
<TABLE>
<S> <C>
"Quarter"............................................................... A-13
"Recapture Income"...................................................... A-13
"Record Date"........................................................... A-13
"Record Holder"......................................................... A-13
"Redeemable Units"...................................................... A-13
"Registration Statement"................................................ A-13
"Required Allocations".................................................. A-13
"Residual Gain"......................................................... A-14
"Residual Loss"......................................................... A-14
"Restricted Activities"................................................. A-14
"Second Liquidation Target Amount"...................................... A-14
"Second Target Distribution"............................................ A-14
"Securities Act"........................................................ A-14
"Special Approval"...................................................... A-14
"Special Limited Partner"............................................... A-14
"Special Limited Partners Book Capital"................................. A-14
"Subordinated Unit"..................................................... A-14
"Subordination Period".................................................. A-14
"Subsidiary"............................................................ A-15
"Substituted Limited Partner"........................................... A-15
"Surviving Business Entity"............................................. A-15
"Termination Capital Transactions"...................................... A-15
"Third Target Distribution"............................................. A-15
"Trading Day"........................................................... A-15
"Transfer".............................................................. A-15
"Transfer Agent"........................................................ A-15
"Transfer Application".................................................. A-15
"Underwriter"........................................................... A-15
"Underwriting Agreement"................................................ A-15
"Unit".................................................................. A-15
"Unpaid MQD"............................................................ A-15
"Unrealized Gain"....................................................... A-16
"Unrealized Loss"....................................................... A-16
"Unrecovered Initial Unit Price"........................................ A-16
"Unrecovered Subordinated Unit Capital"................................. A-16
"Withdrawal Opinion of Counsel"......................................... A-16
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE III--PURPOSE...................................................... A-16
3.1 Purpose and Business.............................................. A-16
3.2 Powers............................................................ A-17
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE IV--CAPITAL CONTRIBUTIONS........................................ A-17
4.1 Initial Contributions; Return of Initial Contributions.......... A-17
Contributions by the General Partner and the Initial Limited
4.2 Partners........................................................ A-17
4.3 Issuances of Additional Units and Other Securites............... A-17
4.4 Limited Preemptive Rights....................................... A-19
4.5 Capital Accounts................................................ A-20
4.6 Interest........................................................ A-22
4.7 No Withdrawal................................................... A-22
4.8 Loans from Partners............................................. A-22
4.9 No Fractional Units............................................. A-22
4.10 Splits and Combinations......................................... A-22
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE V--ALLOCATIONS AND DISTRIBUTIONS.................................. A-23
5.1 Allocations for Capital Account Purposes.......................... A-23
(a)Net Income..................................................... A-23
(b)Net Losses..................................................... A-23
(c)Net Termination Gains and Losses............................... A-23
</TABLE>
A-(iii)
<PAGE>
<TABLE>
<C> <C> <C> <S> <C>
(d) Special Allocations........................................... A-25
(i) Partnership Minimum Gain Chargeback................... A-25
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain... A-26
(iii) Priority Allocations.................................. A-26
(iv) Qualified Income Offset............................... A-26
(v) Gross Income Allocations.............................. A-26
(vi) Nonrecourse Deductions................................ A-26
(vii) Partner Nonrecourse Deductions........................ A-27
(viii) Nonrecourse Liabilities............................... A-27
(ix) Code Section 754 Adjustments.......................... A-27
(x) Economic Uniformity................................... A-27
(xi) Curative Allocation................................... A-27
(xii) Retirement of Assumed Indebtedness.................... A-28
(xiii) First Year Allocation................................. A-28
5.2 Allocations for Tax Purposes...................................... A-28
5.3 Requirement and Characterization of Distributions................. A-30
5.4 Distributions of Cash from Operations............................. A-30
(a) During Subordination Period................................... A-30
(b) After Subordination Period.................................... A-31
5.5 Distributions of Cash from Interim Capital Transactions........... A-31
Adjustment of Minimum Quarterly Distribution and Target
5.6 Distribution Levels............................................... A-32
5.7 Special Provisions Relating to the Subordinated Units............. A-32
5.8 Special Provisions Relating to the Special Limited Partners....... A-33
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE VI--MANAGEMENT AND OPERATION OF BUSINESS......................... A-33
6.1 Management...................................................... A-33
6.2 Certificate of Limited Partnership.............................. A-35
6.3 Restrictions on General Partner's Authority..................... A-35
6.4 Reimbursement of the General Partner............................ A-36
6.5 Outside Activities.............................................. A-36
Loans to and from the General Partner; Contracts with
6.6 Affiliates...................................................... A-37
6.7 Indemnification................................................. A-39
6.8 Liability of Indemnitees........................................ A-40
6.9 Resolution of Conflicts of Interest............................. A-40
6.10 Other Matters Concerning the General Partner.................... A-42
6.11 Title to Partnership Assets..................................... A-42
6.12 Purchase or Sale of Units....................................... A-42
6.13 Registration Rights of Ferrellgas and its Affiliates............ A-43
6.14 Reliance by Third Parties....................................... A-44
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE VII--RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................... A-45
7.1 Limitation of Liability.......................................... A-45
7.2 Management of Business........................................... A-45
7.3 Outside Activities............................................... A-45
7.4 Return of Capital................................................ A-45
7.5 Rights of Limited Partners Relating to the Partnership........... A-45
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE VIII--BOOKS, RECORDS, ACCOUNTING AND REPORTS...................... A-46
8.1 Records and Accounting........................................... A-46
8.2 Fiscal Year...................................................... A-46
8.3 Reports.......................................................... A-46
</TABLE>
A-(iv)
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IX--TAX MATTERS................................................... A-47
9.1 Preparation of Tax Returns....................................... A-47
9.2 Tax Elections.................................................... A-47
9.3 Tax Controversies................................................ A-47
9.4 Organizational Expenses.......................................... A-47
9.5 Withholding...................................................... A-47
9.6 Entity-Level Taxation............................................ A-47
9.7 Entity-Level Arrearage Collections............................... A-48
9.8 Opinions of Counsel.............................................. A-48
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE X--CERTIFICATES................................................... A-48
10.1 Certificates..................................................... A-49
10.2 Registration, Registration of Transfer and Exchange.............. A-49
10.3 Mutilated, Destroyed, Lost or Stolen Certificates................ A-49
10.4 Record Holder.................................................... A-50
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XI--TRANSFER OF INTERESTS......................................... A-50
11.1 Transfer......................................................... A-50
11.2 Transfer of a General Partner's Partnership Interest............. A-51
11.3 Transfer of Units................................................ A-51
11.4 Restrictions on Transfers........................................ A-51
11.5 Citizenship Certificates; Non-citizen Assignees.................. A-51
11.6 Redemption of Interests.......................................... A-52
11.7 Transfer of IDRs................................................. A-53
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XII--ADMISSION OF PARTNERS........................................ A-53
12.1 Admission of Initial Limited Partners............................ A-53
12.2 Admission of Substituted Limited Partners........................ A-54
12.3 Admission of Successor General Partner........................... A-54
12.4 Admission of Additional Limited Partners......................... A-54
12.5 Amendment of Agreement and Certificate of Limited Partnership.... A-54
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XIII--WITHDRAWAL OR REMOVAL OF PARTNERS........................... A-54
13.1 Withdrawal of the General Partner................................ A-54
13.2 Removal of the General Partner................................... A-56
13.3 Interest of Departing Partner and Successor General Partner...... A-56
13.4 Withdrawal of Limited Partners................................... A-57
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XIV--DISSOLUTION AND LIQUIDATION................................. A-57
14.1 Dissolution..................................................... A-57
Continuation of the Business of the Partnership after
14.2 Dissolution..................................................... A-58
14.3 Liquidation..................................................... A-58
14.4 Distributions in Kind........................................... A-59
14.5 Cancellation of Certificate of Limited Partnership.............. A-60
14.6 Reasonable Time for Winding Up.................................. A-60
14.7 Return of Capital............................................... A-60
14.8 Capital Account Restoration..................................... A-60
14.9 Waiver of Partition............................................. A-60
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XV--AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE..... A-60
15.1 Amendment to be Adopted Solely by General Partner................ A-60
15.2 Amendment Procedures............................................. A-61
</TABLE>
A-(v)
<PAGE>
<TABLE>
<C> <S> <C>
15.3 Amendment Requirements.......................................... A-62
15.4 Meetings........................................................ A-62
15.5 Notice of a Meeting............................................. A-63
15.6 Record Date..................................................... A-63
15.7 Adjournment..................................................... A-63
15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes...... A-63
15.9 Quorum.......................................................... A-63
15.10 Conduct of Meeting.............................................. A-64
15.11 Action Without a Meeting........................................ A-64
15.12 Voting and Other Rights......................................... A-64
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XVI--MERGER....................................................... A-65
16.1 Authority....................................................... A-65
16.2 Procedure for Merger or Consolidation........................... A-65
16.3 Approval by Limited Partners of Merger or Consolidation......... A-66
16.4 Certificate of Merger........................................... A-66
16.5 Effect of Merger................................................ A-66
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XVII--RIGHT TO ACQUIRE UNITS...................................... A-67
17.1 Right to Acquire Units.......................................... A-67
</TABLE>
<TABLE>
<C> <S> <C>
ARTICLE XVIII--GENERAL PROVISIONS......................................... A-68
18.1 Addresses and Notices........................................... A-68
18.2 References...................................................... A-68
18.3 Pronouns and Plurals............................................ A-69
18.4 Further Action.................................................. A-69
18.5 Binding Effect.................................................. A-69
18.6 Integration..................................................... A-69
18.7 Creditors....................................................... A-69
18.8 Waiver.......................................................... A-69
18.9 Counterparts.................................................... A-69
18.10 Applicable Law.................................................. A-69
18.11 Invalidity of Provisions........................................ A-69
</TABLE>
<TABLE>
<S> <C>
Exhibit A--Form of Certificate Evidencing Common Unit...................... A-71
</TABLE>
A-(vi)
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP OF
FERRELLGAS PARTNERS, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP OF FERRELLGAS PARTNERS, L.P., dated as
of July 5, 1994, is entered into by and among Ferrellgas, Inc., a Delaware
corporation, as the General Partner, and Danley K. Sheldon, as the
Organizational Limited Partner, together with any other Persons who become
Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein,
the parties hereto hereby agree as follows:
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 FORMATION. (a) The General Partner and the Organizational Limited
Partner have previously formed the Partnership as a limited partnership
pursuant to the provisions of the Delaware Act. Except as expressly provided
to the contrary in this Agreement, the rights and obligations of the Partners
and the administration, dissolution and termination of the Partnership shall
be governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes.
(b) In connection with the formation of the Partnership, Ferrellgas has been
admitted as a general partner of the Partnership, and the Organizational
Limited Partner has been admitted as a limited partner of the Partnership. As
of the Closing Date, after giving effect to the transactions contemplated by
Section 4.2 and after giving effect to the admission of the Initial Limited
Partners as contemplated by Section 12.1 (but in no event prior to such time),
the interest in the Partnership of the Organizational Limited Partner shall be
terminated and the Organizational Limited Partner shall withdraw as a limited
partner of the Partnership.
1.2 NAME. The name of the Partnership shall be "Ferrellgas Partners, L.P."
The Partnership's business may be conducted under any other name or names
deemed necessary or appropriate by the General Partner, including, without
limitation, the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purposes of complying with the laws
of any jurisdiction that so requires. The General Partner in its sole
discretion may change the name of the Partnership at any time and from time to
time and shall notify the Limited Partners of such change in the next regular
communication to the Limited Partners.
1.3 REGISTERED OFFICE; PRINCIPAL OFFICE. Unless and until changed by the
General Partner, the registered office of the Partnership in the State of
Delaware shall be located at The Corporation Trust Center, 1209 Orange Street,
New Castle County, Wilmington, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at, and the address of the General Partner
shall be, One Liberty Plaza, Liberty, Missouri 64068, or such other place as
the General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate.
1.4 POWER OF ATTORNEY. (a) Each Limited Partner and each Assignee hereby
constitutes and appoints each of the General Partner and, if a Liquidator
shall have been selected pursuant to Section 14.3, the Liquidator severally
(and any successor to either thereof by merger, transfer, assignment, election
or otherwise) and each of their authorized officers and attorneys-in-fact,
with full power of substitution, as his true and lawful agent and attorney-in-
fact, with full power and authority in his name, place and stead, to:
A-1
<PAGE>
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate of Limited Partnership and all amendments or restatements
thereof) that the General Partner or the Liquidator deems necessary or
appropriate to form, qualify or continue the existence or qualification
of the Partnership as a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware
and in all other jurisdictions in which the Partnership may conduct
business or own property; (B) all certificates, documents and other
instruments that the General Partner or the Liquidator deems necessary
or appropriate to reflect, in accordance with its terms, any amendment,
change, modification or restatement of this Agreement; (C) all
certificates, documents and other instruments (including, without
limitation, conveyances and a certificate of cancellation) that the
General Partner or the Liquidator deems necessary or appropriate to
reflect the dissolution and liquidation of the Partnership pursuant to
the terms of this Agreement; (D) all certificates, documents and other
instruments relating to the admission, withdrawal, removal or
substitution of any Partner pursuant to, or other events described in,
Article XI, XII, XIII or XIV or the Capital Contribution of any
Partner; (E) all certificates, documents and other instruments relating
to the determination of the rights, preferences and privileges of any
class or series of Units or other Partnership Securities issued
pursuant to Section 4.2; and (F) all certificates, documents and other
instruments (including, without limitation, agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XVI; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and
other instruments necessary or appropriate, in the sole discretion of
the General Partner or the Liquidator, to make, evidence, give, confirm
or ratify any vote, consent, approval, agreement or other action that
is made or given by the Partners hereunder or is consistent with the
terms of this Agreement or is necessary or appropriate, in the sole
discretion of the General Partner or the Liquidator, to effectuate the
terms or intent of this Agreement; provided, that when required by
Section 15.3 or any other provision of this Agreement that establishes
a percentage of the Limited Partners or of the Limited Partners of any
class or series required to take any action, the General Partner or the
Liquidator may exercise the power of attorney made in this Section
1.4(a)(ii) only after the necessary vote, consent or approval of the
Limited Partners or of the Limited Partners of such class or series, as
applicable.
Nothing contained in this Section 1.4(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XV
or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and not be affected by
the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of any Limited Partner or Assignee and the transfer
of all or any portion of such Limited Partner's or Assignee's Partnership
Interest and shall extend to such Limited Partner's or Assignee's heirs,
successors, assigns and personal representatives. Each such Limited Partner or
Assignee hereby agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such power of
attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the General
Partner's or the Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
A-2
<PAGE>
1.5 TERM. The Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on July 31, 2084, or until
the earlier dissolution of the Partnership in accordance with the provisions
of Article XIV.
1.6 POSSIBLE RESTRICTIONS ON TRANSFER. Notwithstanding anything to the
contrary contained in this Agreement, in the event of (a) the enactment (or
imminent enactment) of any legislation, (b) the publication of any temporary
or final regulation by the Treasury Department, (c) any ruling by the Internal
Revenue Service or (d) any judicial decision, that, in any such case, in the
Opinion of Counsel, would result in the taxation of the Partnership as an
association taxable as a corporation or would otherwise result in the
Partnership's being taxed as an entity for federal income tax purposes, then,
the General Partner may impose such restrictions on the transfer of Units or
Partnership Interests as may be required, in the Opinion of Counsel, to
prevent the Partnership from being taxed as an association taxable as a
corporation or otherwise as an entity for federal income tax purposes,
including, without limitation, making such amendments to this Agreement as the
General Partner in its sole discretion may determine to be necessary or
appropriate to impose such restrictions, provided, that any such amendment to
this Agreement that would result in the delisting or suspension of trading of
any class of Units on any National Securities Exchange on which such class of
Units is then traded must be approved by the holders of at least two-thirds of
the Outstanding Units of such class (excluding the vote in respect of Units
held by the General Partner and its Affiliates).
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this
Agreement.
"ACQUISITION" means any transaction in which the Partnership or the
Operating Partnership acquires (through an asset acquisition, merger, stock
acquisition or other form of investment) control over all or a portion of
the assets, properties or business of another Person for the purpose of
increasing the operating capacity of the Partnership and the Operating
Partnership, taken as a whole, from the operating capacity of the
Partnership and the Operating Partnership, taken as a whole, existing
immediately prior to such transaction.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership
as a Limited Partner pursuant to Section 12.4 and who is shown as such on
the books and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased
by any amounts that such Partner is obligated to restore under the
standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is
deemed obligated to restore under Treasury Regulation Sections 1.704-2(g)
and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all losses and
deductions that, as of the end of such fiscal year, are reasonably expected
to be allocated to such Partner in subsequent years under Sections
704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-
1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end
of such fiscal year, are reasonably expected to be made to such Partner in
subsequent years in accordance with the terms of this Agreement or
otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to)
the year in which such distributions are reasonably expected to be made
(other than increases as a result of a minimum gain chargeback pursuant to
Section 5.1(d)(i) or 5.1(d)(ii)). The foregoing definition of Adjusted
Capital Account is intended to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith. The "Adjusted Capital Account" in respect of a
Common Unit, a Subordinated Unit or any other specified interest in the
Partnership
A-3
<PAGE>
shall be the amount which such Adjusted Capital Account would be if such
Common Unit, Subordinated Unit or other interest in the Partnership were
the only interest in the Partnership held by a Limited Partner.
"ADJUSTED PROPERTY" means any property the Carrying Value of which has
been adjusted pursuant to Section 4.5(d)(i) or 4.5(d)(ii). Once an Adjusted
Property is deemed distributed by, and recontributed to, the Partnership
for federal income tax purposes upon a termination thereof pursuant to
Section 708 of the Code, such property shall thereafter constitute a
Contributed Property until the Carrying Value of such property is
subsequently adjusted pursuant to Section 4.5(d)(i) or 4.5(d)(ii).
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls, is controlled by or is under common
control with, the Person in question. As used herein, the term "control"
means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or otherwise.
"AGREED ALLOCATION" means any allocation, other than a Required
Allocation, of an item of income, gain, loss or deduction pursuant to the
provisions of Section 5.1, including, without limitation, a Curative
Allocation (if appropriate to the context in which the term "Agreed
Allocation" is used).
"AGREED VALUE" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as
determined by the General Partner using such reasonable method of valuation
as it may adopt; provided, however, that the Agreed Value of any property
deemed contributed to the Partnership for federal income tax purposes upon
termination and reconstitution thereof pursuant to Section 708 of the Code
shall be determined in accordance with Section 4.5(c)(i). Subject to
Section 4.5(c)(i), the General Partner shall, in its sole discretion, use
such method as it deems reasonable and appropriate to allocate the
aggregate Agreed Value of Contributed Properties contributed to the
Partnership in a single or integrated transaction among each separate
property on a basis proportional to the fair market value of each
Contributed Property.
"AGREEMENT" means this Agreement of Limited Partnership of Ferrellgas
Partners, L.P., as it may be amended, supplemented or restated from time to
time.
"ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more
Units have been transferred in a manner permitted under this Agreement and
who has executed and delivered a Transfer Application as required by this
Agreement, but who has not become a Substituted Limited Partner.
"ASSOCIATE" means, when used to indicate a relationship with any Person,
(i) any corporation or organization of which such Person is a director,
officer or partner or is, directly or indirectly, the owner of 20% or more
of any class of voting stock; (ii) any trust or other estate in which such
Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such Person, or any relative of such spouse, who has
the same residence as such Person.
"AUDIT COMMITTEE" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
officers nor employees of the General Partner or any of its Affiliates.
"AVAILABLE CASH" means, with respect to any Quarter and without
duplication:
(a) the sum of:
(i) all cash receipts of the Partnership during such Quarter from
all sources (including, without limitation, distributions of cash
received from the Operating Partnership and cash proceeds from
Interim Capital Transactions, but excluding cash proceeds from
Termination Capital Transactions), plus, in the case of the Quarter
ending
A-4
<PAGE>
October 31, 1994, the cash balance of the Partnership as of the
close of business on the Closing Date; and
(ii) any reduction with respect to such Quarter in a cash reserve
previously established pursuant to clause (b)(ii) below (either by
reversal or utilization) from the level of such reserve at the end
of the prior Quarter;
(b) less the sum of:
(i) all cash disbursements of the Partnership during such Quarter,
including, without limitation, disbursements for operating expenses,
taxes, if any, debt service (including, without limitation, the
payment of principal, premium and interest), redemption of
Partnership Interests, capital expenditures, contributions, if any,
to the Operating Partnership and cash distributions to Partners (but
only to the extent that such cash distributions to Partners exceed
Available Cash for the immediately preceding Quarter); and
(ii) any cash reserves established with respect to such Quarter,
and any increase with respect to such Quarter in a cash reserve
previously established pursuant to this clause (b)(ii) from the
level of such reserve at the end of the prior Quarter, in such
amounts as the General Partner determines in its reasonable
discretion to be necessary or appropriate (A) to provide for the
proper conduct of the business of the Partnership or the Operating
Partnership (including, without limitation, reserves for future
capital expenditures) or (B) to provide funds for distributions with
respect to Units and any general partner interests in the
Partnership in respect of any one or more of the next four Quarters
or (C) because the distribution of such amounts would be prohibited
by applicable law or by any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which
the Partnership or the Operating Partnership is a party or by which
any of them is bound or its assets are subject;
provided, however, that for purposes of determining Available Cash for the
Quarter ending October 31, 1994, such Quarter shall be deemed to commence
on the Closing Date. Notwithstanding the foregoing, "Available Cash" with
respect to any Quarter shall not include any cash receipts or reductions in
reserves or take into account any disbursements made or reserves
established in each case after the Liquidation Date. Taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners shall not be considered cash disbursements of the
Partnership that reduce Available Cash, but the payment or withholding
thereof shall be deemed to be a distribution of Available Cash to such
Partners. Alternatively, in the discretion of the General Partner, such
taxes (if pertaining to all Partners) may be considered to be cash
disbursements of the Partnership which reduce Available Cash, but the
payment or withholding thereof shall not be deemed to be a distribution of
Available Cash to such Partners.
"BOOK-TAX DISPARITY" means with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or
Adjusted Property and the adjusted basis thereof for federal income tax
purposes as of such date. A Partner's share of the Partnership's Book-Tax
Disparities in all of its Contributed Property and Adjusted Property will
be reflected by the difference between such Partner's Capital Account
balance as maintained pursuant to Section 4.5 and the hypothetical balance
of such Partner's Capital Account computed as if it had been maintained
strictly in accordance with federal income tax accounting principles.
"BUSINESS DAY" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States or
the states of New York or Missouri shall not be regarded as a Business Day.
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"CAPITAL ACCOUNT" means the capital account maintained for a Partner
pursuant to Section 4.5.
"CAPITAL ADDITIONS AND IMPROVEMENTS" means (a) additions or improvements
to the capital assets owned by the Partnership or the Operating Partnership
or (b) the acquisition of existing or the construction of new capital
assets (including, without limitation, retail distribution outlets, propane
tanks, pipeline systems, storage facilities and related assets), made to
increase the operating capacity of the Partnership and the Operating
Partnership, taken as a whole, from the operating capacity of the
Partnership and the Operating Partnership, taken as a whole, existing
immediately prior to such addition, improvement, acquisition or
construction.
"CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to the Contribution Agreement or Sections 4.1, 4.2, 4.3,
4.5(c)(i), 13.3(c) or 14.8.
"CAPITAL INTERESTS" means, with respect to any corporation, any and all
shares, participations, rights or other equivalent interests in the capital
of the corporation, and with respect to any partnership, any and all
partnership interests (whether general or limited) and any other interests
or participations that confer on a Person the right to receive a share of
the profits and losses of, or distributions of assets of, such partnership.
"CARRYING VALUE" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all
depreciation, amortization and cost recovery deductions charged to the
Partners' and Assignees' Capital Accounts in respect of such Contributed
Property, and (b) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes, all as of
the time of determination. The Carrying Value of any property shall be
adjusted from time to time in accordance with Sections 4.5(d)(i) and
4.5(d)(ii) and to reflect changes, additions or other adjustments to the
Carrying Value for dispositions and acquisitions of Partnership properties,
as deemed appropriate by the General Partner.
"CASH FROM INTERIM CAPITAL TRANSACTIONS" means, at any date, such amounts
of Available Cash as are deemed to be Cash from Interim Capital
Transactions pursuant to Section 5.3.
"CASH FROM OPERATIONS" means, at the close of any Quarter but prior to
the Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of all cash receipts of the Partnership and the Operating
Partnership during the period since the Closing Date through such date
(including, without limitation, the cash balance of the Partnership as
of the close of business on the Closing Date, plus an initial balance
of $25 million, excluding any cash proceeds from any Interim Capital
Transactions (except to the extent specified in Section 5.3) and
Termination Capital Transactions),
(b) less the sum of:
(i) all cash operating expenditures of the Partnership and the
Operating Partnership during such period, including, without
limitation, taxes, if any, and amounts owed to the General Partner
as reimbursement pursuant to Section 6.4,
(ii) all cash debt service payments of the Partnership and the
Operating Partnership during such period (other than payments or
prepayments of principal and premium (A) required by reason of loan
agreements (including, without limitation, covenants and default
provisions therein) or by lenders, in each case in connection with
sales or other dispositions of assets or (B) made in connection with
refinancings or refundings of indebtedness with the proceeds from
new indebtedness or from the sale of equity interests, provided,
that any payment or prepayment of principal and premium, whether or
not then due, shall be deemed, at the election and in the discretion
of the General
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Partner, to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership or the Operating Partnership
simultaneously with or within 180 days prior to or after such
payment or prepayment to the extent of the principal amount of such
indebtedness so incurred),
(iii) all cash capital expenditures of the Partnership and the
Operating Partnership during such period, including, without
limitation, cash capital expenditures made in respect of Maintenance
Capital Expenditures, but excluding (A) cash capital expenditures
made in respect of Acquisitions and Capital Additions and
Improvements and (B) cash expenditures made in payment of
transaction expenses relating to Interim Capital Transactions,
(iv) any cash reserves of the Partnership or the Operating
Partnership outstanding as of such date that the General Partner
deems in its reasonable discretion to be necessary or appropriate to
provide for the future cash payment of items of the type referred to
in clauses (i) through (iii) of this sentence, and
(v) any cash reserves of the Partnership or the Operating
Partnership outstanding as of such date that the General Partner
deems in its reasonable discretion to be necessary or appropriate to
provide funds for distributions with respect to Units and any
general partner interests in the Partnership in respect of any one
or more of the next four Quarters,
all as determined on a consolidated basis and after taking into account the
General Partner's interest therein attributable to its general partner
interest in the Operating Partnership. Where cash capital expenditures are
made in part in respect of Acquisitions or Capital Additions and
Improvements and in part for other purposes, the General Partner's good
faith allocation thereof between the portion made for Acquisitions or
Capital Additions and Improvements and the portion made for other purposes
shall be conclusive. Taxes paid by the Partnership on behalf of, or amounts
withheld with respect to, all or less than all of the Partners shall not be
considered cash operating expenditures of the Partnership that reduce Cash
from Operations, but the payment or withholding thereof shall be deemed to
be a distribution of Available Cash to such Partners. Alternatively, in the
discretion of the General Partner, such taxes (if pertaining to all
Partners) may be considered to be cash operating expenditures of the
Partnership which reduce Cash from Operations, but the payment or
withholding thereof shall not be deemed to be a distribution of Available
Cash to such Partners.
"CAUSE" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
"CERTIFICATE" means a certificate, substantially in the form of Exhibit A
to this Agreement or in such other form as may be adopted by the General
Partner in its sole discretion, issued by the Partnership evidencing
ownership of one or more Common Units, or a certificate, in such form as
may be adopted by the General Partner in its sole discretion, issued by the
Partnership evidencing ownership of one or more other Units.
"CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may
be amended, supplemented or restated from time to time.
"CITIZENSHIP CERTIFICATION" means a properly completed certificate in
such form as may be specified by the General Partner by which an Assignee
or a Limited Partner certifies that he (and if he is a nominee holding for
the account of another Person, that to the best of his knowledge such other
Person) is an Eligible Citizen.
"CLAIM" has the meaning assigned to such term in Section 6.13(c).
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"CLOSING DATE" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the
Underwriting Agreement.
"CLOSING PRICE" has the meaning assigned to such term in Section 17.1(a).
"CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder.
Any reference herein to a specific section or sections of the Code shall be
deemed to include a reference to any corresponding provision of future law.
"COMBINED INTEREST" has the meaning assigned to such term in Section
13.3(a).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Common Units in this
Agreement.
"COMMON UNIT ARREARAGE" means, with respect to any Common Unit, whenever
issued, and as to any Quarter within the Subordination Period, the excess,
if any, of (a) the Minimum Quarterly Distribution with respect to such
Common Unit over (b) the sum of all Available Cash distributed with respect
to such Common Unit in respect of such Quarter pursuant to Section
5.4(a)(i).
"CONTRIBUTED PROPERTY" means each property or other asset, in such form
as may be permitted by the Delaware Act, but excluding cash, contributed to
the Partnership (or deemed contributed to the Partnership on termination
and reconstitution thereof pursuant to Section 708 of the Code). Once the
Carrying Value of a Contributed Property is adjusted pursuant to
Section 4.5(d), such property shall no longer constitute a Contributed
Property, but shall be deemed an Adjusted Property.
"CONTRIBUTION AGREEMENT" means that certain Contribution, Conveyance and
Assumption Agreement, dated as of the Closing Date, between Ferrellgas, the
Partnership and the Operating Partnership, together with the additional
conveyance documents and instruments contemplated or referenced thereunder.
"CUMULATIVE COMMON UNIT ARREARAGE" means, with respect to any Common
Unit, whenever issued, and as of the end of any Quarter, the excess, if
any, of (a) the sum resulting from adding together the Common Unit
Arrearage as to such Common Unit for each of the Quarters within the
Subordination Period ending on or before the last day of such Quarter over
(b) the sum of any distributions theretofore made pursuant to Section
5.4(a)(ii) with respect to such Common Unit (including any distributions to
be made in respect of the last of such Quarters).
"CURATIVE ALLOCATION" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(xi).
"CURRENT MARKET PRICE" has the meaning assigned to such term in Section
17.1(a).
"DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership
Act, 6 Del C. (S) 17-101, et seq., as amended, supplemented or restated
from time to time, and any successor to such statute.
"DEPARTING PARTNER" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 13.1 or 13.2.
"ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"ELIGIBLE CITIZEN" means a Person qualified to own interests in real
property in jurisdictions in which the Partnership or the Operating
Partnership does business or proposes to do business
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from time to time, and whose status as a Limited Partner or Assignee does
not or would not subject the Partnership or the Operating Partnership to a
substantial risk of cancellation or forfeiture of any of its properties or
any interest therein.
"EVENT OF WITHDRAWAL" has the meaning assigned to such term in Section
13.1(a).
"FERRELL" means Ferrell Companies, Inc., a Kansas corporation.
"FERRELLGAS" means Ferrellgas, Inc., a Delaware corporation and a wholly
owned subsidiary of Ferrell.
"FIRST LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term
in Section 5.1(c)(i)(D).
"FIRST TARGET DISTRIBUTION" means $0.55 per Unit (or, with respect to the
period commencing on the Closing Date and ending on October 31, 1994, the
product of $0.55 multiplied by a fraction of which the numerator is the
number of days in such period and of which the denominator is 92), subject
to adjustment in accordance with Sections 5.6 and 9.6.
"GENERAL PARTNER" means Ferrellgas, and its successors as general partner
of the Partnership.
"GROUP" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting (except voting pursuant to a revocable proxy
or consent given to such Person in response to a proxy or consent
solicitation made to 10 or more Persons) or disposing of any Partnership
Securities with any other Person that beneficially owns, or whose
Affiliates or Associates beneficially own, directly or indirectly,
Partnership Interests.
"HOLDER" has the meaning assigned to such term in Section 6.13(a).
"IDR" means a Partnership Interest issued to Ferrellgas in connection
with the transfer of its assets to the Partnership pursuant to Section 4.2,
which Partnership Interest shall confer upon the holder thereof only the
rights and obligations specifically provided in this Agreement with respect
to IDRs (and no other rights otherwise available to holders of a
Partnership Interest).
"INCENTIVE DISTRIBUTION" means any amount of cash distributed to the
Special Limited Partners, pursuant to Sections 5.4(a)(v), (vi) or (vii) or
5.4(b)(iii), (iv) or (v).
"INDEMNIFIED PERSONS" has the meaning assigned to such term in Section
6.13(c).
"INDEMNITEE" means the General Partner, any Departing Partner, any Person
who is or was an Affiliate of the General Partner or any Departing Partner,
any Person who is or was an officer, director, employee, partner, agent or
trustee of the General Partner or any Departing Partner or any such
Affiliate, or any Person who is or was serving at the request of the
General Partner or any Departing Partner or any such Affiliate as a
director, officer, employee, partner, agent or trustee of another Person.
"INITIAL LIMITED PARTNERS" means Ferrellgas (with respect to the Common
Units and the Subordinated Units received by it pursuant to Section 4.2)
and the Underwriters, in each case upon being admitted to the Partnership
in accordance with Section 12.1.
"INITIAL OFFERING" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"INITIAL UNIT PRICE" means (a) the initial public offering price per
Common Unit at which the Underwriters offered the Common Units to the
public for sale as set forth on the cover page of the prospectus first
issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the
price per Unit at which such class or series
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of Units is initially sold by the Partnership, as determined by the General
Partner, in each case adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination
of Units.
"INTERIM CAPITAL TRANSACTIONS" means (a) borrowings, refinancings or
refundings of indebtedness and sales of debt securities (other than for
working capital purposes and other than for items purchased on open account
in the ordinary course of business) by the Partnership or the Operating
Partnership, (b) sales of equity interests (including Common Units sold to
the Underwriters pursuant to the exercise of the Overallotment Option) by
the Partnership or the Operating Partnership and (c) sales or other
voluntary or involuntary dispositions of any assets of the Partnership or
the Operating Partnership (other than (x) sales or other dispositions of
inventory in the ordinary course of business, (y) sales or other
dispositions of other current assets including, without limitation,
receivables and accounts and (z) sales or other dispositions of assets as a
part of normal retirements or replacements), in each case prior to the
commencement of the dissolution and liquidation of the Partnership.
"ISSUE PRICE" means the price at which a Unit is purchased from the
Partnership, less any sales commission or underwriting discount charged to
the Partnership.
"LIMITED PARTNER" means, unless the context otherwise requires, (a) the
Organizational Limited Partner, each Initial Limited Partner, each
Substituted Limited Partner, each Additional Limited Partner and any
Departing Partner upon the change of its status from General Partner to
Limited Partner pursuant to Section 13.3, subject to the provisions of
Section 5.7, (b) solely for the purposes of Section 1.4 and Articles VI and
VII, each Special Limited Partner and (c) solely for purposes of Articles
IV, V and VI and Sections 14.3 and 14.4, each Assignee.
"LIQUIDATION DATE" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b)
of the first sentence of Section 14.2, the date on which the applicable
time period during which the holders of Outstanding Units have the right to
elect to reconstitute the Partnership and continue its business has expired
without such an election being made, and (b) in the case of any other event
giving rise to the dissolution of the Partnership, the date on which such
event occurs.
"LIQUIDATOR" means the General Partner or other Person approved pursuant
to Section 14.3 who performs the functions described therein.
"MAINTENANCE CAPITAL EXPENDITURES" means cash capital expenditures made
to maintain, up to the level thereof that existed at the time of such
expenditure, the operating capacity of the capital assets of the
Partnership and the Operating Partnership, taken as a whole, as such assets
existed at the time of such expenditure and shall, therefore, not include
cash capital expenditures made in respect of Aquisitions and Capital
Additions and Improvements. Where cash capital expenditures are made in
part to maintain the operating capacity level referred to in the
immediately preceding sentence and in part for other purposes, the General
Partner's good faith allocation thereof between the portion used to
maintain such operating capacity level and the portion used for other
purposes shall be conclusive.
"MERGER AGREEMENT" has the meaning assigned to such term in Section 16.1.
"MINIMUM QUARTERLY DISTRIBUTION" means (a) $0.50 per Unit per Quarter
(or, with respect to the period commencing on the Closing Date and ending
on October 31, 1994, the product of $0.50 multiplied by a fraction of which
the numerator is the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 5.6
and 9.6.
"NATIONAL SECURITIES EXCHANGE" means an exchange registered with the
Securities and Exchange Commission under Section 6(a) of the Securities
Exchange Act of 1934, as amended, supplemented or restated from time to
time, and any successor to such statute.
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"NET AGREED VALUE" means, (a) in the case of any Contributed Property,
the Agreed Value of such property reduced by any liabilities either assumed
by the Partnership upon such contribution or to which such property is
subject when contributed, and (b) in the case of any property distributed
to a Partner or Assignee by the Partnership, the Partnership's Carrying
Value of such property (as adjusted pursuant to Section 4.5(d)(ii)) at the
time such property is distributed, reduced by any indebtedness either
assumed by such Partner or Assignee upon such distribution or to which such
property is subject at the time of distribution, in either case, as
determined under Section 752 of the Code.
"NET INCOME" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain (other than those items attributable
to dispositions constituting Termination Capital Transactions) for such
taxable period over the Partnership's items of loss and deduction (other
than those items attributable to dispositions constituting Termination
Capital Transactions) for such taxable period. The items included in the
calculation of Net Income shall be determined in accordance with Section
4.5(b) and shall not include any items specially allocated under Section
5.1(d). Once an item of income, gain, loss or deduction that has been
included in the initial computation of Net Income is subjected to a
Required Allocation or a Curative Allocation, Net Income or Net Loss,
whichever the case may be, shall be recomputed without regard to such item.
"NET LOSS" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction (other than those items
attributable to dispositions constituting Termination Capital Transactions)
for such taxable period over the Partnership's items of income and gain
(other than those items attributable to dispositions constituting
Termination Capital Transactions) for such taxable period. The items
included in the calculation of Net Loss shall be determined in accordance
with Section 4.5(b) and shall not include any items specially allocated
under Section 5.1(d). Once an item of income, gain, loss or deduction that
has been included in the initial computation of Net Loss is subjected to a
Required Allocation or a Curative Allocation, Net Income, or Net Loss,
whichever the case may be, shall be recomputed without regard to such item.
"NET TERMINATION GAIN" means, for any taxable period, the sum, if
positive, of all items of income, gain, loss or deduction recognized by the
Partnership (including, without limitation, such amounts recognized through
the Operating Partnership) from Termination Capital Transactions occurring
in such taxable period. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 4.5(b) and
shall not include any items of income, gain or loss specially allocated
under Section 5.1(d). Once an item of income, gain or loss that has been
included in the initial computation of Net Termination Gain is subjected to
a Required Allocation or a Curative Allocation, Net Termination Gain or Net
Termination Loss, whichever the case may be, shall be recomputed without
regard to such item.
"NET TERMINATION LOSS" means, for any taxable period, the sum, if
negative, of all items of income, gain, loss or deduction recognized by the
Partnership (including, without limitation, such amounts recognized through
the Operating Partnership) from Termination Capital Transactions occurring
in such taxable period. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 4.5(b) and
shall not include any items of income, gain or loss specially allocated
under Section 5.1(d). Once an item of gain or loss that has been included
in the initial computation of Net Termination Loss is subjected to a
Required Allocation or a Curative Allocation, Net Termination Gain or Net
Termination Loss, whichever the case may be, shall be recomputed without
regard to such item.
"NON-CITIZEN ASSIGNEE" means a Person who the General Partner has
determined in its sole discretion does not constitute an Eligible Citizen
and as to whose Partnership Interest the General Partner has become the
Substituted Limited Partner, pursuant to Section 11.5.
"NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount
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of any taxable gain that would be allocated to the Partners pursuant to
Sections 5.2(b)(i)(A), 5.2(b)(ii)(A) or 5.2(b)(iii) if such properties were
disposed of in a taxable transaction in full satisfaction of such
liabilities and for no other consideration.
"NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b),
are attributable to a Nonrecourse Liability.
"NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in
Section 17.1(b).
"OPERATING PARTNERSHIP" means Ferrellgas, L.P., a Delaware limited
partnership.
"OPERATING PARTNERSHIP AGREEMENT" means the Agreement of Limited
Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"OPINION OF COUNSEL" means a written opinion of counsel (who may be
regular counsel to Ferrellgas, any Affiliate of Ferrellgas, the Partnership
or the General Partner) acceptable to the General Partner.
"ORGANIZATIONAL LIMITED PARTNER" means Danley K. Sheldon, in his capacity
as the organizational limited partner of the Partnership pursuant to this
Agreement.
"OUTSTANDING" means, with respect to the Units or other Partnership
Securities, all Units or other Partnership Securities that are issued by
the Partnership and reflected as outstanding on the Partnership's books and
records as of the date of determination; provided that, if at any time any
Person or Group (other than Ferrellgas and its Affiliates) owns
beneficially 20% or more of all Common Units, such Common Units so owned
shall not be voted on any matter and shall not be considered to be
Outstanding when sending notices of a meeting of Limited Partners (unless
otherwise required by law), calculating required votes, determining the
presence of a quorum or for other similar purposes under this Agreement,
except that such Common Units shall be considered to be Outstanding for
purposes of Section 13.1(b)(iv) (such Common Units shall not, however, be
treated as a separate class of Partnership Securities for purposes of this
Agreement).
"OVERALLOTMENT OPTION" means the overallotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"PARTNERS" means the General Partner, the Limited Partners and the
Special Limited Partners.
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss,
deduction or expenditure (including, without limitation, any expenditure
described in Section 705(a)(2)(B) of the Code) that, in accordance with the
principles of Treasury Regulation Section 1.704-2(i), are attributable to a
Partner Nonrecourse Debt.
"PARTNERSHIP" means Ferrellgas Partners, L.P., a Delaware limited
partnership established by the Certificate of Limited Partnership, and any
successors thereto.
"PARTNERSHIP INTEREST" means an interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units, IDRs
or other Partnership Securities, or a combination thereof or interest
therein, as the case may be.
"PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance
with the principles of Treasury Regulation Section 1.704-2(d).
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"PARTNERSHIP SECURITIES" has the meaning assigned to such term in Section
4.3(a).
"PER UNIT CAPITAL AMOUNT" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General
Partner who holds Units.
"PERCENTAGE INTEREST" means as of the date of such determination (a) as
to the General Partner, 1%, (b) as to any Limited Partner or Assignee
holding Units, the product of (i) 99% multiplied by (ii) the quotient of
the number of Units held by such Limited Partner or Assignee divided by the
total number of all Units then Outstanding; provided, however, that
following any issuance of additional Partnership Securities by the
Partnership in accordance with Section 4.3, proper adjustment shall be made
to the Percentage Interest represented by each Unit to reflect such
issuance, and (c) as to the holders of additional Partnership Securities
issued by the Partnership in accordance with Section 4.3, the percentage
established as a part of such issuance.
"PERSON" means an individual or a corporation, partnership, trust,
unincorporated organization, association or other entity.
"PURCHASE DATE" means the date determined by the General Partner as the
date for purchase of all Outstanding Units (other than Units owned by the
General Partner and its Affiliates) pursuant to Article XVII.
"QUARTER" means, unless the context requires otherwise, a three month
period of time ending on October 31, January 31, April 30, or July 31;
provided, however, that the General Partner, in its sole discretion, may
amend such period as it deems necessary or appropriate in connection with a
change in the fiscal year of the Partnership.
"RECAPTURE INCOME" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the
Code) upon the disposition of any property or asset of the Partnership,
which gain is characterized as ordinary income because it represents the
recapture of deductions previously taken with respect to such property or
asset.
"RECORD DATE" means the date established by the General Partner for
determining (a) the identity of the Record Holder entitled to notice of, or
to vote at, any meeting of Limited Partners or entitled to vote by ballot
or give approval of Partnership action in writing without a meeting or
entitled to exercise rights in respect of any lawful action of Limited
Partners or (b) the identity of Record Holders entitled to receive any
report or distribution.
"RECORD HOLDER" means the Person in whose name a Unit is registered on
the books of the Transfer Agent as of the opening of business on a
particular Business Day, or with respect to a holder of a general partner
interest or an IDR, the Person in whose name such general partner interest
or IDR is registered on the books of the General Partner as of the opening
of business on such Business Day.
"REDEEMABLE UNITS" means any Units for which a redemption notice has been
given, and has not been withdrawn, under Section 11.6.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-1
(Registration No. 33-53383), as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the
Commission under the Securities Act to register the offering and sale of
the Common Units in the Initial Offering.
"REQUIRED ALLOCATIONS" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(b)(ii) or (b) Sections 5.1(d)(i), 5.1(d)(ii), 5.1(d)(iv),
5.1(d)(v), 5.1(d)(vi), 5.1(d)(vii) and 5.1(d)(ix), such allocations (or
limitations thereon) being directly or indirectly required by the Treasury
regulations promulgated under Section 704(b) of the Code.
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"RESIDUAL GAIN" or "RESIDUAL LOSS" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed
Property or Adjusted Property, to the extent such item of gain or loss is
not allocated pursuant to Sections 5.2(b)(i)(A) or 5.2(b)(ii)(A),
respectively, to eliminate Book-Tax Disparities.
"RESTRICTED ACTIVITIES" means the retail sale of propane to end users
within the continental United States in the manner engaged in by Ferrellgas
immediately prior to the Closing Date.
"SECOND LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term
in Section 5.1(c)(i)(E).
"SECOND TARGET DISTRIBUTION" means $0.63 per Unit (or, with respect to
the period commencing on the Closing Date and ending on October 31, 1994,
the product of $0.63 multiplied by a fraction of which the numerator is
equal to the number of days in such period and of which the denominator is
92), subject to adjustment in accordance with Sections 5.6 and 9.6.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
supplemented or restated from time to time and any successor to such
statute.
"SPECIAL APPROVAL" means approval by the Audit Committee.
"SPECIAL LIMITED PARTNER" means each holder of an IDR.
"SPECIAL LIMITED PARTNERS BOOK CAPITAL" means, as of any date of
determination, the amount equal to the sum of the balances of the Capital
Accounts of all the Special Limited Partners, determined pursuant to
Section 4.5 (prior to any adjustment pursuant to Section 4.5(d) arising
upon the present event requiring a valuation of the Partnership's assets).
"SUBORDINATED UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement.
"SUBORDINATION PERIOD" means the period commencing on the Closing Date
and ending on the first to occur of the following dates:
(a) the first day of any Quarter commencing on or after August 1,
1999, provided that each of the following two tests have been
satisfied:
(i) the Partnership has, with respect to each of the three
consecutive four-Quarter periods immediately preceding such date,
made distributions of Available Cash constituting Cash from
Operations in an amount equal to or greater than the Minimum
Quarterly Distribution on each Common Unit and Subordinated Unit
Outstanding for such periods; provided, however, that in determining
the amount of Available Cash constituting Cash from Operations
distributed in any four-Quarter period the following amounts shall
not be included: (A) any positive balance in Cash from Operations at
the beginning of such four-Quarter period, (B) any net increase in
working capital borrowings in such four-Quarter period and (C) any
net decrease in reserves in such four-Quarter period; and
(ii) as of such date, the Partnership and the Operating
Partnership, on a combined basis, have made, directly or indirectly,
cash capital expenditures attributable to Acquisitions and Capital
Additions and Improvements since the Closing Date which equal or
exceed $50 million; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by Limited Partners
under circumstances where Cause does not exist.
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"SUBSIDIARY" means, with respect to any Person, (i) a corporation of
which more than 50% of the voting power of shares of Capital Interests
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors or other governing body of such corporation is
owned, directly or indirectly, by such Person, by one or more Subsidiaries
of such Person, or a combination thereof, (ii) a partnership (whether
general or limited) in which such Person or a Subsidiary of such Person is,
at the date of determination, a general or limited partner of such
partnership, but only if more than 50% of the Capital Interests of such
partnership (considering all of the Capital Interests of the partnership as
a single class) is owned or controlled, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person, or a combination
thereof, or (iii) any other Person (other than a corporation or a
partnership) in which such Person, directly or indirectly, at the date of
determination, has (x) at least a majority ownership interest or (y) the
power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 12.2 in place of and with
all the rights of a Limited Partner and who is shown as a Limited Partner
on the books and records of the Partnership.
"SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in
Section 16.2(b).
"TERMINATION CAPITAL TRANSACTIONS" means any sale, transfer or other
disposition of property of the Partnership or the Operating Partnership
occurring upon or incident to the liquidation and winding up of the
Partnership and the Operating Partnership pursuant to Article XIV.
"THIRD TARGET DISTRIBUTION" means $0.82 per Unit (or, with respect to the
period commencing on the Closing Date and ending on October 31, 1994, the
product of $0.82 multiplied by a fraction of which the numerator is equal
to the number of days in such period and of which the denominator is 92),
subject to adjustment in accordance with Sections 5.6 and 9.6.
"TRADING DAY" has the meaning assigned to such term in Section 17.1(a).
"TRANSFER" has the meaning assigned to such term in Section 11.1(a).
"TRANSFER AGENT" means such bank, trust company or other Person
(including, without limitation, the General Partner or one of its
Affiliates) as shall be appointed from time to time by the Partnership to
act as registrar and transfer agent for the Units.
"TRANSFER APPLICATION" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"UNDERWRITER" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement dated June 27,
1994, among the Underwriters, the Partnership, the General Partner and
Ferrell providing for the purchase of Common Units by such Underwriters.
"UNIT" means a Partnership Interest of a Limited Partner or Assignee in
the Partnership representing a fractional part of the Partnership Interests
of all Limited Partners and Assignees and shall include, without
limitation, Common Units and Subordinated Units; provided, that each Common
Unit at any time Outstanding shall represent the same fractional part of
the Partnership Interests of all Limited Partners and Assignees holding
Common Units as each other Common Unit and each Subordinated Unit at any
time Outstanding shall represent the same fractional part of the
Partnership Interests of all Limited Partners and Assignees holding
Subordinated Units as each other Subordinated Unit.
"UNPAID MQD" has the meaning assigned to such term in Section
5.1(c)(i)(B).
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"UNREALIZED GAIN" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 4.5(d))
over (b) the Carrying Value of such property as of such date (prior to any
adjustment to be made pursuant to Section 4.5(d) as of such date).
"UNREALIZED LOSS" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying
Value of such property as of such date (prior to any adjustment to be made
pursuant to Section 4.5(d) as of such date) over (b) the fair market value
of such property as of such date (as determined under Section 4.5(d)).
"UNRECOVERED INITIAL UNIT PRICE" means, at any time, with respect to a
class or series of Units (other than Subordinated Units), the price per
Unit at which such class or series of Units was initially offered to the
public for sale by the underwriters in respect of such offering, as
determined by the General Partner, less the sum of all distributions
theretofore made in respect of a Unit of such class or series that was sold
in the initial offering of Units of said class or series constituting Cash
from Interim Capital Transactions and any distributions of cash (or the Net
Agreed Value of any distributions in kind) in connection with the
dissolution and liquidation of the Partnership theretofore made in respect
of a Unit of such class or series that was sold in the initial offering of
Units of such class or series, adjusted as the General Partner determines
to be appropriate to give effect to any distribution, subdivision or
combination of Units.
"UNRECOVERED SUBORDINATED UNIT CAPITAL" means, at any time, with respect
to a Subordinated Unit, prior to its conversion into a Common Unit pursuant
to Sections 5.7(b) and (c), the excess, if any, of (a) the Net Agreed Value
(at the time of conveyance) of the undivided interest in the Contributed
Property conveyed to the Partnership pursuant to Section 4.2 in exchange
for such Subordinated Unit, over (b) any distributions of cash (or the Net
Agreed Value of any distributions in kind) in connection with the
dissolution and liquidation of the Partnership, adjusted as the General
Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Subordinated Units.
"WITHDRAWAL OPINION OF COUNSEL" has the meaning assigned to such term in
Section 13.1(b).
ARTICLE III
PURPOSE
3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be
conducted by the Partnership shall be (a) to serve as a limited partner in the
Operating Partnership and, in connection therewith, to exercise all of the
rights and powers conferred upon the Partnership as a limited partner in the
Operating Partnership pursuant to the Operating Partnership Agreement or
otherwise, (b) to engage directly in, or to enter into or form any
corporation, partnership, joint venture, limited liability company or other
arrangement to engage in, any business activity that the Operating Partnership
is permitted to engage in by the Operating Partnership Agreement and, in
connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity,
(c) to engage directly in, or to enter into or form any corporation,
partnership, joint venture, limited liability company or other arrangement to
engage in, any business activity that is approved by the General Partner and
which lawfully may be conducted by a limited partnership organized pursuant to
the Delaware Act and, in connection therewith, to exercise all of the rights
and powers conferred upon the Partnership pursuant to the agreements relating
to such business activity, and (d) to do anything necessary or appropriate to
the foregoing, including, without limitation, the making of capital
contributions or loans to the Operating Partnership. The General Partner has
no obligation or duty to the Partnership, the Limited Partners, the Special
Limited Partners or the Assignees to propose or approve, and in its sole
discretion may decline to propose or approve, the conduct by the Partnership
of any business.
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3.2 POWERS. The Partnership shall be empowered to do any and all acts and
things necessary, appropriate, proper, advisable, incidental to or convenient
for the furtherance and accomplishment of the purposes and business described
in Section 3.1 and for the protection and benefit of the Partnership.
ARTICLE IV
CAPITAL CONTRIBUTIONS
4.1 INITIAL CONTRIBUTIONS; RETURN OF INITIAL CONTRIBUTIONS. (a) In
connection with the formation of the Partnership under the Delaware Act, the
General Partner has made an initial Capital Contribution to the Partnership in
the amount of $10 for an interest in the Partnership and has been admitted as
the general partner of the Partnership, and the Organizational Limited Partner
has made a Capital Contribution to the Partnership in the amount of $990 for
an interest in the Partnership and has been admitted as a limited partner of
the Partnership.
(b) As of the Closing Date, after giving effect to the transactions
contemplated by Section 4.2 and the admission to the Partnership of the
Initial Limited Partners in accordance with this Agreement, the interest of
the Organizational Limited Partner shall be terminated, the $10 Capital
Contribution by the General Partner and the $990 Capital Contribution by the
Organizational Limited Partner as initial Capital Contributions shall be
refunded and the Organizational Limited Partner shall cease to be a Limited
Partner of the Partnership. Ninety-nine percent of any interest or other
profit that may have resulted from the investment or other use of such initial
Capital Contributions shall be allocated and distributed to the Organizational
Limited Partner, and the balance thereof shall be allocated and distributed to
the General Partner.
4.2 CONTRIBUTIONS BY THE GENERAL PARTNER AND THE INITIAL LIMITED PARTNERS.
(a) On the Closing Date, the General Partner shall, as set forth in the
Contribution Agreement, contribute, transfer, convey, assign and deliver to
the Partnership, as a Capital Contribution, a limited partner interest in the
Operating Partnership which, together with the Partnership Interest (as
defined in the Operating Partnership Agreement) previously held by the
Partnership, will represent a 98.9899% Percentage Interest (as defined in the
Operating Partnership Agreement) in the Operating Partnership, in exchange for
(i) the continuation of its Partnership Interest as general partner in the
Partnership, subject to all of the rights, privileges and duties of the
General Partner under this Agreement, (ii) 1,000,000 Common Units and
16,593,721 Subordinated Units and (iii) the IDRs.
(b) Subject to completion of the Capital Contributions referred to in
Section 4.2(a), on the Closing Date, each Underwriter shall contribute and
deliver to the Partnership cash in an amount equal to the Issue Price per
Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the "First
Closing Date", as such term is defined in the Underwriting Agreement. In
exchange for such Capital Contribution by the Underwriters, the Partnership
shall issue Common Units to each Underwriter on whose behalf such Capital
Contribution is made in an amount equal to the quotient obtained by dividing
(X) the cash contribution to the Partnership by or on behalf of such
Underwriter by (Y) the Issue Price per Common Unit.
4.3 ISSUANCES OF ADDITIONAL UNITS AND OTHER SECURITIES. (a) Subject to
Section 4.3(c), the General Partner is hereby authorized to cause the
Partnership to issue, in addition to the Partnership Interests and Units
issued pursuant to Sections 4.1 and 4.2, such additional Units, or classes or
series thereof, or options, rights, warrants or appreciation rights relating
thereto, or any other type of equity security that the Partnership may
lawfully issue, any unsecured or secured debt obligations of the Partnership
convertible into any class or series of equity securities of the Partnership
(collectively, "PARTNERSHIP SECURITIES"), for any Partnership purpose, at any
time or from time to time, to the Partners or to other Persons for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion, all without the approval of any
Limited Partners. The General Partner shall have sole discretion, subject to
the guidelines set forth in this
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Section 4.3 and the requirements of the Delaware Act, in determining the
consideration and terms and conditions with respect to any future issuance of
Partnership Securities.
(b) Additional Partnership Securities to be issued by the Partnership
pursuant to this Section 4.3 shall be issuable from time to time in one or
more classes, or one or more series of any of such classes, with such
designations, preferences and relative, participating, optional or other
special rights, powers and duties, including, without limitation, rights,
powers and duties senior to existing classes and series of Partnership
Securities (except as provided in Section 4.3(c)), all as shall be fixed by
the General Partner in the exercise of its sole discretion, subject to
Delaware law and Section 4.3(c), including, without limitation, (i) the
allocations of items of Partnership income, gain, loss, deduction and credit
to each such class or series of Partnership Securities; (ii) the right of each
such class or series of Partnership Securities to share in Partnership
distributions; (iii) the rights of each such class or series of Partnership
Securities upon dissolution and liquidation of the Partnership; (iv) whether
such class or series of additional Partnership Securities is redeemable by the
Partnership and, if so, the price at which, and the terms and conditions upon
which, such class or series of additional Partnership Securities may be
redeemed by the Partnership; (v) whether such class or series of additional
Partnership Securities is issued with the privilege of conversion and, if so,
the rate at which, and the terms and conditions upon which, such class or
series of Partnership Securities may be converted into any other class or
series of Partnership Securities or other property; (vi) the terms and
conditions upon which each such class or series of Partnership Securities will
be issued, evidenced by certificates and assigned or transferred; and (vii)
the right, if any, of each such class or series of Partnership Securities to
vote on Partnership matters, including, without limitation, matters relating
to the relative rights, preferences and privileges of each such class or
series.
(c) Notwithstanding the terms of Sections 4.3(a) and 4.3(b), the issuance by
the Partnership of any Partnership Securities pursuant to this Section 4.3
shall be subject to the following restrictions and limitations:
(i) During the Subordination Period, the Partnership shall not issue an
aggregate of more than 7,000,000 additional Common Units (excluding Common
Units issued in connection with the exercise of the Overallotment Option
and Common Units issued upon conversion of Subordinated Units pursuant to
Section 5.7(b)) or an equivalent amount of other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units,
without the prior approval of two-thirds of the Outstanding Common Units;
provided, however, that in addition to such Units the Partnership may also
issue an unlimited amount of additional Common Units or other Partnership
Securities having rights to distribution or in liquidation ranking on a
parity with the Common Units prior to the end of the Subordination Period
and without the approval of the Unitholders if (A) such issuance occurs in
connection with or (B) within 270 days of, and the net proceeds from the
issuance of such Common Units or other Partnership Securities are used to
repay debt incurred in connection with, an Acquisition or a Capital
Addition and Improvement involving properties and assets that would have,
if acquired by the Partnership as of the date that is one year prior to the
first day of the Quarter in which such Acquisition is to be consummated or
such Capital Addition and Improvement is to be completed, resulted in an
increase in (1) the amount of Available Cash constituting Cash from
Operations generated by the Partnership on a per-Unit basis (for all
Outstanding Units) with respect to each of the four most recently completed
Quarters (determined on a pro forma basis assuming that (w) all of the
Common Units or other Partnership Securities to be issued in connection
with or within 270 days of such Acquisition or Capital Addition and
Improvement had been issued and outstanding, and (x) all indebtedness for
borrowed money to be incurred or assumed in connection with such
Acquisition or Capital Addition and Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such offering) had
been incurred or assumed, in each case as of the commencement of such four-
Quarter period), and computing expenses that would have been incurred by
the Partnership in the operation of the assets and properties acquired by
including (y) the personnel
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expenses for employees to be retained by the Partnership in the operation
of the assets and properties acquired and (z) the non-personnel costs and
expenses on the same basis as those incurred by the Partnership in the
operation of the Partnership's business at similarly situated Partnership
facilities) over (2) the actual amount of Available Cash constituting Cash
from Operations generated by the Partnership on a per-Unit basis (for all
Outstanding Units) with respect to each of such four Quarters; and
(ii) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of two-thirds of the Outstanding Common Units; and
(iii) Upon the issuance of any Partnership Interests by the Partnership
or the making of any other Capital Contributions to the Partnership, the
General Partner shall be required to make additional Capital Contributions
to the Partnership in an amount equal to 1.01% of the additional Capital
Contribution then made by a Person other than the General Partner.
(d) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with each
issuance of Units, IDRs or other Partnership Securities pursuant to Section
4.3(a) and to amend this Agreement in any manner that it deems necessary or
appropriate to provide for each such issuance, to admit Additional Limited
Partners in connection therewith and to specify the relative rights, powers
and duties of the holders of the Units, IDRs or other Partnership Securities
being so issued.
(e) The General Partner shall do all things necessary to comply with the
Delaware Act and is authorized and directed to do all things it deems to be
necessary or advisable in connection with any future issuance of Partnership
Securities, including, without limitation, compliance with any statute, rule,
regulation or guideline of any federal, state or other governmental agency or
any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
4.4 LIMITED PREEMPTIVE RIGHTS. Except as provided in this Section 4.4, no
Person shall have any preemptive, preferential or other similar right with
respect to (a) additional Capital Contributions; (b) issuance or sale of any
class or series of Units, IDRs or other Partnership Securities, whether
unissued, held in the treasury or hereafter created; (c) issuance of any
obligations, evidences of indebtedness or other securities of the Partnership
convertible into or exchangeable for, or carrying or accompanied by any rights
to receive, purchase or subscribe to, any such Units, IDRs or other
Partnership Securities; (d) issuance of any right of subscription to or right
to receive, or any warrant or option for the purchase of, any such Units, IDRs
or other Partnership Securities; or (e) issuance or sale of any other
securities that may be issued or sold by the Partnership. The General Partner
shall have the right, which it may from time to time assign in whole or in
part to any of its Affiliates, to purchase Units, IDRs or other Partnership
Securities from the Partnership whenever, and on the same terms that, the
Partnership issues Units, IDRs or other Partnership Securities to Persons
other than the General Partner and its Affiliates, to the extent necessary to
maintain the Percentage Interests of the General Partner and its Affiliates
equal to that which existed immediately prior to the issuance of such Units,
IDRs or other Partnership Securities.
4.5 CAPITAL ACCOUNTS. (a) The Partnership shall maintain for each Partner
(or a beneficial owner of Units held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable to
the General Partner in its sole discretion) owning a Partnership Interest a
separate Capital Account with respect to such Partnership Interest in
accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions made to the Partnership with respect to such Partnership
Interest pursuant to this Agreement and (ii) all items of Partnership income
and gain (including, without limitation, income and gain exempt from tax)
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computed in accordance with Section 4.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 5.1, and decreased by (x) the amount
of cash or Net Agreed Value of all actual and deemed distributions of cash or
property made with respect to such Partnership Interest pursuant to this
Agreement and (y) all items of Partnership deduction and loss computed in
accordance with Section 4.5(b) and allocated with respect to such Partnership
Interest pursuant to Section 5.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of any such item shall be the
same as its determination, recognition and classification for federal income
tax purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 4.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreements) of all property owned by the Operating Partnership.
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 5.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
4.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
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(c) (i) Except as otherwise provided in Section 4.5(c)(ii), a transferee
of a Partnership Interest shall succeed to a pro rata portion of the
Capital Account of the transferor relating to the Partnership Interest so
transferred; provided, however, that, if the transfer causes a termination
of the Partnership under Section 708(b)(1)(B) of the Code, the
Partnership's properties shall be deemed to have been distributed in
liquidation of the Partnership to the Partners (including any transferee of
a Partnership Interest that is a party to the transfer causing such
termination) pursuant to Sections 14.3 and 14.4 and recontributed by such
Partners in reconstitution of the Partnership. Any such deemed distribution
shall be treated as an actual distribution for purposes of this Section
4.5. In such event, the Carrying Values of the Partnership properties shall
be adjusted immediately prior to such deemed distribution pursuant to
Section 4.5(d)(ii) and such Carrying Values shall then constitute the
Agreed Values of such properties upon such deemed contribution to the
reconstituted Partnership. The Capital Accounts of such reconstituted
Partnership shall be maintained in accordance with the principles of this
Section 4.5.
(ii) Immediately prior to the conversion of a Subordinated Unit into a
Common Unit pursuant to Sections 5.7(b) or (c) or the sale, exchange or
other disposition of a Subordinated Unit by a holder thereof, the Capital
Account maintained for such Person with respect to its Subordinated Units
will (A) first, be allocated to the Subordinated Units to be converted or
transferred,as the case may be, in an amount equal to the product of (x)
the number of such Subordinated Units to be converted or transferred,as the
case may be, and (y) the Per Unit Capital Amount for a Common Unit, and (B)
second, any remaining balance in such Capital Account will be retained by
the transferor, regardless of whether it has retained any Subordinated
Units. Following any such allocation, the transferor's Capital Account, if
any, maintained with respect to the retained Subordinated Units, if any,
will have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with respect
to the transferred Subordinated Units will have a balance equal to the
amount allocated under clause (A) hereinabove.
(d) (i) Consistent with the provisions of Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Units for cash or
Contributed Property or the conversion of the General Partner's Partnership
Interest to Common Units pursuant to Section 13.3(b), the Capital Account
of all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as if such Unrealized Gain or Unrealized Loss had
been recognized on an actual sale of each such property immediately prior
to such issuance and had been allocated to the Partners at such time
pursuant to Sections 5.1(a) and 5.1(b). In determining such Unrealized Gain
or Unrealized Loss, the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to the issuance of additional Units shall be
determined by the General Partner using such reasonable method of valuation
as it may adopt; provided, however, the General Partner, in arriving at
such valuation, must take fully into account the fair market value of the
Partnership Interests of all Partners at such time. The General Partner
shall allocate such aggregate value among the assets of the Partnership (in
such manner as it determines in its sole discretion to be reasonable) to
arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts
of all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized
Loss attributable to such Partnership property, as if such Unrealized Gain
or Unrealized Loss had been recognized in a sale of such property
immediately prior to such distribution for an amount equal to its fair
market value, and had been allocated to the Partners, at such time,
pursuant to Section 5.1. Any Unrealized Gain or
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Unrealized Loss attributable to such property shall be allocated in the
same manner as Net Termination Gain or Net Termination Loss pursuant to
Section 5.1(c); provided, however, that, in making any such allocation, Net
Termination Gain or Net Termination Loss actually realized shall be
allocated first. In determining such Unrealized Gain or Unrealized Loss the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior
to a distribution shall (A) in the case of a deemed distribution occurring
as a result of a termination of the Partnership pursuant to Section 708 of
the Code, be determined and allocated in the same manner as that provided
in Section 4.5(d)(i) or (B) in the case of a liquidating distribution
pursuant to Section 14.3 or 14.4, be determined and allocated by the
Liquidator using such reasonable method of valuation as it may adopt.
4.6 INTEREST. No interest shall be paid by the Partnership on Capital
Contributions or on balances in Partners' Capital Accounts.
4.7 NO WITHDRAWAL. No Partner shall be entitled to withdraw any part of its
Capital Contributions or its Capital Account or to receive any distribution
from the Partnership, except as provided in Section 4.1, and Articles V, VII,
XIII and XIV.
4.8 LOANS FROM PARTNERS. Loans by a Partner to the Partnership shall not
constitute Capital Contributions. If any Partner shall advance funds to the
Partnership in excess of the amounts required hereunder to be contributed by
it to the capital of the Partnership, the making of such excess advances shall
not result in any increase in the amount of the Capital Account of such
Partner. The amount of any such excess advances shall be a debt obligation of
the Partnership to such Partner and shall be payable or collectible only out
of the Partnership assets in accordance with the terms and conditions upon
which such advances are made.
4.9 NO FRACTIONAL UNITS. No fractional Units shall be issued by the
Partnership.
4.10 SPLITS AND COMBINATIONS. (a) Subject to Section 4.10(d), the General
Partner may make a pro rata distribution of Units or other Partnership
Securities to all Record Holders or may effect a subdivision or combination of
Units or other Partnership Securities; provided, however, that after any such
distribution, subdivision or combination, each Partner shall have the same
Percentage Interest in the Partnership as before such distribution,
subdivision or combination.
(b) Whenever such a distribution, subdivision or combination of Units or
other Partnership Securities is declared, the General Partner shall select a
Record Date as of which the distribution, subdivision or combination shall be
effective and shall send notice of the distribution, subdivision or
combination at least 20 days prior to such Record Date to each Record Holder
as of the date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants
selected by it to calculate the number of Units to be held by each Record
Holder after giving effect to such distribution, subdivision or combination.
The General Partner shall be entitled to rely on any certificate provided by
such firm as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination,
the General Partner may cause Certificates to be issued to the Record Holders
of Units as of the applicable Record Date representing the new number of Units
held by such Record Holders, or the General Partner may adopt such other
procedures as it may deem appropriate to reflect such distribution,
subdivision or combination; provided, however, if any such distribution,
subdivision or combination results in a smaller total number of Units
Outstanding, the General Partner shall require, as a condition to the delivery
to a Record Holder of such new Certificate, the surrender of any Certificate
held by such Record Holder immediately prior to such Record Date.
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(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 4.9 and this Section 4.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
5.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES. For purposes of maintaining
the Capital Accounts and in determining the rights of the Partners among
themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 4.5(b)) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided hereinbelow.
(a) Net Income. After giving effect to the special allocations set forth
in Section 5.1(d), Net Income for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Income
for such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 5.1(a)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 5.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the
aggregate Net Income allocated to such Partners pursuant to this
Section 5.1(a)(ii) for the current taxable year and all previous
taxable years is equal to the aggregate Net Losses allocated to such
Partners pursuant to Section 5.1(b)(ii) for all previous taxable years;
and
(iii) Third, the balance, if any, 100% to the General Partner and the
Limited Partners in accordance with their respective Percentage
Interests.
(b) Net Losses. After giving effect to the special allocations set forth
in Section 5.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 5.1(b)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
5.1(a)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners in
accordance with their respective Percentage Interests; provided, that
Net Losses shall not be allocated pursuant to this Section 5.1(b)(ii)
to the extent that such allocation would cause any Limited Partner to
have a deficit balance in its Adjusted Capital Account at the end of
such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account); and
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 5.1(d), all items of income gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 5.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations
provided under this Section 5.1 and after all distributions of Available
Cash provided under Section 5.4 have been made with respect to the taxable
period ending on the date of the Partnership's liquidation pursuant to
Section 14.3.
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(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.5(d)) from Termination Capital Transactions, such
Net Termination Gain shall be allocated among the General Partner, the
Limited Partners and the Special Limited Partners in the following
manner (and the Adjusted Capital Accounts of the Partners shall be
increased by the amount so allocated in each of the following
subclauses, in the order listed, before an allocation is made pursuant
to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its
Adjusted Capital Account, in the proportion that such deficit
balance bears to the total deficit balances in the Adjusted Capital
Accounts of all Partners, until each such Partner has been allocated
Net Termination Gain equal to any such deficit balance in its
Adjusted Capital Account;
(B) Second, 99% to all Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the
General Partner until the Adjusted Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Initial Unit Price plus (2) the Minimum Quarterly
Distribution for the Quarter during which such Net Termination Gain
is recognized, reduced by any distribution pursuant to Sections
5.4(a)(i) or (b)(i) with respect to such Common Unit for such
Quarter (the amount determined pursuant to this clause (2) is
hereinafter defined as the "UNPAID MQD") plus (3) any then existing
Cumulative Common Unit Arrearage with respect to a Common Unit sold
by the Underwriters on the Closing Date;
(C) Third, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination
Period, 99% to the Limited Partners holding Subordinated Units, in
the proportion that the total number of Subordinated Units held by
each such Limited Partner bears to the total number of Subordinated
Units then Outstanding, and 1% to the General Partner, in the amount
which will increase the Adjusted Capital Account of each such
Limited Partner maintained with respect to such Subordinated Units
to that amount which equals the sum of (1) the Unrecovered
Subordinated Unit Capital attributable to such Subordinated Units,
determined for the taxable year (or portion thereof) to which this
allocation of gain relates plus (2) the Minimum Quarterly
Distribution for the Quarter during which such Net Termination Gain
is recognized, reduced by any distribution pursuant to Section
5.4(a)(iii) with respect to such Subordinated Unit for such Quarter;
(D) Fourth, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner until
the Adjusted Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Initial Unit
Price, plus (2) the Unpaid MQD, if any, for such Common Unit with
respect to the Quarter during which such Net Termination Gain is
recognized, plus (3) any then existing Cumulative Common Unit
Arrearage with respect to a Common Unit sold by the Underwriters on
the Closing Date, plus (4) the excess of (aa) the First Target
Distribution less the Minimum Quarterly Distribution for each
Quarter of the Partnership's existence over (bb) the amount of any
distributions of Cash from Operations that was distributed pursuant
to Sections 5.4(a)(iv) or 5.4 (b)(ii) (the sum of (1) plus (2) plus
(3) plus (4) is hereinafter defined as the "FIRST LIQUIDATION TARGET
AMOUNT");
(E) Fifth, 85.8673% to all Limited Partners, in accordance with
their relative Percentage Interests, and 13.1327% to the Special
Limited Partners, pro rata, and 1% to the General Partner until the
Adjusted Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution
less the First Target Distribution for each Quarter of the
Partnership's existence over (bb) the amount of any distributions of
Cash from Operations that was distributed pursuant to Section
5.4(a)(v) or 5.4(b)(iii) (the sum of (1) plus (2) is hereinafter
defined as the "SECOND LIQUIDATION TARGET AMOUNT");
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(F) Sixth, 75.7653% to all Limited Partners, in accordance with
their relative Percentage Interests, and 23.2347% to the Special
Limited Partners, pro rata, and 1% to the General Partner until the
Adjusted Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution
less the Second Target Distribution for each Quarter of the
Partnership's existence over (bb) the amount of any distributions of
Cash from Operations that was distributed pursuant to Section
5.4(a)(vi) or 5.4(b)(iv); and
(G) Finally, any remaining amount 50.5102% to all Limited
Partners, in accordance with their relative Percentage Interests,
and 48.4898% to the Special Limited Partners, pro rata, and 1% to
the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 4.5(d)) from Termination Capital Transactions, such
Net Termination Loss shall be allocated to the Partners in the
following manner:
(A) First, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the conversion of the last outstanding
Subordinated Unit, 99% to the Partners holding Subordinated Units,
in proportion that the total number of Subordinated Units held by
each such Limited Partner bears to the total number of Subordinated
Units then Outstanding, and 1% to the General Partner, until the
Adjusted Capital Account in respect of each Subordinated Unit then
Outstanding has been reduced to zero;
(B) Second, 99% to all Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the
General Partner, until the Adjusted Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 5.1, the following special allocations shall be made for such
taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 5.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period, each
Partner shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-
2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes
of this Section 5.1(d), each Partner's Adjusted Capital Account balance
shall be determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any other
allocations pursuant to this Section 5.1(d) with respect to such
taxable period (other than an allocation pursuant to Sections
5.1(d)(vi) and 5.1(d)(vii)). This Section 5.1(d)(i) is intended to
comply with the Partnership Minimum Gain chargeback requirement in
Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain.
Notwithstanding the other provisions of this Section 5.1 (other than
Section 5.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain
for such period (and, if necessary, subsequent periods) in the manner
and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 5.1(d), each Partner's Adjusted Capital Account balance shall
be determined, and the allocation of income or gain required hereunder
shall be effected, prior to the application of any other allocations
pursuant
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to this Section 5.1(d), other than Section 5.1(d)(i) and other than an
allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii), with
respect to such taxable period. This Section 5.1(d)(ii) is intended to
comply with the chargeback of items of income and gain requirement in
Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.
(iii) Priority Allocations. If the amount of cash or the Net Agreed
Value of any property distributed (except cash or property distributed
pursuant to Section 14.3 or 14.4) to any Limited Partner with respect
to a taxable year is greater (on a per Unit basis) than the amount of
cash or the Net Agreed Value of property distributed to the other
Limited Partners (on a per Unit basis), then (1) each Limited Partner
receiving such greater cash or property distribution shall be allocated
gross income in an amount equal to the product of (aa) the amount by
which the distribution (on a per Unit basis) to such Limited Partner
exceeds the distribution (on a per Unit basis) to the Limited Partners
receiving the smallest distribution and (bb) the number of Units owned
by the Limited Partner receiving the greater distribution; and (2) the
General Partner shall be allocated gross income in an aggregate amount
equal to 1/99 of the sum of the amounts allocated in clause (1) above.
All or a portion of the remaining items of Partnership gross income or
gain for the taxable period, if any, shall be allocated 100% to the
Special Limited Partners, pro rata, until the aggregate amount of such
items allocated to the Special Limited Partners, pro rata, under this
paragraph (iii) for the current taxable period and all previous taxable
periods is equal to the cumulative amount of cash distributed to the
Special Limited Partners, pro rata, from the Closing Date through the
end of such taxable period.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specifically allocated to such Partner in an
amount and manner sufficient to eliminate, to the extent required by
the Treasury Regulations promulgated under Section 704(b) of the Code,
the deficit balance, if any, in its Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible
unless such deficit balance is otherwise eliminated pursuant to Section
5.1(d)(i) or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Adjusted Capital Account at the end of any Partnership
taxable period, such Partner shall be specially allocated items of
Partnership gross income and gain in the amount of such excess as
quickly as possible; provided, that an allocation pursuant to this
Section 5.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Adjusted Capital Account
after all other allocations provided for in this Section 5.1 have been
tentatively made as if this Section 5.1(d)(v) were not in this
Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in
its good faith discretion that the Partnership's Nonrecourse Deductions
must be allocated in a different ratio to satisfy the safe harbor
requirements of the Treasury Regulations promulgated under Section
704(b) of the Code, the General Partner is authorized, upon notice to
the Limited Partners, to revise the prescribed ratio to the numerically
closest ratio that does satisfy such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that
bears the Economic Risk of Loss with respect to the Partner Nonrecourse
Debt to which such Partner Nonrecourse Deductions are attributable in
accordance with Treasury Regulation Section 1.704-2(i). If more than
one Partner bears the Economic Risk of Loss with respect to a Partner
Nonrecourse Debt, such Partner Nonrecourse Deductions attributable
thereto shall be allocated between or among such Partners in accordance
with the ratios in which they share such Economic Risk of Loss.
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(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities
of the Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-
in Gain shall be allocated among the Partners in accordance with their
respective Percentage Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b)
or 743(b) of the Code is required, pursuant to Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital Accounts
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis),
and such item of gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such Section of the
Treasury regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of
the Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, if any, shall
be allocated 100% to each Partner holding Subordinated Units in the
proportion of the number of Subordinated Units held by such Partner to
the total number of Subordinated Units then Outstanding, until each
such Partner has been allocated an amount of gross income or gain which
increases the Capital Account maintained with respect to such
Subordinated Units to an amount equal to the product of (A) the number
of Subordinated Units held by such Partner and (B) the Per Unit Capital
Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying
Subordinated Units and the Capital Accounts underlying Common Units
held by Persons other than the General Partner and its Affiliates
immediately prior to the conversion of such Subordinated Units into
Common Units. This allocation method for establishing such economic
uniformity will only be available to the General Partner if the method
for allocating the Capital Account maintained with respect to the
Subordinated Units between the transferred and retained Subordinated
Units pursuant to Section 4.5(c)(ii) does not otherwise provide such
economic uniformity to the Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 5.1, other
than the Required Allocations, the Required Allocations shall be
taken into account in making the Agreed Allocations so that, to the
extent possible, the net amount of items of income, gain, loss and
deduction allocated to each Partner pursuant to the Required
Allocations and the Agreed Allocations, together, shall be equal to
the net amount of such items that would have been allocated to each
such Partner under the Agreed Allocations had the Required
Allocations and the related Curative Allocation not otherwise been
provided in this Section 5.1. Notwithstanding the preceding
sentence, Required Allocations relating to (1) Nonrecourse
Deductions shall not be taken into account except to the extent that
there has been a decrease in Partnership Minimum Gain and (2)
Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
5.1(d)(xi)(A) shall only be made with respect to Required
Allocations to the extent the General Partner reasonably determines
that such allocations will otherwise be inconsistent with the
economic agreement among the Partners. Further, allocations pursuant
to this Section 5.1(d)(xi)(A) shall be deferred with respect to
allocations pursuant to clauses (1) and (2) hereof to the extent the
General Partner reasonably determines that such allocations are
likely to be offset by subsequent Required Allocations.
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(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of
Section 5.1(d)(xi)(A) in whatever order is most likely to minimize
the economic distortions that might otherwise result from the
Required Allocations, and (2) divide all allocations pursuant to
Section 5.1(d)(xi)(A) among the Partners in a manner that is likely
to minimize such economic distortions.
(xii) Retirement of Assumed Indebtedness. All losses or deductions
attributable to premiums, consent fees, or other expenditures
incurred by the Partnership to retire indebtedness assumed from the
General Partner pursuant to the Contribution Agreement shall be
allocated to the General Partner.
(xiii) First Year Allocation. Net Income or Net Loss of the
Partnership for the period beginning on the Closing Date and ending
on the last day of the taxable year of the Partnership that includes
the Closing Date shall be allocated 100% to the General Partner. For
the immediately succeeding taxable year of the Partnership, items of
income or gain (if the allocation in the prior year was an
allocation of Net Income) or items of loss and deduction (if the
allocation in the prior year was an allocation of Net Loss) shall be
allocated 100% to the Limited Partners, in accordance with their
Percentage Interests, in an amount equal to 99% of the Net Income or
Net Loss allocated to the General Partner in the prior taxable year.
5.2 ALLOCATIONS FOR TAX PURPOSES. (a) Except as otherwise provided herein,
for federal income tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its correlative
item of "book" income, gain, loss or deduction is allocated pursuant to
Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) except as otherwise provided in Section 5.2(b)(iii),
any item of Residual Gain or Residual Loss attributable to a Contributed
Property shall be allocated among the Partners in the same manner as its
correlative item of "book" gain or loss is allocated pursuant to Section
5.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1) first,
be allocated among the Partners in a manner consistent with the principles
of Section 704(c) of the Code to take into account the Unrealized Gain or
Unrealized Loss attributable to such property and the allocations thereof
pursuant to Section 4.5(d)(i) or (ii), and (2) second, in the event such
property was originally a Contributed Property, be allocated among the
Partners in a manner consistent with Section 5.2(b)(i)(A); and (B) except
as otherwise provided in Section 5.2(b)(iii), any item of Residual Gain or
Residual Loss attributable to an Adjusted Property shall be allocated among
the Partners in the same manner as its correlative item of "book" gain or
loss is allocated pursuant to Section 5.1.
(iii) The General Partner shall apply the principles of Temporary
Regulation Section 1.704-3T to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Units (or any class or classes thereof), the
General Partner shall have sole discretion to (i) adopt such conventions as it
deems appropriate in determining the amount of depreciation, amortization and
cost recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including, without limitation, gross income) or
deductions; and (iii) amend the provisions of this Agreement as
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appropriate (x) to reflect the proposal or promulgation of Treasury
regulations under Section 704(b) or Section 704(c) of the Code or (y)
otherwise to preserve or achieve uniformity of the Units (or any class or
classes thereof). The General Partner may adopt such conventions, make such
allocations and make such amendments to this Agreement as provided in this
Section 5.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Units issued and Outstanding or the Partnership, and if such
allocations are consistent with the principles of Section 704 of the Code.
(d) The General Partner in its sole discretion may determine to depreciate
or amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite the inconsistency
of such approach with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 of the Code. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers acquiring
Units in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the
uniformity of the intrinsic tax characteristics of any Units that would not
have a material adverse effect on the Limited Partners or the Record Holders
of any class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 5.2, be characterized as Recapture Income in the same proportions and
to the same extent as such Partners (or their predecessors in interest) have
been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to
any election under Section 754 of the Code which may be made by the
Partnership; provided, however, that such allocations, once made, shall be
adjusted as necessary or appropriate to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest of the General Partner or to transferred
Units shall, for federal income tax purposes, be determined on an annual basis
and prorated on a monthly basis and shall be allocated to the Partners as of
the opening of the New York Stock Exchange on the first Business Day of each
month; provided, however, that (i) if the Underwriter's Overallotment Option
is not exercised, such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Closing Date occurs shall be
allocated to Partners as of the opening of the New York Stock Exchange on the
first Business Day of the next succeeding month or (ii) if the Underwriters'
Overallotment Option is exercised, such items for the period beginning on the
Closing Date and ending on the last day of the month in which the Second Time
of Delivery (as defined in the Underwriting Agreement) occurs shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of the next succeeding month; and provided, further,
that gain or loss on a sale or other disposition of any assets of the
Partnership other than in the ordinary course of business shall be allocated
to the Partners as of the opening of the New York Stock Exchange on the first
Business Day of the month in which such gain or loss is recognized for federal
income tax purposes. The General Partner may revise, alter or otherwise modify
such methods of allocation as it determines necessary, to the extent permitted
or required by Section 706 of the Code and the regulations or rulings
promulgated thereunder.
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(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article V shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c)
of the Code or any other method acceptable to the General Partner in its sole
discretion.
5.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. (a) Within 45 days
following the end of (i) the period beginning on the Closing Date and ending
on October 31, 1994 and (ii) each Quarter commencing with the Quarter
beginning on November 1, 1994, an amount equal to 100% of Available Cash with
respect to such period or Quarter shall be distributed in accordance with this
Article V by the Partnership to the Partners, as of the Record Date selected
by the General Partner in its reasonable discretion. All amounts of Available
Cash distributed by the Partnership on any date from any source shall be
deemed to be Cash from Operations until the sum of all amounts of Available
Cash theretofore distributed by the Partnership to Partners pursuant to
Section 5.4 equals the aggregate amount of all Cash from Operations generated
by the Partnership since the Closing Date through the close of the immediately
preceding Quarter. Any remaining amounts of Available Cash distributed by the
Partnership on such date shall, except as otherwise provided in Section 5.5,
be deemed to be Cash from Interim Capital Transactions.
(b) Notwithstanding the definitions of Available Cash and Cash from
Operations contained herein, disbursements (including, without limitation,
contributions to the Operating Partnership or disbursements on behalf of the
Operating Partnership) made or cash reserves established, increased or reduced
after the end of any Quarter but on or before the date on which the
Partnership makes its distribution of Available Cash in respect of such
Quarter pursuant to Section 5.3(a) shall be deemed to have been made,
established, increased or reduced for purposes of determining Available Cash
and Cash from Operations, within such Quarter if the General Partner so
determines. Notwithstanding the foregoing, in the event of the dissolution and
liquidation of the Partnership, all proceeds of such liquidation shall be
applied and distributed in accordance with, and subject to the terms and
conditions of, Sections 14.3 and 14.4.
5.4 DISTRIBUTIONS OF CASH FROM OPERATIONS. (a) During Subordination Period.
Available Cash with respect to any Quarter within the Subordination Period
that is deemed to be Cash from Operations pursuant to the provisions of
Section 5.3 or 5.5 shall be distributed as follows, except as otherwise
required by Section 4.3(b) in respect of additional Partnership Securities
issued pursuant thereto:
(i) First, 99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) Second, 99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage,
if any, existing with respect to such Quarter;
(iii) Third, 99% to the Limited Partners holding Subordinated Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution;
(iv) Fourth, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the First Target Distribution over the Minimum
Quarterly Distribution;
(v) Fifth, 85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, 13.1327% to the Special Limited Partners,
pro rata, and 1% to the General Partner until
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there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Second Target Distribution over the First
Target Distribution;
(vi) Sixth, 75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, 23.2347% to the Special Limited Partners,
pro rata, and 1% to the General Partner until there has been distributed in
respect of each Unit then Outstanding an amount equal to the excess of the
Third Target Distribution over the Second Target Distribution; and
(vii) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, 48.4898% to the Special Limited
Partners, pro rata, and 1% to the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations with
respect to any Quarter will be made in accordance with Section 5.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Cash from Operations
pursuant to the provisions of Section 5.3 or 5.5 shall be distributed as
follows, except as otherwise required by Section 4.2(b) in respect of
additional Partnership Securities issued pursuant thereto:
(i) First, 99% to all Limited Partners, in accordance with their relative
Percentage Interests, and 1% to the General Partner until there has been
distributed in respect of each Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution;
(ii) Second, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the First Target Distribution over the Minimum
Quarterly Distribution;
(iii) Third, 85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, 13.1327% to the Special Limited Partners,
pro rata, and 1% to the General Partner until there has been distributed in
respect of each Unit then Outstanding an amount equal to the excess of the
Second Target Distribution over the First Target Distribution;
(iv) Fourth, 75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, 23.2347% to the Special Limited Partners,
pro rata, and 1% to the General Partner until there has been distributed in
respect of each Unit then Outstanding an amount equal to the excess of the
Third Target Distribution over the Second Target Distribution; and
(v) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, 48.4898% to the Special Limited
Partners, pro rata, and 1% to the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations with
respect to any Quarter will be made in accordance with Section 5.4(b)(v).
5.5 DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. Available Cash
that constitutes Cash from Interim Capital Transactions shall be distributed,
unless the provisions of Section 5.3 require otherwise, 99% to all Limited
Partners, in accordance with their relative Percentage Interests, and 1% to
the General Partner until a hypothetical holder of a Common Unit acquired on
the Closing Date has received with respect to such Common Unit, during the
period since the Closing Date through such date, distributions of Available
Cash that are deemed to be Cash from Interim Capital Transactions in an
aggregate amount equal to the Initial Unit Price. Thereafter, all Available
Cash shall be distributed as if it were Cash from Operations and shall be
distributed in accordance with Section 5.4.
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5.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS. (a) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution shall be
proportionately adjusted in the event of any distribution, combination or
subdivision (whether effected by a distribution payable in Units or otherwise)
of Units or other Partnership Securities in accordance with Section 4.10. In
the event of a distribution of Available Cash that is deemed to be Cash from
Interim Capital Transactions, the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution shall
be adjusted proportionately downward to equal the product obtained by
multiplying the otherwise applicable Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution and Third Target Distribution,
as the case may be, by a fraction of which the numerator is the Unrecovered
Initial Unit Price of the Common Units immediately after giving effect to such
distribution and of which the denominator is the Unrecovered Initial Unit
Price of the Common Units immediately prior to giving effect to such
distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 9.6.
5.7 SPECIAL PROVISIONS RELATING TO THE SUBORDINATED UNITS.
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common
Units and the right to participate in allocations of income, gain, loss and
deduction and distributions of cash made with respect to Common Units pursuant
to this Article V, the holder of a Subordinated Unit shall have all of the
rights and obligations of a Limited Partner holding Common Units hereunder;
provided, however, that immediately upon the end of the Subordination Period
or upon the conversion of Subordinated Units as provided in subparagraph (b)
below, the holder of a Subordinated Unit shall possess all of the rights and
obligations of a Limited Partner holding Common Units hereunder, including,
without limitation, the right to vote as a Common Unitholder, the right to
participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units pursuant to this
Article V (but such Subordinated Units shall remain subject to the provisions
of Sections 4.5(c)(ii) and 5.1(d)(x)).
(b) A total of 5,531,240 Subordinated Units will convert into Common Units
(subject to paragraph (c) immediately below) on the first day of any Quarter
commencing on or after August 1, 1997, provided that each of the following two
tests have been satisfied:
(i) the Partnership has, with respect to each of the two consecutive
four-Quarter periods immediately preceding such date, made distributions
of Available Cash constituting Cash from Operations on the Common Units
and the Subordinated Units in an amount equal to or greater than the
Minimum Quarterly Distribution on each Common Unit and Subordinated Unit
Outstanding for such periods; provided, however, that in determining the
amount of Available Cash constituting Cash from Operations distributed in
any four-Quarter period the following amounts shall not be included: (A)
any positive balance in Cash from Operations at the beginning of such
four-Quarter period, (B) any net increase in working capital borrowings
in such four-Quarter period and (C) any net decrease in reserves in such
four-Quarter period; and
(ii) the amount of Available Cash constituting Cash from Operations
generated by the Partnership in each of the two consecutive four-Quarter
periods immediately preceding such date, equaled or exceeded 125% of the
Minimum Quarterly Distribution on all Common Units and all Subordinated
Units for such periods; provided, however, that in determining the amount
of Available Cash constituting Cash from Operations generated by the
Partnership in any four-Quarter period (A) the following amounts shall
not be included: (1) any positive balance in Cash from Operations at the
beginning of such four-Quarter period, (2) any net increase in working
capital borrowings in such four-Quarter period and (3) any net decrease
in reserves in such four-
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Quarter period, and (B) any net increase in reserves in such four-Quarter
period to provide funds for distributions with respect to Units and any
general partner interests in the Partnership shall be included.
(c) After the end of the Subordination Period or upon the occurrence of the
events described in subparagraph (b) of this Section 5.7, once the General
Partner determines, based on advice of counsel, that a Subordinated Unit has,
as a substantive matter, like intrinsic economic and federal income tax
characteristics, in all material respects, to the intrinsic economic and
federal income tax characteristics of a Common Unit then Outstanding, then the
Subordinated Unit shall be converted to a Common Unit (on a one-for-one basis)
and from that time forward (which time shall, except as provided in
subparagraph (b) above, in no event commence before the first day following
the end of the Subordination Period) shall constitute a Common Unit for all
purposes under this Agreement. In connection with the condition set forth
above, it is understood that the General Partner may take whatever reasonable
steps are required to provide economic uniformity to the Subordinated Units in
preparation for a conversion into Common Units, including the application of
Sections 4.5(c) and 5.1(d)(x); provided, however, that no such steps may be
taken that would have a material adverse effect on the Limited Partners
holding Common Units or the Record Holders of any class of Units.
5.8 SPECIAL PROVISIONS RELATING TO THE SPECIAL LIMITED PARTNERS.
Notwithstanding anything to the contrary set forth in this Agreement, the
Special Limited Partners (a) shall (i) possess the rights and obligations
provided in this Agreement with respect to a Limited Partner pursuant to
Articles VI and VII and (ii) have a Capital Account as a Partner pursuant to
Section 4.5 and all other provisions related thereto and (b) shall not (i) be
entitled to vote on any matters requiring the approval or vote of the holders
of Outstanding Units, (ii) be entitled to any distributions other than to
Partners pursuant to Sections 5.4(a)(v), (vi) and (vii), 5.4(b)(iii), (iv) and
(v), 14.3 and 14.4 or (iii) be allocated items of income, gain, loss or
deduction other than as specified in this Article V.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
6.1 MANAGEMENT. (a) The General Partner shall conduct, direct and manage all
activities of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the General Partner, and no Limited
Partner or Assignee shall have any management power over the business and
affairs of the Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law or which are
granted to the General Partner under any other provision of this Agreement,
the General Partner, subject to Section 6.3, shall have full power and
authority to do all things and on such terms as it, in its sole discretion,
may deem necessary or appropriate to conduct the business of the Partnership,
to exercise all powers set forth in Section 3.2 and to effectuate the purposes
set forth in Section 3.1, including, without limitation, (i) the making of any
expenditures, the lending or borrowing of money, the assumption or guarantee
of, or other contracting for, indebtedness and other liabilities, the issuance
of evidences of indebtedness and the incurring of any other obligations; (ii)
the making of tax, regulatory and other filings, or rendering of periodic or
other reports to governmental or other agencies having jurisdiction over the
business or assets of the Partnership; (iii) the acquisition, disposition,
mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership or the merger or other combination of the
Partnership with or into another Person (the matters described in this clause
(iii) being subject, however, to any prior approval that may be required by
Section 6.3); (iv) the use of the assets of the Partnership (including,
without limitation, cash on hand) for any purpose consistent with the terms of
this Agreement, including, without limitation, the financing of the conduct of
the operations of the Partnership or the Operating Partnership, the lending of
funds to other Persons (including, without limitation, the Operating
Partnership, the General Partner and Affiliates of the General Partner) and
the repayment of obligations of the Partnership and the Operating Partnership
and the making of capital contributions to the
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Operating Partnership; (v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including, without limitation,
instruments that limit the liability of the Partnership under contractual
arrangements to all or particular assets of the Partnership, with the other
party to the contract to have no recourse against the General Partner or its
assets other than its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership than would
otherwise be the case); (vi) the distribution of Partnership cash; (vii) the
selection and dismissal of employees and agents (including, without
limitation, employees having titles such as "president," "vice president,"
"secretary" and "treasurer") and agents, outside attorneys, accountants,
consultants and contractors and the determination of their compensation and
other terms of employment or hiring; (viii) the maintenance of such insurance
for the benefit of the Partnership, the Operating Partnership and the Partners
(including, without limitation, the assets of the Operating Partnership and
the Partnership) as it deems necessary or appropriate; (ix) the formation of,
or acquisition of an interest in, and the contribution of property and the
making of loans to, any further limited or general partnerships, joint
ventures, corporations or other relationships (including, without limitation,
the acquisition of interests in, and the contributions of property to, the
Operating Partnership from time to time); (x) the control of any matters
affecting the rights and obligations of the Partnership, including, without
limitation, the bringing and defending of actions at law or in equity and
otherwise engaging in the conduct of litigation and the incurring of legal
expense and the settlement of claims and litigation; (xi) the indemnification
of any Person against liabilities and contingencies to the extent permitted by
law; (xii) the entering into of listing agreements with The New York Stock
Exchange, Inc. and any other securities exchange and the delisting of some or
all of the Units from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
1.6); (xiii) the purchase, sale or other acquisition or disposition of Units;
and (xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner (including,
without limitation, contributions or loans of funds by the Partnership to the
Operating Partnership).
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Contribution Agreement,
the agreements and other documents filed as exhibits to the Registration
Statement, and the other agreements described in or filed as a part of the
Registration Statement, and the engaging by any Affiliate of the General
Partner in business and activities (other than Restricted Activities) that are
in direct competition with the business and activities of the Partnership and
the Operating Partnership; (ii) agrees that the General Partner (on its own or
through any officer of the Partnership) is authorized to execute, deliver and
perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated
by the Registration Statement on behalf of the Partnership without any further
act, approval or vote of the Partners or the Assignees or the other Persons
who may acquire an interest in Units; and (iii) agrees that the execution,
delivery or performance by the General Partner, the Partnership, the Operating
Partnership or any Affiliate of any of them, of this Agreement or any
agreement authorized or permitted under this Agreement (including, without
limitation, the exercise by the General Partner or any Affiliate of the
General Partner of the rights accorded pursuant to Article XVII), or the
engaging by any Affiliate of the General Partner in any business and
activities (other than Restricted Activities) that are in direct competition
with the business and activities of the Partnership and the Operating
Partnership, shall not constitute a breach by the General Partner of any duty
that the General Partner may owe the Partnership or the Limited Partners or
the Assignees or any other Persons under this Agreement (or any other
agreements) or of any duty stated or implied by law or equity. The term
"Affiliate" when used in this Section 6.1(b) with respect to the General
Partner shall not include the Partnership or any Subsidiary of the
Partnership.
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6.2 CERTIFICATE OF LIMITED PARTNERSHIP. The General Partner has caused the
Certificate of Limited Partnership to be filed with the Secretary of State of
the State of Delaware as required by the Delaware Act and shall use all
reasonable efforts to cause to be filed such other certificates or documents
as may be determined by the General Partner in its sole discretion to be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in
which the limited partners have limited liability) in the State of Delaware or
any other state in which the Partnership may elect to do business or own
property. To the extent that such action is determined by the General Partner
in its sole discretion to be reasonable and necessary or appropriate, the
General Partner shall file amendments to and restatements of the Certificate
of Limited Partnership and do all things to maintain the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) under the laws of the State of Delaware or of any other
state in which the Partnership may elect to do business or own property.
Subject to the terms of Section 7.5(a), the General Partner shall not be
required, before or after filing, to deliver or mail a copy of the Certificate
of Limited Partnership, any qualification document or any amendment thereto to
any Limited Partner or Assignee.
6.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY. (a) The General Partner may
not, without written approval of the specific act by all of the Outstanding
Units or by other written instrument executed and delivered by all of the
Outstanding Units subsequent to the date of this Agreement, take any action in
contravention of this Agreement, including, without limitation, (i) any act
that would make it impossible to carry on the ordinary business of the
Partnership, except as otherwise provided in this Agreement; (ii) possess
Partnership property, or assign any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admit a Person as a Partner,
except as otherwise provided in this Agreement; (iv) amend this Agreement in
any manner, except as otherwise provided in this Agreement; or (v) transfer
its interest as general partner of the Partnership, except as otherwise
provided in this Agreement.
(b) Except as provided in Articles XIV and XVI, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of at least a majority of the Outstanding
Units (other than Units owned by the General Partner and its Affiliates)
during the Subordination Period and thereafter without the approval of at
least a majority of the Outstanding Units; provided, however, that this
provision shall not preclude or limit the General Partner's ability to
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets and shall not apply to any
forced sale of any or all of the Partnership's assets pursuant to the
foreclosure of, or other realization upon, any such encumbrance. Without the
approval of at least two-thirds of the Outstanding Units, the General Partner
shall not, on behalf of the Partnership, (i) consent to any amendment to the
Operating Partnership Agreement or, except as expressly permitted by Section
6.9(d), take any action permitted to be taken by a partner of the Operating
Partnership, in either case, that would have a material adverse effect on the
Partnership as a partner of the Operating Partnership or (ii) except as
permitted under Sections 11.2, 13.1 and 13.2 elect or cause the Partnership to
elect a successor general partner of the Operating Partnership.
(c) Unless approved by the affirmative vote of the holders of at least two-
thirds of each class of Outstanding Units, including two-thirds of the Common
Units (excluding for purposes of such determination Common Units owned by the
General Partner and its Affiliates), the General Partner shall not take any
action or refuse to take any reasonable action the effect of which, if taken
or not taken, as the case may be, would be to cause the Partnership or the
Operating Partnership to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes;
provided that this Section 6.3(c) shall not be construed to apply to
amendments to this Agreement (which are governed by Article XV) or mergers or
consolidations of the Partnership with any Person (which are governed by
Article XVI).
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(d) At all times while serving as the general partner of the Partnership,
the General Partner shall not (except as provided below) make any dividend or
distribution on, or repurchase any shares of, its stock or take any other
action within its control unless it shall first receive an Opinion of Counsel
that the effect of such dividend, distribution, repurchase or other action
would not reduce its net worth below an amount such that the Partnership will
be treated as an association taxable as a corporation for federal income tax
purposes; provided, however, to the extent the General Partner receives
distributions of cash from the Partnership, the Operating Partnership or any
other partnership of which the Partnership is, directly or indirectly, a
partner, the General Partner shall not use such cash to make any dividend or
distribution on, or repurchase any shares of, its stock or take any other
action within its control if the effect of such dividend, distribution,
repurchase or other action would be to reduce its net worth below an amount
necessary to receive an Opinion of Counsel that the Partnership will be
treated as a partnership for federal income tax purposes.
6.4 REIMBURSEMENT OF THE GENERAL PARTNER. (a) Except as provided in this
Section 6.4 and elsewhere in this Agreement or in the Operating Partnership
Agreement, the General Partner shall not be compensated for its services as
general partner of the Partnership or the Operating Partnership.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other basis as the General Partner may determine in its sole discretion, for
(i) all direct and indirect expenses it incurs or payments it makes on behalf
of the Partnership (including, without limitation, salary, bonus, incentive
compensation and other amounts paid to any Person to perform services for the
Partnership or for the General Partner in the discharge of its duties to the
Partnership), and (ii) all other necessary or appropriate expenses allocable
to the Partnership or otherwise reasonably incurred by the General Partner in
connection with operating the Partnership's business (including, without
limitation, expenses allocated to the General Partner by its Affiliates). The
General Partner shall determine the fees and expenses that are allocable to
the Partnership in any reasonable manner determined by the General Partner in
its sole discretion. Reimbursements pursuant to this Section 6.4 shall be in
addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 6.7.
(c) Subject to Section 4.3(c), the General Partner in its sole discretion
and without the approval of the Limited Partners (who shall have no right to
vote in respect thereof) may propose and adopt on behalf of the Partnership,
employee benefit and incentive plans (including, without limitation, plans
involving the issuance of Units), or issue Partnership Securities pursuant to
any employee benefit or incentive plan maintained or sponsored by the General
Partner or one of its Affiliates, in each case for the benefit of employees of
the General Partner, the Partnership, the Operating Partnership or any
Affiliate of any of them in respect of services performed, directly or
indirectly, for the benefit of the Partnership or the Operating Partnership.
The Partnership agrees to issue and sell to the General Partner any Units or
other Partnership Securities that the General Partner is obligated to provide
to any employees pursuant to any such benefit or incentive plans. Expenses
incurred by the General Partner in connection with any such plans (including
the net cost to the General Partner of Units purchased by the General Partner
from the Partnership to fulfill options or awards under such plans) shall be
reimbursed in accordance with Section 6.4(b). Any and all obligations of the
General Partner under any employee benefit or incentive plans adopted by the
General Partner as permitted by this Section 6.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all of the General Partner's Partnership
Interest as a general partner in the Partnership pursuant to Section 11.2.
6.5 OUTSIDE ACTIVITIES. (a) After the Closing Date, the General Partner, for
so long as it is the general partner of the Partnership, (i) agrees that its
sole business will be to act as a general partner of the Partnership, the
Operating Partnership and any other partnership of which the Partnership or
the Operating Partnership is, directly or indirectly, a partner and to
undertake activities that are ancillary or
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related thereto (including being a limited partner in the Partnership), (ii)
shall not enter into or conduct any business or incur any debts or liabilities
except in connection with or incidental to (A) its performance of the
activities required or authorized by this Agreement or the Operating
Partnership Agreement or described in or contemplated by the Registration
Statement and (B) the acquisition, ownership or disposition of Partnership
Interests in the Partnership or partnership interests in the Operating
Partnership or any other partnership of which the Partnership or the Operating
Partnership is, directly or indirectly, a partner, except that,
notwithstanding the foregoing, employees of the General Partner may perform
services for Ferrell and its Affiliates, and (iii) shall not and shall cause
its Affiliates not to engage in any Restricted Activity.
(b) Except as described in Section 6.5(a), no Indemnitee shall be expressly
or implicitly restricted or proscribed pursuant to this Agreement, the
Operating Partnership Agreement or the partnership relationship established
hereby or thereby from engaging in other activities for profit, whether in the
businesses engaged in by the Partnership or the Operating Partnership or
anticipated to be engaged in by the Partnership, the Operating Partnership or
otherwise, including, without limitation, in the case of any Affiliates of the
General Partner those businesses and activities (other than Restricted
Activities) in direct competition with the business and activities of the
Partnership or the Operating Partnership or otherwise described in or
contemplated by the Registration Statement. Without limitation of and subject
to the foregoing each Indemnitee (other than the General Partner) shall have
the right to engage in businesses of every type and description and to engage
in and possess an interest in other business ventures of any and every type or
description, independently or with others, including, without limitation, in
the case of any Affiliates of the General Partner business interests and
activities (other than Restricted Activities) in direct competition with the
business and activities of the Partnership or the Operating Partnership, and
none of the same shall constitute a breach of this Agreement or any duty to
the Partnership, the Operating Partnership or any Partner or Assignee. Neither
the Partnership, the Operating Partnership, any Limited Partner nor any other
Person shall have any rights by virtue of this Agreement, the Operating
Partnership Agreement or the partnership relationship established hereby or
thereby in any business ventures of any Indemnitee (subject, in the case of
the General Partner, to compliance with Section 6.5(c)) and such Indemnitees
shall have no obligation to offer any interest in any such business ventures
to the Partnership, the Operating Partnership, any Limited Partner or any
other Person. The General Partner and any other Persons affiliated with the
General Partner may acquire Units or other Partnership Securities in addition
to those acquired by any of such Persons on the Closing Date, and, except as
otherwise provided in this Agreement, shall be entitled to exercise all rights
of an Assignee or Limited Partner, as applicable, relating to such Units or
Partnership Securities, as the case may be.
(c) Subject to the terms of Sections 6.5(a) and (b) but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the
competitive activities of any Indemnitees (other than the General Partner) are
hereby approved by the Partnership and all Partners and (ii) it shall be
deemed not to be a breach of the General Partner's fiduciary duty or any other
obligation of any type whatsoever of the General Partner for the General
Partner to permit an Affiliate of the General Partner to engage, or for any
such Affiliate to engage, in business interests and activities (other than
Restricted Activities) in preference to or to the exclusion of the
Partnership.
(d) The term "Affiliates" when used in this Section 6.5 with respect to the
General Partner shall not include the Partnership or any Subsidiary of the
Partnership.
6.6 LOANS TO AND FROM THE GENERAL PARTNER; CONTRACTS WITH AFFILIATES. (a)
The General Partner or any Affiliate thereof may lend to the Partnership or
the Operating Partnership, and the Partnership and the Operating Partnership
may borrow, funds needed or desired by the Partnership and the Operating
Partnership for such periods of time as the General Partner may determine and
(ii) the General Partner or any Affiliate thereof may borrow from the
Partnership or the Operating Partnership,
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and the Partnership and the Operating Partnership may lend to the General
Partner or such Affiliate, excess funds of the Partnership and the Operating
Partnership for such periods of time and in such amounts as the General
Partner may determine; provided, however, that in either such case the lending
party may not charge the borrowing party interest at a rate greater than the
rate that would be charged the borrowing party (without reference to the
lending party's financial abilities or guarantees), by unrelated lenders on
comparable loans. The borrowing party shall reimburse the lending party for
any costs (other than any additional interest costs) incurred by the lending
party in connection with the borrowing of such funds. For purposes of this
Section 6.6(a) and Section 6.6(b), the term "Partnership" shall include any
Affiliate of the Partnership that is controlled by the Partnership and the
term "Operating Partnership" shall include any Affiliate of the Operating
Partnership that is controlled by the Operating Partnership.
(b) The Partnership may lend or contribute to the Operating Partnership, and
the Operating Partnership may borrow, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Operating Partnership interest at a
rate greater than the rate that would be charged to the Operating Partnership
(without reference to the General Partner's financial abilities or
guarantees), by unrelated lenders on comparable loans. The foregoing authority
shall be exercised by the General Partner in its sole discretion and shall not
create any right or benefit in favor of the Operating Partnership or any other
Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to the Partnership or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to the Partnership by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 6.6(c) shall be
deemed satisfied as to (i) any transaction approved by Special Approval, (ii)
any transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is
equitable to the Partnership. The provisions of Section 6.4 shall apply to the
rendering of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 6.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 4.1, 4.2 and 4.3, the
Contribution Agreement and any other transactions described in or contemplated
by the Registration Statement, (ii) any transaction approved by Special
Approval, (iii) any transaction, the terms of which are no less favorable to
the Partnership than those generally being provided to or available from
unrelated third parties, or (iv) any transaction that, taking into account the
totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership), is equitable to the Partnership.
(f) The General Partner and its Affiliates will have no obligation to permit
the Partnership or the Operating Partnership to use any facilities or assets
of the General Partner and its Affiliates, except as may be provided in
contracts entered into from time to time specifically dealing with such use,
nor shall there be any obligation on the part of the General Partner or its
Affiliates to enter into such contracts.
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(g) Without limitation of Sections 6.6(a) through 6.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of
the conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
6.7 INDEMNIFICATION. (a) To the fullest extent permitted by law but subject
to the limitations expressly provided in this Agreement, the General Partner,
any Departing Partner and any Person who is or was an officer or director of
the General Partner or any Departing Partner and all other Indemnitees shall
be indemnified and held harmless by the Partnership from and against any and
all losses, claims, damages, liabilities, joint or several, expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or
is threatened to be involved, as a party or otherwise, by reason of its status
as (i) the General Partner, a Departing Partner or any of their Affiliates,
(ii) an officer, director, employee, partner, agent or trustee of the
Partnership, the General Partner, any Departing Partner or any of their
Affiliates or (iii) a Person serving at the request of the Partnership in
another entity in a similar capacity, provided, that in each case the
Indemnitee acted in good faith and in a manner which such Indemnitee
reasonably believed to be in, or not opposed to, the best interests of the
Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful; provided, further, no
indemnification pursuant to this Section 6.7 shall be available to the General
Partner with respect to its obligations incurred pursuant to the Underwriting
Agreement or the Contribution Agreement (other than obligations incurred by
the General Partner on behalf of the Partnership or the Operating
Partnership). The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 6.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies
or property to the Partnership to enable it to effectuate such
indemnification.
(b) To the fullest extent permitted by law, expenses (including, without
limitation, legal fees and expenses) incurred by an Indemnitee who is
indemnified pursuant to Section 6.7(a) in defending any claim, demand, action,
suit or proceeding shall, from time to time, be advanced by the Partnership
prior to the final disposition of such claim, demand, action, suit or
proceeding upon receipt by the Partnership of an undertaking by or on behalf
of the Indemnitee to repay such amount if it shall be determined that the
Indemnitee is not entitled to be indemnified as authorized in this Section
6.7.
(c) The indemnification provided by this Section 6.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law
or otherwise, both as to actions in the Indemnitee's capacity as (i) the
General Partner, a Departing Partner or an Affiliate thereof, (ii) an officer,
director, employee, partner, agent or trustee of the Partnership, the General
Partner, any Departing Partner or an Affiliate thereof or (iii) a Person
serving at the request of the Partnership in another entity in a similar
capacity, and as to actions in any other capacity (including, without
limitation, any capacity under the Underwriting Agreement), and shall continue
as to an Indemnitee who has ceased to serve in such capacity and shall inure
to the benefit of the heirs, successors, assigns and administrators of the
Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner and such other Persons as the General Partner shall determine, against
any liability that may be asserted against or expense that may be incurred by
such Person in connection with the Partnership's activities, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
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(e) For purposes of this Section 6.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an Indemnitee with
respect to an employee benefit plan pursuant to applicable law shall
constitute "fines" within the meaning of Section 6.7(a); and action taken or
omitted by it with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership,
nor the obligation of the Partnership to indemnify any such Indemnitee under
and in accordance with the provisions of this Section 6.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
6.8 LIABILITY OF INDEMNITEES. (a) Notwithstanding anything to the contrary
set forth in this Agreement, no Indemnitee shall be liable for monetary
damages to the Partnership, the Limited Partners, the Assignees or any other
Persons who have acquired interests in the Units, for losses sustained or
liabilities incurred as a result of any act or omission if such Indemnitee
acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 6.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 6.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership and the Limited Partners of
the General Partner, its directors, officers and employees under this Section
6.8 as in effect immediately prior to such amendment, modification or repeal
with respect to claims arising from or relating to matters occurring, in whole
or in part, prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
6.9 RESOLUTION OF CONFLICTS OF INTEREST. (a) Unless otherwise expressly
provided in this Agreement or the Operating Partnership Agreement, whenever a
potential conflict of interest exists or arises between the General Partner or
any of its Affiliates, on the one hand, and the Partnership, the Operating
Partnership, any Partner or any Assignee, on the other, any resolution or
course of action in respect of such conflict of interest shall be permitted
and deemed approved by all Partners, and shall not constitute a breach of this
Agreement, of the Operating Partnership Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied by law or
equity, if the resolution or course of action is, or by operation of this
Agreement is deemed to be, fair and reasonable to the Partnership. The General
Partner shall be authorized but not required in connection with its resolution
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of such conflict of interest to seek Special Approval of a resolution of such
conflict or course of action. Any conflict of interest and any resolution of
such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by
Special Approval, (ii) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) fair to the Partnership, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership). The General
Partner may also adopt a resolution or course of action that has not received
Special Approval. The General Partner (including the Audit Committee in
connection with Special Approval) shall be authorized in connection with its
determination of what is "fair and reasonable" to the Partnership and in
connection with its resolution of any conflict of interest to consider (A) the
relative interests of any party to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interest; (B) any
customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
General Partner (including such Audit Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the General Partner (including such Audit Committee) to
consider the interests of any Person other than the Partnership. In the
absence of bad faith by the General Partner, the resolution, action or terms
so made, taken or provided by the General Partner with respect to such matter
shall not constitute a breach of this Agreement or any other agreement
contemplated herein or a breach of any standard of care or duty imposed herein
or therein or under the Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or under a grant of similar authority or
latitude, the General Partner or such Affiliate shall be entitled to consider
only such interests and factors as it desires and shall have no duty or
obligation to give any consideration to any interest of, or factors affecting,
the Partnership, the Operating Partnership, any Limited Partner or any
Assignee, (ii) it may make such decision in its sole discretion (regardless of
whether there is a reference to "sole discretion" or "discretion") unless
another express standard is provided for, or (iii) in "good faith" or under
another express standard, the General Partner or such Affiliate shall act
under such express standard and shall not be subject to any other or different
standards imposed by this Agreement, the Operating Partnership Agreement, any
other agreement contemplated hereby or under the Delaware Act or any other
law, rule or regulation. In addition, any actions taken by the General Partner
or such Affiliate consistent with the standards of "reasonable discretion" set
forth in the definitions of Available Cash or Cash from Operations shall not
constitute a breach of any duty of the General Partner to the Partnership or
the Limited Partners. The General Partner shall have no duty, express or
implied, to sell or otherwise dispose of any asset of the Operating
Partnership or of the Partnership, other than in the ordinary course of
business. No borrowing by the Partnership or the Operating Partnership or the
approval thereof by the General Partner shall be deemed to constitute a breach
of any duty of the General Partner to the Partnership or the Limited Partners
by reason of the fact that the purpose or effect of such borrowing is directly
or indirectly to (A) enable Incentive Distributions or (B) hasten the
expiration of the Subordination Period or the conversion of any Subordinated
Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Limited Partners hereby authorize the General Partner, on behalf of
the Partnership as a partner of the Operating Partnership, to approve of
actions by the general partner of the Operating Partnership similar to those
actions permitted to be taken by the General Partner pursuant to this Section
6.9.
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6.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER. (a) The General Partner
may rely and shall be protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture, or other paper or document believed
by it to be genuine and to have been signed or presented by the proper party
or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including, without limitation, an Opinion of
Counsel) of such Persons as to matters that such General Partner reasonably
believes to be within such Person's professional or expert competence shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly
authorized officers of the Partnership. Each such attorney shall, to the
extent provided by the General Partner in the power of attorney, have full
power and authority to do and perform each and every act and duty that is
permitted or required to be done by the General Partner hereunder.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited as required to permit the General Partner to act under this
Agreement or any other agreement contemplated by this Agreement and to make
any decision pursuant to the authority prescribed in this Agreement so long as
such action is reasonably believed by the General Partner to be in, or not
inconsistent with, the best interests of the Partnership.
6.11 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real,
personal or mixed and whether tangible or intangible, shall be deemed to be
owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner, one or more of its Affiliates or one or more nominees, as the General
Partner may determine. The General Partner hereby declares and warrants that
any Partnership assets for which record title is held in the name of the
General Partner or one or more of its Affiliates or one or more nominees shall
be held by the General Partner or such Affiliate or nominee for the use and
benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use its
reasonable efforts to cause record title to such assets (other than those
assets in respect of which the General Partner determines that the expense and
difficulty of conveyancing makes transfer of record title to the Partnership
impracticable) to be vested in the Partnership as soon as reasonably
practicable; provided that, prior to the withdrawal or removal of the General
Partner or as soon thereafter as practicable, the General Partner shall use
reasonable efforts to effect the transfer of record title to the Partnership
and, prior to any such transfer, will provide for the use of such assets in a
manner satisfactory to the Partnership. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which record title to such Partnership assets is
held. The General Partner covenants and agrees that at the Closing Date, the
Partnership and the Operating Partnership shall have all licenses, permits,
certificates, franchises, or other governmental authorizations or permits
necessary for the ownership of their properties or for the conduct of their
businesses, except for such licenses, permits, certificates, franchises, or
other governmental authorizations or permits, failure to have obtained which
will not, individually or in the aggregate, have a material adverse effect on
the Partnership or the Operating Partnership.
6.12 PURCHASE OR SALE OF UNITS. The General Partner may cause the
Partnership to purchase or otherwise acquire Units; provided that, except as
permitted pursuant to Section 11.6, the General Partner may not cause the
Partnership to purchase Subordinated Units during the Subordination
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Period. As long as Units are held by the Partnership or the Operating
Partnership, such Units shall not be considered Outstanding for any purpose,
except as otherwise provided herein. The General Partner or any Affiliate of
the General Partner may also purchase or otherwise acquire and sell or
otherwise dispose of Units for its own account, subject to the provisions of
Articles XI and XII.
6.13 REGISTRATION RIGHTS OF FERRELLGAS AND ITS AFFILIATES. (a) If (i)
Ferrellgas or any Affiliate of Ferrellgas (including, without limitation, for
purposes of this Section 6.13, any Person that is an Affiliate of Ferrellgas
at the date hereof notwithstanding that it may later cease to be an Affiliate
of Ferrellgas) holds Units or other Partnership Securities that it desires to
sell and (ii) Rule 144 of the Securities Act (or any successor rule or
regulation to Rule 144) or another exemption from registration is not
available to enable such holder of Units (the "HOLDER") to dispose of the
number of Units or other securities it desires to sell at the time it desires
to do so without registration under the Securities Act, then upon the request
of Ferrellgas or any of its Affiliates, the Partnership shall file with the
Commission as promptly as practicable after receiving such request, and use
all reasonable efforts to cause to become effective and remain effective for a
period of not more than six months following its effective date, a
registration statement under the Securities Act registering the offering and
sale of the number of Units or other securities specified by the Holder;
provided, however, that the Partnership shall not be required to effect more
than three registrations pursuant to this Section 6.13(a); and provided
further, that if the General Partner or, if at the time a request pursuant to
this Section 6.13 is submitted to the Partnership, Ferrellgas or its Affiliate
requesting registration is an Affiliate of the General Partner, the Audit
Committee in connection with Special Approval determines in its good faith
judgment that a postponement of the requested registration for up to six
months would be in the best interests of the Partnership and its Partners due
to a pending transaction, investigation or other event, the filing of such
registration statement or the effectiveness thereof may be deferred for up to
six months, but not thereafter. In connection with any registration pursuant
to the immediately preceding sentence, the Partnership shall promptly prepare
and file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service of process or
to taxation or qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction, and (y) such documents as may
be necessary to apply for listing or to list the securities subject to such
registration on such National Securities Exchange as the Holder shall
reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a
public sale of such Units in such states. Except as set forth in Section
6.13(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include
such number or amount of securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 6.13(b) shall be an underwritten offering, then, in the event
that the managing underwriter of such offering advises the Partnership and the
Holder in writing that in its opinion the inclusion of all or some of the
Holder's securities would adversely and materially affect the success of the
offering, the Partnership shall include in such offering only that number or
amount, if any, of securities held by the Holder which, in the opinion of the
managing underwriter, will not so adversely and materially affect the
offering. Except as set forth in Section 6.13(c), all costs and expenses of
any such registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 6.13, the Partnership shall provide indemnification,
representations, covenants, opinions and other
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assurance to the underwriters in form and substance reasonably satisfactory to
such underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 6.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the
meaning of the Securities Act) and any agent thereof (collectively,
"INDEMNIFIED PERSONS") against any losses, claims, demands, actions, causes of
action, assessments, damages, liabilities (joint or several), costs and
expenses (including, without limitation, interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 6.13(c) as a "CLAIM" and in
the plural as "CLAIMS"), based upon, arising out of, or resulting from any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which any Units were registered under the
Securities Act or any state securities or Blue Sky laws, in any preliminary
prospectus (if used prior to the effective date of such registration
statement), or in any summary or final prospectus or in any amendment or
supplement thereto (if used during the period the Partnership is required to
keep the registration statement current), or arising out of, based upon or
resulting from the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements made
therein not misleading; provided, however, that the Partnership shall not be
liable to any Indemnified Person to the extent that any such claim arises out
of, is based upon or results from an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
such preliminary, summary or final prospectus or such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Partnership by or on behalf of such Indemnified Person specifically for use in
the preparation thereof.
(d) The provisions of Sections 6.13(a) and 6.13(b) shall continue to be
applicable with respect to Ferrellgas (and any of Ferrellgas' Affiliates)
after it ceases to be a Partner of the Partnership, during a period of two
years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Units or other
securities of the Partnership with respect to which it has requested during
such two year period that a registration statement be filed; provided,
however, that the Partnership shall not be required to file successive
registration statements covering the same securities for which registration
was demanded during such two-year period. The provisions of Section 6.13(c)
shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
6.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
6.14 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in
this Agreement, any Person dealing with the Partnership shall be entitled to
assume that the General Partner and any officer of the Partnership authorized
by the General Partner to act on behalf and in the name of the Partnership has
full power and authority to encumber, sell or otherwise use in any manner any
and all assets of the Partnership and to enter into any contracts on behalf of
the Partnership, and such Person shall be entitled to deal with the General
Partner or any such officer as if it were the Partnership's sole party in
interest, both legally and beneficially. Each Limited Partner hereby waives
any and all defenses or other remedies that may be available against such
Person to contest, negate or disaffirm any action of the General Partner or
any such officer in connection with any such dealing. In no event shall any
Person dealing with the General Partner or any such officer or its
representatives be obligated to ascertain that the terms of this Agreement
have been complied with or to inquire into the necessity or expedience of any
act or action of the General Partner or any such officer. Each and every
certificate, document or
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other instrument executed on behalf of the Partnership by the General Partner
or any such officer shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and
delivering such certificate, document or instrument was duly authorized and
empowered to do so for and on behalf of the Partnership and (c) such
certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
7.1 LIMITATION OF LIABILITY. The Limited Partners, the Organizational
Limited Partner and the Assignees shall have no liability under this Agreement
except as expressly provided in this Agreement or the Delaware Act.
7.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner or any of its Affiliates, in
its capacity as such, if such Person shall also be a Limited Partner or
Assignee) shall participate in the operation, management or control (within
the meaning of the Delaware Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner or any of its Affiliates, in
its capacity as such, shall not affect, impair or eliminate the limitations on
the liability of the Limited Partners or Assignees under this Agreement.
7.3 OUTSIDE ACTIVITIES. Subject to the provisions of Section 6.5, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any
Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to
the Partnership, including, without limitation, business interests and
activities in direct competition with the Partnership or the Operating
Partnership. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
7.4 RETURN OF CAPITAL. No Limited Partner or Assignee shall be entitled to
the withdrawal or return of its Capital Contribution, except to the extent, if
any, that distributions made pursuant to this Agreement or upon termination of
the Partnership may be considered as such by law and then only to the extent
provided for in this Agreement. Except to the extent provided by Article V or
as otherwise expressly provided in this Agreement, no Limited Partner or
Assignee shall have priority over any other Limited Partner or Assignee either
as to the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which all Partners and
Assignees agree within the meaning of (S) 17-502(b) of the Delaware Act.
7.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP. (a) In addition
to other rights provided by this Agreement or by applicable law, and except as
limited by Section 7.5(b), each Limited Partner shall have the right, for a
purpose reasonably related to such Limited Partner's interest as a limited
partner in the Partnership, upon reasonable demand and at such Limited
Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him, upon notification to the General Partner,
a current list of the name and last known business, residence or mailing
address of each Partner;
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(iv) to have furnished to him, upon notification to the General Partner,
a copy of this Agreement and the Certificate of Limited Partnership and all
amendments thereto, together with a copy of the executed copies of all
powers of attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) Notwithstanding any other provision of this Agreement, the General
Partner may keep confidential from the Limited Partners and Assignees, for
such period of time as the General Partner deems reasonable, any information
that the General Partner reasonably believes to be in the nature of trade
secrets or other information the disclosure of which the General Partner in
good faith believes is not in the best interests of the Partnership or the
Operating Partnership or could damage the Partnership or the Operating
Partnership or that the Partnership or the Operating Partnership are required
by law or by agreements with third parties to keep confidential (other than
agreements with Affiliates the primary purpose of which is to circumvent the
obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 RECORDS AND ACCOUNTING. The General Partner shall keep or cause to be
kept at the principal office of the Partnership appropriate books and records
with respect to the Partnership's business, including, without limitation, all
books and records necessary to provide to the Limited Partners any
information, lists and copies of documents required to be provided pursuant to
Section 7.5(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business, including, without
limitation, the record of the Record Holders and Assignees of Units or other
Partnership Securities, books of account and records of Partnership
proceedings, may be kept on, or be in the form of, computer disks, hard
drives, punch cards, magnetic tape, photographs, micrographics or any other
information storage device, provided, that the books and records so maintained
are convertible into clearly legible written form within a reasonable period
of time. The books of the Partnership shall be maintained, for both tax and
financial reporting purposes, on an accrual basis in accordance with generally
accepted accounting principles.
8.2 FISCAL YEAR. The fiscal year of the Partnership shall be August 1 to
July 31.
8.3 REPORTS. (a) As soon as practicable, but in no event later than 120 days
after the close of each fiscal year of the Partnership, the General Partner
shall cause to be mailed to each Record Holder of a Unit as of a date selected
by the General Partner in its sole discretion, an annual report containing
financial statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with generally accepted accounting
principles, including a balance sheet and statements of operations, Partners'
equity and cash flows, such statements to be audited by a firm of independent
public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each year, the General
Partner shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the General Partner in its sole discretion, a report containing
unaudited financial statements of the Partnership and such other information
as may be required by applicable law, regulation or rule of any National
Securities Exchange on which the Units are listed for trading, or as the
General Partner determines to be necessary or appropriate.
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ARTICLE IX
TAX MATTERS
9.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange for the
preparation and timely filing of all returns of Partnership income, gains,
deductions, losses and other items required of the Partnership for federal and
state income tax purposes and shall use all reasonable efforts to furnish,
within 90 days of the close of each calendar year, the tax information
reasonably required by holders of Outstanding Units for federal and state
income tax reporting purposes. The classification, realization and recognition
of income, gain, losses and deductions and other items shall be on the accrual
method of accounting for federal income tax purposes. The taxable year of the
Partnership shall be August 1 to July 31.
9.2 TAX ELECTIONS. Except as otherwise provided herein, the General Partner
shall, in its sole discretion, determine whether to make any available
election pursuant to the Code; provided, however, that the General Partner
shall make the election under Section 754 of the Code in accordance with
applicable regulations thereunder. The General Partner shall have the right to
seek to revoke any such election (including, without limitation, the election
under Section 754 of the Code) upon the General Partner's determination in its
sole discretion that such revocation is in the best interests of the Limited
Partners and Assignees. For purposes of computing the adjustments under
Section 743(b) of the Code, the General Partner shall be authorized (but not
required) to adopt a convention whereby the price paid by a transferee of
Units will be deemed to be the lowest quoted closing price of the Units on any
National Securities Exchange on which such Units are traded during the
calendar month in which such transfer is deemed to occur pursuant to Section
5.2(g) without regard to the actual price paid by such transferee.
9.3 TAX CONTROVERSIES. Subject to the provisions hereof, the General Partner
is designated the Tax Matters Partner (as defined in Section 6231 of the
Code), and is authorized and required to represent the Partnership (at the
Partnership's expense) in connection with all examinations of the
Partnership's affairs by tax authorities, including, without limitation,
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
and Assignee agrees to cooperate with the General Partner and to do or refrain
from doing any or all things reasonably required by the General Partner to
conduct such proceedings.
9.4 ORGANIZATIONAL EXPENSES. The Partnership shall elect to deduct expenses,
if any, incurred by it in organizing the Partnership ratably over a 60-month
period as provided in Section 709 of the Code.
9.5 WITHHOLDING. Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that it determines in its
sole discretion to be necessary or appropriate to cause the Partnership and
the Operating Partnership to comply with any withholding requirements
established under the Code or any other federal, state or local law including,
without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the
Code. To the extent that the Partnership is required to withhold and pay over
to any taxing authority any amount resulting from the allocation or
distribution of income to any Partner or Assignee (including, without
limitation, by reason of Section 1446 of the Code), the amount withheld shall
be treated as a distribution of cash pursuant to Section 5.3 in the amount of
such withholding from such Partner.
9.6 ENTITY-LEVEL TAXATION. If legislation is enacted or the interpretation
of existing language is modified which causes the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise subjects the Partnership or the Operating Partnership to entity-
level taxation for federal income tax purposes, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution or Third
Target Distribution, as the case may be, shall be equal to the product
obtained by multiplying (a) the amount thereof by (b) 1 minus the sum of (i)
the highest marginal federal corporate (or other entity, as applicable) income
tax rate of the Partnership for the
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taxable year of the Partnership in which such Quarter occurs (expressed as a
percentage) plus (ii) the effective overall state and local income tax rate
(expressed as a percentage) applicable to the Partnership for the calendar
year next preceding the calendar year in which such Quarter occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes), but
only to the extent of the increase in such rates resulting from such
legislation or interpretation. Such effective overall state and local income
tax rate shall be determined for the taxable year next preceding the first
taxable year during which the Partnership or the Operating Partnership is
taxable for federal income tax purposes as an association taxable as a
corporation or is otherwise subject to entity-level taxation by determining
such rate as if the Partnership or the Operating Partnership had been subject
to such state and local taxes during such preceding taxable year.
9.7 ENTITY-LEVEL ARREARAGE COLLECTIONS. If the Partnership is required by
applicable law to pay any federal, state or local income tax on behalf of, or
withhold such amount with respect to, any Partner or Assignee or any former
Partner or Assignee (a) the General Partner shall cause the Partnership to pay
such tax on behalf of such Partner or Assignee or former Partner or Assignee
from the funds of the Partnership; (b) any amount so paid on behalf of, or
withheld with respect to, any Partner or Assignee shall constitute a
distribution out of Available Cash to such Partner or Assignee pursuant to
Section 5.3; provided, however, in the discretion of the General Partner, such
taxes (if pertaining to all Partners) may be considered to be cash
disbursements of the Partnership which reduce Available Cash, but the payment
or withholding thereof shall not be deemed to be a distribution of Available
Cash to such Partners; and (c) to the extent any such Partner or Assignee (but
not a former Partner or Assignee) is not then entitled to such distribution
under this Agreement, the General Partner shall be authorized, without the
approval of any Partner or Assignee, to amend this Agreement insofar as is
necessary to maintain the uniformity of intrinsic tax characteristics as to
all Units and to make subsequent adjustments to distributions in a manner
which, in the reasonable judgment of the General Partner, will make as little
alteration as practicable in the priority and amount of distributions
otherwise applicable under this Agreement, and will not otherwise alter the
distributions to which Partners and Assignees are entitled under this
Agreement. If the Partnership is permitted (but not required) by applicable
law to pay any such tax on behalf of, or withhold such amount with respect to,
any Partner or Assignee or former Partner or Assignee, the General Partner
shall be authorized (but not required) to cause the Partnership to pay such
tax from the funds of the Partnership and to take any action consistent with
this Section 9.7. The General Partner shall be authorized (but not required)
to take all necessary or appropriate actions to collect all or any portion of
a deficiency in the payment of any such tax that relates to prior periods and
that is attributable to Persons who were Limited Partners or Assignees when
such deficiencies arose, from such Persons.
9.8 OPINIONS OF COUNSEL. Notwithstanding any other provision of this
Agreement, if the Partnership or the Operating Partnership is treated as an
association taxable as a corporation at any time or is otherwise taxable for
federal income tax purposes as an entity at any time and, pursuant to the
provisions of this Agreement, an Opinion of Counsel would otherwise be
required to the effect that an action will not cause the Partnership or the
Operating Partnership to become so treated as an association taxable as a
corporation or otherwise taxable as an entity for federal income tax purposes,
such requirement for an Opinion of Counsel shall be deemed automatically
waived.
ARTICLE X
CERTIFICATES
10.1 CERTIFICATES. Upon the Partnership's issuance of Common Units or
Subordinated Units to any Person, the Partnership shall issue one or more
Certificates in the name of such Person evidencing the number of such Units
being so issued. Certificates shall be executed on behalf of the Partnership
by the General Partner. No Common Unit Certificate shall be valid for any
purpose until it has been
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countersigned by the Transfer Agent. The Partners holding Certificates
evidencing Subordinated Units may exchange such Certificates for Certificates
evidencing Common Units on or after the date on which such Subordinated Units
are converted into Common Units pursuant to the terms of Section 5.7(c).
10.2 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The General
Partner shall cause to be kept on behalf of the Partnership a register in
which, subject to such reasonable regulations as it may prescribe and subject
to the provisions of Section 10.2(b), the General Partner will provide for the
registration and transfer of Units. The Transfer Agent is hereby appointed
registrar and transfer agent for the purpose of registering Units and
transfers of such Units as herein provided. The Partnership shall not
recognize transfers of Certificates representing Units unless same are
effected in the manner described in this Section 10.2. Upon surrender for
registration of transfer of any Units evidenced by a Certificate, and subject
to the provisions of Section 10.2(b), the General Partner on behalf of the
Partnership shall execute, and the Transfer Agent shall countersign and
deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more
new Certificates evidencing the same aggregate number of Units as was
evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 11.5, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units
are surrendered for registration of transfer and such Certificates are
accompanied by a Transfer Application duly executed by the transferee (or the
transferee's attorney-in-fact duly authorized in writing). No charge shall be
imposed by the Partnership for such transfer, provided, that as a condition to
the issuance of any new Certificate under this Section 10.2, the General
Partner may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
10.3 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES. (a) If any mutilated
Certificate is surrendered to the Transfer Agent, the General Partner on
behalf of the Partnership shall execute, and upon its request the Transfer
Agent shall countersign and deliver in exchange therefor, a new Certificate
evidencing the same number of Units as the Certificate so surrendered.
(b) The General Partner on behalf of the Partnership shall execute, and upon
its request the Transfer Agent shall countersign and deliver a new Certificate
in place of any Certificate previously issued if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the Partnership a
bond, in form and substance satisfactory to the General Partner, with
surety or sureties and with fixed or open penalty as the General Partner
may reasonably direct, in its sole discretion, to indemnify the
Partnership, the General Partner and the Transfer Agent against any claim
that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the General
Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the General Partner or the Transfer Agent
receives such notification, the Limited Partner or Assignee shall be precluded
from making any claim against the Partnership, the General Partner or the
Transfer Agent for such transfer or for a new Certificate.
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(c) As a condition to the issuance of any new Certificate under this Section
10.3, the General Partner may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto
and any other expenses (including, without limitation, the fees and expenses
of the Transfer Agent) reasonably connected therewith.
10.4 RECORD HOLDER. In accordance with Section 10.2(b), the Partnership
shall be entitled to recognize the Record Holder as the Limited Partner or
Assignee with respect to any Units and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such Units on the
part of any other Person, whether or not the Partnership shall have actual or
other notice thereof, except as otherwise provided by law or any applicable
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading. Without limiting the foregoing,
when a Person (such as a broker, dealer, bank, trust company or clearing
corporation or an agent of any of the foregoing) is acting as nominee, agent
or in some other representative capacity for another Person in acquiring
and/or holding Units, as between the Partnership on the one hand, and such
other Persons, on the other, such representative Person (a) shall be the
Limited Partner or Assignee (as the case may be) of record and beneficially,
(b) must execute and deliver a Transfer Application and (c) shall be bound by
this Agreement and shall have the rights and obligations of a Limited Partner
or Assignee (as the case may be) hereunder and as provided for herein.
ARTICLE XI
TRANSFER OF INTERESTS
11.1 TRANSFER. (a) The term "TRANSFER," when used in this Article XI with
respect to a Partnership Interest, shall be deemed to refer to a transaction
by which the General Partner assigns its Partnership Interest as a general
partner in the Partnership to another Person, by which the holder of a Unit
assigns such Unit to another Person who is or becomes an Assignee or by which
a Special Limited Partner holding an IDR assigns such IDR to another Person,
and includes a sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
XI. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article XI shall be null and void.
(c) Nothing contained in this Article XI shall be construed to prevent a
disposition by the parent entity of the General Partner of any or all of the
issued and outstanding capital stock of the General Partner.
(d) Nothing contained in this Article XI, or elsewhere in this Partnership
Agreement, shall preclude the settlement of any transactions involving Common
Units entered into through the facilities of the New York Stock Exchange.
11.2 TRANSFER OF A GENERAL PARTNER'S PARTNERSHIP INTEREST. Except for a
transfer by the General Partner of all, but not less than all, of its
Partnership Interest as a general partner in the Partnership to (a) an
Affiliate of the General Partner or (b) another Person in connection with the
merger or consolidation of the General Partner with or into another Person or
the transfer by the General Partner of all or substantially all of its assets
to another Person, the transfer by the General Partner of all or any part of
its Partnership Interest as a general partner in the Partnership to a Person
prior to July 31, 2004 shall be subject to the prior approval of at least a
majority of the Outstanding Units (excluding for purposes of such
determination Units owned by the General Partner and its Affiliates).
Notwithstanding anything herein to the contrary, no transfer by the General
Partner of all or any part of its Partnership Interest as a general partner in
the Partnership to another Person shall be permitted unless (i) the
transferee agrees to assume the rights and duties of the General Partner under
this Agreement and
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the Operating Partnership Agreement and to be bound by the provisions of this
Agreement and the Operating Partnership Agreement, (ii) the Partnership
receives an Opinion of Counsel that such transfer would not result in the loss
of limited liability of any Limited Partner or of any limited partner of the
Operating Partnership or cause the Partnership or any of the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes and (iii)
such transferee also agrees to purchase all (or the appropriate portion
thereof, if applicable) of the partnership interest of the General Partner as
the general partner of the Operating Partnership. In the case of a transfer
pursuant to and in compliance with this Section 11.2, the transferee or
successor (as the case may be) shall, subject to compliance with the terms of
Section 12.3, be admitted to the Partnership as a General Partner immediately
prior to the transfer of the Partnership Interest, and the business of the
Partnership shall continue without dissolution.
11.3 TRANSFER OF UNITS. (a) Units may be transferred only in the manner
described in Section 10.2. The transfer of any Units and the admission of any
new Partner shall not constitute an amendment to this Agreement.
(b) Until admitted as a Substituted Limited Partner pursuant to Article XII,
the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees, or any other individual or
entity in its own or any representative capacity.
(c) Each distribution in respect of Units shall be paid by the Partnership,
directly or through the Transfer Agent or through any other Person or agent,
only to the Record Holders thereof as of the Record Date set for the
distribution. Such payment shall constitute full payment and satisfaction of
the Partnership's liability in respect of such payment, regardless of any
claim of any Person who may have an interest in such payment by reason of an
assignment or otherwise.
(d) A transferee who has completed and delivered a Transfer Application
shall be deemed to have (i) requested admission as a Substituted Limited
Partner, (ii) agreed to comply with and be bound by and to have executed this
Agreement, (iii) represented and warranted that such transferee has the right,
power and authority and, if an individual, the capacity to enter into this
Agreement, (iv) granted the powers of attorney set forth in this Agreement and
(v) given the consents and approvals and made the waivers contained in this
Agreement.
11.4 RESTRICTIONS ON TRANSFERS. Notwithstanding the other provisions of this
Article XI, no transfer of any Unit or interest therein of any Limited
Partner, Special Limited Partner or Assignee shall be made if such transfer
would (a) violate the then applicable federal or state securities laws or
rules and regulations of the Securities and Exchange Commission, any state
securities commission or any other governmental authorities with jurisdiction
over such transfer, (b) result in the taxation of the Partnership or the
Operating Partnership as an association taxable as a corporation or otherwise
subject the Partnership or the Operating Partnership to entity-level taxation
for federal income tax purposes or (c) affect the Partnership's or the
Operating Partnership's existence or qualification as a limited partnership
under the Delaware Act.
11.5 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES. (a) If the Partnership
or the Operating Partnership is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Partnership or the Operating Partnership has an interest
based on the nationality, citizenship or other related status of a Limited
Partner or Assignee, the General Partner may request any Limited Partner or
Assignee to furnish to the General Partner, within 30 days after receipt of
such request, an executed Citizenship Certification or such other information
concerning his nationality, citizenship or other related status (or, if the
Limited Partner or Assignee is a nominee holding for the account of another
Person, the nationality, citizenship or other related status of such Person)
as the
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General Partner may request. If a Limited Partner or Assignee fails to furnish
to the General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt of
such Citizenship Certification or other requested information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Units owned by such Limited Partner
or Assignee shall be subject to redemption in accordance with the provisions
of Section 11.6. In addition, the General Partner may require that the status
of any such Limited Partner or Assignee be changed to that of a Non-citizen
Assignee, and, thereupon, the General Partner shall be substituted for such
Non-citizen Assignee as the Limited Partner in respect of his Units.
(b) The General Partner shall, in exercising voting rights in respect of
Units held by it on behalf of Non-citizen Assignees, distribute the votes in
the same ratios as the votes of Limited Partners in respect of Units other
than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 14.4 but shall
be entitled to the cash equivalent thereof, and the General Partner shall
provide cash in exchange for an assignment of the Non-citizen Assignee's share
of the distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the General Partner from the Non-citizen
Assignee of his Partnership Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Units
of such Non-citizen Assignee not redeemed pursuant to Section 11.6, and upon
his admission pursuant to Section 12.2 the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
11.6 REDEMPTION OF INTERESTS. (a) If at any time a Limited Partner or
Assignee fails to furnish a Citizenship Certification or other information
requested within the 30-day period specified in Section 11.5(a), or if upon
receipt of such Citizenship Certification or other information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Partnership may, unless the Limited
Partner or Assignee establishes to the satisfaction of the General Partner
that such Limited Partner or Assignee is an Eligible Citizen or has
transferred his Units to a Person who furnishes a Citizenship Certification to
the General Partner prior to the date fixed for redemption as provided below,
redeem the Partnership Interest of such Limited Partner or Assignee as
follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Units, the date fixed for redemption,
the place of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable Units and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Units of the class to be
so redeemed multiplied by the number of Units of each such class included
among the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three
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equal annual installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by
an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to be
other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice of
redemption from transferring his Units before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon receipt of notice
of such a transfer, the General Partner shall withdraw the notice of
redemption, provided, the transferee of such Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make
such certification, such redemption shall be effected from the transferee on
the original redemption date.
11.7 TRANSFER OF IDRS. A Special Limited Partner holding IDRs may transfer
any or all of the IDRs held by such Special Limited Partner. The General
Partner shall have the authority (but shall not be required) to adopt such
reasonable restrictions on the transfer of IDRs, consistent with the
restrictions on transfer of Units provided for in this Agreement, and
requirements for registering the transfer of IDRs as the General Partner, in
its sole discretion, shall determine are necessary or appropriate including,
without limitation, if the General Partner shall so determine, in its sole
discretion, the right of the Partnership to redeem IDRs upon terms and
conditions similar to those applicable to Units.
ARTICLE XII
ADMISSION OF PARTNERS
12.1 ADMISSION OF INITIAL LIMITED PARTNERS. Upon the issuance by the
Partnership of Common Units, Subordinated Units and IDRs to the General
Partner as described in Section 4.2, the General Partner shall be deemed to
have been admitted to the Partnership as a Limited Partner in respect of the
Common Units and Subordinated Units issued to it and as a Special Limited
Partner in respect of the IDRs issued to it. Upon the issuance by the
Partnership of Common Units to the Underwriters as described in Section 4.2 in
connection with the Initial Offering and the execution by each Underwriter of
a Transfer Application, the General Partner shall admit the Underwriters to
the Partnership as Initial Limited Partners in respect of the Common Units
purchased by them.
12.2 ADMISSION OF SUBSTITUTED LIMITED PARTNERS. By transfer of a Unit in
accordance with Article XI, the transferor shall be deemed to have given the
transferee the right to seek admission as a Substituted Limited Partner
subject to the conditions of, and in the manner permitted under, this
Agreement. A transferor of a Certificate shall, however, only have the
authority to convey to a purchaser or other transferee who does not execute
and deliver a Transfer Application (a) the right to negotiate such Certificate
to a purchaser or other transferee and (b) the right to transfer the right to
request admission as a Substituted Limited Partner to such purchaser or other
transferee in respect of the transferred Units. Each transferee of a Unit
(including, without limitation, any nominee holder or an agent acquiring such
Unit for the account of another Person) who executes and delivers a Transfer
Application shall, by virtue of such execution and delivery, be an Assignee
and be deemed to have applied to become a Substituted Limited Partner with
respect to the Units so transferred to such Person. Such Assignee shall become
a Substituted Limited Partner (x) at such time as the General
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Partner consents thereto, which consent may be given or withheld in the
General Partner's sole discretion, and (y) when any such admission is shown on
the books and records of the Partnership. If such consent is withheld, such
transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to
allocations and distributions, including, without limitation, liquidating
distributions, of the Partnership. With respect to voting rights attributable
to Units that are held by Assignees, the General Partner shall be deemed to be
the Limited Partner with respect thereto and shall, in exercising the voting
rights in respect of such Units on any matter, vote such Units at the written
direction of the Assignee who is the Record Holder of such Units. If no such
written direction is received, such Units will not be voted. An Assignee shall
have no other rights of a Limited Partner.
12.3 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor General Partner
approved pursuant to Section 13.1 or 13.2 or the transferee of or successor to
all of the General Partner's Partnership Interest as a general partner in the
Partnership pursuant to Section 11.2 who is proposed to be admitted as a
successor General Partner shall be admitted to the Partnership as the General
Partner, effective immediately prior to the withdrawal or removal of the
General Partner pursuant to Section 13.1 or 13.2 or the transfer of the
General Partner's Partnership Interest as a general partner in the Partnership
pursuant to Section 11.2; provided, however, that no such successor shall be
admitted to the Partnership until compliance with the terms of Section 11.2
has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
Partnership and Operating Partnership without dissolution.
12.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS. (a) A Person (other than the
General Partner, an Initial Limited Partner or a Substituted Limited Partner)
who makes a Capital Contribution to the Partnership in accordance with this
Agreement shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including, without limitation, the power of attorney
granted in Section 1.4, and (ii) such other documents or instruments as may be
required in the discretion of the General Partner to effect such Person's
admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 12.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's sole discretion. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded as such in the books and records of the Partnership,
following the consent of the General Partner to such admission.
12.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP. To
effect the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Delaware Act to amend
the records of the Partnership to reflect such admission and, if necessary, to
prepare as soon as practical an amendment of this Agreement and, if required
by law, to prepare and file an amendment to the Certificate of Limited
Partnership and may for this purpose, among others, exercise the power of
attorney granted pursuant to Section 1.4.
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
13.1 WITHDRAWAL OF THE GENERAL PARTNER. (a) The General Partner shall be
deemed to have withdrawn from the Partnership upon the occurrence of any one
of the following events (each such event herein referred to as an "EVENT OF
WITHDRAWAL");
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(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 13.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General Partner
pursuant to Section 11.2;
(iii) the General Partner is removed pursuant to Section 13.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition; (C) files a
petition or answer seeking for itself a reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any law; (D) files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against the General
Partner in a proceeding of the type described in clauses (A)-(C) of this
Section 13.1(a)(iv); or (E) seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator of the General Partner or
of all or any substantial part of its properties;
(v) a final and non-appealable judgment is entered by a court with
appropriate jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a
court with appropriate jurisdiction against the General Partner, in each
case under any federal or state bankruptcy or insolvency laws as now or
hereafter in effect; or
(vi) a certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation.
If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi)
occurs, the withdrawing General Partner shall give notice to the Limited
Partners within 30 days after such occurrence. The Partners hereby agree that
only the Events of Withdrawal described in this Section 13.1 shall result in
the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Central Standard
Time, on July 31, 2004, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice of its intention to withdraw to the Limited
Partners, provided, that prior to the effective date of such withdrawal the
withdrawal is approved by Limited Partners holding at least two-thirds of the
Outstanding Units (excluding for purposes of such determination Units owned by
the General Partner and its Affiliates) and the General Partner delivers to
the Partnership an Opinion of Counsel ("WITHDRAWAL OPINION OF COUNSEL") that
such withdrawal (following the selection of the successor General Partner)
would not result in the loss of the limited liability of any Limited Partner
or of the limited partner of the Operating Partnership or cause the
Partnership or the Operating Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes; (ii) at any time after 12:00 midnight, Central Standard
Time, on July 31, 2004, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice to the Limited Partners, such withdrawal to take
effect on the date specified in such notice; (iii) at any time that the
General Partner ceases to be a General Partner pursuant to Section 13.1(a)(ii)
or is removed pursuant to Section 13.2; or (iv) notwithstanding clause (i) of
this sentence, at any time that the General Partner voluntarily withdraws by
giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners, such withdrawal to take effect on the date specified in the
notice, if at the time such notice is given one Person and its Affiliates
(other than the General Partner and its Affiliates) own beneficially or of
record or control at least 50% of the Outstanding Units. The withdrawal of the
General Partner from the Partnership upon the occurrence of an Event of
Withdrawal shall also constitute the withdrawal of the General Partner as
general partner of the Operating Partnership. If the General Partner gives a
notice of withdrawal pursuant to Section 13.1(a)(i), holders of at least a
majority of the
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Outstanding Units (excluding for purposes of such determination Units owned by
the General Partner and its Affiliates) may, prior to the effective date of
such withdrawal, elect a successor General Partner. If, prior to the effective
date of the General Partner's withdrawal, a successor is selected by the
Limited Partners as provided herein, the Partnership, as the limited partner
of the Operating Partnership, shall cause such Person to become the successor
general partner of the Operating Partnership, as provided in the Operating
Partnership Agreement. If, prior to the effective date of the General
Partner's withdrawal, a successor is not selected by the Limited Partners as
provided herein or the Partnership does not receive a Withdrawal Opinion of
Counsel, the Partnership shall be dissolved in accordance with Section 14.1.
Any successor General Partner elected in accordance with the terms of this
Section 13.1 shall be subject to the provisions of Section 12.3.
13.2 REMOVAL OF THE GENERAL PARTNER. The General Partner may be removed if
such removal is approved by Limited Partners holding at least two-thirds of
the Outstanding Units. Any such action by such Limited Partners for removal of
the General Partner must also provide for the election of a successor General
Partner by Limited Partners holding at least a majority of the Outstanding
Units. Such removal shall be effective immediately following the admission of
a successor General Partner pursuant to Article XII. The removal of the
General Partner shall also automatically constitute the removal of the General
Partner as general partner of the Operating Partnership, as provided in the
Operating Partnership Agreement. If a Person is elected as a successor General
Partner in accordance with the terms of this Section 13.2, the Partnership, as
the limited partner of the Operating Partnership, shall cause such Person to
become the successor general partner of the Operating Partnership, as provided
in the Operating Partnership Agreement. The right of the Limited Partners
holding Outstanding Units to remove the General Partner shall not exist or be
exercised unless the Partnership has received an opinion opining as to the
matters covered by a Withdrawal Opinion of Counsel. Any successor General
Partner elected in accordance with the terms of this Section 13.2 shall be
subject to the provisions of Section 12.3.
13.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER. (a) In the
event of (i) withdrawal of the General Partner under circumstances where such
withdrawal does not violate this Agreement or (ii) removal of the General
Partner by the Limited Partners under circumstances where Cause does not
exist, if a successor General Partner is elected in accordance with the terms
of Section 13.1 or 13.2, the Departing Partner shall have the option
exercisable prior to the effective date of the departure of such Departing
Partner to require its successor to purchase its Partnership Interest as a
general partner in the Partnership and its partnership interest as the general
partner in the Operating Partnership (collectively, the "COMBINED INTEREST")
in exchange for an amount in cash equal to the fair market value of such
Combined Interest, such amount to be determined and payable as of the
effective date of its departure. If the General Partner is removed by the
Limited Partners under circumstances where Cause exists or if the General
Partner withdraws under circumstances where such withdrawal violates this
Agreement or the Operating Partnership Agreement, and if a successor General
Partner is elected in accordance with the terms of Section 13.1 or 13.2, such
successor shall have the option, exercisable prior to the effective date of
the departure of such Departing Partner, to purchase the Combined Interest of
the Departing Partner for such fair market value of such Combined Interest. In
either event, the Departing Partner shall be entitled to receive all
reimbursements due such Departing Partner pursuant to Section 6.4, including,
without limitation, any employee-related liabilities (including, without
limitation, severance liabilities), incurred in connection with the
termination of any employees employed by the General Partner for the benefit
of the Partnership or the Operating Partnership. Subject to Section 13.3(b),
the Departing Partner shall, as of the effective date of its departure, cease
to share in any allocations or distributions with respect to its Partnership
Interest as a general partner in the Partnership and Partnership income, gain,
loss, deduction and credit will be prorated and allocated as set forth in
Section 5.2(g).
For purposes of this Section 13.3(a), the fair market value of the Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing
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agreement within 30 days after the effective date of such Departing Partner's
departure, by an independent investment banking firm or other independent
expert selected by the Departing Partner and its successor, which, in turn,
may rely on other experts and the determination of which shall be conclusive
as to such matter. If such parties cannot agree upon one independent
investment banking firm or other independent expert within 45 days after the
effective date of such departure, then the Departing Partner shall designate
an independent investment banking firm or other independent expert, the
Departing Partner's successor shall designate an independent investment
banking firm or other independent expert, and such firms or experts shall
mutually select a third independent investment banking firm or independent
expert, which shall determine the fair market value of the Combined Interest.
In making its determination, such independent investment banking firm or other
independent expert shall consider the then current trading price of Units on
any National Securities Exchange on which Units are then listed, the value of
the Partnership's assets, the rights and obligations of the General Partner
and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 13.3(a), the Departing Partner shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant to a valuation
made by an investment banking firm or other independent expert selected
pursuant to Section 13.3(a), without reduction in such Partnership Interest
(but subject to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the Departing
Partner as to all debts and liabilities of the Partnership arising on or after
the date on which the Departing Partner becomes a Limited Partner. For
purposes of this Agreement, conversion of the General Partner's Combined
Interest to Common Units will be characterized as if the General Partner
contributed its Combined Interest to the Partnership in exchange for the
newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 13.1 or 13.2 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
capital of the Partnership cash in an amount such that its Capital Account,
after giving effect to such contribution and any adjustments made to the
Capital Accounts of all Partners pursuant to Section 4.4(d)(i), shall be equal
to that percentage of the Capital Accounts of all Partners that is equal to
its Percentage Interest as the General Partner. In such event, such successor
General Partner shall, subject to the following sentence, be entitled to such
Percentage Interest of all Partnership allocations and distributions and any
other allocations and distributions to which the Departing Partner was
entitled. In addition, such successor General Partner shall cause this
Agreement to be amended to reflect that, from and after the date of such
successor General Partner's admission, the successor General Partner's
interest in all Partnership distributions and allocations shall be 1%, and
that of the holders of Outstanding Units shall be 99%.
13.4 WITHDRAWAL OF LIMITED PARTNERS. No Limited Partner shall have any right
to withdraw from the Partnership; provided, however, that when a transferee of
a Limited Partner's Units becomes a Record Holder, such transferring Limited
Partner shall cease to be a Limited Partner with respect to the Units so
transferred.
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
14.1 DISSOLUTION. The Partnership shall not be dissolved by the admission of
Substituted Limited Partners or Additional Limited Partners or by the
admission of a successor General Partner in accordance with the terms of this
Agreement. Upon the removal or withdrawal of the General Partner, if a
successor General Partner is elected pursuant to Section 13.1 or 13.2, the
Partnership shall not be dissolved and such successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
(subject to Section 14.2) its affairs should be wound up, upon:
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(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the General Partner as provided in Section
13.1(a) (other than Section 13.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 13.1(b) or 13.2
and such successor is admitted to the Partnership pursuant to Section 12.3;
(c) an election to dissolve the Partnership by the General Partner that
(i) during the Subordination Period, is approved by at least a majority of
the Outstanding Units other than Units held by the General Partner or its
Affiliates or (ii) after the expiration of the Subordination Period, is
approved by at least a majority of the Outstanding Units (and all Limited
Partners hereby expressly consent that in either case such approval may be
effected upon written consent of said applicable percentage of the
Outstanding Units);
(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership and the Operating Partnership taken as a whole.
14.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION. Upon
(a) dissolution of the Partnership following an Event of Withdrawal caused by
the withdrawal or removal of the General Partner as provided in Section
13.1(a)(i) or (iii) and the failure of the Partners to select a successor to
such Departing Partner pursuant to Section 13.1 or 13.2, then within 90 days
thereafter or (b) dissolution of the Partnership upon an event constituting an
Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or (vi), then
within 180 days thereafter, a majority of the Outstanding Units may elect to
reconstitute the Partnership and continue its business on the same terms and
conditions set forth in this Agreement by forming a new limited partnership on
terms identical to those set forth in this Agreement and having as the
successor general partner a Person approved by a majority of the Outstanding
Units. Upon any such election by a majority of the Outstanding Units, all
Partners shall be bound thereby and shall be deemed to have approved thereof.
Unless such an election is made within the applicable time period as set forth
above, the Partnership shall conduct only activities necessary to wind up its
affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be treated
thenceforth as the interest of a Limited Partner and converted into Common
Units in the manner provided in Section 13.3(b); and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 1.4; provided,
that the right of a majority of Outstanding Units to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
14.3 LIQUIDATION. Upon dissolution of the Partnership, unless the
Partnership is continued under an election to reconstitute and continue the
Partnership pursuant to Section 14.2, the General Partner, or in the event the
General Partner has been dissolved or removed, become bankrupt as set forth in
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Section 13.1 or withdrawn from the Partnership, a liquidator or liquidating
committee approved by a majority of the Outstanding Units, shall be the
Liquidator. The Liquidator (if other than the General Partner) shall be
entitled to receive such compensation for its services as may be approved by a
majority of the Outstanding Units. The Liquidator shall agree not to resign at
any time without 15 days' prior notice and (if other than the General Partner)
may be removed at any time, with or without cause, by notice of removal
approved by a majority of the Outstanding Units. Upon dissolution, removal or
resignation of the Liquidator, a successor and substitute Liquidator (who
shall have and succeed to all rights, powers and duties of the original
Liquidator) shall within 30 days thereafter be approved by a majority of the
Outstanding Units. The right to approve a successor or substitute Liquidator
in the manner provided herein shall be deemed to refer also to any such
successor or substitute Liquidator approved in the manner herein provided.
Except as expressly provided in this Article XIV, the Liquidator approved in
the manner provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers, other than the limitation on sale set forth in
Section 6.3(b)) to the extent necessary or desirable in the good faith
judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the
winding up and liquidation of the Partnership as provided for herein. The
Liquidator shall liquidate the assets of the Partnership, and apply and
distribute the proceeds of such liquidation in the following order of
priority, unless otherwise required by mandatory provisions of applicable law:
(a) the payment to creditors of the Partnership, including, without
limitation, Partners who are creditors, in the order of priority provided
by law; and the creation of a reserve of cash or other assets of the
Partnership for contingent liabilities in an amount, if any, determined by
the Liquidator to be appropriate for such purposes; and
(b) to all Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made
by reason of this clause) for the taxable year of the Partnership during
which the liquidation of the Partnership occurs (with the date of such
occurrence being determined pursuant to Treasury Regulation Section 1.704-
1(b)(2)(ii)(g)); and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such
occurrence).
14.4 DISTRIBUTIONS IN KIND. (a) Notwithstanding the provisions of Section
14.3, which require the liquidation of the assets of the Partnership, but
subject to the order of priorities set forth therein, if prior to or upon
dissolution of the Partnership the Liquidator determines that an immediate
sale of part or all of the Partnership's assets would be impractical or would
cause undue loss to the Partners, the Liquidator may, in its absolute
discretion, defer for a reasonable time the liquidation of any assets except
those necessary to satisfy liabilities of the Partnership (including, without
limitation, those to Partners as creditors) and or distribute to the Partners
or to specific classes of Partners, in lieu of cash, as tenants in common and
in accordance with the provisions of Section 14.3, undivided interests in such
Partnership assets as the Liquidator deems not suitable for liquidation. Any
such distributions in kind shall be made only if, in the good faith judgment
of the Liquidator, such distributions in kind are in the best interest of the
Limited Partners, and shall be subject to such conditions relating to the
disposition and management of such properties as the Liquidator deems
reasonable and equitable and to any agreements governing the operation of such
properties at such time. The Liquidator shall determine the fair market value
of any property distributed in kind using such reasonable method of valuation
as it may adopt.
(b) In accordance with Section 704(c)(1)(B) of the Code, in the case of any
deemed distribution occurring as a result of a termination of the Partnership
pursuant to Section 708(b)(1)(B) of the Code,
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to the maximum extent possible consistent with the priorities of Section 14.3,
the General Partner shall have sole discretion to treat the deemed
distribution of Partnership assets to Partners as occurring in a manner that
will not cause a shift of the Book-Tax Disparity attributable to a Partnership
asset existing immediately prior to the deemed distribution to another asset
upon the deemed contribution of assets to the reconstituted Partnership,
including, without limitation, deeming the distribution of any Partnership
assets to be made either to the Partner who contributed such assets or to the
transferee of such Partner.
14.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the completion
of the distribution of Partnership cash and property as provided in Sections
14.3 and 14.4 in connection with the liquidation of the Partnership, the
Partnership shall be terminated and the Certificate of Limited Partnership and
all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be cancelled and such
other actions as may be necessary to terminate the Partnership shall be taken.
14.6 REASONABLE TIME FOR WINDING UP. A reasonable time shall be allowed for
the orderly winding up of business and affairs of the Partnership and the
liquidation of its assets pursuant to Section 14.3 in order to minimize any
losses otherwise attendant upon such winding up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
14.7 RETURN OF CAPITAL. The General Partner shall not be personally liable
for, and shall have no obligation to contribute or loan any monies or property
to the Partnership to enable it to effectuate, the return of the Capital
Contributions of the Limited Partners, or any portion thereof, it being
expressly understood that any such return shall be made solely from
Partnership assets.
14.8 CAPITAL ACCOUNT RESTORATION. No Limited Partner shall have any
obligation to restore any negative balance in its Capital Account upon
liquidation of the Partnership. The General Partner shall be obligated to
restore any negative balance in its Capital Account upon liquidation of its
interest in the Partnership by the end of the taxable year of the Partnership
during which such liquidation occurs, or, if later, within 90 days after the
date of such liquidation.
14.9 WAIVER OF PARTITION. Each Partner hereby waives any right to partition
of the Partnership property.
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT;
MEETINGS; RECORD DATE
15.1 AMENDMENT TO BE ADOPTED SOLELY BY GENERAL PARTNER. Each Limited Partner
agrees that the General Partner (pursuant to its powers of attorney from the
Limited Partners, Special Limited Partners and Assignees), without the
approval of any Limited Partner or Assignee, may amend any provision of this
Agreement, and execute, swear to, acknowledge, deliver, file and record
whatever documents may be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or appropriate to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or that is
necessary or advisable in the opinion of the General Partner to ensure that
the Partnership and the Operating
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Partnership will not be treated as an association taxable as a corporation
or otherwise taxed as an entity for federal income tax purposes;
(d) a change (i) that, in the sole discretion of the General Partner,
does not adversely affect the Limited Partners in any material respect,
(ii) that is necessary or desirable to satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute (including, without limitation,
the Delaware Act) or that is necessary or desirable to facilitate the
trading of the Units (including, without limitation, the division of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the General Partner determines in its sole discretion to be in the
best interests of the Partnership and the Limited Partners or (iii) that is
necessary or desirable to implement certain tax-related provisions of the
Partnership Agreement, or (iv) that is required to effect the intent of the
provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year and taxable year of the Partnership and
any changes that, in the sole discretion of the General Partner, are
necessary or appropriate as a result of a change in the fiscal year and
taxable year of the Partnership including, without limitation, if the
General Partner shall so determine, a change in the definition of "Quarter"
and the dates on which distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership or the General Partner or its directors or officers from in
any manner being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, as amended, whether or not substantially similar to
plan asset regulations currently applied or proposed by the United States
Department of Labor;
(g) subject to the terms of Section 4.3, an amendment that, in the sole
discretion of the General Partner, is necessary or desirable in connection
with the authorization for issuance of any class or series of Partnership
Securities pursuant to Section 4.3;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the General Partner, is
necessary or desirable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
3.1; or
(k) any other amendments substantially similar to the foregoing.
15.2 AMENDMENT PROCEDURES. Except as provided in Sections 15.1 and 15.3, all
amendments to this Agreement shall be made in accordance with the following
requirements. Amendments to this Agreement may be proposed only by or with the
consent of the General Partner. A proposed amendment shall be effective upon
its approval by the holders of at least two-thirds of the Outstanding Units
during the Subordination Period and thereafter upon its approval by the
holders of at least a majority of the Outstanding Units, unless, in either
case, a greater or different percentage is required under this Agreement. Each
proposed amendment that requires the approval of the holders of a specified
percentage of Outstanding Units shall be set forth in a writing that contains
the text of the
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proposed amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Limited Partners to consider and vote on such
proposed amendment. The General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
15.3 AMENDMENT REQUIREMENTS. (a) Notwithstanding the provisions of Sections
15.1 and 15.2, no provision of this Agreement that establishes a percentage of
Outstanding Units required to take any action shall be amended, altered,
changed, repealed or rescinded in any respect that would have the effect of
reducing such voting requirement unless such amendment is approved by the
written consent or the affirmative vote of holders of Outstanding Units whose
aggregate Outstanding Units constitute not less than the voting requirement
sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner
without its consent, (ii) enlarge the obligations of the General Partner
without its consent, which may be given or withheld in its sole discretion,
(iii) modify the amounts distributable, reimbursable or otherwise payable to
the General Partner by the Partnership or the Operating Partnership, (iv)
change Section 14.1(a) or (c), (v) restrict in any way any action by or rights
of the General Partner as set forth in this Agreement or (vi) change the term
of the Partnership or, except as set forth in Section 14.1(c), give any Person
the right to dissolve the Partnership.
(c) Except as otherwise provided, and without limitation of the General
Partner's authority to adopt amendments to this Agreement as contemplated in
Section 15.1, any amendment that would have a material adverse effect on the
rights or preferences of any class of Outstanding Units in relation to other
classes of Units must be approved by the holders of not less than a majority
of the Outstanding Units of the class affected (excluding for purposes of such
determination Units owned by the General Partner and its Affiliates).
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 6.3 or 15.1 and except as otherwise provided by
Section 16.3(b), no amendments shall become effective without the approval of
the holders of at least 95% of the Outstanding Units unless the Partnership
obtains an Opinion of Counsel to the effect that (a) such amendment will not
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise taxable as an entity for
federal income tax purposes and (b) such amendment will not affect the limited
liability of any Limited Partner or any limited partner of the Operating
Partnership under applicable law.
(e) This Section 15.3 shall only be amended with the approval of the holders
of not less than 95% of the Outstanding Units.
15.4 MEETINGS. All acts of Limited Partners to be taken pursuant to this
Agreement shall be taken in the manner provided in this Article XV. Meetings
of the Limited Partners may be called by the General Partner or by Limited
Partners owning 20% or more of the Outstanding Units of the class or classes
for which a meeting is proposed. Limited Partners shall call a meeting by
delivering to the General Partner one or more requests in writing stating that
the signing Limited Partners wish to call a meeting and indicating the general
or specific purposes for which the meeting is to be called. Within 60 days
after receipt of such a call from Limited Partners or within such greater time
as may be reasonably necessary for the Partnership to comply with any
statutes, rules, regulations, listing agreements or similar requirements
governing the holding of a meeting or the solicitation of proxies for use at
such a meeting, the General Partner shall send a notice of the meeting to the
Limited Partners either directly or indirectly through the Transfer Agent. A
meeting shall be held at a time and place determined by the General Partner on
a date not more than 60 days after the mailing of notice of the meeting.
Limited Partners shall not vote on matters that would cause the Limited
Partners to be deemed to be taking part in the management and control of the
business and affairs of the Partnership so as to jeopardize the Limited
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Partners' limited liability under the Delaware Act or the law of any other
state in which the Partnership is qualified to do business.
15.5 NOTICE OF A MEETING. Notice of a meeting called pursuant to Section
15.4 shall be given to the Record Holders in writing by mail or other means of
written communication in accordance with Section 18.1. The notice shall be
deemed to have been given at the time when deposited in the mail or sent by
other means of written communication.
15.6 RECORD DATE. For purposes of determining the Limited Partners entitled
to notice of or to vote at a meeting of the Limited Partners or to give
approvals without a meeting as provided in Section 15.11, the General Partner
may set a Record Date, which shall not be less than 10 nor more than 60 days
before (a) the date of the meeting (unless such requirement conflicts with any
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern) or (b) in the event
that approvals are sought without a meeting, the date by which Limited
Partners are requested in writing by the General Partner to give such
approvals.
15.7 ADJOURNMENT. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting and a new Record Date need
not be fixed, if the time and place thereof are announced at the meeting at
which the adjournment is taken, unless such adjournment shall be for more than
45 days. At the adjourned meeting, the Partnership may transact any business
which might have been transacted at the original meeting. If the adjournment
is for more than 45 days or if a new Record Date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given in accordance with
this Article XV.
15.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES. The
transactions of any meeting of Limited Partners, however called and noticed,
and whenever held, shall be as valid as if had at a meeting duly held after
regular call and notice, if a quorum is present either in person or by proxy,
and if, either before or after the meeting, Limited Partners representing such
quorum who were present in person or by proxy and entitled to vote, sign a
written waiver of notice or an approval of the holding of the meeting or an
approval of the minutes thereof. All waivers and approvals shall be filed with
the Partnership records or made a part of the minutes of the meeting.
Attendance of a Limited Partner at a meeting shall constitute a waiver of
notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of
matters required to be included in the notice of the meeting, but not so
included, if the disapproval is expressly made at the meeting.
15.9 QUORUM. The holders of two-thirds of the Outstanding Units of the class
or classes for which a meeting has been called represented in person or by
proxy shall constitute a quorum at a meeting of Limited Partners of such class
or classes unless any such action by the Limited Partners requires approval by
holders of a majority in interest of such Units, in which case the quorum
shall be a majority (excluding, in either case, if such are to be excluded
from the vote, Outstanding Units owned by the General Partner and its
Affiliates). At any meeting of the Limited Partners duly called and held in
accordance with this Agreement at which a quorum is present, the act of
Limited Partners holding Outstanding Units that in the aggregate represent a
majority of the Outstanding Units entitled to vote and be present in person or
by proxy at such meeting shall be deemed to constitute the act of all Limited
Partners, unless a greater or different percentage is required with respect to
such action under the provisions of this Agreement, in which case the act of
the Limited Partners holding Outstanding Units that in the aggregate represent
at least such greater or different percentage shall be required. The Limited
Partners present at a duly called or held meeting at which a quorum is present
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the
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required percentage of Outstanding Units specified in this Agreement. In the
absence of a quorum, any meeting of Limited Partners may be adjourned from
time to time by the affirmative vote of a majority of the Outstanding Units
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 15.7.
15.10 CONDUCT OF MEETING. The General Partner shall have full power and
authority concerning the manner of conducting any meeting of the Limited
Partners or solicitation of approvals in writing, including, without
limitation, the determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of Section 15.4, the conduct of
voting, the validity and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or during the
meeting or voting. The General Partner shall designate a Person to serve as
chairman of any meeting and shall further designate a Person to take the
minutes of any meeting. All minutes shall be kept with the records of the
Partnership maintained by the General Partner. The General Partner may make
such other regulations consistent with applicable law and this Agreement as it
may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including, without
limitation, regulations in regard to the appointment of proxies, the
appointment and duties of inspectors of votes and approvals, the submission
and examination of proxies and other evidence of the right to vote, and the
revocation of approvals in writing.
15.11 ACTION WITHOUT A MEETING. Any action that may be taken at a meeting of
the Limited Partners may be taken without a meeting if an approval in writing
setting forth the action so taken is signed by Limited Partners owning not
less than the minimum percentage of the Outstanding Units that would be
necessary to authorize or take such action at a meeting at which all the
Limited Partners were present and voted. Prompt notice of the taking of action
without a meeting shall be given to the Limited Partners who have not approved
in writing. The General Partner may specify that any written ballot submitted
to Limited Partners for the purpose of taking any action without a meeting
shall be returned to the Partnership within the time period, which shall be
not less than 20 days, specified by the General Partner. If a ballot returned
to the Partnership does not vote all of the Units held by the Limited Partner,
the Partnership shall be deemed to have failed to receive a ballot for the
Units that were not voted. If approval of the taking of any action by the
Limited Partners is solicited by any Person other than by or on behalf of the
General Partner, the written approvals shall have no force and effect unless
and until (a) they are deposited with the Partnership in care of the General
Partner, (b) approvals sufficient to take the action proposed are dated as of
a date not more than 90 days prior to the date sufficient approvals are
deposited with the Partnership and (c) an Opinion of Counsel is delivered to
the General Partner to the effect that the exercise of such right and the
action proposed to be taken with respect to any particular matter (i) will not
cause the Limited Partners to be deemed to be taking part in the management
and control of the business and affairs of the Partnership so as to jeopardize
the Limited Partners' limited liability, (ii) will not jeopardize the status
of the Partnership as a partnership under applicable tax laws and regulations
and (iii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
15.12 VOTING AND OTHER RIGHTS. (a) Only those Record Holders of Units on the
Record Date set pursuant to Section 15.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to
matters as to which the holders of the Outstanding Units have the right to
vote or to act. All references in this Agreement to votes of, or other acts
that may be taken by, the Outstanding Units shall be deemed to be references
to the votes or acts of the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such broker, dealer or other agent shall, in exercising the voting rights in
respect of such Units on any matter, and unless the arrangement between such
Persons provides otherwise, vote such Units in favor of, and at the direction
of, the Person who is the beneficial owner,
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and the Partnership shall be entitled to assume it is so acting without
further inquiry. The provisions of this Section 15.12(b) (as well as all other
provisions of this Agreement) are subject to the provisions of Section 10.4.
ARTICLE XVI
MERGER
16.1 AUTHORITY. The Partnership may merge or consolidate with one or more
corporations, business trusts or associations, real estate investment trusts,
common law trusts or unincorporated businesses, including, without limitation,
a general partnership or limited partnership, formed under the laws of the
State of Delaware or any other state of the United States of America, pursuant
to a written agreement of merger or consolidation ("MERGER AGREEMENT") in
accordance with this Article XVI.
16.2 PROCEDURE FOR MERGER OR CONSOLIDATION. Merger or consolidation of the
Partnership pursuant to this Article XVI requires the prior approval of the
General Partner. If the General Partner shall determine, in the exercise of
its sole discretion, to consent to the merger or consolidation, the General
Partner shall approve the Merger Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "SURVIVING BUSINESS ENTITY");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partnership interests, rights, securities or
obligations of the Surviving Business Entity; and (i) if any general or
limited partnership interests, securities or rights of any constituent
business entity are not to be exchanged or converted solely for, or into,
cash, property or general or limited partnership interests, rights,
securities or obligations of the Surviving Business Entity, the cash,
property or general or limited partnership interests, rights, securities or
obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such
general or limited partnership interests, securities or rights are to
receive in exchange for, or upon conversion of, their general or limited
partnership interests, securities or rights, and (ii) in the case of
securities represented by certificates, upon the surrender of such
certificates, which cash, property or general or limited partnership
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
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16.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION. (a) The
General Partner of the Partnership, upon its approval of the Merger Agreement,
shall direct that the Merger Agreement be submitted to a vote of Limited
Partners whether at a meeting or by written consent, in either case in
accordance with the requirements of Article XV. A copy or a summary of the
Merger Agreement shall be included in or enclosed with the notice of a meeting
or the written consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of at least a majority of the Outstanding Units
(excluding for purposes of such determination Units owned by the General
Parter and its Affiliates) during the Subordination Period and at least a
majority of the Outstanding Units thereafter unless the Merger Agreement
contains any provision which, if contained in an amendment to this Agreement,
the provisions of this Agreement or the Delaware Act would require the vote or
consent of a greater percentage of the Outstanding Units or of any class of
Limited Partners, in which case such greater percentage vote or consent shall
be required for approval of the Merger Agreement; provided that, in the case
of a merger or consolidation in which the surviving entity is a corporation or
other entity intended to be treated as an association taxable as a corporation
or otherwise taxable as an entity for federal income tax purposes, if in the
opinion of the General Partner it is necessary to effect, in contemplation of
such merger or consolidation, an amendment that would otherwise require a vote
pursuant to Section 15.3(d), no such vote pursuant to Section 15.3(d) shall be
required unless such amendment by its terms will be applicable to the
Partnership in the event the merger or consolidation is abandoned or unless
such amendment will be applicable to the Partnership during a period in excess
of ten days prior to the merger or consolidation.
(c) After such approval by vote or consent of the Limited Partners, and at
any time prior to the filing of the certificate of merger pursuant to Section
16.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
16.4 CERTIFICATE OF MERGER. Upon the required approval by the General
Partner and the Limited Partners of a Merger Agreement, a certificate of
merger shall be executed and filed with the Secretary of State of the State of
Delaware in conformity with the requirements of the Delaware Act.
16.5 EFFECT OF MERGER. (a) At the effective time of the certificate of
merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
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ARTICLE XVII
RIGHT TO ACQUIRE UNITS
17.1 RIGHT TO ACQUIRE UNITS. (a) Notwithstanding any other provision of this
Agreement, if at any time not more than 20% of the total Units of any class
then Outstanding are held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer to the Partnership or any Affiliate of the General
Partner, exercisable in its sole discretion, to purchase all, but not less
than all, of the Units of such class then Outstanding held by Persons other
than the General Partner and its Affiliates, at the greater of (x) the Current
Market Price as of the date three days prior to the date that the notice
described in Section 17.1(b) is mailed, and (y) the highest cash price paid by
the General Partner or any of its Affiliates for any such Unit purchased
during the 90-day period preceding the date that the notice described in
Section 17.1(b) is mailed. As used in this Agreement, (i) "CURRENT MARKET
PRICE" as of any date of any class of Units listed or admitted to trading on
any National Securities Exchange means the average of the daily Closing Prices
(as hereinafter defined) per Unit of such class for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date; (ii) "CLOSING
PRICE" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal National Securities Exchange on which the Units of
such class are listed or admitted to trading or if the Units of such class are
not listed or admitted to trading on any National Securities Exchange, the
last quoted price on such day or, if not so quoted, the average of the high
bid and low asked prices on such day in the over the counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or such other system then in use, or if on any such day the
Units of such class are not quoted by any such organization, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Units of such class selected by the Board
of Directors of the General Partner, or if on any such day no market maker is
making a market in the Units of such class, the fair value of such Units on
such day as determined reasonably and in good faith by the Board of Directors
of the General Partner; and (iii) "TRADING DAY" means a day on which the
principal National Securities Exchange on which the Units of any class are
listed or admitted to trading is open for the transaction of business or, if
Units of a class are not listed or admitted to trading on any National
Securities Exchange, a day on which banking institutions in New York City
generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Units granted pursuant to
Section 17.1(a), the General Partner shall deliver to the Transfer Agent
notice of such election to purchase (the "NOTICE OF ELECTION TO PURCHASE") and
shall cause the Transfer Agent to mail a copy of such Notice of Election to
Purchase to the Record Holders of Units (as of a Record Date selected by the
General Partner) at least 10, but not more than 60, days prior to the Purchase
Date. Such Notice of Election to Purchase shall also be published for a period
of at least three consecutive days in at least two daily newspapers of general
circulation printed in the English language and published in the Borough of
Manhattan, New York. The Notice of Election to Purchase shall specify the
Purchase Date and the price (determined in accordance with Section 17.1(a) at
which Units will be purchased and state that the General Partner, its
Affiliate or the Partnership, as the case may be, elects to purchase such
Units, upon surrender of Certificates representing such Units in exchange for
payment, at such office or offices of the Transfer Agent as the Transfer Agent
may specify, or as may be required by any National Securities Exchange on
which the Units are listed or admitted to trading. Any such Notice of Election
to Purchase mailed to a Record Holder of Units at his address as reflected in
the records of the Transfer Agent shall be conclusively presumed to have been
given whether or not the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the Transfer Agent cash in an amount
sufficient to pay the aggregate purchase price of all of the Units to be
purchased in
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accordance with this Section 17.1. If the Notice of Election to Purchase shall
have been duly given as aforesaid at least 10 days prior to the Purchase Date,
and if on or prior to the Purchase Date the deposit described in the preceding
sentence has been made for the benefit of the holders of Units subject to
purchase as provided herein, then from and after the Purchase Date,
notwithstanding that any Certificate shall not have been surrendered for
purchase, all rights of the holders of such Units (including, without
limitation, any rights pursuant to Articles IV, V and XIV) shall thereupon
cease, except the right to receive the purchase price (determined in
accordance with Section 17.1(a)) for Units therefor, without interest, upon
surrender to the Transfer Agent of the Certificates representing such Units,
and such Units shall thereupon be deemed to be transferred to the General
Partner, its Affiliate or the Partnership, as the case may be, on the record
books of the Transfer Agent and the Partnership, and the General Partner or
any Affiliate of the General Partner, or the Partnership, as the case may be,
shall be deemed to be the owner of all such Units from and after the Purchase
Date and shall have all rights as the owner of such Units (including, without
limitation, all rights as owner of such Units pursuant to Articles IV, V and
XIV).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Unit subject to purchase as provided in this Section 17.1 may surrender his
Certificate, as the case may be, evidencing such Unit to the Transfer Agent in
exchange for payment of the amount described in Section 17.1(a), therefor,
without interest thereon.
ARTICLE XVIII
GENERAL PROVISIONS
18.1 ADDRESSES AND NOTICES. Any notice, demand, request, report or proxy
materials required or permitted to be given or made to a Partner or Assignee
under this Agreement shall be in writing and shall be deemed given or made
when delivered in person or when sent by first class United States mail or by
other means of written communication to the Partner or Assignee at the address
described below. Any notice, payment or report to be given or made to a
Partner or Assignee hereunder shall be deemed conclusively to have been given
or made, and the obligation to give such notice or report or to make such
payment shall be deemed conclusively to have been fully satisfied, upon
sending of such notice, payment or report to the Record Holder of such Unit at
his address as shown on the records of the Transfer Agent or as otherwise
shown on the records of the Partnership, regardless of any claim of any Person
who may have an interest in such Unit or the Partnership Interest of a General
Partner by reason of any assignment or otherwise. An affidavit or certificate
of making of any notice, payment or report in accordance with the provisions
of this Section 18.1 executed by the General Partner, the Transfer Agent or
the mailing organization shall be prima facie evidence of the giving or making
of such notice, payment or report. If any notice, payment or report addressed
to a Record Holder at the address of such Record Holder appearing on the books
and records of the Transfer Agent or the Partnership is returned by the United
States Post Office marked to indicate that the United States Postal Service is
unable to deliver it, such notice, payment or report and any subsequent
notices, payments and reports shall be deemed to have been duly given or made
without further mailing (until such time as such Record Holder or another
Person notifies the Transfer Agent or the Partnership of a change in his
address) if they are available for the Partner or Assignee at the principal
office of the Partnership for a period of one year from the date of the giving
or making of such notice, payment or report to the other Partners and
Assignees. Any notice to the Partnership shall be deemed given if received by
the General Partner at the principal office of the Partnership designated
pursuant to Section 1.3. The General Partner may rely and shall be protected
in relying on any notice or other document from a Partner, Assignee or other
Person if believed by it to be genuine.
18.2 REFERENCES. Except as specifically provided otherwise, references to
"Articles" and "Sections" are to Articles and Sections of this Agreement.
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18.3 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
18.4 FURTHER ACTION. The parties shall execute and deliver all documents,
provide all information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement.
18.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
18.6 INTEGRATION. This Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
18.7 CREDITORS. None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the Partnership.
18.8 WAIVER. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute waiver
of any such breach or any other covenant, duty, agreement or condition.
18.9 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which together shall constitute an agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto or, in the case of a
Person acquiring a Unit, upon accepting the certificate evidencing such Unit
or executing and delivering a Transfer Application as herein described,
independently of the signature of any other party.
18.10 APPLICABLE LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
18.11 INVALIDITY OF PROVISIONS. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not be affected thereby.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
FERRELLGAS, INC.
By: ______________________________________
ORGANIZATIONAL LIMITED PARTNER:
------------------------------------------
Danley K. Sheldon
LIMITED PARTNERS:
All Limited Partners now and hereafter
admitted as limited partners of the
Partnership, pursuant to Powers of
Attorney now and hereafter executed in
favor of, and granted and delivered to,
the General Partner.
By:FERRELLGAS, INC.
General Partner, as attorney-in-
fact for all Limited Partners
pursuant to the Powers of Attorney
granted pursuant to Section 1.4.
By: _______________________________
A-70
<PAGE>
EXHIBIT A
TO THE AGREEMENT OF
LIMITED PARTNERSHIP OF
FERRELLGAS PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
FERRELLGAS PARTNERS, L.P.
No. Common Units
FERRELLGAS, INC., a Delaware corporation, as the General Partner of
FERRELLGAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the
registered owner of Common Units representing limited partner
interests in the Partnership (the "Common Units") transferable on the books of
the Partnership, in person or by duly authorized attorney, upon surrender of
this Certificate properly endorsed and accompanied by a properly executed
application for transfer of the Common Units represented by this Certificate.
The rights, preferences and limitations of the Common Units are set forth in,
and this Certificate and the Common Units represented hereby are issued and
shall in all respects be subject to the terms and provisions of, the Agreement
of Limited Partnership of FERRELLGAS PARTNERS, L.P., as amended, supplemented
or restated from time to time (the "Partnership Agreement"). Copies of the
Partnership Agreement are on file at, and will be furnished without charge on
delivery of written request to the Partnership at, the principal office of the
Partnership located at One Liberty Plaza, Liberty, Missouri 64068. Capitalized
terms used herein but not defined shall have the meaning given them in the
Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in
the Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated:_________________
FERRELLGAS, INC.,
as General Partner
Countersigned and Registered by: By: _________________________________
President
___________________________________ , By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
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<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws
or regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties ....... Custodian ........
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as under Uniform Gifts to
tenants in common Minors
Act ......................
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
in
FERRELLGAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF FERRELLGAS PARTNERS, L.P.
You have acquired an interest in Ferrellgas Partners, L.P., One Liberty
Plaza, Liberty, Missouri 64068, whose taxpayer identification number is 43-
1675728. The Internal Revenue Service has issued Ferrellgas Partners, L.P. the
following tax shelter registration number: _____________
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN FERRELLGAS PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Ferrellgas Partners, L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT,
OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN
FERRELLGAS PARTNERS, L.P.
If you transfer your interest in Ferrellgas Partners, L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address
and tax shelter registration number of Ferrellgas Partners, L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could
result in the imposition of a penalty under Section 6707(b) or 6708(a) of the
Internal Revenue Code of 1986, as amended, unless such failure is shown to be
due to reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
A-72
<PAGE>
FOR VALUE RECEIVED, ________________________________ hereby assigns, conveys,
sells and transfers unto ______________________________________________________
- --------------------------------- ------------------------------------------
(Please print or typewrite name (Please insert Social Security or other
and address of Assignee) identifying number of Assignee)
______________________ Common Units representing limited partner interests
evidenced by this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint ______________________ as its
attorney-in-fact with full power of substitution to transfer the same on the
books of Ferrellgas Partners, L.P.
Date: _____________________ NOTE: The signature to any endorsement hereon
must correspond with the name as written
upon the face of this Certificate in
every particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY
A MEMBER FIRM OF THE NATIONAL ---------------------------------------
ASSOCIATION OF SECURITIES DEALERS, (Signature)
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY ---------------------------------------
(Signature)
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units
to be transferred is surrendered for registration or transfer and an
Application for Transfer of Common Units has been executed by a transferee
either (a) on the form set forth below or (b) on a separate application that
the Partnership will furnish on request without charge. A transferor of the
Common Units shall have no duty to the transferee with respect to execution of
the transfer application in order for such transferee to obtain registration
of the transfer of the Common Units.
---------------------------------------------------------------
A-73
<PAGE>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Agreement of
Limited Partnership of Ferrellgas Partners, L.P. (the "Partnership"), as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right,
power and authority and, if an individual, the capacity necessary to enter
into the Partnership Agreement, (c) grants the powers of attorney provided for
in the Partnership Agreement and (d) makes the waivers and gives the consents
and approvals contained in the Partnership Agreement.
Capitalized terms not defined herein have the meanings assigned to such
terms in the Partnership Agreement.
Date: _______________________________ -------------------------------------
Signature of Assignee
- ------------------------------------- -------------------------------------
Social Security or other identifying Name and Address of Assignee
number of Assignee
- -------------------------------------
Purchase Price
including commissions, if any
Type of Entity (check one)
_________ Individual _________ Partnership ________________________ Corporation
_________ Trust _________ Other (specify) _____________________________________
Nationality (Check One):
_____ U.S. Citizen, Resident or Domestic Entity
_____ Foreign Corporation, or _____ Non-resident alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers
of property if a holder of an interest in the Partnership is a foreign person.
To inform the Partnership that no withholding is required with respect to the
undersigned interest holder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interest holder).
Complete Either A or B:
A.Individual Interest Holder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identifying number (Social Security Number) is
___________________________________________________.
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<PAGE>
3.My home address is
________________________________________________.
B. Partnership, Corporate or Other Interest-Holder
1. ______________________________________________________________ is not a
(Name of Interest-Holder)
foreign corporation, foreign partnership, foreign trust or foreign
estate (as those terms are defined in the Code and Treasury
Regulations).
2. The interest-holder's U.S. employer identification number is
_____________________________________________________________________ .
3. The interest-holder's office address and place of incorporation (if
applicable) is
_____________________________________________________________________ .
The interest-holder agrees to notify the Partnership within 60 days of the
date the interest-holder becomes a foreign person.
The interest-holder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
- -------------------------------------------------------------------------------
(Name of Interest-Holder)
- -------------------------------------------------------------------------------
Signature and Date
- -------------------------------------------------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the
above certification as to any person for whom the Assignee will hold the
Common Units shall be made to the best of the Assignee's knowledge.
A-75
<PAGE>
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units
to be transferred is surrendered for registration or transfer and an
Application for Transfer of Common Units has been executed by a transferee
either (a) on the form set forth below or (b) on a separate application that
the Partnership will furnish on request without charge. A transferor of the
Common Units shall have no duty to the transferee with respect to execution of
the transfer application in order for such transferee to obtain registration
of the transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Agreement of
Limited Partnership of Ferrellgas Partners, L.P. (the "Partnership"), as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right,
power and authority and, if an individual, the capacity necessary to enter
into the Partnership Agreement, (c) appoints the General Partner and, if a
Liquidator shall be appointed, the Liquidator of the Partnership as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not
defined herein have the meanings assigned to such terms in the Partnership
Agreement.
Date: _______________________________ -------------------------------------
SIGNATURE OF ASSIGNEE
- ------------------------------------- -------------------------------------
SOCIAL SECURITY OR OTHER IDENTIFYING NAME AND ADDRESS OF ASSIGNEE
NUMBER OF ASSIGNEE
- -------------------------------------
PURCHASE PRICE INCLUDING
COMMISSIONS, IF ANY
Type of Entity (check one)
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) ________________
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation, or [_] Non-resident alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers
of property if a holder of an interest in the Partnership is a foreign person.
To inform the Partnership that no withholding is required with respect to the
undersigned interest-holder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
B-1
<PAGE>
Complete Either A or B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identifying number (Social Security Number) is
___________________________________________________________________ .
3.My home address is _________________________________________________ .
B.Partnership, Corporate or Other Interestholder
1._____________________________________________________ is not a foreign
(NAME OF INTERESTHOLDER)
corporation, foreign partnership, foreign trust or foreign estate
(as those terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is
___________________________________________________________________ .
3.The interestholder's office address and place of incorporation (if
applicable) is
___________________________________________________________________ .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interest-holder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
------------------------------------------
(NAME OF INTERESTHOLDER)
------------------------------------------
SIGNATURE AND DATE
------------------------------------------
TITLE (IF APPLICABLE)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the
above certification as to any person for whom the Assignee will hold the
Common Units shall be made to the best of the Assignee's knowledge.
B-2
<PAGE>
APPENDIX C
GLOSSARY OF TERMS
ACQUISITION PRO FORMA AVAILABLE CASH CONSTITUTING CASH FROM OPERATIONS: The
amount of Available Cash constituting Cash from Operations generated by the
Partnership on a per Unit basis for all outstanding Units with respect to each
of the four most recently completed quarters prior to the referenced
acquisition, determined on a pro forma basis assuming that all of the Common
Units or any such parity securities to be issued in connection with, or in
repayment of any debt incurred in connection with, such transaction had been
issued and outstanding and all indebtedness for borrowed money to be incurred
or assumed in connection with such transaction (other than any such
indebtedness that is to be repaid with the proceeds of such issuance) had been
incurred or assumed, as of the commencement of such four-quarter period, and
computing expenses that would have been incurred by the Partnership in the
operation of the assets and properties acquired by including (i) the personnel
expenses for employees to be retained by the Partnership in the operation of
the assets and properties acquired and (ii) the non-personnel costs and
expenses on the same basis as those incurred by the Partnership in the
operation of the Partnership's business at similarly situated Partnership
facilities.
AUDIT COMMITTEE: A committee of the board of directors of the General
Partner who are neither officers nor employees of the General Partner or any
affiliate of the General Partner with the authority to review, at the request
of the board of directors of the General Partner, specific matters as to which
the board of directors of the General Partner believes there may be a conflict
of interest in order to determine if the resolution of such conflict proposed
by the General Partner is fair and reasonable to the Partnership.
AVAILABLE CASH: Generally, for any quarter, all of the cash receipts of the
Partnership during such quarter (other than cash receipts that are
attributable to the liquidation of the Partnership) plus net reductions to
reserves less all of its cash disbursements and net additions to reserves
during such quarter, including, for the period from the closing of this
offering through October 31, 1994, the cash balance of the Partnership on the
date the Partnership commences operations. The full definition of Available
Cash is set forth in the Partnership Agreement, a form of which is included in
this Prospectus as Appendix A. The definition of Available Cash permits the
General Partner to maintain reserves for distributions with respect to any of
the next four succeeding quarters in order to reduce quarter-to-quarter
variations in distributions. The General Partner has broad discretion in
establishing reserves for other purposes, and its decisions regarding reserves
could have a significant impact on the amount of Available Cash available for
distribution.
BTU: British thermal unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
CASH FROM INTERIM CAPITAL TRANSACTIONS: To avoid the difficulty of trying to
determine whether Available Cash distributed by the Partnership is Cash from
Operations or Cash from Interim Capital Transactions, all Available Cash
distributed by the Partnership from any source will be treated as Cash from
Operations until the sum of all Available Cash distributed as Cash from
Operations equals the cumulative amount of Cash from Operations actually
generated from the date the Partnership commenced operations through the end
of the fiscal quarter prior to such distribution. Any excess Available Cash
(irrespective of its source) will be deemed to be Cash from Interim Capital
Transactions and distributed accordingly. The full definition of Cash from
Interim Capital Transactions is set forth in the Partnership Agreement, a form
of which is included in this Prospectus as Appendix A.
CASH FROM OPERATIONS: Cash from Operations, which is determined on a
cumulative basis, generally refers to the cash balance of the Partnership on
the date the Partnership commences operations, plus an initial balance of $25
million, plus all cash receipts of the Partnership operations
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(excluding any cash proceeds from Interim Capital Transactions), after
deducting all cash operating expenditures, cash debt service payments (other
than refinancings or refundings of debt with the proceeds from new debt or the
sale of equity interests), cash capital expenditures of the Partnership
necessary to maintain the facilities and operations of the Partnership (as
distinguished from capital expenditures made to increase the operating
capacity of the Partnership) and any cash reserves that the General Partner
determines in its reasonable discretion to be necessary or appropriate to
provide for the future cash payment of items of the type referred to above.
The General Partner has the discretion to determine whether capital
expenditures made by the Partnership were necessary or desirable to maintain
the facilities and operations of the Partnership or whether they were made to
increase the operating capacity of the Partnership. The General Partner's
determination will in turn determine whether the capital expenditures in
question will reduce the amount of Cash from Operations. The full definition
of Cash from Operations is set forth in the Partnership Agreement, a form of
which is included in this Prospectus as Appendix A.
COMMON UNIT ARREARAGES: With respect to any Common Units for any quarter
within the Subordination Period, the amount by which the Minimum Quarterly
Distribution in such quarter exceeds the amount of Available Cash constituting
Cash from Operations actually distributed on such Common Unit for such
quarter. Common Unit Arrearages are calculated on a cumulative basis for all
quarters during the Subordination Period. Common Units will not accrue
arrearages for any quarter after the Subordination Period. Common Unit
Arrearages do not accrue interest.
COMMON UNITS: The 13,100,000 Common Units (15,065,000 if the Underwriters'
overallotment option is exercised in full) offered hereby and to be issued at
the closing of this offering together with the 1,000,000 Common Units (if the
Underwriters' overallotment option is exercised in full, all of such Common
Units will be repurchased by the Partnership) to be held by Ferrell at the
closing of this offering. Each Common Unit represents a fractional part of the
partnership interests of all limited partners and assignees and has the rights
and obligations specified with respect to Common Units in the Partnership
Agreement.
COMPANY: Ferrellgas, Inc., a Delaware corporation and a wholly owned
subsidiary of Ferrell. Also referred to in this Prospectus as "Ferrellgas" and
the "General Partner."
CONTRIBUTION AGREEMENT: The Contribution, Conveyance and Assumption
Agreement dated as of the closing date of this offering between Ferrellgas,
the Partnership and the Operating Partnership, which provides for, among other
things, the principal transactions required to effect the transfer of assets
to the Operating Partnership prior to or concurrent with the consummation of
this offering.
CREDIT FACILITY: The credit facility to be entered into by the Operating
Partnership and Bank of America National Trust and Savings Association, as
Agent, which will permit borrowings by the Operating Partnership of up to $100
million on a senior unsecured revolving line of credit basis and up to $85
million on a senior unsecured credit facility.
CURRENT MARKET PRICE: The 20-day average of the closing prices of the
applicable security on the NYSE ending three days prior to the date on which
such notice is first mailed.
EBITDA: Earnings before interest, income taxes and depreciation and
amortization, calculated as operating income plus depreciation and
amortization excluding interest.
FERRELL: Ferrell Companies, Inc., a Kansas corporation.
FERRELLGAS: Ferrellgas, Inc., a Delaware corporation and a wholly owned
subsidiary of Ferrell. Also referred to in this Prospectus as the "Company"
and the "General Partner."
FIXED CHARGE COVERAGE RATIO: Earnings from continuing operations before
income taxes, plus interest expense (including amortization of original issue
discount) plus depreciation and amortization (excluding amortization of
prepaid cash expenses) as a ratio of fixed charges (consisting of interest
expense, including amortization of original issue discount and letter of
credit commissions and fees).
FGP: The trading symbol for the Common Units on the NYSE.
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GENERAL PARTNER: Ferrellgas, a wholly owned subsidiary of Ferrell, and its
successors as general partner of the Partnership.
INCENTIVE DISTRIBUTION RIGHTS: The right to receive specified incentive
distributions of Available Cash constituting Cash from Operations if quarterly
distributions of Available Cash constituting Cash from Operations exceed
certain specified target levels, issued to Ferrellgas in connection with the
transfer of its assets to the Partnership.
INDENTURE: The indenture pursuant to which the Senior Notes will be issued
(the form of which has been filed as an exhibit to the registration statement
of which this Prospectus is a part).
INITIAL UNIT PRICE: An amount per Unit equal to the initial public offering
price of the Common Units.
INTERIM CAPITAL TRANSACTIONS: (a) borrowings, refinancings and refundings of
indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by the Partnership, (b) sales of equity interests
(including the Common Units sold to the Underwriters pursuant to the exercise
of their overallotment option) by the Partnership and (c) sales or other
voluntary or involuntary dispositions of any assets of the Partnership (other
than (i) sales or other dispositions of inventory in the ordinary course of
business, (ii) sales or other dispositions of other current assets, including,
without limitation, receivables and accounts and (iii) sales or other
dispositions of assets as a part of normal retirements or replacements), in
each case prior to the commencement of the dissolution and liquidation of the
Partnership.
MINIMUM QUARTERLY DISTRIBUTION OR MQD: $0.50 per Unit with respect to each
quarter, subject to adjustment as described in "Cash Distribution Policy--
Quarterly Distributions of Available Cash--Distributions of Cash from Interim
Capital Transactions" and "Cash Distribution Policy--Quarterly Distributions
of Available Cash--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
OPERATING PARTNERSHIP: Ferrellgas, L.P., a Delaware limited partnership of
which the Partnership will own a 99% limited partner interest and Ferrellgas
will own a 1% general partner interest. The Operating Partnership will conduct
the Partnership's business and has been established to simplify the
Partnership's obligations under the laws of certain jurisdictions in which it
will conduct business.
OPERATING PARTNERSHIP AGREEMENT: The partnership agreement for the Operating
Partnership (the form of which has been filed as an exhibit to the
registration statement of which this Prospectus is a part).
PARTNERSHIP: Ferrellgas Partners, L.P., a Delaware limited partnership.
PARTNERSHIP AGREEMENT: The partnership agreement for the Partnership (the
form of which has been filed as an exhibit to the registration statement of
which this Prospectus is a part), and unless the context requires otherwise,
references to the Partnership Agreement constitute references to the
Partnership Agreements of the Partnership and of the Operating Partnership,
collectively.
SENIOR NOTES: Collectively, the $200 million in aggregate principal amount
of 10.0% Fixed Rate Senior Notes due in 2001 and $50 million in aggregate
principal amount of Floating Rate Senior Notes due in 2001 to be issued
pursuant to the Indenture and sold by the Operating Partnership in a
registered public offering concurrent with the sale of the Common Units
offered by this Prospectus. The Senior Notes will be unsecured general joint
and several obligations of the Operating Partnership and will be recourse to
the General Partner in its capacity as general partner of the Operating
Partnership.
SUBORDINATED UNITS: The subordinated limited partner interests to be issued
to Ferrellgas in connection with the transfer of its assets to the
Partnership.
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SUBORDINATION PERIOD: The Subordination Period will extend from the closing
of this offering until the first day of any quarter beginning on or after
August 1, 1999 in respect of which (i) distributions of Available Cash on the
Common Units and the Subordinated Units equaled or exceeded the Minimum
Quarterly Distribution for each of the three consecutive four-quarter periods
immediately preceding such date (excluding any such Available Cash that is
attributable to net increases in working capital borrowings, net decreases in
reserves and any positive balance in Cash from Operations at the beginning of
such four-quarter periods) and (ii) the Partnership has invested at least $50
million in acquisitions and capital additions or improvements made to increase
the operating capacity of the Partnership. In addition, the Subordination
Period ends if the General Partner is removed other than for cause.
TARGET DISTRIBUTIONS: The distribution level at which all Unitholders have
received a total of $0.55 for such quarter in respect of each Unit, in
addition to any distributions to Common Unitholders of Common Unit Arrearages
(the "First Target Distribution"), and the distribution levels at which the
interest in distributions for holders of Incentive Distribution Rights
increase from 0% to 13% (the "Second Target Distribution") and from 13% to 23%
(the "Third Target Distribution"). See "Cash Distribution Policy--Quarterly
Distributions of Available Cash."
TRANSFER APPLICATION: The application that all purchasers of Common Units in
this offering and purchasers of Common Units in the open market who wish to
become Common Unitholders of record must deliver before the transfer of such
Common Units will be registered and before cash distributions and federal
income tax allocations will be made to the transferee. A form of Transfer
Application is included in this Prospectus as Appendix B.
UNITHOLDERS: Holders of the Common Units and the Subordinated Units.
UNITS: The Common Units and the Subordinated Units, collectively.
UNRECOVERED INITIAL UNIT PRICE: At any time, with respect to a class or
series of Units (other than Subordinated Units), the price per Unit at which
such class or series of Units was initially offered to the public for sale by
the Underwriters in respect of such offering, as determined by the General
Partner, less the sum of all distributions theretofore made in respect of a
Unit of such class or series that was sold in the initial offering of Units of
said class or series constituting Cash from Interim Capital Transactions and
any distributions of cash (or the net agreed value of any distributions in
kind) in connection with the dissolution and liquidation of the Partnership
theretofore made in respect of a Unit of such class or series that was sold in
the initial offering of Units of such class or series, adjusted as the General
Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
UNRECOVERED SUBORDINATED UNIT CAPITAL: At any time, with respect to a
Subordinated Unit, prior to its conversion into a Common Unit, the excess, if
any, of (a) the net agreed value (at the time of conveyance) of the undivided
interest in any property conveyed to the Partnership in exchange for such
Subordinated Unit, over (b) any distributions of cash (or the net agreed value
of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership, adjusted as the General Partner determines to
be appropriate to give effect to any distribution, subdivision or combination
of Subordinated Units.
C-4
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF, OR THAT INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 27
The Transactions.......................................................... 38
Use of Proceeds........................................................... 40
Capitalization............................................................ 41
Dilution.................................................................. 42
Cash Distribution Policy.................................................. 43
Selected Historical and Pro Forma Consolidated Financial and Operating
Data..................................................................... 50
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 52
Business.................................................................. 63
Management................................................................ 73
Conflicts of Interest and Fiduciary Responsibility........................ 79
Description of the Common Units........................................... 84
The Partnership Agreement................................................. 86
Units Eligible for Future Sale............................................ 97
Tax Considerations........................................................ 99
Investment in the Partnership by Employee Benefit Plans................... 116
Underwriting.............................................................. 117
Validity of Common Units.................................................. 118
Experts................................................................... 118
Additional Information.................................................... 119
Index to Financial Statements............................................. F-1
Form of Agreement of Limited Partnership of Ferrellgas
Partners, L.P. ..................................................... Appendix A
Form of Application for Transfer of Common Units .................... Appendix B
Glossary of Terms.................................................... Appendix C
</TABLE>
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LOGO
FERRELLGAS
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13,100,000 COMMON UNITS
REPRESENTING
LIMITED PARTNER INTERESTS
FERRELLGAS PARTNERS, L. P.
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GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
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INSIDE FRONT A map depicting the locations of assets and operations of
COVER PAGE Ferrellgas Partners, L.P. (the "Partnership") in the United
OF PROSPECTUS States. The map is coded to reflect the locations of the
following: (1) retail markets; (ii) the headquarters; (iii) the
Houston headquarters; (iv) a service center; (v) owned
underground storage; and (vi) owned throughput terminals. The
map also depicts LPG common carrier pipelines not owned by the
Partnership and seaborne import terminals not owned by the
Partnership.
PAGE 9 A chart depicting the organization and ownership of the
Partnership and Ferrellgas, L.P. (the "Operating Partnership")
after giving effect to the sale of the Common Units. The
ownership interests as depicted are as follow: (1) Ferrell
Companies, Inc. ("Ferrell") will own 1,000,000 Common Units,
16,593,721 Subordinated Units and Incentive Distribution Rights
representing a 56.8% limited partner interest in the
Partnership; Ferrellgas, Inc. ("Ferrellgas"), a wholly owned
subsidiary of Ferrell, will own a 1% general partner interest
in the Partnership and a 1.0101% general partner interest in
the Operating Partnership; the Partnership will own a 98.9899%
limited partner interest in the Operating Partnership; and the
public unitholders will own 13,100,000 Common Units
representing a 42.2% limited partner interest in the
Partnership.
