<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FERRELLGAS PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 5984 43-1698480
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL) IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE)
ORGANIZATION)
ONE LIBERTY PLAZA DANLEY K. SHELDON
LIBERTY, MISSOURI 64068 ONE LIBERTY PLAZA
(816) 792-1600 LIBERTY, MISSOURI 64068
(ADDRESS, INCLUDING ZIP (816) 792-1600
CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING
NUMBER, INCLUDING AREA ZIP CODE, AND
CODE, OF REGISTRANT'S TELEPHONE NUMBER,
PRINCIPAL EXECUTIVE INCLUDING AREA CODE, OF
OFFICES) AGENT FOR SERVICE)
COPIES TO:
G. MICHAEL O'LEARY KENDRICK T. WALLACE
ANDREWS & KURTH L.L.P. BRYAN CAVE LLP WALTER J. SMITH
4200 TEXAS COMMERCE TOWER 1200 MAIN STREET, SUITE BAKER & BOTTS, L.L.P.
HOUSTON, TEXAS 77002 3500 ONE SHELL PLAZA
(713) 220-4200 KANSAS CITY, MISSOURI 910 LOUISIANA
64105 HOUSTON, TEXAS 77002-4995
(816) 374-3200 (713) 229-1234
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
[_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Subordinated Units representing
limited partner interests..... 10,350,000 $23.16 $239,667,187.50 $72,626.42
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</TABLE>
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(1) Includes 1,350,000 Subordinated Units which may be purchased by the
Underwriters pursuant to an over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 (c), based upon the average high and low sale prices
for the Ferrellgas Partners, L.P. Common Units on the New York Stock
Exchange on November 18, 1997.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1997
PROSPECTUS
9,000,000 Subordinated Units
Ferrellgas Partners, L.P.
LOGO
Representing Limited Partner Interests
--------
All of the 9,000,000 Subordinated Units offered hereby are being sold by
Ferrellgas, Inc. ("Ferrellgas" or the "General Partner"), the general partner
of Ferrellgas Partners, L.P., a Delaware limited partnership (the
"Partnership"). The Partnership will not receive any of the proceeds from the
sale of the Subordinated Units by Ferrellgas.
The Subordinated Units offered hereby represent an approximate 28.2% limited
partner interest in the Partnership. After the offering, there will be
outstanding 14,699,678 Common Units, 9,000,000 Subordinated Units and 7,593,721
Junior Subordinated Units. Ferrellgas will own 1,210,162 of such Common Units,
all of such Junior Subordinated Units and a combined 2% general partner
interest in the Partnership after this offering, representing an aggregate
29.6% interest in the Partnership. The foregoing information assumes that the
Underwriters' over-allotment option is not exercised.
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF SUBORDINATED UNITS SHOULD CONSIDER EACH OF THE
FACTORS DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 17, IN EVALUATING AN
INVESTMENT IN THE PARTNERSHIP, INCLUDING, BUT NOT LIMITED, TO THE FOLLOWING:
. DURING THE SUBORDINATION PERIOD, WHICH WILL GENERALLY NOT END PRIOR TO
AUGUST 1, 1999, DISTRIBUTIONS OF CASH TO THE HOLDERS OF SUBORDINATED UNITS
(INCLUDING THOSE OFFERED HEREBY) ARE SUBORDINATE TO THE RIGHTS OF THE
HOLDERS OF COMMON UNITS TO RECEIVE QUARTERLY DISTRIBUTIONS OF $0.50 PER
COMMON UNIT (THE "MINIMUM
(continued on page iii)
Prior to this offering there has been no public market for Subordinated
Units. For the factors considered in determining the initial public offering
price, see "Underwriting." Application has been made to list the Subordinated
Units for trading on the New York Stock Exchange (the "NYSE"), subject to
official notice of issuance, under the trading symbol " ." On November ,
1997 the closing price of the Common Units as reported by the NYSE was $ per
Common Unit.
--------
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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<TABLE>
<S> <C> <C> <C>
UNDERWRITING
INITIAL PUBLIC DISCOUNTS AND PROCEEDS TO
OFFERING PRICE COMMISSIONS(1) FERRELLGAS(2)
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Per Subordinated Unit $ $ $
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Total(3) $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Expenses of the offering, estimated to be $ , are payable by the
Partnership.
(3) The General Partner has granted the Underwriters an option for 30 days to
purchase up to an additional 1,350,000 Subordinated Units at the initial
public offering price per unit, less the underwriting discounts and
commissions, solely to cover over-allotments. The General Partner will
obtain any Subordinated Units to be sold pursuant to such option by
exchanging an equal number of Junior Subordinated Units with the
Partnership. If such option is exercised in full, the total Initial Public
Offering price, Underwriting Discounts and Commissions and proceeds to
Ferrellgas will be $ , $ and $ , respectively.
See "Underwriting."
--------
The Subordinated Units are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the Subordinated Units
offered hereby will be available for delivery on or about , 1997, at the
office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001.
--------
Smith Barney Inc. Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
PaineWebber Incorporated
, 1997
<PAGE>
Ferrellgas Partners, L.P.
LOGO
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SUBORDINATED
UNITS. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING, MAY BID FOR AND PURCHASE COMMON UNITS AND SUBORDINATED UNITS IN THE
OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
ii
<PAGE>
Continued from first page
Quarterly Distribution"), or $2.00 per Common Unit on an annualized basis,
plus any arrearages on Common Units for prior quarters. There can be no
assurance that the Partnership will generate sufficient Available Cash to
make distributions on the Subordinated Units. In addition, there can be no
assurance that the Partnership will ever meet the requirements necessary
for the Subordination Period to end. Accordingly, there can be no assurance
that the Subordinated Units will ever convert to Common Units.
. Subject to certain limitations, the Partnership has the right to issue
additional Units without the consent of the Unitholders. The issuance of
such additional Units could result in a decrease in the amount of cash
available for distribution on each Subordinated Unit.
. During the Junior Subordination Period, distributions to Subordinated
Unitholders of the Minimum Quarterly Distribution (and any arrearages on
the Subordinated Units for prior quarters during the Junior Subordination
Period) will have priority over distributions on the Junior Subordinated
Units. The Junior Subordination Period extends until the record date for
the quarterly distribution of Available Cash in respect of the quarterly
period ending October 31, 1998, subject to earlier termination if the
General Partner is removed other than for Cause. Upon termination of the
Junior Subordination Period, all preferences that the Subordinated Units
have over the Junior Subordinated Units will end and any remaining
distribution arrearages on the Subordinated Units will be canceled. The
number of outstanding Junior Subordinated Units will be decreased (and the
number of outstanding Subordinated Units will be increased) by the number
of Subordinated Units (if any) sold to the Underwriters upon the exercise
by the Underwriters of the over-allotment option.
. Future Partnership performance will depend upon the success of the
Partnership in maximizing profits from retail propane sales. Propane sales
are affected by, among other things, weather patterns, product prices and
competition, including competition from other energy sources.
. Because the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future,
the Partnership will depend on acquisitions as the principal means of
growth. There can be no assurance that the Partnership will be able to
complete future acquisitions.
. The Minimum Quarterly Distribution on the Units is not guaranteed. The
actual amount of cash distributions will depend on future Partnership
operating performance and will be affected by the funding of reserves,
operating and capital expenditures and other matters within the discretion
of the General Partner, as well as required interest and principal payments
on, and the other terms of, the Partnership's indebtedness.
. Prior to making any distribution on the Units, the Partnership will
reimburse the General Partner and its affiliates at cost for all expenses
incurred on behalf of the Partnership. Approximately $128 million of
expenses (primarily wages and salaries) were reimbursed by the Partnership
to the General Partner in fiscal 1997.
. 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. Under certain circumstances, affiliates of the
General Partner could compete with the Partnership.
. The Partnership Agreement limits the liability and modifies the fiduciary
duties of the General Partner; holders of Subordinated 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.
The validity and enforceability of these types of provisions under Delaware
law are uncertain.
. At July 31, 1997, the Partnership's total indebtedness as a percentage of
its total capitalization was approximately 92%. As a result, the
Partnership has indebtedness that is substantial in relation to its
partners' capital.
. Holders of Subordinated Units will have only limited voting rights, and the
General Partner will manage and operate the Partnership. The General
Partner may not be removed except pursuant to the vote of the holders of at
least 66 2/3% of the outstanding Units (including Units owned by the
General Partner and its affiliates). After this offering, the General
Partner will own approximately 28.1% of the outstanding Units, which could
make it difficult to obtain such a vote for removal.
. The availability to a Subordinated Unitholder of the economic benefits of
an investment in the Partnership largely depends on the classification of
the Partnership as a partnership for federal income tax purposes. The
Partnership will rely upon an opinion of counsel, and not a ruling from the
Internal Revenue Service, on that issue and others relevant to a
Subordinated Unitholder.
. The tax consequences of an investment in the Partnership are complex. It is
anticipated a Unitholder may receive substantial distributions that would
reduce such holder's tax basis, with the result that such holder may
recognize substantial taxable gain upon a sale of such holder's Units.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... v
INFORMATION INCORPORATED BY REFERENCE...................................... v
PROSPECTUS SUMMARY......................................................... 1
The Partnership........................................................... 1
Selected Historical Financial Data........................................ 5
Risk Factors.............................................................. 6
The Offering.............................................................. 11
Summary of Tax Considerations............................................. 14
RISK FACTORS............................................................... 17
Risks Inherent in the Partnership's Business.............................. 17
Risks Inherent in an Investment in the Partnership........................ 19
Conflicts of Interest and Fiduciary Responsibilities...................... 23
Tax Risks................................................................. 24
USE OF PROCEEDS............................................................ 27
DISTRIBUTIONS AND MARKET FOR
COMMON UNITS.............................................................. 27
CASH DISTRIBUTION POLICY................................................... 28
Quarterly Distributions of Available Cash................................. 28
Distributions of Cash Upon Liquidation.................................... 33
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA.............. 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 37
General................................................................... 37
Selected Quarterly Financial Data......................................... 38
Fiscal Year............................................................... 38
Results of Operations..................................................... 38
Fiscal Year Ended July 31, 1997 versus Fiscal Year Ended July 31, 1996.... 38
Fiscal Year Ended July 31, 1996 versus Fiscal Year Ended July 31, 1995.... 39
Liquidity and Capital Resources........................................... 40
BUSINESS................................................................... 43
Business of Ferrellgas Partners, L.P...................................... 43
Business of Ferrellgas, L.P............................................... 43
General................................................................... 43
Retail Operations......................................................... 43
Industry and Competition.................................................. 46
Other Operations.......................................................... 47
Employees................................................................. 48
Governmental Regulation; Environmental and Safety Matters................. 48
Service Marks and Trademarks.............................................. 49
Properties................................................................ 49
Legal Proceedings......................................................... 50
MANAGEMENT................................................................. 51
General................................................................... 51
Directors and Executive Officers of the General Partner................... 51
</TABLE>
<TABLE>
<S> <C>
CONFLICTS OF INTEREST AND
FIDUCIARY RESPONSIBILITIES................................................. 53
Conflicts of Interest...................................................... 53
DESCRIPTION OF THE UNITS.................................................... 58
The Units.................................................................. 58
Transfer Agent and Registrar............................................... 58
Transfer of Units.......................................................... 59
THE PARTNERSHIP AGREEMENT................................................... 60
Organization and Duration.................................................. 60
Purpose.................................................................... 60
Power of Attorney.......................................................... 60
Restrictions on Authority of the General Partner........................... 60
Withdrawal or Removal of the General Partner............................... 61
Transfer of General Partner Interest....................................... 62
Reimbursement for Services................................................. 62
Change of Management Provisions............................................ 62
Status as Limited Partner or Assignee...................................... 62
Non-citizen Assignees; Redemption.......................................... 63
Issuance of Additional Securities.......................................... 63
Limited Call Right......................................................... 64
Amendment of Partnership Agreement......................................... 64
Meetings; Voting........................................................... 66
Indemnification............................................................ 67
Limited Liability.......................................................... 67
Books and Reports.......................................................... 68
Right to Inspect Partnership Books and Records............................. 68
Termination and Dissolution................................................ 69
Liquidation and Distribution of Proceeds................................... 69
Registration Rights........................................................ 69
SELLING UNITHOLDER AND UNITS AVAILABLE FOR FUTURE SALE...................... 70
TAX CONSIDERATIONS.......................................................... 72
Legal Opinions and Advice.................................................. 72
Tax Rates and Changes in Federal Income Tax Laws........................... 73
Partnership Status......................................................... 73
Limited Partner Status..................................................... 74
Tax Consequences of Unit Ownership......................................... 74
Allocation of Partnership Income, Gain, Loss and Deduction................. 77
Tax Treatment of Operations................................................ 77
Disposition of Units....................................................... 80
Uniformity of Units........................................................ 83
Administrative Matters..................................................... 84
State, Local and Other Tax Considerations.................................. 86
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS..................... 88
UNDERWRITING................................................................ 89
VALIDITY OF THE SECURITIES.................................................. 90
EXPERTS..................................................................... 91
GLOSSARY.................................................................... A-1
TRANSFER APPLICATION........................................................ B-1
</TABLE>
iv
<PAGE>
AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933 (the "Securities Act"), a
Registration Statement on Form S-3 (together with all amendments thereto, the
"Registration Statement") for the registration of the securities to be offered
by this prospectus ("Prospectus"). This Prospectus does not contain all
information set forth in the Registration Statement and the exhibits thereto,
to which reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or other document
titled as an exhibit to the Registration Statement, reference is hereby made
to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference.
The Registration Statement (and the exhibits and schedules thereto), as well
as the periodic reports and other information filed by the Partnership with
the Commission, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at
Suite 1300, Seven World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, Washington D.C. 20549 at prescribed rates. The Commission
maintains a web site (http://www.sec.gov.) that contains reports, proxy and
information statements and other information filed electronically by the
Partnership with the Commission through its Electronic Data Gathering,
Analysis and Retrieval (EDGAR) System. In addition, the Partnership's Common
Units are listed, and application has been made to list the Subordinated
Units, for trading on the New York Stock Exchange (the "NYSE") and material
filed by the Partnership can be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith the Partnership is required to file periodic reports and
other information with the Commission.
INFORMATION INCORPORATED BY REFERENCE
The following document filed by the Partnership with the Commission is
incorporated herein by reference:
(i) The Annual Report on Form 10-K of the Partnership for the year ended
July 31, 1997.
All documents filed by the Partnership with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Subordinated Units
by this Prospectus shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated herein by reference, which statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Copies of these documents (excluding exhibits
unless such exhibits are specifically incorporated by reference into the
information incorporated herein) will be provided by first class mail without
charge to each person to whom this Prospectus is delivered, upon written or
oral request, to Theresa Schekirke, Ferrellgas, Inc., One Liberty Plaza,
Liberty, Missouri 64068 (telephone number: (816) 792-0203).
v
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this
Prospectus. Unless the context otherwise requires, references herein to the
Partnership include the Partnership and the Operating Partnership, and
descriptions herein of the interests of the partners in the Partnership and the
Operating Partnership and in distributions by the Partnership are stated on a
combined basis. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option granted to the Underwriters is not
exercised. The Partnership's fiscal year ends on July 31. Reference to a
particular fiscal year of the Partnership are to the twelve months ended on
July 31 of the year indicated. See the Glossary for the definitions of certain
terms used herein.
THE PARTNERSHIP
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The General Partner believes that the
Partnership is the second largest retail marketer of propane in the United
States (as measured by gallons sold), serving more than 800,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 513 retail outlets with 295 satellite
locations in 38 states (some outlets serve interstate markets). The
Partnership's retail operation accounts for approximately 8% of the retail
propane purchased in the United States as measured by gallons sold. The
Partnership's largest market concentrations (based on retail gallons sold) are
in the Midwest, Great Lakes and Southeast regions of the United States. For the
Partnership's fiscal years ended July 31, 1997, 1996 and 1995, annual retail
propane sales volumes were 694 million, 650 million, and 576 million gallons,
respectively. The retail propane business of the Partnership 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 its customers' premises, as well as to portable propane
cylinders.
The Partnership believes that it is also a leading natural gas liquids
trading company. Annual propane and natural gas liquids trading, chemical
feedstocks and wholesale propane sales volumes were approximately 1.2 billion,
1.7 billion and 1.5 billion gallons during the fiscal years ended July 31,
1997, 1996 and 1995, respectively.
GENERAL
Ferrell Companies, Inc. ("Ferrell"), the parent of Ferrellgas, was founded in
1939 as a single retail propane outlet in Atchison, Kansas and was incorporated
in 1954. Ferrell is primarily owned by James E. Ferrell and his family. In
1984, Ferrellgas, a subsidiary of Ferrell, was formed to operate the retail
propane business previously conducted by Ferrell. In July 1994, the propane
business and assets of Ferrellgas were contributed to the Partnership in
connection with the Partnership's initial public offering.
Ferrellgas' initial growth largely resulted from 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, Ferrellgas
acquired a retail propane operation with annual retail sales volumes of
approximately 33 million gallons. In December 1986, Ferrellgas acquired a
retail propane operation with annual retail sales volumes of approximately 395
million gallons. These two major acquisitions and many other smaller
acquisitions significantly expanded and diversified Ferrellgas' geographic
coverage. Since 1986, the Partnership or its predecessor has acquired more than
100 independent propane retailers, the largest of which were Skelgas (acquired
in May 1996) and Vision (acquired in November 1994). For the fiscal years ended
July 31, 1997 to 1993, the Partnership or its predecessor invested
approximately $38.8 million, $108.8 million, $70.1 million, $3.4 million and
$0.9 million, respectively, to acquire operations with annual retail sales of
approximately 20.5 million, 111.8 million, 70.0 million, 2.9 million and 0.7
million gallons of propane, respectively. The Partnership
<PAGE>
believes that it and its predecessor's acquisitions to date have been completed
on economically attractive terms. Primarily as a result of this acquisition
strategy, retail propane gallons sold by the Partnership (or its predecessor)
have increased from 321 million in fiscal 1986 to 694 million in fiscal 1997.
The propane industry is relatively fragmented, with the ten largest retail
distributors possessing approximately 33% of the total retail propane market
and much of the industry consisting of more than 5,000 local or regional
distributors. The Partnership believes that the fragmented nature of the
propane industry provides significant opportunities for additional growth
through acquisitions.
BUSINESS STRATEGY
The goal of the Partnership is to be the leading retail propane company in
the United States. The Partnership believes it has obtained its competitive
advantage by promoting an entrepreneurial culture that empowers its employees
to be responsive to individual customer needs. The Partnership's business
strategy is to continue its historical focus on residential and commercial
retail propane operations. The Partnership anticipates that its future growth
will be achieved primarily through the acquisition of smaller retail propane
operations throughout the United States and to a lesser extent through the
expansion of the existing customer base by increased competitiveness and
investment in internal growth opportunities.
The Partnership intends to concentrate its acquisition activities in
geographic areas close to its existing operations, acquiring propane retailers
that can be combined with existing operations to provide an attractive return
on investment after taking into account the efficiencies that may result from
such combinations. The Partnership also expects to pursue acquisitions that
broaden its geographic coverage. The Partnership's goal in each acquisition
will be to improve the operations and profitability of these smaller companies
by integrating them into the Partnership's existing operations. The Partnership
believes numerous local retail propane companies are potential candidates for
acquisition and that the Partnership's geographic diversity of operations
increases the number of attractive acquisition opportunities available to it.
The Partnership intends to fund future acquisitions through a combination of
internal cash flow, external borrowings and the issuance of additional Units.
The Partnership's ability to accomplish these goals will be subject to the
availability of acquisition candidates on terms that are attractive to the
Partnership. There is no assurance that the Partnership will be able to sustain
the recent level of acquisitions or that any acquisitions will prove beneficial
to the Partnership.
In addition to growth through acquisitions, the Partnership believes that it
may also achieve growth within its existing propane operations. The Partnership
strives to create a culture of leadership and innovation by implementing
initiatives such as pre-employment testing, safety and management training
programs and rewards for excellence in customer service, leadership and safety.
As a result of the Partnership's culture, its experience in responding to
competition and its implementation of more efficient operating standards, the
Partnership believes it is positioned to be successful in attracting and
retaining customers.
PARTNERSHIP STRUCTURE AND MANAGEMENT
The employees of Ferrellgas manage and operate the propane business and
assets of the Partnership as officers and employees of the General Partner. In
order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it conducts business, the Partnership's activities are
conducted through a subsidiary partnership (the "Operating Partnership"). The
Partnership is the sole limited partner of the Operating Partnership and the
General Partner serves as general partner of the Operating Partnership.
The General Partner does not receive any management fee in connection with
its management of the Partnership and does not receive any 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 (as hereinafter defined) provides that the General Partner shall
determine the fees and expenses that are allocable
2
<PAGE>
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. The limited partners have no ability to control the expenses
allocated by the General Partner to the Partnership.
The principal executive offices of the Partnership and the Operating
Partnership are located at One Liberty Plaza, Liberty, Missouri 64068, and
their telephone number is (816) 792-1600.
3
<PAGE>
The following chart depicts the organization and ownership of the Partnership
and the Operating Partnership upon completion of the offering made hereby. 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 holders in the Partnership and the Operating Partnership on a combined
basis assuming completion of the offering made hereby.
LOGO
LOGO
EFFECTIVE AGGREGATE OWNERSHIP OF
THE
PARTNERSHIP AND THE OPERATING
PARTNERSHIP
<TABLE>
<S> <C>
Public Unitholders' Common
Units 42.2%
Public Unitholders'
Subordinated Units 28.2%
Ferrellgas' Common Units 3.8%
Ferrellgas' Junior
Subordinated Units 23.8%
Ferrellgas' Combined General
Partner Interest 2.0%
-----
Total 100%
=====
</TABLE>
4
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates indicated,
summary historical financial and operating data for the Partnership. The
summary historical financial data are derived from and should be read in
conjunction with the Partnership's historical consolidated financial statements
and notes thereto included in its Annual Report on Form 10-K for the year ended
July 31, 1997, which is incorporated in this Prospectus by reference. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THE PARTNERSHIP
--------------------------
HISTORICAL YEAR ENDED JULY
31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
UNIT DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues...................................... $804,298 $653,640 $596,436
Gross profit (1).................................... 334,170 297,326 256,795
Operating and other expenses........................ 221,562 197,796 168,854
Depreciation and amortization....................... 43,789 37,024 32,014
Operating income.................................... 68,819 62,506 55,927
Interest expense.................................... 45,769 37,983 31,993
Earnings from continuing operations................. 23,218 24,312 23,820
Earnings from continuing operations per Unit........ 0.74 0.77 0.76
Cash distributions declared per Common Unit (2)..... 2.00 2.00 1.65
Cash distributions declared per Subordinated Unit
(2)................................................ 2.00 2.00 1.65
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 18,111 $ 15,294 $ 28,928
Total assets........................................ 657,076 654,295 578,596
Long-term debt...................................... 487,334 439,112 338,188
Total partners' capital............................. 44,783 84,609 118,637
OPERATING DATA:
Retail propane sales volumes (in gallons)........... 693,995 650,214 575,935
EBITDA (3).......................................... $112,608 $99,530 $87,941
Capital expenditures (4):
Maintenance....................................... $ 10,137 $ 6,657 $ 8,625
Growth............................................ 6,055 6,654 11,097
Acquisition....................................... 38,780 108,803 70,069
-------- -------- --------
Total........................................... $ 54,972 $122,114 $ 89,791
======== ======== ========
</TABLE>
- --------
(1) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(2) No cash distributions were declared by the Partnership from inception to
July 31, 1994. The $0.65 distribution made at the end of the first quarter
of fiscal 1995 included $0.50 for the first quarter of fiscal 1995 and
$0.15 for the period from inception through July 31, 1994.
(3) EBITDA is defined 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 not recognized under
generally accepted accounting principles, however, the Partnership believes
that it 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 earnings.
(4) The Partnership'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
Partnership's customer base and operating capacity; and (iii) acquisition
capital expenditures, which include expenditures related to the acquisition
of retail propane operations. Acquisition capital expenditures represent
total cost of acquisition less working capital acquired.
5
<PAGE>
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 Subordinated Units offered
hereby should consider the following risk factors in evaluating an investment
in the Subordinated Units. All statements other than statements of historical
facts included in this Prospectus, including, without limitation, statements
regarding the Partnership's business strategy, plans and objectives of
management of the Partnership for future operations, are forward-looking
statements. Although the Partnership believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Important factors that could
cause actual results to differ materially from the Partnership's expectations
are disclosed below, under "Risk Factors" and elsewhere in this Prospectus.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
. Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many customers of the
Partnership rely heavily on propane as a heating fuel. Accordingly, the
volume of retail propane sold is highest during the six-month peak
heating season of October through March and is directly affected by the
severity of the winter weather. During fiscal 1997, approximately 68% of
the Partnership's combined retail propane volume and in excess of 95% of
the Partnership's EBITDA were attributable to sales during the peak
heating season. Actual weather conditions can vary substantially from
year to year, significantly affecting the Partnership's financial
performance. Furthermore, variations in weather in one or more regions in
which the Partnership operates can significantly affect the total volumes
sold by the Partnership and the margins realized on such sales and,
consequently, the Partnership's results of operations.
. The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to
changes in wholesale propane prices. The Partnership currently estimates
that less than 20% of the Partnership's propane sales (based on total
retail gallons sold) during fiscal 1998 will be pursuant to fixed-price
contracts. Propane is a commodity, the market price of which can be
subject to volatile changes in response to changes in supply or other
market conditions. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
. The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Because
of the relatively low barriers to entry into the retail propane market,
the potential exists for small independent propane retailers, as well as
other companies (not necessarily then engaged in retail propane
distribution), to begin competing with the Partnership's retail outlets.
Certain of the Partnership's competitors may have greater financial
resources than the Partnership. Should a competitor attempt to increase
market share by reducing prices, the Partnership's financial condition
and results of operations could be materially adversely affected. In
addition, propane competes with other sources of energy, some of which
are less costly for equivalent energy value.
. Acquisitions will be the principal means of growth for the Partnership,
as the retail propane industry is mature and overall demand for propane
is expected to experience limited growth. There can be no assurance,
however, that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire
such businesses on economically acceptable terms, that any acquisitions
will not be dilutive to earnings and distributions to the holders of
Units ("Unitholders") or that any additional debt incurred to finance
acquisitions will not adversely affect the ability of the Partnership to
make distributions to the Unitholders.
6
<PAGE>
. The Partnership engages in the brokerage and trading of propane and other
natural gas liquids, primarily to generate a profit independent of the
retail and wholesale operations, but also to insure the availability of
propane during periods of short supply. Trading losses may have an
adverse impact on the amount of cash available for distribution to
holders of Common Units, Subordinated Units and Junior Subordinated Units
(collectively, "Units").
. The Partnership's operations are subject to all operating hazards and
risks normally incidental to handling, storing and delivering combustible
liquids such as propane. As a result, the Partnership has been and is
likely to be a defendant in various legal proceedings in the ordinary
course of business. The Partnership maintains insurance policies with
insurers in such amounts and with such coverages and deductibles as it
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 injury
and property damage or that such levels of insurance will be available in
the future at economical prices.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
. During the Subordination Period, which will generally not end prior to
August 1, 1999, distributions of cash to the Subordinated Unitholders are
subordinate to the rights of the holders of Common Units to receive
quarterly distributions of $0.50 per Common Unit (the "Minimum Quarterly
Distribution"), or $2.00 per Common Unit on an annualized basis, plus any
arrearages on Common Units for prior quarters. There can be no assurance
that the Partnership will generate sufficient Available Cash to make
distributions on the Subordinated Units or the Common Units. In addition
there can be no assurance that the Partnership will ever meet the
requirements necessary for the Subordination Period to end. Accordingly,
there can be no assurance that the Subordinated Units will ever convert
to Common Units.
. Subject to certain limitations, the Partnership has the right to issue
Units without the consent of the Unitholders. The effect of such
issuances may be to dilute the value of the interests of the then-
existing Unitholders in the net assets of the Partnership, to dilute the
interests of Unitholders in distributions by the Partnership or to make
it more difficult for a person or group to remove the General Partner or
otherwise change the management of the Partnership.
. During the Junior Subordination Period, distributions of the Minimum
Quarterly Distribution (and any arrearages on the Subordinated Units for
prior quarters during the Junior Subordination Period) will have priority
over distributions on the Junior Subordinated Units. The Junior
Subordination Period extends until the record date for the quarterly
distribution of Available Cash in respect of the quarterly period ending
October 31, 1998, subject to earlier termination if the General Partner
is removed other than for Cause. Upon termination of the Junior
Subordination Period, all preferences that the Subordinated Units have
over the Junior Subordinated Units will end and any remaining
distribution arrearages on the Subordination Units will be canceled. The
number of outstanding Junior Subordinated Units will be decreased (and
the number of outstanding Subordinated Units will be increased) by the
number of Subordinated Units (if any) sold to the Underwriters upon the
exercise by the Underwriters of the over-allotment option.
. The actual amount of cash distributions will depend on future Partnership
operating performance. Cash distributions are dependent primarily on cash
flow, including from reserves and working capital borrowings, and not on
profitability, which is affected by non-cash items. Therefore, cash
distributions may be made during periods when the Partnership records
losses and might not be made during periods when the Partnership records
profits. Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units
and changes in reserves will affect the amount of Available Cash.
. On July 31, 1997, the Partnership's total indebtedness as a percentage of
its total capitalization was approximately 92%. As a result, the
Partnership is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital. The Partnership's
leverage could adversely affect the ability of the Partnership to finance
its future operations and capital needs, limit its ability to pursue
7
<PAGE>
acquisitions and other business opportunities and make its results of
operations more susceptible to adverse economic or operating conditions.
The Partnership's debt instruments contain restrictive covenants that
will limit the ability of the Partnership to incur additional
indebtedness and to make distributions to Unitholders. The payment of
principal and interest on the Partnership's indebtedness reduces the cash
available to make distributions on the Units.
. The Partnership's indebtedness contains provisions relating to changes of
control. If such provisions are triggered, such outstanding indebtedness
may become due. There is no restriction on the ability of the General
Partner or its affiliates to enter into a transaction that would trigger
such change of control provisions.
. Prior to making any distribution on the Units, the Partnership reimburses
the General Partner and its affiliates at cost for all expenses incurred
on behalf of the Partnership. Approximately $128 million of expenses
(primarily wages and salaries) were reimbursed by the Partnership to the
General Partner in fiscal 1997. In addition, the General Partner and its
affiliates may provide services to the Partnership in the future for
which the Partnership will be charged reasonable fees as determined by
the General Partner. The reimbursement of such expenses and the payment
of any such fees could adversely affect the ability of the Partnership to
make distributions.
. The General Partner manages and operates the Partnership. Holders of
Units will have no right to elect the General Partner on an annual or
other continuing basis, and will have only limited voting rights on
matters affecting the Partnership's business. The General Partner may not
be removed except pursuant to the vote of the holders of at least 66 2/3%
of the outstanding Units (including Units owned by the General Partner
and its affiliates). After this offering, the General Partner will own
approximately 28.1% of the outstanding Units, which could make it
difficult to obtain such a vote for removal.
. The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
General Partner or otherwise change the management of the Partnership.
The effect of these provisions may be to diminish the price at which the
Units will trade under certain circumstances.
. Prior to this offering, there has been no public market for the
Subordinated Units. The initial public offering price for the
Subordinated Units will be determined through negotiations between the
General Partner and the representatives of the Underwriters. Although the
Partnership believes that the market price for Subordinated Units will be
less than the market price for Common Units, no assurance can be given as
to the market prices at which the Subordinated Units will trade.
. If at any time less than 20% of the 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
to any of its affiliates or the Partnership, to acquire all, but not less
than all, of the remaining limited partner interests of such class held
by such unaffiliated persons at a price generally equal to the then
current market price of limited partner interests of such class. As a
consequence, a holder of Units may be required to sell his Units at a
time when he may not desire to sell them or at a price that is less than
the price he would desire to receive upon such sale.
. Under certain circumstances, Unitholders could lose their limited
liability and could become liable for amounts improperly distributed to
them by the Partnership.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. The General Partner and its affiliates have conflicts of interest with
the Partnership and its limited partners. The Partnership Agreement
contains certain provisions that limit the liability and reduce the
fiduciary duties of the General Partner to the holders of Units, as well
as provisions that may restrict the remedies available to Unitholders for
actions that might, without such limitations, constitute breaches of
fiduciary duty. Unitholders are deemed to have consented to certain
actions and conflicts of interest that
8
<PAGE>
might otherwise be deemed a breach of fiduciary or other duties under
applicable state law. The validity and enforceability of these types of
provisions under Delaware law are uncertain.
. Decisions of the General Partner with respect to the amount and timing of
cash expenditures, borrowings, issuances of additional Units and changes
in reserves in any quarter will affect whether or the extent to which
there is sufficient Available Cash to meet the Minimum Quarterly
Distribution and Target Distribution Levels on any or all Units in a
given quarter.
. The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other
than those incidental to its ownership of interests in the Partnership.
Notwithstanding the foregoing, 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, therefore, compete with the
Partnership in other propane-related activities, such as trading,
transportation, storage and wholesale distribution of propane. There can
be no assurance that there will not be competition between the
Partnership and affiliates of the General Partner in the future.
. The Partnership Agreement does not prohibit the Partnership from engaging
in roll-up transactions. Were the General Partner to cause the
Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse
effect on a Unitholder's investment in the Partnership.
TAX RISKS
. The availability to a Unitholder of the economic 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. Assuming the accuracy of certain factual matters as to which
the General Partner and the Partnership have made representations,
Andrews & Kurth L.L.P., special counsel to the General Partner and the
Partnership, is of the opinion that, under current law, the Partnership
is classified as a partnership for federal income tax purposes and will
continue to be so classified after giving effect to the offering of the
Subordinated Units.
. No ruling has been requested or received from the Internal Revenue
Service (the "IRS") with respect to classification of the Partnership as
a partnership for federal income tax purposes, whether the Partnership's
propane operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any other
matter affecting the Partnership.
. 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.
. It is anticipated that a Unitholder may receive substantial distributions
that would reduce such holder's tax basis, with the result that such
holder may recognize substantial taxable gain upon a sale of such
holder's Units, even if the sale price is less than the original cost.
. Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For
example, virtually all of the taxable income derived by most
organizations exempt from federal income tax (including individual
retirement accounts ("IRAs") and other retirement plans) from the
ownership of a Unit will be unrelated business taxable income and thus
will be taxable to such a Unitholder.
. In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by the
Partnership will generally only be available to offset future income
generated by the Partnership and cannot be used to offset income from
other activities, including other passive activities or investments.
Passive losses which are not deductible because they exceed the
9
<PAGE>
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 Partnership has registered with the Secretary of the Treasury as a
"tax shelter." No assurance can be given that the Partnership will not be
audited in the future by the IRS or that tax adjustments will not be
made. Any adjustments in the Partnership's tax returns will lead to
adjustments in the Unitholders' tax returns and may lead to audits of the
Unitholders' tax returns and adjustments of items unrelated to the
Partnership.
. The Partnership has adopted certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and
final Treasury regulations. A successful challenge to those conventions
by the IRS could adversely affect the amount of tax benefits available to
a purchaser of Units or could affect the timing of such tax benefits or
the amount of gain from the sale of Units and could have a negative
impact on the value of the Units or result in audit adjustments to the
tax returns of Unitholders.
. A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Partnership does business or owns
property. The Partnership owns property and conducts business in numerous
states which currently impose a personal income tax.
See "Risk Factors," "Cash Distribution Policy," "Conflicts of Interest and
Fiduciary Responsibilities," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk
factors and conflicts that should be considered in evaluating an investment in
the Subordinated Units.
10
<PAGE>
THE OFFERING
Securities offered.......... 9,000,000 Subordinated Units (10,350,000
Subordinated Units if the Underwriters' over-
allotment option is exercised in full).
Units to be outstanding
after this offering........
Upon the closing of this offering, Ferrellgas
will exchange with the Partnership 7,593,721
Subordinated Units for an equal number of Junior
Subordinated Units. The purpose of such exchange
is to cause all of the Subordinated Units not
sold in this offering to be further subordinated,
generally through the record date for the
distribution for the quarterly period ending
October 31, 1998, to the rights of the holders of
the remaining Subordinated Units to receive the
Minimum Quarterly Distribution per quarter (plus
Subordinated Unit Arrearages, if any).
Immediately after this offering, there will be
outstanding 14,699,678 Common Units, 9,000,000
Subordinated Units, and 7,593,721 Junior
Subordinated Units. Immediately after the
offering, the General Partner will own 1,210,162
of such Common Units, all of such Junior
Subordinated Units and a 2% general partner
interest, representing approximately a 29.6%
interest in the Partnership. If the Underwriters'
over-allotment option is exercised, the General
Partner will obtain the Subordinated Units to be
sold pursuant to such options by exchanging an
equal number of Junior Subordinated Units with
the Partnership. In addition, a total of 850,000
Subordinated Units are reserved for issuance
under the Partnership's Unit Option Plan,
pursuant to which key employees of the
Partnership are granted options to purchase
Subordinated Units from the Partnership.
Distributions of Available The Partnership distributes 100% of its Available
Cash....................... 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" consists
generally of all of the cash receipts of the
Partnership adjusted for its cash disbursements
and net changes in reserves. The full definition
of Available Cash is set forth in the Partnership
Agreement. The General Partner has discretion in
making cash disbursements, incurring borrowings
and changing the amount of reserves, thereby
affecting the amount of Available Cash. See "Cash
Distribution Policy." Available Cash will
generally be distributed 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. See "Cash Distribution Policy--Quarterly
Distributions of Available Cash--Incentive
Distributions."
Distributions to With respect to each quarter during the
Unitholders................ Subordination Period (as defined below), which
will generally not end earlier than August 1,
1999, the Common Unitholders 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 Distribution on the Common Units for
prior quarters, before any distributions are made
to the Subordinated Unitholders or the Junior
Subordinated Unitholders. Upon the expiration of
the Subordination Period, Common Units will no
longer accrue distribution arrearages.
11
<PAGE>
In addition, with respect to each quarterly
period commencing on November 1, 1997 and ending
on the record date for the quarterly cash
distribution made for the quarter ending October
31, 1998 (the "Junior Subordination Period"),
subject to earlier termination if the General
Partner is removed other than for Cause (as
defined in the Glossary), the Minimum Quarterly
Distribution (plus arrearages on the Subordinated
Units for prior quarters during the Junior
Subordination Period) will be made to the holders
of Subordinated Units before any such
distributions are made to the holders of Junior
Subordinated Units. After the Junior
Subordination Period, the Junior Subordinated
Units will be deemed to be Subordinated Units for
purposes of determining the priority and amount
of distributions.
The Subordinated Units will accrue distribution
arrearages ("Subordinated Unit Arrearages") only
during the Junior Subordination Period, and such
Subordinated Unit Arrearages will be made up only
from distributions of Available Cash constituting
Cash from Operations (defined in the Glossary)
otherwise payable to holders of the Junior
Subordinated Units in respect of calendar
quarters ending during the Junior Subordination
Period. Any Subordinated Unit Arrearages not
satisfied prior to the expiration of the Junior
Subordination Period will be cancelled upon such
expiration. Except for Subordinated Unit
Arrearages, neither the Subordinated Units nor
the Junior Subordinated Units accrue distribution
arrearages.
Subordination Period;
Junior Subordination
Period.....................
The Subordination Period will end 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 (A) the Minimum Quarterly Distribution on
each outstanding Common Unit for such periods and
(B) the sum of the Minimum Quarterly
Distributions on all outstanding Subordinated
Units and Junior Subordinated Units 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 be excluded:
(X) any positive balance in Cash from Operations
at the beginning of such four-quarter period, (Y)
any net increase in working capital borrowings in
such four-quarter period and (Z) any net decrease
in reserves in such four-quarter period (the
"Earnings Requirement"); and (ii) as of such
date, the Partnership has made, directly or
indirectly, cash capital expenditures
attributable to acquisitions and capital
additions and improvements since the
Partnership's initial public offering which equal
or exceed $50 million (the "Capital Expenditure
Requirement");
(b) the date on which the General Partner is
removed as general partner of the Partnership
upon the requisite vote by limited partners
12
<PAGE>
under circumstances where Cause does not exist.
See "Cash Distribution Policy--Quarterly
Distributions of Available Cash" and "The
Partnership Agreement--Change of Management
Provisions."
The Partnership has met the Capital Expenditure
Requirement and, for the four-quarter period
ended July 31, 1997, has satisfied the
requirement for the first four-quarter period of
the Earnings Requirement. If the Partnership
satisfies the Earnings Requirement in each of the
following two four-quarter periods, then the
Subordination Period will end on August 1, 1999.
The Partnership did not satisfy the Earnings
Requirement in any four-quarter period prior to
the four quarters ended July 31, 1997 and there
can be no assurance that it will satisfy the
Earnings Requirement in any future four-quarter
period. Therefore, there can be no assurance that
the Subordination Period will end and that the
Subordinated Units will convert to Common Units.
The Junior Subordination Period will end on the
record date for the quarterly cash distribution
made for the quarterly period ending October 31,
1998, subject to earlier termination if the
General Partner is removed other than for Cause.
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 distributed, and
Incentive Distributions will not be made unless
the Partnership has made distributions at
specified levels above the aggregate Minimum
Quarterly Distribution on the outstanding Units.
The rights to receive Incentive Distributions are
referred to as "Incentive Distribution Rights."
See "Cash Distribution Policy--Quarterly
Distributions of Available Cash."
Liquidation preference...... In the event of any liquidation of the
Partnership during the Subordination Period, the
outstanding Common Units generally will be
entitled to receive a distribution out of the net
assets of the Partnership in preference to
liquidating 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. In the event of any liquidation of
the Partnership prior to November 1, 1998, the
outstanding Subordinated Units generally will be
entitled to receive a distribution out of the net
assets of the Partnership in preference to
liquidating distributions on the Junior
Subordinated Units. See "Cash Distribution
Policy--Distributions of Cash Upon Liquidation."
Use of proceeds............. All of the Subordinated Units offered by this
Prospectus are being sold by the General Partner.
The Partnership will not receive any of the
proceeds from the sale of the Subordinated Units.
Listing..................... Application has been made to list the
Subordinated Units for trading on the NYSE,
subject to official notice of issuance.
NYSE symbol.................
13
<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 United States
federal, state and local tax consequences of an investment in Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Units. The following discussion, insofar as it relates
to United States federal income tax laws, is based upon the opinion of Andrews
& Kurth L.L.P., special counsel to the General Partner and the Partnership
("Counsel"), 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; CASH DISTRIBUTIONS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Units will
generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Unitholder will be required
to report in his federal income tax return his share of the Partnership's
income, gains, losses and deductions. In general, cash distributions to a
Unitholder will be taxable only if, and to the extent that, they exceed the tax
basis in his Units.
PARTNERSHIP ALLOCATIONS
In general, 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. At any time that
distributions are made on the Common Units and not on the Subordinated Units,
or on the Subordinated Units and not on the Junior Subordinated Units, or that
Incentive Distributions are made, gross income will be allocated to the
recipients to the extent of such distribution. 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 Unitholder's taxable year even if cash distributions
are not 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 actually distributed to him.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Subordinated Units in this
offering who owns the Units through the record date for the last quarter of the
Partnership's fiscal year ending on July 31, 2002, will be allocated, on a
cumulative basis, no federal taxable income for such period. The Partnership
further anticipates that after the Partnership's fiscal year ending on July 31,
2002, the taxable income allocable to Subordinated Unitholders will represent a
significantly higher percentage (and could in certain circumstances exceed the
amount) of cash distributed to such Unitholders. These estimates are based upon
the assumption that the gross income from operations will approximate the
amount required to make the Minimum Quarterly Distribution with respect to all
Units 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, competitive and
political uncertainties which are beyond the control of the Partnership.
Further, the estimates are based on current tax law and certain tax reporting
positions that the Partnership has adopted and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be
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correct. The actual percentages could be higher or lower than as described
above and any differences could be material. See "Tax Considerations--Tax
Consequences of Unit Ownership--Ratio of Taxable Income to Distributions."
BASIS OF SUBORDINATED UNITS
A Unitholder's initial tax basis for a Subordinated Unit purchased in this
offering will generally be the amount paid for the Subordinated Unit. A
Unitholder's basis will generally be increased by his share of Partnership
income and decreased by his share of Partnership losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses 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 incurred by virtue of the passive loss rules may be
fully deducted when the Unitholder disposes of all of his investment in the
Partnership in a taxable transaction with an unrelated party.
SECTION 754 ELECTION
The Partnership has made the election provided for by Section 754 of the
Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Partnership.
DISPOSITION OF UNITS
A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
Units. Thus, distributions of cash from the Partnership to a Unitholder in
excess of the income allocated to him will, in effect, become taxable income if
he sells the Units at a price greater than his adjusted tax basis even if the
price is less than his original cost. A portion of the amount realized (whether
or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Partnership
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership currently conducts
business in 45 states. A Unitholder will be required to file state income tax
returns and to pay state income taxes in some or all the states in which the
Partnership does business or owns property and may be subject to penalties for
failure to comply with such requirements. 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 states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder. Withholding, the amount of
which may be more or less than a particular Unitholder's income tax liability
owed to the state, may not relieve the nonresident Unitholder from the
obligation to file an income tax return. Amounts withheld may 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 Partnership 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
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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 U.S. federal, state and local 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.
OWNERSHIP OF UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
An investment in Units by tax-exempt organizations (including IRAs and other
retirement plans), regulated investment companies (mutual funds) and foreign
persons raises issues unique to such persons. Much of the income allocated to a
Unitholder that is a tax-exempt organization will be unrelated business taxable
income and, thus, will be taxable to such Unitholder; no significant amount of
the Partnership's gross income will be qualifying income for purposes of
determining whether a Unitholder will qualify as a regulated investment
partnership; 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. Furthermore, distributions to
foreign Unitholders will be subject to federal income tax withholding. See "Tax
Considerations--Uniformity of Units--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 is not subject
to this registration requirement. Nevertheless, the Partnership is registered
as a tax shelter with the Secretary of the Treasury and the IRS has issued the
following tax shelter registration number to the Partnership: 94201000010.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE
PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED
BY THE IRS. See "Tax Considerations--Administrative Matters--Registration as a
Tax Shelter."
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RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many 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 Subordinated Units should
consider the following risk factors in evaluating an investment in the
Subordinated Units. All statements other than statements of historical facts
included in this Prospectus, including, without limitation, statements
regarding the Partnership's business strategy, plans and objectives of
management of the Partnership for future operations are forward-looking
statements. Although the Partnership believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Important factors that could
cause actual results to differ materially from the Partnership's expectations
are disclosed below and elsewhere in this Prospectus. See the Glossary for the
definition of certain terms used herein.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
Weather Conditions Affect the Demand for Propane
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of retail
propane sold is highest during the six-month peak heating season of October
through March and is directly affected by the severity of the winter weather.
During fiscal 1997, approximately 68% of the Partnership's retail propane
volume and in excess of 95% of the Partnership's EBITDA were attributable to
sales during the peak heating season. Actual weather conditions can vary
substantially from year to year, significantly affecting the Partnership's
financial performance. Furthermore, variations in weather in one or more
regions in which the Partnership operates can significantly affect the total
volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying.
The Partnership Is Subject To Pricing and Inventory Risk
The Partnership believes that an important element of its high retention of
retail customers has been its ability to deliver propane during periods of
extreme demand. The Partnership engages in the brokerage and trading of
propane and other natural gas liquids primarily to generate a profit
independent of the retail and wholesale operations, but also to insure the
availability of propane during periods of short supply. If the Partnership
sustains material losses from its trading of products, the amount of Available
Cash constituting Cash from Operations available for distribution to the
holders of Units may be reduced. 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 retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability is sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of which
can be subject to volatile changes in response to changes in supply or other
market conditions. The Partnership will have no control over these market
conditions. Consequently, the unit price of propane purchased by the
Partnership, as well as other propane marketers, can change rapidly over a
short period of time. The Partnership currently estimates that less than 20%
of the Partnership's propane sales (based on total retail gallons sold) during
fiscal year 1998 will be pursuant to fixed-price contracts. In general,
product supply contracts permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices
established at major delivery points. As it may not be possible immediately to
pass on to customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
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Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers pursuant to
supply contracts or on the spot market. To the extent that the Partnership
purchases propane from foreign (including Canadian) sources, its propane
business will be subject to risks of disruption in foreign supply. The
Partnership generally attempts to minimize inventory risk by purchasing
propane on a short-term basis. However, the Partnership may purchase large
volumes of propane during periods of low demand, which generally occur during
the summer months, at the then current market price. Because of the potential
volatility of propane prices, if the Partnership makes such purchases, the
market price for propane could fall below the price at which the Partnership
made the purchases, thereby adversely affecting gross margins or rendering
sales from such inventory unprofitable. The Partnership engages in hedging of
product cost and supply through common hedging practices.
The Retail Propane Business Is Highly Competitive
The Partnership's profitability is affected by the competition for customers
among all participants in the retail propane business. The Partnership
competes with other distributors of propane, including a number of large
national and regional firms and several thousand small independent firms.
Because of the relatively low barriers to entry into the retail propane
market, the potential exists for small independent propane retailers, as well
as other companies (not necessarily then engaged in retail propane
distribution) to begin competing with the Partnership's retail outlets. As a
result, the Partnership is always subject to the risk of additional
competition in the future. Certain of the Partnership's competitors may have
greater financial resources than the Partnership. Should a competitor attempt
to increase market share by reducing prices, the Partnership's financial
condition and results of operations could be materially adversely affected.
Generally, warmer-than-normal weather further intensifies competition. The
Partnership believes that its ability to compete effectively depends on the
reliability of its service, its responsiveness to customers and its ability to
maintain competitive retail prices.
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
Partnership 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 its ability to acquire other
retail distributors and the success of its marketing efforts to acquire new
customers.
The Retail Propane Business Faces Competition from Alternative Energy Sources
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. The Partnership competes for customers against
suppliers of electricity, natural gas and fuel oil. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
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. Although propane is similar to fuel oil in certain applications and
market demand, propane and fuel oil compete to a lesser extent primarily
because of the cost of converting from one to the other. The Partnership
cannot predict the effect that the development of alternative energy sources
might have on its operations.
The Partnership May Not Be Successful in Growing Through Acquisitions
The retail propane industry is mature, and the Partnership foresees at best
only limited growth in total retail demand for propane. Moreover, as a result
of long-standing customer relationships that are typical in the retail home
propane industry, the inconvenience of switching tanks and suppliers and
propane's higher cost as compared to certain other energy sources, such as
natural gas, the Partnership may experience difficulty in acquiring new retail
customers, other than through acquisitions. Therefore, while the Partnership's
business strategy includes internal growth and start-ups of new customer
service locations, the ability of the Partnership's
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propane business to grow will depend principally upon its ability to acquire
other retail propane distributors. There can be no assurance that the
Partnership will identify attractive acquisition candidates in the future,
that the Partnership will be able to acquire such businesses on economically
acceptable terms, that any acquisitions will not be dilutive to earnings and
distributions to the Unitholders or that any additional debt incurred to
finance acquisitions will not adversely affect the ability of the Partnership
to make distributions to the Unitholders. The Partnership is not required
under the Partnership Agreement to seek Unitholder approval of any
acquisition. The Partnership is subject to certain covenants in agreements
governing its indebtedness that restrict the Partnership's ability to incur
indebtedness to finance acquisitions. In addition, to the extent that warm
weather or other factors adversely affect the Partnership's operating and
financial results, the Partnership's access to capital to finance its
acquisition activities may be further limited.
The Partnership Is Subject to Operating and Litigation Risks Which May Not Be
Covered by Insurance
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and delivering combustible liquids
such as propane. As a result, the Partnership has been, and is likely to be, a
defendant in various legal proceedings 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 it 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 injury and property damage or that
such levels of insurance will be available in the future at economical prices.
Energy Efficiency and Technology Advances May Affect Demand
The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has adversely affected the
demand for propane by retail customers. The Partnership cannot predict the
materiality of the effect of future conservation measures or the effect that
any technological advances in heating, conservation, energy generation or
other devices might have on its operations.
The Partnership Will Be Dependent Upon Key Personnel of the General Partner
The Partnership 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, Chief Executive
Officer and Chairman of the Board of the General Partner. 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 General Partner for more than 30 years and who will
indirectly own approximately 30% of the Partnership after this offering
(approximately 25% if the Underwriters' over-allotment option is exercised in
full), has indicated to the Partnership that he intends to continue as chief
executive officer of the General Partner for the foreseeable future.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
Distribution Priority of Common Units; Ability to Issue Additional Units;
Limitations on Subordination of Junior Subordinated Units
During the Subordination Period, which will generally not end prior to
August 1, 1999, distributions of cash to the holders of Subordinated Units are
subordinated to the rights of the holders of Common Units to receive the
Minimum Quarterly Distribution of $0.50 per Common Unit, or $2.00 per Common
Unit on an annualized basis, plus any arrearages on the Common Units for prior
quarters. There can be no assurance that the Partnership will generate
sufficient Available Cash constituting Cash from Operations to make
distributions on Subordinated Units or Common Units. In addition, there can be
no assurance that the Partnership will ever meet the requirements necessary
for the Subordination Period to end. Accordingly, there can be no assurance
that the Subordinated Units will ever convert to Common Units.
Subject to certain limitations, the Partnership has the right to issue Units
without the consent of the Unitholders. The effect of such issuances may be to
dilute the value of the interests of the then-
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existing holders of Units in the net assets of the Partnership, to dilute the
interests of holders of Units in distributions by the Partnership or to make
it more difficult for a person or group to remove the General Partner or
otherwise change the management of the Partnership. See "--The Partnership May
Issue Additional Units thereby Diluting Existing Unitholders' Interests."
During the Junior Subordination Period, distributions of the Minimum
Quarterly Distribution (and any Subordinated Unit Arrearages) will have
priority over distributions on the Junior Subordinated Units. The Junior
Subordination Period extends until the record date for the quarterly
distribution of Available Cash in respect of the quarterly period ending
October 31, 1998, subject to earlier termination if the General Partner is
removed other than for Cause. Upon termination of the Junior Subordination
Period, all preferences that the Subordinated Units have over the Junior
Subordinated Units will end and any remaining Subordinated Unit Arrearages
will be canceled.
The Partnership May Issue Additional Units thereby Diluting Existing
Unitholders' Interests
The Partnership generally has the authority under the Partnership Agreement
to issue an unlimited number of additional Common Units, Subordinated Units,
Junior Subordinated Units or other equity securities for such consideration
and on such terms and conditions as are established by the General Partner, in
its sole discretion without the approval of the Unitholders. A total of
14,699,678 Common Units are currently outstanding. During the Subordination
Period, however, the Partnership may not (i) issue equity securities ranking
prior or senior to the Common Units or an aggregate of more than 7,000,000
additional Common Units (of which 599,678 have been issued prior to the date
hereof) (excluding Common Units issued upon conversion of Subordinated Units
and for certain other limited purposes) or an equivalent number of securities
ranking on a parity with the Common Units without the approval of holders of
66 2/3% of the outstanding Common Units or (ii) subject to any necessary
approval by the holders of Common Units pursuant to clause (i) above, issue
more than 9,400,322 additional Subordinated Units (excluding Subordinated
Units issued upon the exchange of Junior Subordinated Units in connection with
any exercise by the Underwriters of the over-allotment option or upon the
conversion of the Junior Subordinated Units after the expiration of the Junior
Subordination Period) or other equity securities of the Partnership ranking
prior or senior to the Subordinated Units or an equivalent amount of
securities ranking on a parity with the Subordinated Units (or other
securities convertible into or exercisable or exchangeable during the
Subordination Period for Common Units, Subordinated Units or such senior or
parity securities), in either case without the approval of the holders of at
least a majority of the outstanding Subordinated Units (excluding Subordinated
Units held by the General Partner and its affiliates). After the end of the
Subordination Period, the Partnership may issue an unlimited number of limited
partner interests of any type without the approval of the Unitholders. Based
on the circumstances of each case, the issuance of additional Units or other
securities may reduce the cash available for distribution to holders of
previously outstanding Units, dilute the value of the interests of the then-
existing holders of Units in the net assets of the Partnership or make it more
difficult for a person or group to remove the General Partner or otherwise
change the management of the Partnership.
Cash Distributions Are Not Guaranteed and May Fluctuate with Partnership
Performance
Although the Partnership will distribute all of its Available Cash, 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 cash flow generated by operations, required
principal and interest payments on the Partnership's debt, the costs of
acquisitions (including related debt service payments), restrictions contained
in the Partnership's debt instruments, issuances of debt and equity securities
by the Partnership, fluctuations in working capital, capital expenditures,
adjustments in reserves, prevailing economic conditions and financial,
business and other factors, a number of which will be beyond the control of
the Partnership and the General Partner. Cash distributions are dependent
primarily on cash flow, including from reserves and working capital
borrowings, and not on profitability, which is affected by non-cash items.
Therefore, cash distributions might be made during periods when the
Partnership records losses and might not be made during periods when the
Partnership records profits.
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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 issued by the Operating Partnership do not contain any
sinking fund provision and such indebtedness will be due in full in 2001. The
Senior Secured Notes issued by the Partnership (together with the Senior Notes
of the Operating Partnership, the "Notes") also contain no sinking fund
provisions and such indebtedness will be due in 2006. In addition, the 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 affiliates), the holders of the Notes have the right to
require the issuer to repurchase any or all of the outstanding Notes at 101%
of the aggregate principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase. The Credit Facility (as defined in the Glossary)
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 Notes. 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 Partnership will be able to refinance the 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 Partnership will be able to repay amounts outstanding under the
Credit Facility or repurchase the 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 General
Partner for over 30 years and who will indirectly own approximately 30% of the
Partnership after this offering (approximately 25% if the Underwriters' over-
allotment option is exercised in full), has indicated to the General Partner
that he has no current intent to take any action that would trigger the change
of control provisions of the Notes or the Credit Facility while such
provisions remain in effect. The Partnership, however, can give no assurance
that Mr. Ferrell will not, in the future, take actions that would trigger such
change of control provisions.
The Partnership's Indebtedness May Limit the Partnership's Ability to Make
Distributions and May Affect its Operations
On July 31, 1997, the Partnership's total indebtedness as a percentage of
its total capitalization was approximately 92%. As a result, the Partnership
is significantly leveraged and has indebtedness that is substantial in
relation to its partners' capital. Future borrowings could result in a
significant increase in the Partnership's leverage. The ability of the
Partnership to make principal and interest payments depends on future
performance, which performance is subject to many factors, a number of which
will be outside the Partnership's control. The debt instruments of the
Partnership contain restrictive covenants that limit the ability of the
Partnership to distribute cash and to incur additional indebtedness. The
payment of principal and interest on such indebtedness and the reserves
required by the terms of the Partnership's indebtedness for the future payment
thereof will reduce the cash available to make distributions on the Units. The
Partnership's leverage may adversely affect the ability of the Partnership to
finance its future operations and capital needs, limit its ability to pursue
acquisitions and other business opportunities and make its results of
operations more susceptible to adverse economic or operating conditions.
Cost Reimbursements and Fees Due to the General Partner Are Substantial
Prior to making any distribution on the Units, the Partnership must
reimburse the General Partner and its affiliates at cost for all expenses
incurred on behalf of the Partnership. Approximately $128 million of expenses
(primarily wages and salaries) were reimbursed by the Partnership to the
General Partner in fiscal 1997. In addition, the General Partner and its
affiliates may provide services to the Partnership in the future for which the
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Partnership is charged reasonable fees as determined by the General Partner.
The reimbursement of such expenses and the payment of any such fees could
adversely affect the ability of the Partnership to make distributions.
Unitholders Have Certain Limits on their Voting Rights; The General Partner
Manages and Operates the Partnership
The General Partner manages and operates the Partnership. Unlike the holders
of common stock in a corporation, Unitholders will have only limited voting
rights on matters affecting the Partnership's business. Unitholders will have
no right to elect the General Partner on an annual or other continuing basis,
and the General Partner may not be removed except pursuant to the vote of the
holders of at least 66 2/3% of the outstanding Units (including Units owned by
the General Partner and its affiliates) and upon the election of a successor
general partner by the vote of the holders of not less than a majority of the
outstanding Units. After this offering, the General Partner will own
approximately 28.1% of the outstanding Units, which could make it difficult to
obtain such a vote for removal. See "The Partnership Agreement."
Change of Management Provisions
The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the General
Partner or otherwise change the management of the Partnership.
No Prior Public Market for Subordinated Units
Prior to this offering, there has been no public market for the Subordinated
Units. The initial public offering price for the Subordinated Units has been
determined through negotiations between the General Partner and the
representatives of the Underwriters. For a description of the factors
considered in determining the initial public offering price, see
"Underwriters." Although the Partnership believes that the Subordinated Units
will trade at prices below the trading prices of the Common Units, no assurance
can be given as to the market prices at which the Subordinated Units will
trade. Application has been made to list the Subordinated Units for trading on
the NYSE, subject to official notice of issuance, under the symbol " ."
The General Partner Will Have a Limited Call Right With Respect to the Limited
Partner Interests
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Subordinated Units) are held by
persons other than the General Partner and its affiliates, the General Partner
will have the right, which it may assign to any of its affiliates or the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons at a price
generally equal to the then-current market price of limited partner interests
of such class. As a consequence, a holder of Units may be required to sell his
Units at a time when he may not desire to sell them or at a price that is less
than the price he would desire to receive upon such sale.
Unitholders May Not Have Limited Liability in Certain Circumstances;
Liability for Return of Certain Distributions
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
Unitholders as a group to remove or replace the General Partner, to make
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, then the Unitholders could be held
liable in certain circumstances for the Partnership's obligations to the same
extent as a general partner. In addition, under certain circumstances a
Unitholder may be liable to the Partnership for the amount of a distribution
for a period of three years from the date of the distribution.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General Partner and its affiliates,
on the other. The directors and officers of the General Partner have fiduciary
duties to manage the General Partner in a manner beneficial to its
stockholder. At the same time, the General Partner has fiduciary duties to
manage the Partnership in a manner beneficial to the Partnership and the
Unitholders. The duties of the General Partner, as general partner, to the
Partnership and the Unitholders, therefore, may come into conflict with the
duties of management of the General Partner to its stockholder.
Conflicts of interest might arise with respect to the following matters,
among others:
(i) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
changes in reserves in any quarter will affect whether, or the extent to
which, there is sufficient Available Cash to meet the Minimum Quarterly
Distribution and Target Distribution Levels on any or all Units in a given
quarter.
(ii) The Partnership does not have any employees and relies 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 limits 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.
(v) Any agreements between the Partnership and the General Partner and
its affiliates will not grant to the Unitholders, separate and apart from
the Partnership, the right to enforce the obligations of the General
Partner and such affiliates in favor of the Partnership. Therefore, the
General Partner, in its capacity as the managing 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 causing the Partnership to enter into
additional contractual arrangements with any of such entities. 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
arm's-length negotiations.
(vii) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign 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 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. In addition, the General Partner and such affiliates have
no obligation to present business opportunities to the Partnership.
(ix) The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the General Partner to cause the
Partnership to engage in a roll-up transaction, there could be no assurance
that such a transaction would not have a material adverse effect on a
Unitholder's investment in the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates, on
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the one hand, and the Partnership or the Unitholders, on the other, and to
consider, in resolving such conflicts of interest, the interests of other
parties in addition to the interests of the Unitholders. In addition, the
Partnership Agreement provides that a purchaser of 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 those
described above, and 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. 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. Any resolution of a conflict approved by the Audit Committee of
the General Partner will be conclusively deemed fair and reasonable to the
Partnership. The latitude given in the Partnership Agreement to the General
Partner in resolving conflicts of interest may significantly limit the ability
of a Unitholder to challenge what might otherwise be a breach of fiduciary
duty.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and their
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, the Partnership is required to indemnify the General
Partner, its affiliates and their respective officers, directors, employees,
agents and trustees to the fullest extent permitted by law against liabilities,
costs and expenses incurred by the General Partner or such other persons, if
the General Partner or such persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than the
General Partner) 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.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified 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 that
would be in effect under common law were it not for the Partnership Agreement.
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax Treatment is Dependent on Partnership Status
The availability to a Unitholder of the economic 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. Assuming the
accuracy of certain factual matters as to which the General Partner and the
Partnership have made representations, Counsel is of the opinion that, under
current law, the Partnership will be classified as a partnership for federal
income tax purposes and will continue to be so classified after giving effect
to the offering of the Subordinated Units. No ruling from the IRS as to
classification has been or is expected to be requested. One of the
representations of the Partnership on which the opinion of Counsel is based is
that at least 90% of the Partnership's gross income for each taxable year has
been and will be "qualifying income." Whether the Partnership will continue to
be classified as a partnership in part depends, therefore, on the Partnership's
ability to meet this qualifying income test in the future. 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 (currently a 35% federal rate), distributions would generally
be taxed again to the Unitholders as corporate distributions, and no income,
gains, losses or deductions 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 holders of Units 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 holders of Units and thus would likely result
in a substantial reduction in the value of the Units. See "Tax Considerations--
Partnership Status."
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<PAGE>
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 will be subject to change,
including a decrease in the Minimum Quarterly Distribution and the Target
Distribution Levels to reflect the impact of such law on the Partnership. See
"Cash Distribution Policy--Quarterly Distributions of Available Cash--
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
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, whether the
Partnership's propane operations generate "qualifying income" under Section
7704 of the Code 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. Any such contest with the IRS
may materially and adversely impact the market for the Units and the prices at
which the Units trade. In addition, 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.
Tax Liability Exceeding Cash Distributions
A Unitholder will be required to pay federal income taxes 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.
There is no assurance that a Unitholder will receive cash distributions equal
to his allocable share of taxable income from the Partnership or even the tax
liability to him resulting from that income. Further, a holder of Units may
incur a tax liability, in excess of the amount of cash received, upon the sale
of his Units. See "Tax Considerations--Tax Consequences of Unit Ownership" and
"--Disposition of Units."
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. For
example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of a Unit will be unrelated business taxable income and thus will
be taxable to such a Unitholder. See "Tax Considerations--Tax-Exempt
Organizations and Certain Other Investors."
Limitation on the Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
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. 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. Net passive income from
the Partnership may be offset by 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 Shelter Registration; Potential IRS Audit
The Partnership is registered with the Secretary of the Treasury 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
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<PAGE>
a Unitholder owning less than a 1% profits interest in the Partnership to
participate in the income tax audit process are very limited. Further, any
adjustments in the Partnership's tax returns will lead to adjustments in the
Unitholders' tax returns and may lead to audits of Unitholders' tax 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
Unitholder's personal tax return.
Possible Loss of Tax Benefits Relating to Non-uniformity of Units and
Nonconforming Depreciation Conventions
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units of the same class must be maintained. To maintain uniformity and for
other reasons, the Partnership has adopted certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of Units and could have a negative impact on the value
of the Units. See "Tax Considerations--Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Partnership does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Partnership does business or owns property and may
be subject to penalties for failure to comply with those requirements. The
Partnership currently conducts business in 45 states. It is the responsibility
of each Unitholder to file all United States federal, state and local 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. See "Tax Considerations--State, Local and Other Tax
Considerations."
Tax Gain or Loss on Disposition of Units
A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Units. Thus, prior
Partnership distributions in excess of cumulative net taxable income in respect
of a Unit which decreased a Unitholder's tax basis in such Unit will, in
effect, become taxable income if the Unit is sold at a price greater than the
Unitholder's tax basis in such Unit, even if the price is less than his
original cost. A portion of the amount realized (whether or not representing
gain) may be ordinary income. Furthermore, should the IRS successfully contest
certain conventions used by the Partnership, a Unitholder could realize more
gain on the sale of Units than would be the case under such conventions without
the benefit of decreased income in prior years.
Reporting of Partnership Tax Information and Audits
The Partnership will furnish each holder of Units with a Schedule K-1 that
sets forth his allocable share of income, gains, losses and deductions. In
preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms to
statutory or regulatory requirements or to administrative pronouncements of the
IRS. Further, the Partnership's tax return may be audited, and any such audit
could result in an audit of a Unitholder's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the
audit, including adjustments of items unrelated to the Partnership.
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<PAGE>
USE OF PROCEEDS
All the Subordinated Units offered by the Prospectus are being sold by
Ferrellgas. The Partnership will not receive any of the proceeds from the sale
of the Subordinated Units.
DISTRIBUTIONS AND MARKET FOR COMMON UNITS
Since the inception of the Partnership in 1994, the Partnership has made cash
distributions on each Common Unit and Subordinated Unit at the rate of $0.50
per quarter, or $2.00 on an annualized basis. Specifically, no cash
distributions were made by the Partnership from inception to July 31, 1994. The
$0.65 distribution made at the end of the fiscal 1995 first quarter included
$0.50 for the first quarter of fiscal 1995 and $0.15 for the period from
inception through July 31, 1994. The Minimum Quarterly Distribution of $0.50
was paid for each subsequent quarter through the quarter ended July 31, 1997.
The Common Units are listed and traded on the NYSE under the symbol "FGP."
The Common Units began trading on June 28, 1994, at an initial public offering
price of $21.00 per Common Unit. As of November 18, 1997, there were 776
registered Common Unitholders of record. The following table sets forth the
high and low sales prices for the Common Units on the NYSE.
<TABLE>
<CAPTION>
COMMON UNIT PRICE RANGE
-------------------------------------------
FISCAL 1998 FISCAL 1997 FISCAL 1996
-------------- ------------- -------------
FISCAL HIGH LOW HIGH LOW HIGH LOW
- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter (ending October 31).. $24.25 $22.56 $23.50 $22.50 $23.00 $21.00
Second Quarter (ending January 31). (1) (1) 22.88 20.75 24.50 21.25
Third Quarter (ending April 30).... -- -- 23.00 21.13 24.25 21.88
Fourth Quarter (ending July 31).... -- -- 23.00 21.25 23.50 21.25
</TABLE>
- --------
(1) Second Quarter high/low is through , 1997.
The last reported sale price of the Common Units on the NYSE on ,
1997 was $ per Common Unit.
Prior to this offering, there has been no trading market for the Subordinated
Units. Application has been made to list the Subordinated Units for trading on
the NYSE, subject to official notice of issuance, under the trading symbol
" ."
The Partnership believes that the Subordinated Units will trade at a price
that will be less than the price at which the Common Units trade. There can be
no assurance that there will be an active trading market in the Subordinated
Units.
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<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 in 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 "Cash Distribution Policy--
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 commenced
operations ($22.1 million), plus an initial balance of $25 million at the
commencement of the Partnership's 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 by the Partnership 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 is 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) is 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, Subordinated Unit and Junior Subordinated Unit in an aggregate
amount per Unit equal to $21.00 (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 Partnership has not distributed any Cash from Interim Capital
Transactions. The General Partner does not anticipate that there will be
significant amounts of Cash from Interim Capital Transactions distributed.
The discussion below indicates the percentages of cash distributions
required to be made to the General Partner and the Common Unitholders and the
Subordinated Unitholders and the circumstances under which the holders of
Junior Subordinated Units and the 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.
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 from all sources for such quarter.
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<PAGE>
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 and the Junior
Subordinated Units. In addition, for each quarter during the Junior
Subordination Period, the Minimum Quarterly Distribution (plus Subordinated
Unit Arrearages) will be made to the holders of Subordinated Units before any
such distributions are made to the holders of Junior Subordinated Units. After
the end of the Junior Subordinated Period, the Junior Subordinated Units will
be deemed to be Subordinated Units for purposes of determining the priority
and amount of distributions. The terms "Junior Subordination Period,"
"Subordination Period," "Common Unit Arrearages" and "Subordinated 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 (other than Subordinated Unit Arrearages)
with respect to distributions for any quarter.
The Subordination Period will extend until the first day of any quarter
beginning on or after August 1, 1999 in respect of which (i) for each of the
three consecutive four-quarter periods immediately preceding such date, the
Partnership has made distributions of Available Cash equal to or greater than
(A) the Minimum Quarterly Distribution on each outstanding Common Unit and (B)
the sum of the Minimum Quarterly Distributions on all outstanding Subordinated
Units and Junior Subordinated Units for such periods; provided, however, that
in determining the amount of Available Cash distributed in any four-quarter
period the following amounts shall be excluded: (X) any positive balance in
Cash from Operations at the beginning of such four-quarter period, (Y) any net
increase in working capital borrowings in such four-quarter period, and (Z)
any net decrease in reserves in such four-quarter period (the "Earnings
Requirement"); 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 "Capital Expenditure Requirement").
The Partnership has met the Capital Expenditure Requirement and, in the four-
quarter period ended July 31, 1997, has satisfied the requirement for the
first four-quarter period of the Earnings Requirement. If the Partnership
satisfies the Earnings Requirement in each of the next two four-quarter
periods, then the Subordination Period will end on August 1, 1999. The
Partnership did not satisfy the Earnings Requirement in any four-quarter
period prior to the four quarters ended July 31, 1997 and there can be no
assurance that it will satisfy the Earnings Requirement in any future four-
quarter period. Therefore, there can be no assurance that the Subordination
Period will end and that the Subordinated Units will convert to Common Units.
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 of the Junior Subordinated Units that will be held by
Ferrellgas immediately after this offering 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, Subordinated
Units, and the Junior 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 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). The
General Partner does not expect that
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<PAGE>
the Partnership will meet the requirements in clause (ii) of the preceding
sentence during the Subordination Period, and, as a result, does not expect
these Junior Subordinated Units to convert into Common Units prior to the end
of the Subordination Period.
The Junior Subordination Period will end after the record date for
distributions of Available Cash to the holders of Subordinated Units with
respect to the quarterly period ending October 31, 1998, subject to earlier
termination if the General Partner is removed other than for Cause. Upon the
expiration of the Junior Subordination Period, the Junior Subordinated Units
will be deemed to be Subordinated Units for purposes of determining the
priority and amount of distributions and all Subordinated Unit Arrearages will
be extinguished.
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, (a) so long as there are any Junior Subordinated Units
outstanding, 98% to the Subordinated Unitholders and the Junior
Subordinated Unitholders (to be apportioned between the Subordinated
Unitholders and the Junior Subordinated Unitholders as provided below) and
2% to the General Partner until there has been distributed to the
Subordinated Unitholders and the Junior Subordinated Unitholders an
aggregate amount equal to the product of (i) the total number of
Subordinated Units and Junior Subordinated Units outstanding and (ii) the
Minimum Quarterly Distribution for such quarter. The amount to be
distributed to the Subordinated Unitholders and the Junior Subordinated
Unitholders under this clause third shall be distributed among them in the
following order and priority:
(i) first, to the Subordinated Unitholders, pro rata, until there has
been distributed in respect of each Subordinated Unit an amount equal
to the Minimum Quarterly Distribution for such quarter;
(ii) then, to the Subordinated Unitholders, pro rata, until there has
been distributed in respect of each Subordinated Unit an amount equal
to any cumulative Subordinated Unit Arrearages on each Subordinated
Unit; and
(iii) finally, all remaining amounts to be distributed under this
clause third shall be distributed to the Junior Subordinated
Unitholders, pro rata; and
(b) after there are no longer any Junior Subordinated Units outstanding, 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" below.
After the Junior Subordination Period, the Junior Subordinated Units shall
be deemed to be Subordinated Units for purposes of determining the priority
and amount of distributions of Available Cash on the Subordinated Units and
the Junior Subordinated Units and all Subordinated Unit Arrearages (if any)
shall be extinguished. In addition, after the Junior Subordination Period, and
at such time as the General Partner shall determine, based on advice of
counsel, that a Junior 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
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<PAGE>
characteristics of a Subordinated Unit outstanding, then Junior Subordinated
Units shall convert into an equal number of Subordinated Units. See "--
Exchange of Subordinated Units and Junior Subordinated Units."
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 owns 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" below.
Incentive Distributions
For any quarter with respect to which (i) Available Cash has been
distributed on outstanding Common Units in such amount as may be necessary to
eliminate any Common Unit Arrearages and (ii) Available Cash has been
distributed in an additional amount equal to the product of (A) the aggregate
amount of Units outstanding and (B) the Minimum Quarterly Distribution, 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 Common Unitholders have received (without regard 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 Common Unitholders have received (without regard to any
distributions to Common Unitholders with respect to Common Unit Arrearages)
a total of $0.63 for such quarter in respect of each Common Unit (the
"Second Target Distribution");
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 Common Unitholders have received (without regard to any
distributions to Common Unitholders with respect to Common Unit Arrearages)
a total of $0.82 for such quarter in respect of each Common 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.
Notwithstanding the foregoing, any amounts otherwise distributable under
clauses first through fourth above to the Junior Subordinated Unitholders with
respect to any quarter ending during the Junior Subordination Period shall
instead be distributed to the Subordinated Unitholders, pro rata, to the
extent of any cumulative Subordinated Unit Arrearages.
31
<PAGE>
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
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 do not reduce the
Minimum Quarterly Distribution for the quarter with respect to which they are
distributed, and arrearages on the Common Units will accrue to the extent
distributions of Available Cash constituting Cash from Operations do not equal
the Minimum Quarterly Distribution. (The General Partner does not anticipate
that there will be significant distributions of Cash from Interim Capital
Transactions.) The continued ability of the Partnership to make distributions
on the Subordinated Units will therefore be dependent on the Partnership's
ability to generate and maintain levels of Available Cash constituting Cash
from Operations in excess of that required to pay the Minimum Quarterly
Distribution on the Common Units. Although since its inception the Partnership
has been able to generate and maintain levels of Available Cash constituting
Cash from Operations sufficient to permit the full payment of the Minimum
Quarterly Distribution on all Units (currently approximately $16.0 million per
quarter), no assurance can be given as to its continued ability to do so.
After the Junior Subordination Period, any reduction in such level below that
necessary to pay the Minimum Quarterly Distribution on all Units will result
in a reduction in distributions to the Subordinated Units.
Exchange of Subordinated Units and Junior Subordinated Units
Ferrellgas has agreed to exchange, upon consummation of the offering made by
this Prospectus, an aggregate of 7,593,721 Subordinated Units for an equal
number of Junior Subordinated Units. The purpose of such exchange is to cause
all of the Subordinated Units not sold in this offering to be subordinate
during the Junior Subordination Period, for purposes of determining the
priority and amount of distributions of Available Cash, to the rights of the
holders of Subordinated Units offered hereby. If the Underwriters' over-
allotment option is exercised, the General Partner will obtain the
Subordinated Units to be sold pursuant to such option by exchanging an equal
number of Junior Subordinated Units with the Partnership.
After the end of the Junior Subordination Period, the Junior Subordinated
Units shall be deemed to be Subordinated Units for purposes of determining the
priority and amount of distributions of Available Cash on the Subordinated
Units and the Junior Subordinated Units and the remaining Subordinated Unit
Arrearages (if any) shall be extinguished. In addition, after the end of the
Junior Subordination Period, and at such time as the General Partner shall
determine, based on advice of counsel, that a Junior Subordinated Unit has, as
a substantive
32
<PAGE>
matter, like intrinsic economic and federal income tax characteristics, in all
material respects, to the intrinsic economic and federal income tax
characteristics of a Subordinated Unit, Junior Subordinated Units shall
convert into an equal number of Subordinated Units.
After the end of the Subordination Period, the outstanding Subordinated
Units and, if the Junior Subordination Period has not previously ended, the
outstanding Junior Subordinated Units, shall be deemed to be Common Units for
purposes of determining the priority and amount of distributions of Available
Cash on outstanding Units, arrearages will cease to accrue on all outstanding
Common Units and, if the Junior Subordination Period has not previously ended,
any remaining Subordinated Unit Arrearages will be canceled and no such
further arrearages shall accrue. In addition, after the end of the
Subordination Period, and at such time as the General Partner shall determine,
based on the advice of counsel, that each outstanding Subordinated Unit and,
if the Junior Subordinated Units have not previously converted into
Subordinated Units, each Junior 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, each outstanding Subordinated Unit or Junior
Subordinated Unit shall convert into a Common Unit.
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 Units (whether effected by a distribution
payable in Units or otherwise), but not by reason of the issuance of
additional Units for cash or property. For example, in the event of a two-for-
one split of the 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. The Partnership Agreement
provides that a combination or subdivision of any class or classes of Units
requires a proportionate combination or subdivision of each other class of
Units.
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, with the Initial Unit Price being $21.00 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 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
33
<PAGE>
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 (i) to entitle the holders of outstanding Common Units to a preference
over the holders of outstanding Subordinated Units and Junior Subordinated
Units upon the liquidation of the Partnership, to the extent of the Unrecovered
Initial Unit Price plus any Common Unit Arrearages, and (ii) in the event of
liquidation during the Junior Subordination Period, to entitle the holders of
outstanding Subordinated Units to a preference over the holders of the Junior
Subordinated Units upon the liquidation of the Partnership, to the extent of
the Unrecovered Subordinated Unit Capital (as defined in the Glossary) plus any
Subordinated 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 an exhibit to the Registration Statement. 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 balances:
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 Unit;
third,
(a) if there are any Junior Subordinated Units outstanding at the time of
liquidation, 98% to the Subordinated Unitholders and the Junior
Subordinated Unitholders (to be apportioned between the Subordinated
Unitholders and the Junior Subordinated Unitholders as provided below) and
2% to the General Partner until the aggregate capital account balances of
the Subordinated Unitholders and the Junior Subordinated Unitholders are
equal to the product of (i) the total number of Subordinated Units and
Junior Subordinated Units outstanding times (ii) the Unrecovered
Subordinated Unit Capital (as such term is defined in the Glossary). The
gain to be allocated to the Subordinated Unitholders and the Junior
Subordinated Unitholders hereunder shall be allocated among them in the
following order and priority:
(i) first, to the Subordinated Unitholders, pro rata, until the
capital account for each Subordinated Unit is equal to the Unrecovered
Subordinated Unit Capital plus any Subordinated Unit Arrearages in
respect of such Subordinated Unit (but never in excess of an amount
equal to the product of (x) the total number of Junior Subordinated
Units outstanding multiplied by (y) the product of (I) the Minimum
Quarterly Distribution times (II) the number of regular quarterly
distributions that would otherwise be payable with respect to the
quarters ending prior to November 1, 1998 if the liquidation were not
occurring (the "Limitation Amount"));
(ii) then, all remaining gain to be allocated under this clause third
shall be allocated to the Junior Subordinated Unitholders, pro rata;
and
(b) if there are no Junior Subordinated Units outstanding at the time of
liquidation, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner until the capital account for each Subordinated Unit is
equal to the Unrecovered Subordinated Unit Capital in respect of such
Subordinated Unit;
34
<PAGE>
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
Common Unit equal to (a) the excess of the First Target Distribution per
Common Unit over the Minimum Quarterly Distribution per Unit for each
quarter of the Partnership's existence, less (b) the amount per Common Unit
of any distributions of Available Cash constituting Cash from Operations in
excess of the Minimum Quarterly Distribution per Common Unit that was
distributed to the Common Unitholders as a First Target Distribution 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 Common
Unit equal to (a) the excess of the Second Target Distribution per Common
Unit over the First Target Distribution per Common Unit for each quarter of
the Partnership's existence, less (b) the amount per Common Unit of any
distributions of Available Cash constituting Cash from Operations in excess
of the First Target Distribution per Common Unit that was distributed to
the Common Unitholders as a Second Target Distribution for any quarter of
the Partnership's existence;
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 Common
Unit equal to (a) the excess of the Third Target Distribution per Common
Unit over the Second Target Distribution per Common Unit for each quarter
of the Partnership's existence, less (b) the amount per Common Unit of any
distributions of Available Cash constituting Cash from Operations in excess
of the Second Target Distribution per Common Unit that was distributed to
the Common Unitholders as a Third Target Distribution for any quarter of
the Partnership's existence; and
seventh, 50% to all Unitholders, pro rata, 48% to the holders of the
Incentive Distribution Rights, pro rata, and 2% to the General Partner.
Notwithstanding the foregoing, any amounts otherwise allocable under
clauses fourth through seventh above to the Junior Subordinated Unitholders
shall instead be allocated to the Subordinated Unitholders, pro rata, to
the extent of the difference, if positive, between (i) the cumulative
Subordinated Unit Arrearages, if any, and (ii) the amount previously
allocated with respect to the Subordinated Unit Arrearages pursuant to
subclause (a)(i) of the third clause above (but the sum of such amounts to
be allocated pursuant to such subclause and this paragraph shall not exceed
the Limitation Amount).
After the Junior Subordination Period, no allocations will be made under
paragraph third above and the Junior Subordinated Units shall be deemed to be
Subordinated Units for purposes of the allocations described above. In
addition, after the Subordination Period, any such distribution will be
allocated as above described; provided that no allocations will be made under
paragraphs second and third and that the references to "Common Units" after
the Subordination Period shall refer to "Units."
Any loss or unrealized loss will be allocated to the General Partner and the
Unitholders as follows: first, 98% to the Junior 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 Junior
Subordinated Unitholders' respective capital accounts have been reduced to
zero, second, 98% to the Subordinated Unitholders in proportion to the
positive balance 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; third, 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.
35
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical consolidated financial
and operating data of the Partnership as of the dates and for each of the
periods indicated below. The selected financial data as of and for each of the
fiscal years ended July 31, 1997, 1996 and 1995 have been derived from the
Partnerships' financial statements audited by Deloitte & Touche LLP,
independent accountants. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Partnership's historical consolidated
financial statements and notes thereto included in its Annual Report on Form
10-K for the year ended July 31, 1997, which is incorporated in this
Prospectus by reference.
<TABLE>
<CAPTION>
THE PARTNERSHIP
--------------------------
HISTORICAL YEAR ENDED JULY
31,
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
UNIT DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues...................................... $804,298 $653,640 $596,436
Gross profit (1).................................... 334,172 297,326 256,795
Operating and other expenses........................ 221,562 197,796 168,854
Depreciation and amortization....................... 43,789 37,024 32,014
Operating income.................................... 68,819 62,506 55,927
Interest expense.................................... 45,769 37,983 31,993
Earnings from continuing operations................. 23,218 24,312 23,820
Earnings from continuing operations per Unit........ $ 0.74 $ 0.77 $ 0.76
Cash distributions declared per Common Unit (2)..... 2.00 2.00 1.65
Cash distributions declared per Subordinated Unit
(2)................................................ 2.00 2.00 1.65
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 18,111 $ 15,294 $ 28,928
Total assets........................................ 657,076 654,295 578,596
Long-term debt...................................... 487,334 439,112 338,188
Total partners' capital ............................ 44,783 84,609 118,637
OPERATING DATA:
Retail propane sales volumes (in gallons)........... 693,995 650,214 575,935
EBITDA (3).......................................... $112,608 $99,530 $87,941
Capital expenditures (4):
Maintenance....................................... $ 10,137 $ 6,657 $ 8,625
Growth............................................ 6,055 6,654 11,097
Acquisition....................................... 38,780 108,803 70,069
-------- -------- --------
Total........................................... $ 54,972 $122,114 $ 89,791
======== ======== ========
</TABLE>
- --------
(1) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(2) No cash distributions were declared by the Partnership from inception to
July 31, 1994. The $0.65 distribution made at the end of the first quarter
of fiscal 1995 included $0.50 for the first quarter of fiscal 1995 and
$0.15 for the period from inception through July 31, 1994.
(3) EBITDA is defined 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 not recognized under
generally accepted accounting principles, however the Partnership believes
that it 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 earnings.
(4) The Partnership'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
Partnership's customer base and operating capacity; and (iii) acquisition
capital expenditures, which include expenditures related to the
acquisitions of retail propane operations. Acquisition capital
expenditures represent total cost of acquisition less working capital
acquired.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Partnership's Financial Statements and the Notes thereto included in its
Annual Report on Form 10-K for the year ended July 31, 1997, which is
incorporated herein by reference.
GENERAL
Ferrellgas Partners, L.P., is a Delaware limited partnership which was
formed on April 19, 1994. The Partnership's activities are conducted through
the Operating Partnership. The Partnership is the sole limited partner of the
Operating Partnership with a 99% limited partner interest. The term
"Partnership" refers to the Partnership and Operating Partnership collectively
unless the context otherwise requires.
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The Partnership's revenue is derived
primarily from the retail propane marketing business. The Partnership believes
that it is the second largest retail marketer of propane in the United States,
based on gallons sold, serving more than 800,000 residential,
industrial/commercial and agricultural customers in 45 states and the District
of Columbia through approximately 513 retail outlets and 295 satellite
locations in 38 states (some outlets serve interstate markets). Annual retail
propane sales volumes were 694 million, 650 million, and 576 million gallons
for the fiscal years ended July 31, 1997, 1996, and 1995, respectively.
The retail propane business of the Partnership 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 Partnership 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 Partnership believes it is one of the largest independent traders of
propane and natural gas liquids in the United States. In fiscal year 1997, the
Partnership's wholesale and trading sales volume was approximately 1.2 billion
gallons, over 50% of which was propane, with the remainder consisting
principally of other natural gas liquids.
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 110 suppliers; however, it also conducts
transactions on the New York Mercantile Exchange. Trading of products 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. The Partnership attempts to minimize
trading risk through the enforcement of its trading policies, which include
total 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 Partnership's
fiscal years ended July 31, 1997, 1996 and 1995, net revenues from trading of
products were $5.5 million, $7.3 million and $5.8 million, respectively.
37
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
Due to the seasonality of the retail propane business, first and fourth
quarter revenues, gross profit and net earnings are consistently less than the
comparable second and third quarter results. Other factors affecting the
results of operations include competitive conditions, demand for product,
variations in the weather and fluctuations in propane prices.
During the first three quarters of fiscal 1997, the Partnership experienced
increased revenues and gross profit due to the effect of acquisitions in the
fourth quarter of fiscal 1996 and the ability to pass along retail price
increases in connection with significantly higher wholesale propane product
costs, partially offset by the impact of warmer weather. The fourth quarter
gross profit was negatively affected by a cumulative inventory costing
adjustment that related to the prior three quarters. This inventory costing
adjustment contributed to approximately .3%, 1.4% and 1.0%, as a percentage of
revenues, of the Partnership's gross profit increase in the first, second and
third quarters of fiscal 1997, respectively. In addition, net earnings (loss)
for the third and fourth quarters of fiscal 1997 were positively affected by
favorable general liability claims experience. The following presents the
Partnership's selected quarterly financial data for the two years ended July
31, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1997
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues................................ $ 167,860 $347,056 $192,873 $ 96,509
Gross profit............................ 66,785 143,291 84,855 39,239
Net earnings (loss)..................... (10,298) 54,412 9,676 (30,572)
Net earnings (loss) per limited partner
Unit................................... $ (0.33) $ 1.73 $ 0.31 $ (0.97)
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenues................................ $ 124,588 $238,381 $190,743 $ 99,928
Gross profit............................ 55,479 111,909 85,480 44,458
Net earnings (loss) (1)................. (7,303) 41,476 18,012 (28,838)
Earnings (loss) before extraordinary
loss................................... (7,303) 41,476 18,012 (27,873)
Earnings (loss) before extraordinary
loss per limited partner Unit.......... $ (0.23) $ 1.32 $ 0.57 $ (0.88)
</TABLE>
- --------
(1) Reflects a $965 extraordinary loss on early retirement of debt, net of
minority interest of $10.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JULY 31, 1997 VERSUS FISCAL YEAR ENDED JULY 31, 1996
Total revenues increased 23.0% to $804,298,000, as compared to $653,640,000
in the prior year, primarily due to increased sales price per retail gallon,
increased retail propane volumes, and to a lesser extent an increase in
revenues from other operations (net trading operations, wholesale propane
marketing and chemical feedstocks marketing).
A volatile propane market during the first half of fiscal 1997 caused a
significant increase in the cost of product. The Partnership was able to pass
along the increased wholesale cost of product to the customer through an
increase in sales price per gallon. Retail volumes increased by 6.7%, or 44
million gallons, which was primarily due to the increase in volumes related to
acquisitions, partially offset by the effect of warmer weather during fiscal
1997 as compared to fiscal 1996 and by customer conservation efforts. Fiscal
1997 winter temperatures, as reported by the American Gas Association, were 6%
warmer than the prior year and 4% warmer than normal.
38
<PAGE>
The 10.2% increase in revenues from other operations to $103,971,000 was due
to an increase in wholesale marketing volumes and sales price per gallon,
which was partially offset by a decrease in chemical feedstocks marketing
revenues. Wholesale marketing volumes increased primarily due to the effect of
acquisitions, while price increased as a result of increased cost of product.
Chemical feedstocks marketing volumes decreased as a result of decreased
availability of product from refineries and decreased demand from
petrochemical companies. Unrealized gains and losses on options, forwards, and
futures contracts were not significant at July 31, 1997 and 1996.
Gross profit increased 12.4% to $334,170,000 as compared to $297,326,000 in
the 1996 fiscal year, primarily due to an increase in retail sales gross
margin, which was partially offset by a decrease in gross profits from other
operations. Retail operation results increased primarily due to the increase
in volumes attributed to acquisitions and an increase in retail margins, which
was partially offset by the effect of warmer weather and customer conservation
efforts. Wholesale marketing and chemical feedstocks marketing are comprised
of low margin sales; therefore, the net increase in other revenues did not
significantly affect gross profit.
Operating expenses increased 10.5% to $198,298,000, as compared to
$179,462,000 in the prior year, primarily due to acquisition related increases
in personnel costs, plant and office expenses and vehicle and other expenses.
This increase was partially offset by favorable general liability claims
experience.
Depreciation and amortization expense increased 18.3% to $43,789,000, as
compared to $37,024,000 for the prior year, due primarily to acquisitions of
propane businesses.
Interest expense increased 20.5% over the prior year. This increase is
primarily the result of the Partnership's issuance of $160,000,000 of 9 3/8%
Senior Secured Notes in April 1996 (the "Partnership Senior Notes"), the
proceeds of which were primarily used to fund acquisitions made in fiscal
1996. This increase was partially offset by an overall decrease in interest
rates on borrowings during the year.
FISCAL YEAR ENDED JULY 31, 1996 VERSUS FISCAL YEAR ENDED JULY 31, 1995
Total revenues increased 9.6% to $653,640,000 as compared to $596,436,000 in
the prior year, primarily due to increased retail propane volumes and
increased sales price per retail gallon, which was partially offset by a
decline in revenues from other operations (net trading operations, wholesale
propane marketing and chemical feedstocks marketing).
Retail volumes increased by 12.9% or 74 million gallons, primarily due to
the effect of colder weather during fiscal 1996 as compared to fiscal 1995 and
acquisition-related growth. Fiscal 1996 winter temperatures, as reported by
the American Gas Association, were 14.3% colder than the prior year and 3.0%
colder than normal. Colder winter temperatures also caused higher cost of
product. The Partnership was able to pass along the increased cost of product
to the customer through an increase in sales price per gallon as compared to
the prior fiscal year.
The 28.5% decrease in revenues from other operations, to $94,318,000, was
primarily due to a decrease in chemical feedstocks marketing revenues due to a
decrease in sales volume and selling price. Both volume and price decreased as
a result of decreased availability of product from refineries and decreased
demand from petrochemical companies. Unrealized gains and losses on options,
forwards, and futures contracts were not significant at July 31, 1996 and
1995.
The acquisition of Skelgas in May 1996 did not have a significant effect on
fiscal 1996 revenues due to the expected low retail volumes in the fourth
quarter of fiscal year 1996.
Gross profit increased 15.8% as compared to the 1995 fiscal year, primarily
due to a $28,415,000 increase in retail sales gross margin and to a lesser
extent to increases in gross profits from other operations. Retail operation
results increased primarily due to the increase in retail volumes. Gross
profits from other operations increased $11,027,000 mainly due to the
increased activity of a non-retail transportation operation. This increased
activity did not materially impact income from continuing operations due to
the related increase in operating
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expenses. Chemical feedstocks marketing is comprised of low margin sales;
therefore, the decrease in other revenues did not significantly impact gross
profit.
Operating expenses increased 17.1% over the prior year. The increase was
primarily attributable to acquisitions of propane and increased activity in
the non-retail transportation operations as compared to the prior year.
Depreciation and amortization expense increased 15.6% over the prior year,
due primarily to acquisitions of propane businesses.
Interest expense increased 18.7% over the prior year. This increase was
primarily the result of the Partnership's issuance of the Partnership Senior
Notes and increased net borrowings from the Operating Partnership's revolving
credit loans during the first nine months of the year. This increase was
partially offset by decreasing interest rates during the first nine months of
the year.
The extraordinary charge of $965,000 was due to the writeoff of unamortized
debt issuance costs as a result of the refinancing of $50,000,000 of floating
rate debt previously issued by the Operating Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The ability of the Partnership to satisfy its obligations is dependent upon
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond
its control. For the fiscal year ending July 31, 1998, the General Partner
believes that the Partnership will have sufficient funds to meet its
obligations. Future maintenance and working capital needs of the Partnership
are expected to be provided by cash generated from future operations, existing
cash balances and the working capital borrowing facility. In order to fund
expansive capital projects and future acquisitions, the Partnership may borrow
on existing or future bank lines, may issue additional debt or may issue
additional Units.
Operating Activities
Cash provided by operating activities was $75,087,000 for the year ended
July 31, 1997, compared to $65,096,000 in the prior year. This increase is
primarily due to the decrease in accounts receivable related to timing of
trading of products at year end and increased earnings prior to non-cash
deductions.
Investing Activities
The Partnership made total acquisition capital expenditures of $38,780,000
(net of working capital acquired of $1,420,000) during fiscal 1997. This
amount was funded by $36,114,000 cash payments (net of $795,000 for transition
costs previously accrued for fiscal 1996 acquisitions) and $4,881,000 in other
costs and considerations.
During the year ended July 31, 1997, the Partnership made growth and
maintenance capital expenditures of $16,192,000, primarily for the following
purposes: 1) additions to Partnership-owned customer tanks and cylinders, 2)
vehicle lease buyouts, 3) relocating the Houston office and relocating and
upgrading district plant facilities, and 4) development of an enhanced gas
inventory management system and upgrading computer equipment and software.
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 Partnership's principal
physical assets, are generally long. The Partnership currently meets its
vehicle and transportation equipment needs by leasing a substantial number of
light and medium duty trucks and tractors. The Partnership believes vehicle
leasing is currently a cost-effective method for meeting the Partnership's
transportation equipment needs. The Partnership continues to seek expansion of
its operations through strategic acquisitions of smaller retail propane
operations located throughout the United States. These acquisitions will be
funded through internal cash flow, external borrowings or the issuance of
additional Partnership interests. The Partnership does not have any material
commitments of funds for capital expenditures other than to support the
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current level of operations. In fiscal 1998, the Partnership expects growth
and maintenance capital expenditures to increase slightly over fiscal 1997
levels.
Financing Activities
During the fiscal year ended July 31, 1997, the Operating Partnership
borrowed $41,729,000 under its $255,000,000 Credit Facility, as amended (the
"Credit Facility"), to fund expected seasonal working capital needs, business
acquisitions and capital expenditures. At July 31, 1997, $86,400,000 of
borrowings were outstanding under the revolving portion of the Credit
Facility. In addition, letters of credit outstanding, used primarily to secure
obligations under certain insurance arrangements, totaled $24,102,000. At July
31, 1997, the Operating Partnership had $94,498,000 available for general
corporate, acquisition and working capital purposes under the Credit Facility.
The Operating Partnership typically has significant cash needs during the
first quarter of its fiscal year due to expected low revenues, increasing
inventories and the Partnership's cash distribution paid in mid-September.
On April 26, 1996, the Partnership issued the Partnership Senior Notes. The
Partnership Senior Notes will be redeemable at the option of the Partnership,
in whole or in part, at any time on or after June 15, 2001. The Operating
Partnership also has outstanding $200,000,000 of 10% Fixed Rate Senior Notes
due 2001 (the "Fixed Rate Senior Notes"). The Fixed Rate Senior Notes are
redeemable, at the option of the Operating Partnership, at any time on or
after August 1, 1998, with a premium before August 1, 2000. The Partnership
Senior Notes will become guaranteed by the Operating Partnership on a senior
subordinated basis if certain conditions are met. The Credit Facility and the
Fixed Rate Senior Notes currently prohibit the Operating Partnership from
guaranteeing any indebtedness unless, among meeting other conditions, the
fixed charge coverage ratio for the Operating Partnership meets certain levels
at prescribed dates. Currently the Operating Partnership does not meet such
conditions and, therefore, there can be no assurance as to whether or when
this guarantee will occur. Interest on the Partnership Senior Notes is payable
semi-annually in arrears on June 15 and December 15, and interest on the Fixed
Rate Senior Notes is payable semi-annually in arrears on February 1 and August
1.
On July 31, 1996, the Operating Partnership amended and restated its
$205,000,000 credit facility with Bank of America National Trust & Savings
Association ("BofA"), as agent. Among other changes, the amendment increased
the maximum borrowing amount to $255,000,000 and extended the termination date
of the revolving line of credit to July 1999. The unsecured Credit Facility
permits borrowings of up to $185,000,000 on a senior unsecured revolving line
of credit basis for general corporate, working capital and acquisition
purposes (of which up to $50,000,000 is available to support letters of
credit). The Credit Facility also provides an unsecured revolving line of
credit for additional working capital needs of $20,000,000. The Operating
Partnership anticipates either exercising a renewal for up to one year or
refinancing any amounts still owed in July 1999. The Credit Facility also
includes an unsecured term loan due June 1, 2001, which was used to refinance
the Operating Partnership's $50,000,000 Floating Rate Series B Senior Notes.
To offset the variable rate characteristic of the Credit Facility, the
Operating Partnership has entered into interest rate collar agreements,
expiring between June and December 1998, with three major banks that
effectively limit interest rates on a certain notional amount to between 4.9 %
and 6.5% under the current pricing arrangement. At July 31, 1997, the total
notional principal amount of these agreements was $125,000,000.
During the year ended July 31, 1997, the Partnership paid cash distributions
of $2.00 per Unit. These distributions covered the period from May 1, 1996 to
April 30, 1997. On August 19, 1997, the Partnership declared its fourth-
quarter cash distribution of $0.50 per Unit, which was paid September 12,
1997. The Partnership's annualized distribution is presently $2.00 per Unit.
The Partnership's Senior Notes, the Operating Partnership's Fixed Rate
Senior Notes and the Credit Facility contain various restrictive covenants
applicable to the Partnership, the Operating Partnership and its subsidiaries,
the most restrictive of which relate to additional indebtedness, sale and
disposition of assets, and transactions with affiliates. In addition, the
Operating Partnership is prohibited from making cash distributions of the
Minimum Quarterly Distribution if a default or event of default exists or
would exist upon making such
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<PAGE>
distribution, or if the Operating Partnership fails to meet certain coverage
tests. The Partnership and the Operating Partnership are in compliance with
all requirements, tests, limitations and covenants related to the
Partnership's Senior Notes, the Operating Partnership's Fixed Rate Senior
Notes and the Credit Facility.
Adoption of New Accounting Standards
The Financial Standards Accounting Board recently issued the following new
accounting standards: Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 128 is required to be adopted by the Partnership during
the three-month period ending January 31, 1998. The adoption of this statement
is not expected to have a material effect on the calculation of earnings per
Unit. SFAS Nos. 130 and 131 are required to be adopted by the Partnership for
the fiscal year ending July 31, 1998. The adoption of both standards is not
expected to have material effect on the Partnership's financial position or
results of operations.
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BUSINESS
The Partnership is engaged in the sale, distribution, marketing and trading
of propane and other natural gas liquids. The discussion that follows focuses
on the Partnership's retail operations and its other operations, which consist
primarily of propane and natural gas liquids trading operations, chemical
feedstocks marketing and wholesale propane marketing, all of which were
conveyed to the Partnership on July 5, 1994. All historical references prior
to July 5, 1994 relate to the operations as conducted by the General Partner.
The General Partner believes that the Partnership is the second largest
retail marketer of propane in the United States (as measured by gallons sold),
serving more than 800,000 residential, industrial/commercial and agricultural
customers in 45 states and the District of Columbia through approximately 513
retail outlets with 295 satellite locations in 38 states (some outlets serve
interstate markets). The Partnership's retail operations account for
approximately 8% of the retail propane purchased in the United States as
measured by gallons sold. For the Partnership's fiscal years ended July 31,
1997, 1996 and 1995, annual retail propane sales volumes were 694 million, 650
million, and 576 million gallons, respectively. The retail propane business of
the Partnership 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 its customers' premises, as
well as to portable propane cylinders.
The Partnership also believes that it is also is a leading natural gas
liquids trading company. Annual propane and natural gas liquids trading,
chemical feedstocks and wholesale propane sales volumes were approximately 1.2
billion, 1.7 billion and 1.5 billion gallons during the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.
GENERAL
Ferrell Companies, Inc., the parent of Ferrellgas, 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
primarily owned by James E. Ferrell and his family. In July 1994, the propane
business and assets of Ferrellgas were contributed to the Partnership in
connection with the Partnership's initial public offering.
Ferrellgas' initial growth largely resulted from 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, Ferrellgas
acquired a retail propane operation with annual retail sales volumes of
approximately 33 million gallons and in December 1986, Ferrellgas acquired a
retail propane operation with annual retail sales volumes of approximately 395
million gallons. These two major acquisitions and many other smaller
acquisitions significantly expanded and diversified Ferrellgas's geographic
coverage. Since 1986, the Partnership or its predecessor has acquired more
than 100 independent propane retailers, the largest of which were Skelgas
(acquired in May 1996) and Vision (acquired in November 1994). For the fiscal
years ended July 31, 1997 to 1993, the Partnership or its predecessor invested
approximately $38.8 million, $108.8 million, $70.1 million, $3.4 million and
$0.9 million, respectively, to acquire operations with annual retail sales of
approximately 20.5 million, 111.8 million, 70.0 million, 2.9 million and 0.7
million gallons of propane, respectively. The Partnership believes that its
and its predecessor's acquisitions to date have been completed on economically
attractive terms. Primarily as a result of this acquisition strategy, retail
propane gallons sold by the Partnership (or its predecessor) have increased
from 321 million in fiscal 1986 to 694 million in fiscal 1997. The propane
industry is relatively fragmented, with the ten largest retail distributors
possessing approximately 33% of the total retail propane market and much of
the industry consisting of more than 5,000 local or regional distributors. The
Partnership believes that the fragmented nature of the propane industry
provides significant opportunities for growth through acquisitions.
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BUSINESS STRATEGY
The goal of the Partnership is to be the leading retail propane company in
the United States. The Partnership believes it has obtained its competitive
advantage by promoting an entrepreneurial culture that empowers each of its
employees to be responsive to individual customer needs. The Partnership's
business strategy is to continue its historical focus on residential and
commercial retail propane operations. The Partnership anticipates that its
future growth will be achieved primarily through the acquisition of smaller
retail propane operations throughout the United States and to a lesser extent
through the expansion of the existing customer base by increased
competitiveness and investment in internal growth opportunities.
The Partnership intends to concentrate its acquisition activities in
geographic areas close to its existing operations, acquiring propane retailers
that can be combined with existing operations to provide an attractive return
on investment after taking into account the efficiencies that may result from
such combinations. The Partnership also expects to pursue acquisitions that
broaden its geographic coverage. The Partnership's goal in each acquisition
will be to improve the operations and profitability of these smaller companies
by integrating them into the Partnership's existing operations. The
Partnership believes numerous local retail propane companies are potential
candidates for acquisition and that the Partnership's geographic diversity of
operations increases the number of attractive acquisition opportunities
available to it. The Partnership intends to fund future acquisitions through a
combination of internal cash flow, external borrowings and the issuance of
additional Units. The Partnership's ability to accomplish these goals will be
subject to the availability of acquisition candidates on terms that are
attractive to the Partnership. There is no assurance that the Partnership will
be able to sustain the recent level of acquisitions or that any acquisitions
will prove beneficial to the Partnership.
In addition to growth through acquisitions, the Partnership believes that it
may also achieve growth within its existing propane operations. The
Partnership strives to create a culture of leadership and innovation by
implementing initiatives such as pre-employment testing, safety and management
training programs and rewards for excellence in customer service, leadership
and safety. As a result of the Partnership's culture, as well as its
experience in responding to competition and implementation of more efficient
operating standards, the Partnership believes it is positioned to be
successful in attracting and retaining customers.
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.
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.
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 for industrial
applications where natural gas service is not available.
The Partnership utilizes marketing programs targeting both new and existing
customers by emphasizing its efficiency in delivering propane to customers as
well as its training and safety programs. The Partnership sells propane
primarily to four specific markets: residential, industrial/commercial,
agricultural and other (principally to other propane retailers and as engine
fuel). During the fiscal year ended July 31, 1997, propane sales to
residential
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customers accounted for 56% of retail gross profit, propane sales to
industrial and other commercial customers accounted for 25% of retail gross
profit, propane sales to agricultural and other customers accounted for 11% of
retail gross profit and other non-propane related sales accounted for 8% of
retail gross profit. Residential sales have a greater profit margin and more
stable customer base and tend to be less sensitive to price changes than the
other markets served by the Partnership. No single customer of the Partnership
accounts for 10% or more of the Partnership's consolidated revenues.
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. The Partnership generally purchases propane in the contract and spot
markets, primarily from major oil companies, on a short-term basis; therefore,
its supply costs fluctuate with market price fluctuations. Should wholesale
propane prices decline in the future, the Partnership's margins on its retail
propane distribution business may 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. Retail propane customers typically lease their storage tanks
from their propane distributors. Approximately 70% of the Partnership's
customers lease their tanks from the Partnership. The lease terms and, in some
states, certain fire safety regulations, restrict the filling of a leased tank
solely to the propane supplier that owns the tank. The costs and inconvenience
of switching tanks minimizes a customer's tendency to switch suppliers of
propane on the basis of minor variations in price.
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). To the extent necessary, the Partnership will
reserve cash inflows from the second and third quarters for distribution in
the first and fourth fiscal quarters. In addition, sales volume traditionally
fluctuates from year to year in response to variations in weather, prices and
other factors, although the Partnership believes that the broad geographic
distribution of its operations helps to minimize 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. During times of colder-than-normal
winter weather, the Partnership and its predecessors have been able to take
advantage of their large, efficient distribution network to help avoid supply
disruptions such as those experienced by some of their competitors, thereby
broadening their long-term customer base.
SUPPLY AND DISTRIBUTION
The Partnership 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 Partnership's
ability to buy large volumes of propane and (ii) the Partnership's large
distribution system and underground storage capacity, the General Partner
believes that the Partnership 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 Partnership is not
dependent upon any single supplier or group of suppliers, the loss of which
would have a material adverse effect on the Partnership. In fiscal 1997, no
single supplier provided more than 10% of the Partnership's total propane
purchases. A portion of the Partnership'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 Partnership's contracts specify
certain minimum and maximum amounts of propane to be purchased thereunder. The
Partnership may purchase and store inventories of propane in order to help
insure uninterrupted deliverability during periods of extreme demand. The
Partnership owns three underground storage facilities with an aggregate
capacity of approximately 184 million gallons. Currently, approximately 142
million gallons of this capacity is leased to third parties. The remaining
space is available for the Partnership's 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
Partnership and highway transport trucks owned or leased by the Partnership.
The Partnership operates a fleet of
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transport trucks to transport propane from refineries, natural gas processing
plants or pipeline terminals to its 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 Partnership's
retail distribution outlets to customers by its fleet of 1,605 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 industry publications, propane accounts for approximately 3-4% of
household energy consumption in the United States, an average level which has
remained relatively constant for the past 19 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
periods of peak demand and during interruptions 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 Partnership
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. 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. The
Partnership believes that 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 Partnership
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 industry publications, the Partnership
believes that the ten largest multi-state retail marketers of propane,
including the Partnership, account for approximately 33% of the total retail
sales of propane in the United States. Based upon information contained in
industry publications, the Partnership also believes no single marketer has a
greater than 10% share of the total market in the United States and that the
Partnership is the second largest retail marketer of propane in the United
States, with a market share of approximately 8% as measured by gallon volume
of retail propane sales.
Most of the Partnership's retail distribution outlets compete with three or
more other marketers or distributors. The principal factors influencing
competition among propane marketers are price and service. The Partnership
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
46
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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 Partnership consist principally of (1) trading,
(2) chemical feedstocks marketing and (3) wholesale propane marketing. The
Partnership, 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 Partnership owns no properties
that are material to these operations. These operations may utilize available
space in the Partnership's underground storage facilities in the furtherance
of these businesses. Because the Partnership possesses a large distribution
system, underground storage capacity and the ability to buy large volumes of
propane, the General Partner believes that the Partnership 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.
Trading
The Partnership's traders are engaged in trading propane and other natural
gas liquids for the Partnership's account and for supplying the Partnership's
retail and wholesale propane operations. The Partnership primarily trades
products purchased from its over 110 suppliers; however, it also conducts
transactions on the New York Mercantile Exchange. Trading of products 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 50% of the
Partnership's total trading volume, with the remainder consisting principally
of various other natural gas liquids. The Partnership attempts to minimize
trading risk through the enforcement of its trading policies, which include
total 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 Partnership's
fiscal years ended July 31, 1997, 1996 and 1995, net revenues of $5.5 million,
$7.3 million, and $5.8 million, respectively, were derived from trading of
products.
Chemical Feedstocks Marketing
The Partnership is also involved in the marketing of refinery and
petrochemical feedstocks. Petroleum by-products are purchased from refineries
and sold to petrochemical plants. The Partnership leases 361 railroad tank
cars to facilitate product delivery. Revenues of $29.8 million, $44.4 million
and $91.9 million were derived from such activities for the Partnership's
fiscal years ended July 31, 1997, 1996 and 1995, respectively.
Wholesale Propane Marketing
The Partnership engages in the wholesale distribution of propane to other
retail propane distributors. During the fiscal years ended July 31, 1997, 1996
and 1995, the Partnership sold 123 million, 104 million and 96 million
gallons, respectively, of propane to wholesale customers and had revenues
attributable to such sales of $68.7 million, $42.6 million and $33.5 million,
respectively.
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EMPLOYEES
The Partnership has no employees and is managed by the General Partner
pursuant to the Partnership Agreement. At July 31, 1997, the General Partner
had 3,370 full-time employees and 837 temporary and part-time employees. At
July 31, 1997, the General Partner's full-time employees were employed in the
following areas:
<TABLE>
<S> <C>
Retail Locations.................................................... 2,834
Transportation and Storage.......................................... 219
Corporate Offices (Liberty, MO & Houston, TX)....................... 317
-----
Total............................................................. 3,370
=====
</TABLE>
Approximately one percent of the General Partner's employees are represented
by six local labor unions, which are all affiliated with the International
Brotherhood of Teamsters. The General Partner has not experienced any
significant work stoppages or other labor problems.
The Partnership's supply, trading, chemical feedstocks marketing,
distribution scheduling and product accounting functions are operated
primarily out of the Partnership's offices located in Houston, by a total
full-time corporate staff of 83 people.
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 Partnership 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 Partnership 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
employees of the General Partner look for evidence of hazardous substances or
the existence of underground storage tanks.
With respect to the transportation of propane by truck, the Partnership 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 ("DOT").
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 Partnership operates. There are no material environmental
claims pending, and the Partnership complies in all material respects with all
material governmental regulations and industry standards applicable to
environmental and safety matters, except as it relates to the DOT Final
Interim Rule on emergency shutoff valves on bobtail vehicles. The DOT has
taken the position that all existing emergency shutoff devices used on propane
cargo vessels fail to comply with the existing Emergency Discharge Control
Regulation 49 CFR 178.337-11. Accordingly, the DOT has issued a Final Interim
Rule that requires all transporters of propane to implement revised procedures
to ensure immediate activation of the emergency shutoff device in the event of
a catastrophic failure of a cargo vehicle's discharge system. The Partnership
is in compliance with Final Interim Rule as to transport vehicles, and is
working with both the DOT and outside experts to develop a system for bobtail
vehicles that complies with the existing Emergency Discharge Control
Regulations as well as the provisions of the Final Interim Rule.
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SERVICE MARKS AND TRADEMARKS
The Partnership markets retail propane under the "Ferrellgas" tradename and
uses the tradename "Ferrell North America" for its other operations. In
addition, the Partnership has a trademark on the name "FerrellMeter," its
patented gas leak detection device. The General Partner contributed all of its
rights, title and interest in such tradenames and trademark in the continental
United States to the Partnership. The General Partner will have an option to
purchase such tradenames and trademark from the Partnership for a nominal
value if the General Partner is removed as general partner of the Partnership
other than for Cause. If the General Partner 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.
PROPERTIES
The Partnership owns or leases the following transportation equipment which
is utilized primarily in retail operations, except for railroad tank cars,
which are used primarily by chemical feedstocks marketing operations.
<TABLE>
<CAPTION>
OWNED LEASED TOTAL
----- ------ -----
<S> <C> <C> <C>
Truck tractors......................................... 106 48 154
Transport trailers..................................... 256 31 287
Bulk delivery trucks................................... 951 654 1,605
Pickup and service trucks.............................. 1,015 442 1,457
Railroad tank cars..................................... -- 361 361
</TABLE>
The 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.
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 Partnership provides to its
retail customers for propane storage. The Partnership 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 697,000 propane tanks are owned by the Partnership, most of
which are located on customer property and leased to those customers. The
Partnership also owns approximately 638,000 portable propane cylinders, most
of which are leased to industrial and commercial customers for use in
manufacturing and processing needs, including forklift operations, to
residential customers for home heating and cooking, and to local dealers who
purchase propane from the Partnership for resale.
The Partnership owns underground storage facilities at Hutchinson, Kansas;
Adamana, Arizona; and Moab, Utah. At July 31, 1997, the capacity of these
facilities approximated 88 million gallons, 88 million gallons and 8 million
gallons, respectively (an aggregate of approximately 184 million gallons).
Currently, approximately 142 million gallons of this capacity is leased to
third parties. The remaining space is available for the Partnership's use.
The Partnership owns the land and two buildings (50,245 square feet of
office space) comprising its corporate headquarters in Liberty, Missouri, and
leases the 27,696 square feet of office space in Houston, Texas, where its
trading, chemical feedstocks marketing and wholesale marketing operations are
primarily located.
The Partnership 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 Partnership does not believe that any such burdens will
materially interfere with the continued use of such properties in its
business, taken as a whole. In addition, the Partnership believes that it has,
or is in the process of obtaining, all required
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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 Partnership's
properties or the operations of its business.
LEGAL PROCEEDINGS
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or
use. The Partnership, 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 product liability, personal injury and
property damage. The Partnership maintains liability insurance policies with
insurers in such amounts and with such coverages and deductibles as the
General Partner believes is reasonable and prudent. However, there can be no
assurance that such insurance will be adequate to protect the Partnership 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, the Partnership believes that there
are no known claims or known contingent claims that are likely to have a
material adverse effect on the results of operations or financial condition of
the Partnership.
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<PAGE>
MANAGEMENT
GENERAL
The General Partner manages and operates the activities of the Partnership,
and the General Partner anticipates that its activities will be limited to
such management and operation. Unitholders do not directly or indirectly
participate in the management or operation of the Partnership. The General
Partner owes a fiduciary duty to the Unitholders.
In September 1994, the General Partner appointed 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 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 does not directly employ any of the persons responsible for
managing or operating the Partnership. At July 31, 1997, 3,370 full-time and
837 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 General Partner at October 31, 1997.
Each of the persons named below is elected to his respective office or offices
annually. None of the executive officers has entered into an employment
agreement with the General Partner.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION
---- --- -------- --------
<S> <C> <C> <C>
James E. Ferrell............ 58 1984 Chairman of the Board, Chief Executive
Officer and a Director of the General
Partner
Danley K. Sheldon........... 39 -- President, Chief Financial Officer and
Treasurer
Patrick J. Chesterman....... 47 -- Senior Vice President, Supply
James M. Hake............... 37 -- Vice President, Acquisitions
Robert J. Wikse............. 48 -- Vice President, Administration
Daniel M. Lambert........... 56 1994 Director of the General Partner
A. Andrew Levison........... 41 1994 Director of the General Partner
</TABLE>
James E. Ferrell--Mr. Ferrell has been with Ferrell or its predecessors and
its affiliates in various executive capacities since 1965.
Danley K. Sheldon--Mr. Sheldon has been President of the General Partner
since October 1996 and Chief Financial Officer of the General Partner since
January 1994. He has served as Treasurer since 1989 and joined the General
Partner in 1986.
Patrick J. Chesterman--Mr. Chesterman has been Senior Vice President, Supply
since September 1997. After joining the General Partner in June 1994, he had
one-year assignments as Vice President-Retail Operations, Director of Human
Resources and Director of Field Support. Prior to joining the General Partner,
Mr. Chesterman was Director of Fuels Policy and Operations for the U.S. Air
Force.
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<PAGE>
James M. Hake--Mr. Hake has been Vice President, Acquisitions of the General
Partner since October 1994. He joined the General Partner in 1986.
Robert J. Wikse--Mr. Wikse has been Vice President, Administration since his
appointment in January 1995. After joining the General Partner in July 1991,
he had a three-year assignment as Regional Director of Western U.S.--Retail
Operations.
Daniel M. Lambert--Dr. Lambert was elected a director of the General Partner
in September 1994. Dr. Lambert has been President of Baker University in
Baldwin City, Kansas, since July 1, 1987.
A. Andrew Levison--Mr. Levison was elected a director of the General Partner
in September 1994. Mr. Levison has been a Managing Director of Donaldson,
Lufkin & Jenrette Securities Corporation since 1989.
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<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partner and its stockholder, on the
one hand, and the Partnership and its limited partners, on the other hand. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner, including its investments in its subsidiaries and
affiliates, in a manner beneficial to its stockholder. At the same time, 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 Unitholders, 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 the General Partner to its
stockholder 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 the General
Partner or its affiliates, on the one hand, and the Partnership, on the other.
The Audit Committee currently consists of Messrs. Lambert and Levinson. See
"Management--Partnership Management" and "Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Revised Uniform Limited Partnership Act, as
amended (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.
Conflicts of interest could arise with respect to the situations described
below, among others:
Unitholders Will Have No Right to Enforce Obligations of the General Partner
and Its Affiliates Under Agreements with the Partnership
The agreements between the Partnership and the General Partner do not grant
to the Unitholders, separate and apart from the Partnership, the right to
enforce the obligations of the General Partner and its affiliates in favor of
the Partnership. Therefore, the Partnership 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 causing the Partnership to pay the General Partner or its
affiliates for any services rendered (provided such services are rendered on
terms fair and reasonable to the Partnership) or causing the Partnership to
enter into additional contractual arrangements with any of them. 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 arm's-length
negotiations. All of such transactions 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
53
<PAGE>
specifically dealing with such use, nor shall there be any obligation of the
General Partner and its affiliates to enter into any such contracts.
Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders
Decisions of the General Partner with respect to the amount and timing of
cash expenditures, participation in capital expansions and acquisitions,
borrowings, issuances of additional partnership interests and changes in
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash to meet the Minimum Quarterly Distribution and
Target Distributions Levels on all Units in such quarter or in subsequent
quarters. 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 enabling the General Partner to receive
distributions on the Subordinated Units, Junior Subordinated Units or the
Incentive Distribution Rights or hastening the expiration of the Subordination
Period or the conversion of the Subordinated Units into Common Units. The
Partnership Agreement provides that the Partnership and the Operating
Partnership may borrow funds from the General Partner and its affiliates. The
General Partner and its affiliates may not borrow funds from the Partnership
or the Operating Partnership. Furthermore, 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 constitute a breach of any duty of
the General Partner to the Partnership or the Unitholders.
The Partnership Reimburses the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Partnership Agreement, the General Partner and its
affiliates are 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. The Partnership Agreement
provides that the General Partner will determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion. See "Management--Reimbursement of
Expenses of the General Partner and its Affiliates."
The General Partner Limits Its Liability with Respect to the Partnership's
Obligations
Whenever possible, the General Partner limits the Partnership's liability
under contractual arrangements to all or particular assets of the Partnership,
with the other party thereto having 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.
Employees of the General Partner and its Affiliates Who Provide Services to
the Partnership Also Provide Services to Other Businesses
The Partnership does not have any employees and relies 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 divide their time
between the business of the Partnership and the business of the affiliates,
and are not required to spend any specified percentage or amount of their time
on the business of the Partnership.
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<PAGE>
Units Are Subject to the General Partner Limited Call Right
The General Partner may exercise its right to call and purchase Units as
provided in the Partnership Agreement or assign such right to one of its
affiliates or to the Partnership. The General Partner may use its own
discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a Unitholder may have his 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 Units. For a description of such right, see "The Partnership
Agreement--Limited Call Right."
The Partnership May Retain Separate Counsel for Itself or for the Holders of
Subordinated Units; Advisors Retained by the Partnership for this Offering
Have Not Been Retained to Act for Holders of Subordinated Units
The Subordinated 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.
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 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. The Partnership may
retain separate counsel for itself or the holders of Subordinated Units 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 holders of
Subordinated Units, on the other, after the sale of the Subordinated Units
offered hereby, depending on the nature of such conflict, but it does not
intend to do so in most cases.
The General Partner is Not Restricted from Engaging in a Transaction Which
Would Trigger Change of Control Provisions
The Partnership's indebtedness contains provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
General Partner to enter into a transaction which would trigger such change of
control provisions.
The General Partners' Affiliates May Compete with the Partnership
Following the sale of the Subordinated 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 anticipates that there may be competition between the Partnership and
affiliates of the General Partner. Although the Partnership 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.
The Partnership Agreement Permits the Partnership to Engage in Roll-Up
Transactions
The Partnership Agreement does not prohibit the Partnership from engaging in
roll-up transactions. Were the General Partner to cause the Partnership to
engage in a roll-up transaction, there could be no assurance that such a
transaction would not have a material adverse effect on a Unitholder's
investment in the Partnership.
55
<PAGE>
Fiduciary and Other Duties
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. Neither the Delaware
Act nor case law defines with particularity the fiduciary duties owed by
general partners to limited partners or a limited partnership, but the
Delaware Act provides 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 of duty owed by
general partners to limited partners and the partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in
the absence of a provision in a partnership agreement providing otherwise,
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. 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 intended to 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 in order to become a limited partner
of the Partnership, a holder of Subordinated Units is required to agree to be
bound by the provisions thereof, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act favoring the
principle of freedom of contract and the enforceability of partnership
agreements. The Delaware Act also provides that a partnership agreement is not
unenforceable by reason of its not having been signed by a person being
admitted as a limited partner or becoming an assignee in accordance with the
terms thereof.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or their 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 in general 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
practices or principles and such other factors as its 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 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 refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition,
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<PAGE>
the statutory or case law of certain jurisdictions may permit a limited
partner to institute legal action on behalf of himself and 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, to the extent permitted by
law, 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 decisions 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, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by
the General Partner or such other 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 their 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.
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<PAGE>
DESCRIPTION OF THE UNITS
The Subordinated Units will be registered under the Exchange Act and the
rules and regulations promulgated thereunder. The Partnership is subject to
the reporting and certain other requirements of the Exchange Act. The
Partnership is required to file periodic reports containing financial and
other information with the Commission.
Purchasers of Subordinated Units in this offering and subsequent transferees
of Subordinated 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 Subordinated
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 Subordinated
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.
Application has been made to list the Subordinated Units for trading on the
NYSE, subject to official notice of issuance, under the trading symbol
" ."
THE UNITS
Generally, the 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, Subordinated Units and Junior
Subordinated Units in and to Partnership distributions, together with a
description of the circumstances under which the Junior Subordinated Units may
convert into Subordinated Units or the 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 Subordinated Units and
will receive a fee from the Partnership for serving in such capacities. All
fees charged by the Transfer Agent for transfers of Units will be borne by the
Partnership and not by the holders of Units, except that 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 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 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 Subordinated 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 Subordinated 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 Subordinated Units), the transferee of Subordinated 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 Subordinated 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. Subordinated 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 Subordinated Units. A purchaser or transferee of
Subordinated Units who does not execute and deliver a Transfer Application
obtains only (a) the right to assign the Subordinated 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 Subordinated Units. Thus, a purchaser or transferee of
Subordinated Units who does not execute and deliver a Transfer Application
will not receive cash distributions unless the Subordinated 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 Subordinated Units, and
may not receive certain federal income tax information or reports furnished to
record holders of Subordinated Units. The transferor of Subordinated Units
will have a duty to provide such transferee with all information that may be
necessary to obtain registration of the transfer of the Subordinated Units,
but a transferee agrees, by acceptance of the certificate representing
Subordinated 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 and the
Partnership Agreement for the Operating Partnership (the "Operating
Partnership Agreement") are included as exhibits to the Registration Statement
of which this Prospectus constitutes a part. The following discussion is
qualified in its entirety by reference to the Partnership Agreements for the
Partnership and for the Operating Partnership. The Partnership is the sole
limited partner of the Operating Partnership, which owns, manages and operates
the Partnership's business. The General Partner serves 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.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in 1994 as
Delaware limited partnerships. The General Partner is the general partner of
the Partnership and the Operating Partnership. The General Partner holds an
aggregate 2% interest as general partner, and the Unitholders (including
Ferrellgas and its affiliates as an owner of Common Units, Subordinated Units,
Junior 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 the formation of the Partnership, any
activities that are, in the sole judgment of the General Partner, reasonably
related thereto and any other activity approved by the General Partner.
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 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
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realization upon the foregoing encumbrances without such approval. The
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, 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, 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
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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 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 and Junior Subordinated Period will end and all
Subordinated Units and Junior Subordinated Units, including those held by
Ferrellgas and any of its affiliates, will immediately convert into Common
Units.
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 Subordinated 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
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is not taken, a purchaser will not be registered as a record holder of
Subordinated Units on the books of the Transfer Agent or issued a Subordinated
Unit. Purchasers may hold Subordinated Units in nominee accounts. See
"Description of the Subordinated Units--Transfer Agent and Registrar" and "--
Transfer of Units" for a more complete description of the requirements for the
transfer of Subordinated 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 Subordinated 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 Subordinated Units, and will not receive
cash distributions, federal income tax allocations or reports furnished to
record holders of Subordinated Units. The only right such transferees will
have is the right to negotiate such Subordinated 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 Subordinated Units
to a purchaser or other transferee who executes a Transfer Application in
respect of the Subordinated Units. A nominee or broker who has executed a
Transfer Application with respect to Subordinated Units held in street name or
nominee accounts will receive such distributions and reports pertaining to
such Subordinated 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 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 (i) 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 conversion of Subordinated Units or Junior Subordinated
Units) or an equivalent amount of securities ranking on a parity with the
Common Units, in either case without the approval of both (i) the holders of
at least 66 2/3% of the outstanding Common Units; (because 599,678 Common
Units have been issued by the Partnership since its inception, only 6,400,322
additional Common Units may be issued pursuant to this clause (i) without
Common Unitholder approval) or (ii) subject to any necessary approval by the
holders of Common Units pursuant to clause (i) above, more than 9,400,322
additional Subordinated Units (excluding Subordinated Units issued upon the
exchange of Junior Subordinated Units in connection with any exercise by the
Underwriters of the over-allotment option or upon the conversion of the Junior
Subordinated Units after the expiration of the Junior Subordination Period) or
other equity securities of the Partnership ranking prior or senior to the
Subordinated Units or an equivalent amount of securities ranking on a parity
with the Subordinated Units (or other securities convertible into or
exercisable or exchangeable during the Subordination Period for Common Units,
Subordinated Units or such senior or parity securities), in either case
without the approval of the holders
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of at least a majority of the outstanding Subordinated Units (excluding
Subordinated Units held by the General Partner and its affiliates); provided,
however, that the Partnership may also issue an unlimited number of additional
Units of any class 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 Units of any class. 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 other 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, Junior 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.
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
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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 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
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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 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 Units on any matter, vote such Units at the written direction of such
record holder. Absent such direction, such 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 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, Junior Subordinated Units and Common Units will all vote
together 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.
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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 against
and expenses incurred by such persons in connection with the Partnership's
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 Partnership's 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 that were unknown to him at the
time he became a limited partner and that could not be ascertained from the
partnership agreement.
The Operating Partnership conducts 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
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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 are
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership is August 1 to July 31 for financial
purposes. The Partnership's current taxable year is also August 1 to July 31;
however, the Partnership intends to apply to the IRS for a taxable year ending
January 31. If the IRS consents to such request, the Partnership will have a
short taxable year beginning August 1, 1998 and ending January 31, 1999. If
such consent is not received, the Partnership will have a short taxable year
beginning August 1, 1998 and ending December 31, 1998 and thereafter the
Partnership's taxable year will be the calendar year.
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 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 Partnership's 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.
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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.
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 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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SELLING UNITHOLDER AND UNITS AVAILABLE FOR FUTURE SALE
All the Subordinated Units being offered by this Prospectus are being
offered for the account of Ferrellgas, the general partner of the Partnership.
After this offering, assuming the Underwriters' over-allotment option is not
exercised, Ferrellgas will own 1,210,162 Common Units and 7,593,721 Junior
Subordinated Units, representing an aggregate 27.6% limited partner interest.
The sale of these Units could adversely affect the price of the Common Units
and the Subordinated Units.
The Subordinated 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 two 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.
The Partnership may at any time, without approval of the Subordinated
Unitholders, issue 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 (i) equity securities of the Partnership
ranking prior or senior to the Common Units or an aggregate of more than
7,000,000 additional Units of any class (excluding Common Units issued upon
conversion of Subordinated Units or Junior Subordinated Units) or an
equivalent amount of securities ranking on a parity with the Common Units, in
either case without the approval of both (i) the holders of at least 66 2/3%
of the outstanding Common Units (because 599,678 Common Units have been issued
by the Partnership since its inception, only 6,400,322 additional Common Units
may be issued pursuant to this clause (i) without Common Unitholder approval)
or (ii) subject to any necessary approval by the holders of Common Units
pursuant to clause (i) above, more than 9,400,322 additional Subordinated
Units (excluding Subordinated Units issued upon the exchange of Junior
Subordinated Units in connection with any exercise by the Underwriters of the
over-allotment option or upon the conversion of the Junior Subordinated Units
after the expiration of the Junior Subordination Period) or other equity
securities of the Partnership ranking prior or senior to the Subordinated
Units or an equivalent amount of securities ranking on a parity with the
Subordinated Units (or other securities convertible into or exercisable or
exchangeable during the Subordination Period for Common Units, Subordinated
Units or such senior or parity securities), in either case without the
approval of the holders of at least a majority of the outstanding Subordinated
Units (excluding Subordinated Units held by the General Partner and its
affiliates); provided, however, that the Partnership may also issue an
unlimited number of additional Units or of any class 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
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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, Subordinated Units and Junior Subordinated
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 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.
For a period of 120 days from the date of this Prospectus, the Partnership
and the General Partner will not, without the prior written consent of Smith
Barney Inc., sell, contract to sell or otherwise dispose of, except as
provided hereunder and except for any Units which may be issued in connection
with acquisitions by the Partnership, any Units or any securities
substantially similar to, convertible into or exercisable or exchangeable for
Units or grant any options or warrants to purchase any Units (other than
options that may be issued in connection with the Partnership's Unit Option
Plan as in effect on the day of this Prospectus). In addition, Ferrell has
agreed that, for a period of 120 days from the date of this Prospectus, it
will not sell, contract to sell or otherwise dispose of any Units or any
securities substantially similar to, convertible into or exercisable or
exchangeable for the Units or grant any options or warrants to purchase any
Units, except (i) 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, (ii) in connection with the sale of the Partnership or substantially
all of its assets, (iii) as collateral in connection with good faith
borrowing, (iv) gifts of up to 20% of such Units to charitable organizations
or (v) in the event of the death or permanent disability of James E. Ferrell,
provided, however, that in the case of (i) above the transferee shall enter
into an agreement with the Underwriters agreeing to comply with the above
restrictions for the remainder of the 120-day period.
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TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice," expresses 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 (the "Code"), existing and proposed regulations thereunder
and current administrative rulings and court decisions, all of which are
subject to change. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to the
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, non-resident aliens or other Unitholders
subject to specialized tax treatment (such as tax-exempt institutions, foreign
persons, individual retirement accounts, REITs or mutual funds). Accordingly,
each prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Subordinated Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Partnership and the Operating
Partnership will each be treated as a partnership, and (ii) owners of
Subordinated 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.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law,
the following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of
Subordinated Units and, insofar as it relates to matters of law and legal
conclusions, addresses the material tax consequences to Unitholders who are
individual citizens or residents of the United States.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Partnership as a partnership
for federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Code or any other
matter affecting the Partnership or prospective Unitholders. An opinion of
counsel represents only that 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. Any such contest with the IRS may materially and adversely impact the
market for the Subordinated Units and the prices at which Subordinated Units
trade. In addition, 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.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Subordinated Units are loaned to a short
seller to cover a short sale of Subordinated Units (see "--Tax Treatment of
Operations--Treatment of Short Sales"), (ii) whether a Unitholder acquiring
Subordinated Units in separate transactions must maintain a single aggregate
adjusted tax basis in his Subordinated Units (see "--Disposition of
Subordinated Units--
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Recognition of Gain or Loss"), (iii) whether the Partnership's monthly
convention for allocating taxable income and losses is permitted by existing
Treasury Regulations (see "--Disposition of Subordinated Units--Allocations
Between Transferors and Transferees"), (iv) whether the Partnership's method
for depreciating Section 743 adjustments is sustainable (see "--Tax Treatment
of Operations--Section 754 Election") and (v) whether the allocations of
recapture income contained in the Partnership Agreement will be respected for
federal income tax purposes (see "--Allocation of Partnership Income, Gain,
Loss and Deduction").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals for 1998 is 39.6%. The
Taxpayer Relief Act of 1997 (the "TRA of 1997") reduced the maximum capital
gains rate for investments held at least one year to 20% (from 28%) effective
May 7, 1997. Effective July 29, 1997, the holding period necessary to qualify
for the new capital gains rate increased from one year to 18 months. For Units
sold after July 28, 1997, with a holding period between one year and 18
months, the maximum rate remains at 28%.
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 and deduction 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 partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating 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 and the Operating Partnership
have been and will each be classified as a partnership for federal income tax
purposes.
In rendering its opinion with respect to periods beginning before January 1,
1997, Counsel relied on different factual matters which the General Partner
believes are true. In rendering its opinion as to taxable years beginning
after December 31, 1996, Counsel has relied on certain factual representations
made by the Partnership and the General Partner. Such factual matters are as
follows:
(a) Neither the Partnership nor the Operating Partnership has elected nor
will elect to be treated as an association or corporation;
(b) The Partnership and the Operating Partnership have been and will be
operated in accordance with (i) all applicable partnership statutes, (ii)
the applicable Partnership Agreement, and (iii) the description thereof in
this Prospectus;
(c) For each taxable year, more than 90% of the gross income of the
Partnership will be (i) derived from 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; and
(d) The General Partner has and will at all times act independently of
the limited partners.
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 interest (from
other than a financial business), dividends and income and gains from the
processing, transportation and marketing crude oil, natural gas, and products
thereof, including the retail and wholesale marketing of propane and the
transportation of propane and natural gas liquids.
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If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and 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 that corporation, and then
distributed that 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 that time,
does not have liabilities in excess of the tax basis of its assets.
Thereafter, the Partnership would be treated as a corporation for federal
income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, its items
of income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would
be taxed to the Partnership or the Operating Partnership at corporate rates.
In addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits)
a nontaxable return of capital (to the extent of the Unitholder's tax basis in
his Subordinated Units) or taxable capital gain (after the Unitholder's tax
basis in the Subordinated 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 and thus would likely result in a substantial
reduction of the value of the Units.
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 of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Counsel is also of the opinion that (a) assignees who have executed and
delivered Transfer Applications, and are awaiting admission as limited
partners and (b) Unitholders whose Subordinated Units are held in street name
or by a nominee and who have the right to direct the nominee in the exercise
of all substantive rights attendant to the ownership of their Subordinated
Units will be treated as partners of the Partnership for federal income tax
purposes. As there is no direct authority addressing assignees of Subordinated
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 or losses would not appear
to be reportable by a Unitholder who is not a partner for federal income tax
purposes, 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. Furthermore, a purchaser or other
transferee of Subordinated 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 Subordinated Units unless the Subordinated
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
Subordinated Units.
A beneficial owner of Subordinated Units whose Subordinated 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 Subordinated Units for federal
income tax purposes. See "--Treatment of Operations--Treatment of Short
Sales."
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
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regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership
income, gain, loss and deduction for the taxable year of the Partnership
ending with or within the taxable year of the Unitholder.
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
tax basis in his Subordinated Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Subordinated Units,
taxable in accordance with the rules described under "--Disposition of
Subordinated 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 that Unitholder. To the extent that Partnership
distributions cause a Unitholder's "at risk" amount to be less than zero at
the end of any taxable year, he must recapture any losses deducted in previous
years. See "--Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in the Partnership because
of the issuance by the Partnership of additional Units will decrease such
Unitholder's share of nonrecourse liabilities of the Partnership, and thus
will result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Subordinated Units, if such
distribution reduces the Unitholder's share of the Partnership's "unrealized
receivables" (including depreciation recapture) and/or substantially
appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Partnership in return for the
non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions
The Partnership estimates that a purchaser of Subordinated Units in this
offering who owns the Units through the record date for the last quarter of
the Partnership's fiscal year ending on July 31, 2002, will be allocated, on a
cumulative basis, no federal taxable income for such period. The Partnership
further anticipates that after the Partnership's fiscal year ending on July
31, 2002, the taxable income allocable to the Subordinated Unitholders will
constitute a significantly higher percentage of cash distributed to such
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 with respect to all Units 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, competitive and political
uncertainties beyond the control of the Partnership. Further, the estimates
are based on current tax law and certain tax reporting positions that the
Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
Subordinated Units.
Basis of Subordinated Units
A Unitholder's initial tax basis for his Subordinated Units will be the
amount he paid for the Subordinated Units plus his share of the Partnership's
nonrecourse liabilities. That basis will be increased by his share of
Partnership income and by any increases in his share of Partnership
nonrecourse liabilities. That basis will be decreased (but not below zero) by
distributions from the Partnership, by the Unitholder's share of Partnership
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losses, by any decrease in his share of Partnership nonrecourse liabilities
and by his share of expenditures of the Partnership that are not deductible in
computing its taxable income and are not required to be capitalized. A limited
partner will have no share of Partnership debt which is recourse to the
General Partner, but will have a share, generally based on his share of
profits, of Partnership debt which is not recourse to any partner. See "--
Disposition of Subordinated Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% of the value of its
stock is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the Unitholder is
considered to be "at risk" with respect to the Partnership's activities, if
that is less than the Unitholder's tax 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 tax basis or at risk amount (whichever is the limiting
factor) is subsequently increased. Upon the taxable disposition of a Unit, any
gain recognized by a Unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended
by the basis limitation. Any excess loss (above such gain) previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase
or decrease as the tax basis of the Unitholder's Units increases or decreases
(other than tax basis increases or decreases attributable to increases or
decreases in his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership 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 a Unitholder's income generated by the
Partnership may be deducted in full when he 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) the
Partnership's interest expense
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attributed to portfolio income, and (iii) the portion of interest expense
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. 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 generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
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.
At any time that distributions are made to the Common Units and not to the
Subordinated Units, or that Incentive Distributions are made to the General
Partner, gross income will be allocated to the recipients to the extent of
such distribution. If the Partnership has a net loss, items of income, gain,
loss and deduction will generally be allocated first, to the General Partner
and the Unitholders in accordance with their respective Percentage Interests
to the extent of their positive capital accounts (as maintained under the
Partnership Agreement) and, second, to the General Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be 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"). The effect of these allocations to a Unitholder will
be essentially the same as if the tax basis of the Contributed Property were
equal to their fair market value at the time of contribution. In addition,
certain items of recapture income will be allocated to the extent possible to
the partner allocated the deduction or curative allocation giving rise to the
treatment of such gain as recapture income in order to minimize the
recognition of ordinary income by some Unitholders. 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 or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference 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 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 interest of the
partners in cash flow and other nonliquidating distributions and rights of the
partners to distributions of capital upon liquidation.
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.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
The Partnership currently uses the fiscal year ending July 31 as its taxable
year and has adopted the accrual method of accounting for federal income tax
purposes. The Partnership intends to apply to the IRS for consent to change to
a fiscal year ending January 31. Although the Partnership expects to receive
consent, if consent is
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not received, as a result of this offering, it is likely that beginning August
1, 1998, the taxable year of the Partnership will become the calendar year.
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 his taxable year must
include his allocable share of Partnership income, gain, loss and deduction in
income for his taxable year with the result that he 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. See "--Disposition of
Subordinated Units--Allocations Between Transferors and Transferees." If the
taxable year of the Partnership becomes the calendar year, a purchaser of
Subordinated Units pursuant to this offering may be required to include in his
1998 taxable income his share of the Partnership's income, gain, loss and
deduction for the period from the date of his purchase of Subordinated Units
through July 31, 1998, plus his share of the Partnership's income, gain, loss
and deduction for the short taxable year of the Partnership from August 1,
1998, through December 31, 1998. In view of the publicly-traded nature of the
Partnership it may be impossible to determine the appropriate taxable year of
the Partnership. If, as a result, the Partnership failed to timely provide
information to Unitholders, the Partnership could be exposed to certain
penalties. The Partnership does not expect to incur such penalties and, even
if incurred, does not expect that such penalties would be material.
Initial Tax Basis, Depreciation and Amortization
The tax basis of 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 of such assets. The Partnership
assets initially had an aggregate tax basis equal to the tax basis of the
assets in the possession of the General Partner immediately prior to the
formation of the Partnership. The federal income tax burden associated with
the difference between the fair market value of property held by the
Partnership and its tax basis immediately prior to this offering will be borne
by partners holding interests in the Partnership prior to this offering. See
"--Allocation of Partnership Income, Gain, Loss and Deduction."
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 as ordinary income upon a sale of his interest in
the Partnership. See "--Allocation of Partnership Income, Gain, Loss and
Deduction" and "--Disposition of Subordinated Units--Recognition of Gain or
Loss."
Costs incurred in organizing the Partnership are being amortized over a
period of 60 months. The costs incurred in promoting the issuance of Units
(i.e. syndication expenses) 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. Under recently adopted regulations, the underwriting discounts and
commissions would be treated as a syndication cost.
Section 754 Election
The Partnership has made the election permitted by Section 754 of the Code.
The election is irrevocable without the consent of the IRS. The election
generally permits the Partnership to adjust a Subordinated Unit purchaser's
(other than a Subordinated Unit purchaser that purchases Subordinated Units
from the Partnership) tax basis in the Partnership's assets ("inside basis")
pursuant to Section 743(b) of the Code to reflect his purchase price. The
Section 743(b) adjustment belongs to the purchaser and not to other partners.
(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 tax basis in such assets ("common basis") and (2) his
Section 743(b) adjustment to that basis.)
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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 Unit.
Similarly, the proposed regulations under Section 197 indicate 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 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 basis in such properties.
Pursuant to the Partnership Agreement, the Partnership is authorized to adopt
a convention to preserve the uniformity of Units even if such convention is
not consistent with Treasury Regulation Sections 1.167(c)-1(a)(6), Proposed
Treasury Regulation Section 1.168-2(n) or Proposed Treasury Regulation Section
1.197-2(g)(3). See "--Uniformity of Units."
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, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable, despite its inconsistency with
Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation Section
1.167(c)-1(a)(6) (neither of which is expected to directly apply to a material
portion of the Partnership's assets) or Proposed Treasury Regulation Section
1.197-2(g)(3). To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Partnership will apply the rules described in the Regulations. 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)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's assets. 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."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. 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.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Partnership of the Partnership's assets immediately prior to the transfer. In
such a case, as a result of the election, the transferee would have a higher
tax basis in his share of the Partnership's assets for purposes of
calculating, among other items, his depreciation and depletion 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 tax
basis in such Units is lower than such Unit's share of the aggregate tax basis
of the Partnership's assets immediately prior to the transfer. Thus, the fair
market value of the 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 resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Partnership's opinion, the expense of compliance
exceed the benefit of the election, the Partnership may seek permission from
the IRS to revoke the Section 754 election for the Partnership. If such
permission is granted, a subsequent purchaser of Units may be allocated more
income than he would have been allocated had the election not been revoked.
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Alternative Minimum Tax
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction or loss for purposes of
the alternative minimum tax. A portion of the Partnership's depreciation
deductions may be treated as an item of 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 minimum tax rate for noncorporate taxpayers is 26%
on the first $175,000 of alternative minimum taxable income in excess of the
exemption amount and 28% on any additional alternative minimum taxable income.
Prospective Unitholders should consult with their tax advisors as to the
impact of an investment in Units on their liability for the alternative
minimum tax.
Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values, and determinations of the initial tax bases, of the assets of
the Partnership. Although the Partnership 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 by the Partnership. 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 or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their
tax liability for prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Partnership income, gain,
deduction or loss with respect to those Units would not 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. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements 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.
See also "Disposition of Units--Recognition of Gain or Loss."
DISPOSITION OF 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. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale
of Units could result in a tax liability in excess of any cash received from
such sale.
Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Unit which decreased a Unitholder's tax basis in such Unit
will, in effect, become taxable income if the Unit is sold at a price greater
than the Unitholder's tax basis in such Unit, even if the price is less than
his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"--Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partner of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the
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Unitholder may have been entitled to additional deductions against income in
prior years but may be unable to claim them, with the result to him of greater
overall taxable income than appropriate. Counsel is unable to opine as to the
validity of the convention but believes such a contest by the IRS to be
unlikely because a successful contest could result in substantial additional
deductions to other Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit will generally be taxable as capital gain or
loss. Capital gain recognized on the sale of Units held for more than 18
months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss (which could be substantial), 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 "inventory items" owned by the
Partnership. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items 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 corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Units, a Unitholder will be unable
to select high or low basis Units to sell as would be the case with corporate
stock. It is not clear whether the ruling applies to the Partnership because,
similar to corporate stock, interests in the Partnership are evidenced by
separate certificates. Accordingly, Counsel is unable to opine as to the
effect such ruling will have on the Unitholders. A Unitholder considering the
purchase of additional Units or a sale of Units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
such ruling.
The TRA of 1997 affects the taxation of certain financial products and
securities, including partnership interests by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enter (i) into a short sale
of, (ii) enter into an offsetting notional principal contract with respect to,
(iii) enter into a futures or forward contract to deliver, (iv) or in the case
of an appreciated financial position that is a short sale or offsetting
notional principal or futures or forward contract, acquire, the same or
substantially identical property. The Secretary of the Treasury is also
authorized to issue regulations that treat a taxpayer that enters in
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned
by each of them as of the opening of the principal national securities
exchange on which the Common Units and the Subordinated Units are then traded
on the first business day of the month (the "Allocation Date"). However, gain
or loss realized on a sale or other disposition of Partnership assets other
than in the ordinary course of business will be allocated among the
Unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a Unitholder transferring Units in the open market
may be allocated income, gain, loss and deduction accrued after the date of
transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers
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of less than all of the Unitholder's interest), taxable income or losses of
the Partnership might be reallocated among the Unitholders. The Partnership is
authorized to revise its 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 under 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 cash distribution with respect
to such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive
that cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale
or exchange and in any event by 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 that 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 the sale or exchange through a
broker. Additionally, a transferee of a Unit will be required to furnish a
statement to the IRS, filed with its income tax return for the taxable year in
which the sale or exchange occurred, that sets forth the amount of the
consideration paid for the Unit. Failure to satisfy these 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. Under
the TRA of 1997, if the Partnership elects to be treated as a large
partnership, it will not terminate by reason of the sale or exchange of
interests in the Partnership. A termination of the Partnership will cause a
termination of the Operating Partnership. A termination of the Partnership
will result in the closing of the Partnership's taxable year for all
Unitholders. In the case of a Unitholder reporting on a taxable year other
than a fiscal year ending July 31, the closing of the Partnership's taxable
year may result in more than 12 months' taxable income or loss of the
Partnership being includable in his taxable income for the year of
termination. 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 a termination, and a termination could result in a deferral of
Partnership deductions for depreciation. A termination could also result in
penalties if the Partnership were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of,
or subject the Partnership to, any tax legislation enacted prior to the
termination.
Under regulations, a termination of the Partnership would result in a deemed
transfer by the Partnership of its assets to a new partnership in exchange for
an interest in the new partnership followed by a deemed distribution of
interests in the new partnership to the Unitholders in liquidation of the
Partnership.
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 any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
the Partnership is authorized to treat the payment as a distribution to
current Unitholders. The Partnership 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 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
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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
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must 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).
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197-2(g)(3). Any non-uniformity could have a negative impact on the
value of the Units. See "--Tax Treatment of Operations--Section 754 Election."
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, or treat that portion as nonamortizable, to the extent
attributable to property the common basis of which is not amortizable, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) (neither of which is expected to
directly apply to a material portion of the Partnership's assets) and Proposed
Treasury Regulation Section 1.197-1(a)(3). See "--Tax Treatment of
Operations--Section 754 Election." To the extent such Section 743(b)
adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, the Partnership will apply the rules described
in the Regulations. If the Partnership determines that such a position cannot
reasonably be taken, the Partnership may adopt a depreciation and amortization
convention under which all purchasers acquiring 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 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
sustained, the uniformity of Units might be affected, and the gain from the
sale of Units might be increased without the benefit of additional deductions.
See "--Disposition of Units--Recognition of Gain or Loss."
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 ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income. Much
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.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its 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
include that type of income.
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Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain,
loss or deduction and pay federal income tax at regular rates on any net
income or gain. Generally, a partnership is required to pay a withholding, tax
on the portion of the partnership's 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 39.6%)
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. A change in applicable law
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 corporation 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 income and gain (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.
That 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.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are 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 60 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's share of the Partnership's income,
gain, loss and deduction for the preceding Partnership taxable year. In
preparing this information, which will generally not be reviewed by counsel,
the Partnership will use various accounting and reporting conventions, some of
which have been mentioned in the previous discussion, to determine the
Unitholder's share of income, gain, loss and deduction. There is no assurance
that any of those conventions will yield a result which conforms to the
requirements of the Code, regulations or administrative interpretations of the
IRS. The Partnership cannot assure prospective Unitholders that the IRS will
not successfully contend in court that such accounting and reporting
conventions are impermissible. Any such challenge by the IRS could negatively
affect the value of the Units.
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 adjust a prior year's tax liability, 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.
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 and deduction are determined in a 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 of the Partnership.
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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 that
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 (by 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 a 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 his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties. Under the TRA of 1997, partners in electing large
partnerships would be required to treat all Partnership items in a manner
consistent with the Partnership return.
Under the reporting provisions of the TRA of 1997, each partner of an
electing large partnership takes 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) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and
other activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing
fuel from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate.
The TRA of 1997 also made a number of changes to the tax compliance and
administrative rules relating to electing large partnerships. One provision
would require that each partner in an electing 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 prior 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 TRA of 1997, 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 is not expected that the
Partnership will elect to have these provisions apply because of the cost of
their application.
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 owner 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 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 owner; 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.
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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 is not 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 Secretary of the Treasury 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 IRS has issued the following tax shelter
registration number to the Partnership: 94201000010. 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 Unit to furnish the 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 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 that failure, will be subject to a $250
penalty for each failure. Any penalties discussed herein are not deductible
for federal income tax purposes. Registration as a tax shelter may increase
the risk of an audit.
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 that portion and that the taxpayer acted in good faith with respect to
that 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 in this context does not appear to include the
Partnership. If any Partnership item of income, gain, loss or deduction
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.
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%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will 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 is not presented here, each
prospective Unitholder should consider their potential impact on his
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investment in the Partnership. The Partnership currently conducts business in
45 states. A Unitholder will be required to file state income tax returns and
to pay state income taxes in some or all of the states in which the
Partnership does business or owns property and may be subject to penalties for
failure to comply with those requirements. 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, or the Partnership may elect, 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 may be treated as if distributed
to Unitholders for purposes of determining the amounts distributed by the
Partnership. See "--Disposition of Units--Entity-Level Collections." 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 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 U.S. 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 IRAs 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--Uniformity of Units--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
IRAs 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 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 regulations provide 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, IRAs 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
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof (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 number of Subordinated Units set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SUBORDINATED UNITS
----------- ------------------
<S> <C>
Smith Barney Inc.......................................
Goldman, Sachs & Co....................................
Donaldson, Lufkin & Jenrette Securities Corporation....
A.G. Edwards & Sons, Inc...............................
PaineWebber Incorporated...............................
---------
Total................................................ 9,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Subordinated Units are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all
Subordinated Units offered hereby (other than those covered by over-allotment
option described below) if any such Subordinated Units are taken.
The Underwriters, for whom Smith Barney Inc., Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette, A.G. Edwards & Sons, Inc. and PaineWebber
Incorporated are acting as Representatives (the "Representatives"), initially
propose to offer the Subordinated Units offered hereby directly to the public
at the public offering price set forth on the cover page of this Prospectus
and part of such Subordinated Units to certain dealers at such price less a
concession not in excess of $ per Subordinated Unit. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
Subordinated Unit to other Underwriters or to certain other dealers. After the
initial offering of the Subordinated Units to the public, the offering price
and other selling terms may from time to time be varied by the
Representatives. The Representatives have informed the Partnership that the
Underwriters do not expect to confirm sales to accounts over which they
exercise discretionary authority without the prior written approval of the
transaction by the customer.
The General Partner has granted to the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 1,350,000
additional Subordinated Units at the public offering price set forth on the
cover page of this Prospectus, minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, made in connection with the sale of the
Subordinated Units offered hereby. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Subordinated Units as the
number of Subordinated Units set forth opposite such Underwriter's name in the
preceding table bears to the total number of Subordinated Units listed in such
table.
In connection with the offering of the Subordinated Units offered hereby and
in compliance with applicable law, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the market price of the
Subordinated Units at levels above those which might otherwise prevail in the
open market. Specifically, the Underwriters may over-allot in connection with
the offering, creating a short position in the Subordinated Units for their
own account. For the purposes of covering a syndicate short position or
pegging, fixing or maintaining the price of the Subordinated Units, the
Underwriters may place bids for the Subordinated Units or the Common Units or
effect purchases of the Subordinated Units or the Common Units in the open
market. A syndicate short
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position may also be covered by exercise of the over-allotment option
described above. Finally, the Underwriters may impose a penalty bid on certain
Underwriters and dealers. This means that the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing Subordinated Units in the offering if the syndicate repurchases
previously distributed Subordinated Units in transactions to cover syndicate
short positions, in stabilization transactions or otherwise. The Underwriters
are not required to engage in any of these activities and any such activities,
if commenced, may be discontinued at any time.
For a period of 120 days from the date of this Prospectus, the Partnership
and the General Partner have agreed that they will not, without the prior
written consent of Smith Barney Inc., sell, contract to sell or otherwise
dispose of, except as provided hereunder and except for any Units which may be
issued in connection with acquisitions by the Partnership, any Units, or any
securities substantially similar to, convertible into or exercisable or
exchangeable for Units or grant any options or warrants to purchase any Units
(other than options that may be issued in connection with the Partnership's
Unit Option Plan as in effect on the day of this Prospectus). In addition,
Ferrell has agreed that, for a period of 120 days from the date of this
Prospectus, it will not, without the prior written consent of Smith Barney
Inc., sell, contract to sell or otherwise dispose of any Units or any
securities substantially similar to, convertible into or exercisable or
exchangeable for Units or grant any options or warrants to purchase any Units,
except (i) 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, (ii) in
connection with the sale of the Partnership or substantially all of its
assets, (iii) as collateral in connection with good faith borrowing, (iv)
gifts of up to 20% of such Units to charitable organizations or (v) in the
event of the death or permanent disability of James E. Ferrell, provided,
however, that in the case of (i) above the transferee shall entered into an
agreement with the Underwriters agreeing to comply with the above restrictions
for the remainder of the 120-day period.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Subordinated Units offered hereby as interests in a
direct participation program, the offering is being made in compliance with
Rule 2810 of the NASD's Conduct Rules. Investor suitability of the
Subordinated 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 Subordinated
Units. Consequently, the initial public offering price will be determined by
negotiations between the General Partner and the Representatives. Among the
factors to be considered in determining the initial public offering price will
be the history of and prospects for the Partnership's business and the
industry in which it competes, an assessment of the Partnership's management
and the present state of the Partnership's development, the past and present
revenues, earnings and cash flows of the Partnership, the market price of the
Common Units, the prospects for growth of the Partnership's revenues, earnings
and cash flows, the current state of the economy in the United States and the
current level of economic activity in the industry in which the Partnership
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Partnership.
Application has been made to list the Subordinated Units for trading on the
NYSE, subject to official notice of issuance, under the symbol " ." In
order to meet one of the requirements for listing the Subordinated Units on
the NYSE, the Underwriters have undertaken to sell lots of 100 or more
Subordinated Units to a minimum of 2,000 beneficial holders.
The Partnership and the General Partner have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
VALIDITY OF THE SECURITIES
The validity of the Subordinated Units will be passed upon for the
Partnership by Andrews & Kurth L.L.P., Houston, Texas and for the Underwriters
by Baker & Botts L.L.P., Houston, Texas.
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EXPERTS
The financial statements and the related financial statement schedules
incorporated in this prospectus by reference from the Partnership's Annual
Report on Form 10-K for the year ended July 31, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports, which
are incorporated herein by reference, and have been so incorporated in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
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APPENDIX A
GLOSSARY
ADJUSTED PROPERTY: Any property, the Carrying Value of which has been
adjusted pursuant to Section 4.5(d)(i) or 4.5(d)(ii) of the Partnership
Agreement. 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)
of the Partnership Agreement.
AGREED VALUE: With respect to any Contributed Property, the Agreed Value is
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) of the
Partnership Agreement. Subject to Section 4.5(c)(i) of the Partnership
Agreement, 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.
ALLOCATION DATE: The first business day of the month.
ASSIGNEE: A Non-citizen Assignee or a Person to whom one or more Units have
been transferred in a manner permitted under the Partnership Agreement and who
has executed and delivered a Transfer Application as required by the
Partnership Agreement, but who has not become a Substituted Limited Partner.
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 the initial cash
balance of the Partnership at its inception, plus net reductions to reserves
less all of its cash disbursements (including cash distributions to partners
to the extent such distributions exceed Available Cash for the preceding
quarter) and net additions to reserves during such quarter, including, for the
period from the Closing Date through , the cash balance of the
Partnership on the date the Partnership commenced operations. The full
definition of Available Cash is set forth in the Partnership Agreement, a form
of which is included as an exhibit to the Registration Statement of which this
Prospectus is a part. 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.
BOFA: Bank of America National Trust and Savings Association.
BOOK-TAX DISPARITY: The difference, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, 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
A-1
<PAGE>
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 of the
Partnership Agreement 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.
BTU: British thermal unit, the quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
CAPITAL ACCOUNT: The capital account maintained for a Partner pursuant to
Section 4.5 of the Partnership Agreement.
CAPITAL ADDITIONS AND IMPROVEMENTS: The (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 Operating
Partnership, taken as a whole, existing immediately prior to such addition,
improvement, acquisition or construction.
CAPITAL EXPENDITURE REQUIREMENT: With respect to the Subordination Period,
cash capital expenditures attributable to acquisitions and Capital Additions
and Improvements since the Closing Date, in an amount equal to or exceeding
$50 million, which test has been satisfied by the Partnership.
CARRYING VALUE: With respect to a Contributed Property, the Carrying Value
is 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. With respect to any other Partnership property, the Carrying Value
is 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) of the Partnership Agreement 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: The amount of all Available Cash
distributed as Cash from Operations which exceeds 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. The full definition of Cash from Interim Capital Transactions is
set forth in the Partnership Agreement, a form of which is included as an
exhibit to the Registration Statement, of which this Prospectus is a part.
CASH FROM OPERATIONS: Cash from Operations, which is determined on a
cumulative basis at the close of any quarter prior to the Partnership
Liquidation date, generally refers to the initial cash balance of the
Partnership plus $25 million, plus all cash receipts of the Partnership
operations (excluding Cash from Interim Capital Transactions), after deducting
all cash operating expenditures, cash debt service payments (other than
payments or prepayments of principal and premium required by loan agreements
or lenders and 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 in respect of
acquisitions and capital additions and improvements 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 as an exhibit to the
Registration Statement, of which this Prospectus is a part.
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CAUSE: A final, non-appealable judgment entered by a court of competent
jurisdiction finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
CLOSING DATE: The first date on which the Common Units were sold by the
Partnership.
CODE: 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.
COMMISSION: The Securities and Exchange Commission.
COMMON BASIS: A partner's share of the Partnership's tax basis in the
Partnership's assets.
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: A Unit representing a fractional part of the partnership
interests of all limited partners and assignees that has the rights and
obligations specified with respect to Common Units in the Partnership
Agreement.
CONTRIBUTED PROPERTY: 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) of the
Partnership Agreement, such property shall no longer constitute a Contributed
Property, but shall be deemed an Adjusted Property.
CREDIT FACILITY: The credit facility entered into by the Operating
Partnership and BofA, as agent, which permits borrowings by the Operating
Partnership of up to $255 million on a senior unsecured revolving line of
credit basis.
CURRENT MARKET PRICE: The 20 trading-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.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
Section 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
DEPARTING PARTNER: A former General Partner, from and after the effective
date of any withdrawal or removal of such former General Partner pursuant to
the Section 13.1-13.2 of Partnership Agreement.
DOT: United States Department of Transportation.
EARNINGS REQUIREMENT: With respect to the Subordination Period, the
requirement that the Partnership shall have, 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 sum of (A) the Minimum Quarterly Distribution on
each outstanding Common Unit for such periods and (B) the sum of the Minimum
Quarterly Distribution on all outstanding Subordinated Units and Junior
Subordinated Units 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 be excluded: (x) any
positive balance in Cash from Operations at the beginning of such four-quarter
period, (y) any net increase in working capital borrowings in such four-
quarter period, and (z) any net decrease in reserves in such four-quarter
period.
EBITDA: Earnings before interest, income taxes and depreciation and
amortization, calculated as operating income plus depreciation and
amortization excluding interest.
A-3
<PAGE>
EDGAR: The Commission's Electronic Data Gathering, Analysis and Retrieval
System.
ELIGIBLE CITIZEN: 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 from time to time, and whose status as a
limited partner of the Partnership 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.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
FERRELL: Ferrell Companies, Inc., a Kansas corporation.
FERRELLGAS: Ferrellgas, Inc., a Delaware corporation and wholly owned
subsidiary of Ferrell. Also referred to in this Prospectus as the "General
Partner."
FIRST TARGET DISTRIBUTION: $0.55 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6 of the Partnership Agreement.
FIXED RATE SENIOR NOTES; SENIOR NOTES: Principal amount of $200,000,000 of
the 10% Fixed Rate Senior Notes due 2001, redeemable, at the option of the
Operating Partnership, anytime on or after August 1, 1998 with a premium
before August 1, 2000.
GENERAL PARTNER: Ferrellgas, a wholly owned subsidiary of Ferrell.
INCENTIVE DISTRIBUTIONS: Any amount of cash distributed pursuant to the
Incentive Distribution Rights, the current holder of which is Ferrell.
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.
INDEMNITEES: The General Partner, any Departing Partner and 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, any
Departing Partner or any such affiliate as a director, officer, employee,
partner, agent, or trustee of another Person.
INDENTURE: The indenture pursuant to which the Fixed Rate Senior Notes were
issued.
INITIAL UNIT PRICE: The amount per Unit equal to $21.00.
INSIDE BASIS: A Subordinated Unit purchaser's (other than a Subordinated
Unit purchaser that purchases Subordinated Units from the Partnership) tax
basis in the Partnership's assets.
JUNIOR SUBORDINATION PERIOD: The period commencing on November 1, 1997 and
ending on the earlier of (i) the record date for the quarterly cash
distribution made for the quarterly period ending October 31, 1998 or (ii) the
date of any removal of the General Partner other than for Cause.
JUNIOR SUBORDINATED UNITS: A Unit representing a fractional part of the
partnership interests of all limited partners and assignees that has the
rights and obligations specified with respect to Junior Subordinated Units in
the Partnership Agreement.
LIMITATION AMOUNT: With respect to distributions of cash upon liquidation to
the Subordinated Unitholders, (i) the total number of Junior Subordinated
Units outstanding multiplied by (ii) the product of the Minimum Quarterly
Distribution times the number of regular quarterly distributions that would
otherwise be payable with respect to the quarters ending prior to November 1,
1998 if the liquidation were not occurring.
A-4
<PAGE>
LIQUIDATOR: Upon dissolution of the Partnership, the person authorized to
wind up the affairs of the Partnership, liquidate the Partnership's assets and
apply the proceeds of the liquidation in accordance with the terms of the
Partnership Agreement.
MINIMUM QUARTERLY DISTRIBUTION: $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."
NON-CITIZEN ASSIGNEE: 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 of the Partnership Agreement.
NONRECOURSE LIABILITY: has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
NYSE: The New York Stock Exchange, Inc.
OPERATING PARTNERSHIP: Ferrellgas, L.P., a Delaware limited partnership of
which the Partnership owns a 98.9899% limited partner interest and the General
Partner owns a 1.0101% general partner interest. The Operating Partnership
conducts the Partnership's business and was established to simplify the
Partnership's obligations under the laws of certain jurisdictions in which it
conducts business.
OPERATING PARTNERSHIP AGREEMENT: The Agreement of Limited Partnership of the
Operating Partnership, as it may be amended, supplemented or restated from
time to time.
OPINION OF COUNSEL: A written opinion of counsel, acceptable to the General
Partner in its reasonable discretion, to the effect that the taking of a
particular action 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.
PARTNERSHIP: Ferrellgas Partners, L.P., a Delaware limited partnership.
PARTNERSHIP AGREEMENT: The Agreement of Limited Partnership of the
Partnership, as it may be amended, supplemented or restated from time to time.
Unless the context requires otherwise, references to the Partnership Agreement
constitute references to the partnership agreements of the Partnership and the
Operating Partnership, collectively.
PARTNERSHIP INTEREST: An interest in the Partnership, which shall include
general partner interests, Common Units, Subordinated Units, Junior
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities, or a combination thereof or interest therein, as the case may be.
PARTNERSHIP SECURITIES: Such additional Units, or classes or series thereof,
or options, rights, warrants or appreciation rights relating thereto, and any
other type of equity security that the Partnership may lawfully issue,
including any unsecured or secured debt obligations of the Partnership
convertible into any class or series of equity securities of the Partnership.
PARTNERSHIP SENIOR NOTES: The Partnership's $160,000,000 principal amount of
9 3/8% Senior Secured Notes, issued in April 1996.
PERSON: An individual or a corporation, partnership, trust, unincorporated
organization, association or other entity.
REGISTRATION STATEMENT: The Registration Statement on Form S-3, filed by the
Partnership with the Commission on November , 1997.
A-5
<PAGE>
REPRESENTATIVES: Smith Barney Inc., Goldman, Sachs & Co., Donaldson, Lufkin
& Jenrette Securities Corporation, A.G. Edwards & Sons, Inc. and PaineWebber
Incorporated, acting as representatives for the several underwriters.
RULE 144: Rule 144 under the Securities Act.
SECOND TARGET DISTRIBUTION: $0.63 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6 of the Partnership Agreement.
SECURITIES ACT: The Securities Act of 1933, as amended.
SENIOR NOTES; FIXED RATE SENIOR NOTES: Principal amount of $200,000,000 of
the 10% Fixed Rate Senior Notes due 2001, redeemable, at the option of the
Operating Partnership, anytime on or after August 1, 1998, with a premium
before August 1, 2000.
SENIOR SECURED NOTES: Principal amount of $160,000,000 of the 9 3/8% Senior
Secured Notes due 2006, redeemable, at the option of the Partnership, any time
on or after June 15, 2001, with a premium before June 15, 2004.
SKELGAS: Skelgas Propane, Inc., a Delaware corporation.
SUBORDINATED UNIT ARREARAGES: With respect to any Subordinated Unit,
whenever issued, and as to any quarter ending during the Junior Subordination
Period, the excess, if any, of (a) the Minimum Quarterly Distribution with
respect to such Subordinated Unit over (b) the sum of Available Cash
distributed with respect to such Subordinated Unit in respect of such quarter
pursuant to the Partnership Agreement. Subordinated Unit Arrearages do not
accrue interest. Subordinated Units will not accrue arrearages for any quarter
after the Junior Subordination Period. Subordinated Units Arrearages do not
accrue interest.
SUBORDINATED UNITS: A Unit representing a fractional part of the partnership
interests of all limited partners and assignees that has the rights and
obligations specified with respect to Subordinated Units in the Partnership
Agreement.
SUBORDINATED UNITHOLDER: A holder of the Subordinated Units.
SUBORDINATION PERIOD: The period extending from the Closing Date until the
first day of any quarter beginning on or after August 1, 1999 in respect of
which the Earnings Requirement and the Capital Expenditure Requirement shall
have been satisfied. In addition, the Subordination Period ends if the General
Partner is removed other than for Cause.
SUBSTITUTED LIMITED PARTNER: A Person who is admitted as a Limited Partner
to the Partnership pursuant to Section 12.2 of the Partnership Agreement 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.
TARGET DISTRIBUTIONS, TARGET DISTRIBUTION LEVELS: 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 and to Subordinated Unitholders of Subordinated 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").
TAX MATTERS PARTNER: The General Partner, appointed in the Partnership
Agreement to participate in partnership proceedings regarding the tax
treatment of partnership items of income, gain, loss and deduction.
THIRD TARGET DISTRIBUTION: $0.82 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6 of the Partnership Agreement.
TRA OF 1997: Taxpayer Relief Act of 1997.
TRANSFER AGENT: First National Bank of Boston, N.A., serving as registrar
and transfer agent for the Common Units and the Subordinated Units.
A-6
<PAGE>
TRANSFER APPLICATION: The application that all purchasers of Subordinated
Units in this offering and purchasers of Subordinated Units in the open market
who wish to become Subordinate Unitholders of record must deliver before the
transfer of such Subordinated 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, the Subordinated Units or the
Junior Subordinated Units.
UNITS: The Common Units, the Subordinated Units and the Junior Subordinated
Units collectively.
UNIT OPTION PLAN: Plan authorizing the issuance of options covering up to
850,000 Subordinated Units to certain officers and employees of the General
Partner. The Unit Options are exercisable beginning after July 31, 1999,
assuming the Subordination Period has elapsed at exercise prices ranging from
$16.80 to $21.67 per unit, which is an estimate of the fair market value of
the Subordinated Units at the time of the grant, vest immediately or over a
one to five year period and expire on the tenth anniversary of the date of
grant.
UNRECOVERED INITIAL UNIT PRICE: At any time, with respect to a class or
series of Units (other than Junior Subordinated Units), the Initial Unit
Price, 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.
VISION: Vision Energy Resources, Inc., a Delaware corporation.
A-7
<PAGE>
APPENDIX B
No transfer of the Subordinated Units evidenced hereby will be registered on
the books of the Partnership unless the Certificate evidencing the
Subordinated Units to be transferred is surrendered for registration or
transfer and an Application for Transfer of Subordinated 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 Subordinated 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 Subordinated
Units.
APPLICATION FOR TRANSFER OF SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Subordinated 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 Amended and
Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the
"Partnership"), as amended by Amendment No. 1 thereto and as further 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 identification 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 interestholder 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>
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE PARTNERSHIP OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL
TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Information Incorporated by Reference..................................... ii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 27
Distributions and Market for Common Units................................. 27
Cash Distribution Policy.................................................. 28
Selected Historical Consolidated Financial and Operating Data............. 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Business.................................................................. 43
Management................................................................ 51
Conflicts of Interest and Fiduciary Responsibilities...................... 53
Description of the Units.................................................. 58
The Partnership Agreement................................................. 60
Selling Unitholder and Units Available for Future Sale.................... 70
Tax Considerations........................................................ 72
Investment in the Partnership by Employee Benefit Plans................... 88
Underwriting.............................................................. 89
Validity of the Securities................................................ 90
Experts................................................................... 91
Glossary.................................................................. A-1
Transfer Application...................................................... B-1
</TABLE>
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9,000,000
Subordinated Units
Ferrellgas Partners, L.P.
[LOGO OF FERRELLGAS PARTNERS APPEARS HERE]
Representing
Limited Partner Interests
-------
PROSPECTUS
NOVEMBER , 1997
-------
Smith Barney Inc.
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
PaineWebber Incorporated
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $72,626.42
NASD Fee...................................................... 24,466.72
New York Stock Exchange Listing Fee........................... *
Accounting Fees and Expenses.................................. *
Legal Fees and Expenses....................................... *
Printing and Engraving Expenses............................... *
Blue Sky Qualification Fees and Expenses...................... *
Transfer Agent's Fee.......................................... *
Miscellaneous................................................. *
----------
Total....................................................... $ *
==========
</TABLE>
- --------
(1) The amounts set forth above, except for the SEC, NASD and New York Stock
Exchange fees, are in each case estimated.
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership Agreements of the Partnership and the Operating Partnership
provide that the Partnership or the Operating Partnership, as the case may be,
will indemnify (to the fullest extent permitted by applicable law) certain
persons from and against any and all losses, claims, damages, liabilities
(joint or several), expenses (including, without limitation, legal fees and
expenses), judgements, fines and amounts paid in settlement actually and
reasonably incurred by such Indemnitee in connection with any claim, demand,
action, suit or proceeding to which the Indemnitee is or was an actual or
threatened party and which relates to the Partnership Agreement or the
Operating Partnership Agreement or the property, business, affairs or
management of the Partnership or the Operating Partnership. This indemnity is
available only if the Indemnitee acted in good faith, in a manner in which
such Indemnitee 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. Indemnitees include the
General Partner, any Departing Partner, any affiliate of the General Partner
or any Departing Partner, any person who is or was a director, officer,
employee or agent of the General Partner or any Departing Partner or any
affiliate of either, or any person who is or was serving at the request of the
General Partner, any Departing Partner, or any such affiliate as a director,
officer, partner, trustee, employee or agent of another person. Expenses
subject to indemnity will be paid by the applicable partnership to the
Indemnitee in advance, subject to receipt of an undertaking by or on behalf of
the Indemnitee to repay such amount if it is ultimately determined by a court
of competent jurisdiction that the Indemnitee is not entitled to
indemnification. The Partnership will, to the extent commercially reasonable,
purchase and maintain insurance on behalf of the Indemnitees, whether or not
the Partnership would have the power to indemnify such Indemnitees against
liability under the applicable partnership agreement.
Reference is made to Section 9 of the Underwriting Agreement filed as
Exhibit 1.1 hereto.
II-1
<PAGE>
ITEM 16. EXHIBITS
(a) The following is a complete list of Exhibits filed or incorporated by
reference as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Agreement of Limited Partnership of the Partnership (incorporated
herein by reference to Exhibit 3.1 to the Partnership's
Registration Statement on Form S-1 (File No. 33-55185)).
*3.2 Form of Amended and Restated Agreement of Limited Partnership of
the Partnership.
4.1 Form of Certificate representing Subordinated Unit.
*5.1 Opinion of Andrews & Kurth L.L.P. as to the validity of the
securities being registered.
*8.1 Opinion of Andrews & Kurth L.L.P. as to certain federal income tax
matters.
23.1 Consent of Deloitte & Touche LLP.
*23.2 Consent of Andrews & Kurth L.L.P. (included in their opinions
filed as Exhibits 5.1 and 8.1).
*24.1 Powers of Attorney (included on signature page of the Registration
Statement).
</TABLE>
- --------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Act, may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions described in Item 15 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Ferrellgas Partners, L.P. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Liberty, Missouri on
the 19th day of November, 1997.
FERRELLGAS PARTNERS, L.P.
By: Ferrellgas, Inc., General Partner
By: /s/ Danley K. Sheldon
------------------------------------
Danley K. Sheldon
President, Chief Financial Officer
and Treasurer
Dated: November 19, 1997
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Danley K.
Sheldon and Kevin Kelly, and each of them, either of whom may act without the
joinder of the other, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments
(including post-effective amendments) to this Registration Statement or any
Registration Statement for the same offering that is to be effective upon
filing pursuant to 462(b) under the Securities Act, as amended, and to file
the same, with all exhibits thereto and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, and each
of them, or the substitute or substitutes of any or all of them, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James E. Ferrell Chairman of the Board, Chief November 19, 1997
______________________________________ Executive Officer and
James E. Ferrell Director of Ferrellgas, Inc.
(principal executive
officer)
/s/ Danley K. Sheldon President, Chief Financial November 19, 1997
________________________________________ Officer and Treasurer of
Danley K. Sheldon Ferrellgas, Inc. (principal
financial officer and
principal accounting
officer)
/s/ Daniel M. Lambert Director of Ferrellgas, Inc. November 19, 1997
________________________________________
Daniel M. Lambert
/s/ A. Andrew Levison Director of Ferrellgas, Inc. November 19, 1997
________________________________________
A. Andrew Levison
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Agreement of Limited Partnership of the Partnership (incorporated
herein by reference to Exhibit 3.1 to the Partnership's Registration
Statement on Form S-1 (File No. 33-55185)).
*3.2 Form of Amended and Restated Agreement of Limited Partnership of the
Partnership.
4.1 Form of Certificate representing Subordinated Unit.
*5.1 Opinion of Andrews & Kurth L.L.P. as to the validity of the securities
being registered.
*8.1 Opinion of Andrews & Kurth L.L.P. as to certain federal income tax
matters.
23.1 Consent of Deloitte & Touche LLP.
*23.2 Consent of Andrews & Kurth L.L.P. (included in their opinions filed as
Exhibits 5.1 and 8.1).
*24.1 Powers of Attorney (included on signature page of the Registration
Statement).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Ferrellgas Partners, L.P.
9,000,000 Subordinated Units
Representing Limited Partner Interests
UNDERWRITING AGREEMENT
November ___, 1997
Smith Barney Inc.
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
A.g. Edwards & Sons, Inc.
PaineWebber Incorporated
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Ferrellgas, Inc., a Delaware corporation ("Ferrellgas" or the "General
Partner"), a wholly owned subsidiary of Ferrell Companies, Inc., a Kansas
corporation ("Ferrell"), proposes to sell an aggregate of 9,000,000 subordinated
units (the "Initial Subordinated Units") representing limited partner interests
in Ferrellgas Partners, L.P., a Delaware limited partnership (the
"Partnership"), of which Ferrellgas is the general partner, to the several
Underwriters named in Schedule I hereto (the "Underwriters"). The General
Partner also proposes to sell to the Underwriters, upon the terms and conditions
set forth in Section 2 hereof, up to an additional 1,350,000 subordinated units
(the "Option Subordinated Units"). The Initial Subordinated Units and the
Option Subordinated Units are hereinafter collectively referred to as the
"Offered Subordinated Units."
The General Partner, the Partnership and Ferrell wish to confirm as follows
their respective agreements with you (the "Representatives") and the other
several Underwriters on whose behalf you are acting, in connection with the
several purchases of the Offered Subordinated Units by the Underwriters. The
General Partner, the Partnership and Ferrellgas, L.P., a Delaware limited
partnership (the "Operating Partnership") are sometimes collectively referred to
herein as the "Companies."
1. Registration Statement and Prospectus. The Partnership has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
<PAGE>
statement"), including a prospectus subject to completion relating to the
Offered Subordinated Units. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits) as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Offered Subordinated Units may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If an
abbreviated registration statement is prepared and filed with the Commission in
accordance with Rule 462(b) under the Act ("an Abbreviated Registration
Statement"), the term "Registration Statement" as used in this Agreement
includes the Abbreviated Registration Statement. The term "Prospectus" as used
in this Agreement means the prospectus in the form included in the Registration
Statement, or, if the prospectus included in the Registration Statement omits
information in reliance on Rule 430A under the Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b) under
the Act, the term "Prospectus" as used in this Agreement means the prospectus in
the form included in the Registration Statement as supplemented by the addition
of the Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in
this Agreement means the prospectus subject to completion in the form included
in the registration statement at the time of the initial filing of the
registration statement with the Commission, and as such prospectus shall have
been amended from time to time prior to the date of the Prospectus. Any
reference in this Agreement to the registration statement, the Registration
Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-3 under the Act, as of the date of the registration statement, the
Registration Statement, such Prepricing Prospectus or the Prospectus, as the
case may be, and any reference to any amendment or supplement to the
registration statement, the Registration Statement, any Prepricing Prospectus or
the Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated
Documents" means the documents which at the time are incorporated by reference
in the registration statement, the Registration Statement, any Prepricing
Prospectus, the Prospectus, or any amendment or supplement thereto.
2. Agreements to Sell and Purchase. Subject to such adjustments as you may
determine in order to avoid fractional units, the General Partner hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the General Partner and the Partnership herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the General Partner, at a
purchase price of $________ per Offered Subordinated Unit (the "Purchase Price
Per Unit"), the number of Offered Subordinated Units which bears the same
proportion to the aggregate number of Initial Subordinated Units to be sold by
the General Partner as the number of Initial Subordinated Units set forth
opposite the name of such Underwriter in Schedule I hereto (or such number of
Initial Subordinated Units increased
-2-
<PAGE>
as set forth in Section 11 hereof) bears to the aggregate number of Initial
Subordinated Units to be sold by the General Partner.
The General Partner also agrees, subject to all the terms and conditions
set forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the General Partner and the
Partnership herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from the General
Partner, at the Purchase Price Per Unit, pursuant to an option (the "over-
allotment option") which may be exercised at any time and from time to time
prior to 9:00 P.M., New York City time, on the 30th day after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of 1,350,000 Option Subordinated Units from the
General Partner. Option Subordinated Units may be purchased only for the
purpose of covering over-allotments made in connection with the offering of the
Initial Subordinated Units. Upon any exercise of the over-allotment option,
each Underwriter, severally and not jointly, agrees to purchase from the General
Partner the number of Option Subordinated Units (subject to such adjustments as
you may determine in order to avoid fractional units) which bears the same
proportion to the number of Option Subordinated Units to be sold by the General
Partner as the number of Initial Subordinated Units set forth opposite the name
of such Underwriter in Schedule I hereto (or such number of Initial Subordinated
Units increased as set forth in Section 11 hereof) bears to the aggregate number
of Initial Subordinated Units to be sold by the General Partner.
3. Terms of Public Offering. The General Partner has been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Offered Subordinated Units as soon after the Registration
Statement and this Agreement have become effective as in your judgment is
advisable and initially to offer the Offered Subordinated Units upon the terms
set forth in the Prospectus.
4. Delivery of the Subordinated Units and Payment Therefor. Delivery to the
Underwriters of and payment for the Offered Subordinated Units shall be made at
the office of [Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at
10:00 A.M., New York City time], on _______________, 1997 (the "Closing Date").
The place of closing for the Initial Subordinated Units and the Closing Date may
be varied by agreement among you, the General Partner and the Partnership.
Delivery to the Underwriters of and payment for any Option Subordinated
Units to be purchased by the Underwriters shall be made at the aforementioned
office of [Smith Barney Inc.] at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
General Partner of the Underwriters' determination to purchase a number,
specified in such notice, of Option Subordinated Units. The place of closing
for any Option Subordinated Units and the Option Closing Date for such Option
Subordinated Units may be varied by agreement among you, the General Partner and
the Partnership.
-3-
<PAGE>
Certificates for the Initial Subordinated Units and for any Option
Subordinated Units to be purchased hereunder shall be registered in such names
and in such denominations as you shall request prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date or any Option
Closing Date, as the case may be. Such certificates shall be made available to
you in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the
Initial Subordinated Units and any Option Subordinated Units to be purchased
hereunder shall be delivered to you on the Closing Date or the Option Closing
Date, as the case may be, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the General Partner, the Partnership and Ferrell. (A) The
General Partner and the Partnership agree with the several Underwriters as
follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Offered Subordinated Units
may commence, the Partnership will endeavor to cause the Registration Statement
or such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Partnership will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Offered
Subordinated Units for offering or sale in any jurisdiction or the initiation of
any proceeding for such purpose; and (iii) within the period of time referred to
in paragraph 5(f) below, of any change in the Companies' condition (financial or
other), business, prospects, properties, net worth or results of operations, or
of the happening of any event, which makes any statement of a material fact made
in the Registration Statement or the Prospectus (as then amended or
supplemented) untrue or which requires the making of any additions to or changes
in the Registration Statement or the Prospectus (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectus (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Partnership will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Partnership will furnish to you, without charge (i) six signed
copies of the registration statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits to
the registration statement, (ii) such number of conformed copies of the
registration statement as originally filed and of each amendment thereto, but
without exhibits, as you may request, (iii) such number of copies of the
Incorporated Documents, without exhibits, as you may request, and (iv) six
copies of the exhibits to the Incorporated Documents.
-4-
<PAGE>
(d) The Partnership will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus or, prior to the
end of the period of time referred to in the first sentence in subsection (f)
below, file any document that upon filing becomes an Incorporated Document, of
which you shall not previously have been advised or to which, after you shall
have received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the
Partnership has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Partnership
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Offered
Subordinated Units are offered by the several Underwriters and by dealers, prior
to the date of the Prospectus, of each Prepricing Prospectus so furnished by the
Partnership.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Partnership will
expeditiously deliver to each Underwriter and dealer, without charge, as many
copies of the Prospectus (and of any amendment or supplement thereto) as you may
request. The Partnership consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Offered Subordinated Units are offered by the several Underwriters and by all
dealers to whom Offered Subordinated Units may be sold, both in connection with
the offering and sale of the Offered Subordinated Units and for such period of
time thereafter as the Prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer. If during such period of
time any event shall occur that in the judgment of the General Partner or the
Partnership or in the opinion of counsel for the Underwriters is required to be
set forth in the Prospectus (as then amended or supplemented) or should be set
forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus (or to file under the Exchange Act any
document that upon filing becomes an Incorporated Document) in order to comply
with the Act or any other law, the Partnership will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto (or to such document), and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Partnership and you, as Representatives of
the several Underwriters, agree that the Prospectus should be amended or
supplemented, the Partnership, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Partnership will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Offered
Subordinated Units for offering and sale by the several Underwriters and by
dealers under the securities or Blue Sky laws of such jurisdictions as you may
designate and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or qualification;
provided that in no event shall the Partnership be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to service of process in suits,
-5-
<PAGE>
other than those arising out of the offering or sale of the Offered Subordinated
Units, in any jurisdiction where it is not now so subject.
(h) The Partnership will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Partnership will
furnish to you (i) as soon as available, a copy of each report of the
Partnership mailed to holders of the Subordinated Units of limited partner
interests in the Partnership ("Subordinated Units") or filed with the
Commission, and (ii) from time to time such other information concerning the
Partnership as you may request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating this
Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the General Partner and the Partnership to comply with the terms or
fulfill any of the conditions of this Agreement, the General Partner and the
Partnership, jointly and severally, agree to reimburse the Representatives for
all out-of-pocket expenses (including fees and expenses of counsel for the
Underwriters) incurred by you in connection herewith.
(k) If Rule 430A of the Act is employed, the Partnership will timely
file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(l) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, the General Partner and the Partnership have not taken, nor will
they take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Subordinated Units or the common units of limited partner
interest of the Partnership (the "Common Units") to facilitate the sale or
resale of the Offered Subordinated Units. The Common Units, the Subordinated
Units and the Junior Subordinated Units (as defined below) are sometimes herein
collectively referred to as the "Units."
(m) For a period of 90 days from the date of the Prospectus, the General
Partner and the Partnership will not, without the prior written consent of Smith
Barney Inc., sell, contract to sell or otherwise dispose of, except as provided
hereunder and except for any Units which may be issued in connection with
acquisitions by the Partnership, any Units or any securities substantially
similar to, convertible into or exercisable or exchangeable for Units or grant
any options or warrants to purchase any Units.
-6-
<PAGE>
(n) The General Partner and the Partnership will use their best efforts
to have the Offered Subordinated Units listed, subject to notice of issuance, on
the New York Stock Exchange on or before the Closing Date.
(B) Ferrell agrees with the several Underwriters as follows:
(a) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, Ferrell has not taken, nor will it take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Subordinated Units or the
Common Units to facilitate the sale or resale of the Offered Subordinated Units.
(b) For a period of 90 days from the date of the Prospectus, Ferrell
will not, without the prior written consent of Smith Barney Inc., sell, contract
to sell or otherwise dispose of, except as provided hereunder, any Units or any
securities substantially similar to, convertible into or exercisable or
exchangeable for the Units or grant any options or warrants to purchase Units,
except (i) 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, (ii) in
connection with the sale of the Partnership or substantially all of its assets,
(iii) as collateral in connection with good faith borrowing, (iv) gifts of up to
20% of such Units to charitable organizations or (v) in the event of the death
or permanent disability of James E. Ferrell, provided, however, that in the case
of (i) above the transferee shall enter into an agreement with you agreeing to
comply with the above restrictions for the remainder of the 90-day period.
6. Representations and Warranties of the General Partner and the
Partnership. The General Partner and the Partnership represent and warrant to
each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Partnership and the transactions contemplated by this Agreement
meet the requirements for using Form S-3 under the Act. The registration
statement in the form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto shall become
effective and the Prospectus and any supplement or amendment thereto when filed
with the Commission under Rule 424(b) under the Act, complied or will comply in
all material respects with the provisions of the Act and will not at any such
times contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except that this representation and warranty does not apply to
statements in or omissions from the registration statement or the prospectus
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Partnership in writing by or on behalf of any
Underwriter through you expressly for use therein.
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(c) The Incorporated Documents heretofore filed, when they were filed
(or, if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder; any further
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; and no such further document, when it is filed, will
contain an untrue statement of a material fact or will omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading.
(d) The capitalization of the Partnership is as set forth in the most
recent balance sheet of the Partnership incorporated by reference into the
Registration Statement and the Prospectus. All outstanding Subordinated Units
(including the Offered Subordinated Units), other Units and incentive
distribution rights ("Incentive Distribution Rights") of the Partnership have
been duly authorized and validly issued, are fully paid and nonassessable
(except as such non-assessability may be affected by matters described in the
Prospectus under the caption "Partnership Agreement--Limited Liability") and are
free of any preemptive or similar rights; the Junior Subordinated Units have
been duly authorized (including due authorization under the Partnership
Agreement (as defined below)) and, when issued and delivered to the General
Partner in exchange for Subordinated Units in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable (except as such non-
assessability may be affected by matters described in the Prospectus under the
caption "Partnership Agreement--Limited Liability") and free of any preemptive
or similar rights; and the Subordinated Units, the other Units and the Incentive
Distribution Rights conform to the respective descriptions thereof in the
Registration Statement and the Prospectus.
(e) The Partnership is a limited partnership duly organized and validly
existing under the laws of the State of Delaware, with full partnership power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business in each jurisdiction or
place where the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure so to register or
qualify does not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the
Partnership and the Operating Partnership, taken as a whole (the
"Partnerships").
(f) The Operating Partnership is a limited partnership duly organized
and validly existing under the laws of the State of Delaware, with full
partnership power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus. The Operating Partnership has been duly qualified or registered as a
foreign limited partnership for the transaction of business in every state
except Alaska, Delaware, Hawaii and New Hampshire, and there are no other
jurisdictions where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
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register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of the Partnerships.
(g) The General Partner has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its properties, to
conduct its business and to act as general partner of the Partnership and the
Operating Partnership, in each case as described in the Registration Statement
and the Prospectus. The General Partner has been duly qualified or registered as
a foreign corporation for the transaction of business, and is in good standing,
in every state except Alaska, Delaware, Hawaii and New Hampshire, and there are
no other jurisdictions where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Partnerships.
(h) All of the issued and outstanding shares of capital stock of the
General Partner have been duly authorized and validly issued and are fully paid
and non-assessable and are free of any preemptive or similar rights; and all of
the issued and outstanding shares of capital stock of the General Partner are
owned by Ferrell, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance.
(i) The General Partner is the sole general partner of the Partnership
with a general partner interest in the Partnership of 1%; such general partner
interest is duly authorized by the Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"), and was validly issued to the General
Partner and is fully paid; and the General Partner owns such general partner
interest free and clear of any lien, adverse claim, security interest, equity or
other encumbrance.
(j) The General Partner is the sole general partner of the Operating
Partnership with a general partner interest in the Operating Partnership of
1.0101%; such general partner interest is duly authorized by the Agreement of
Limited Partnership of the Operating Partnership, as amended to date (the
"Operating Partnership Agreement"), by and between the General Partner and the
Partnership, and was validly issued to the General Partner and is fully paid;
and the General Partner owns such general partner interest free and clear of any
lien, adverse claim, security interest, equity or other encumbrance.
(k) The Partnership is the sole limited partner of the Operating
Partnership, with a limited partner interest in the Operating Partnership of
98.9899%; such limited partner interest is authorized by the Operating
Partnership Agreement, has been validly issued and is fully paid and non-
assessable (except as such non-assessability may be affected by matters
described in the Prospectus under the caption "The Partnership Agreement--
Limited Liability"); and the Partnership owns such limited partner interest in
the Operating Partnership free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance.
(l) The Partnership Agreement has been duly authorized, executed and
delivered by the General Partner and is a valid and legally binding agreement of
the General Partner,
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enforceable against the General Partner in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equitable principles; and the Operating Partnership Agreement has been duly
authorized, executed and delivered by the General Partner and the Partnership
and is a valid and legally binding agreement of the General Partner and the
Partnership, enforceable against the General Partner and the Partnership in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors, rights and to general equitable principles.
(m) Upon consummation of the Transactions and the sale of the Initial
Subordinated Units, the General Partner will own a limited partner interest in
the Partnership represented by 1,210,612 Common Units, no Subordinated Units and
7,593,721 Junior Subordinated Units; such Units (other than the Junior
Subordinated Units) are, and upon consummation of the Transactions such Junior
Subordinated Units will be, duly authorized by the Partnership Agreement,
validly issued, fully paid and non-assessable (except as such non-assessability
may be affected by matters described in the Prospectus under the caption "The
Partnership Agreement--Limited Liability") and owned by the General Partner free
and clear of a liens, encumbrances, charges or claims.
(n) Other than as set forth in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending to which the Companies are a
party, or of which any of their respective properties is the subject, which are
required to be disclosed in the Prospectus and are not so disclosed, which, if
determined adversely to such person, would individually or in the aggregate have
a material adverse effect upon the properties, business, general affairs,
management condition (financial or otherwise), financial position, security
holders' equity, results of operations or prospects of either the Companies,
taken as a whole, or which could reasonably be expected to materially and
adversely affect the consummation of this Agreement or the Transactions, and, to
the best of the knowledge of the Companies, no such actions, suits or
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(o) None of the Companies is in: (i) breach or violation of the
provisions of its partnership agreements or of its charter or bylaws, as the
case may be; or (ii) default (and no event has occurred which, with notice or
lapse of time or both, would constitute such a default) in the due performance
or observance of any term, covenant or condition contained in any bond, note,
debenture or other evidence of indebtedness or any indenture, mortgage, deed of
trust, loan agreement, contract, lease or other agreement or instrument to which
it is a party or by which its is bound or to which any of its properties or
assets is subject or violation of any statute, rule or regulation or
administrative or court decree applicable to it or any of its properties, which
default or violation, individually or in the aggregate, could have a material
adverse effect upon the holders of the Subordinated Units or the properties,
business, general affairs, management, prospects, condition (financial or
otherwise), financial position, security holders' equity or results of
operations of any of the Partnership and the Operating Partnership, taken as a
whole, or the General Partner.
(p) Neither the sale of the Offered Subordinated Units, the execution,
delivery or performance of this Agreement by the General Partner and the
Partnership nor the consummation
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by the General Partner and the Partnership of the Transactions (i) requires any
consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration of
the Offered Subordinated Units under the Act and the Exchange Act and compliance
with the securities or Blue Sky laws of various jurisdictions, all of which have
been or will be effected in accordance with this Agreement) or conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
the partnership agreement, the certificate of incorporation or bylaws of any of
the Companies or (ii) conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, any material agreement, indenture,
lease or other instrument to which any of the Companies are a party or by which
any of them or any of their respective properties may be bound, or violates or
will violate any statute, law, regulation or filing or judgment, injunction,
order or decree applicable to any of the Companies or any of their respective
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of any of the Companies pursuant to the
terms of any agreement or instrument to which any of them is a party or by which
any of them may be bound or to which any of the property or assets of any of
them is subject.
(q) The accountants, Deloitte & Touche LLP, who have certified or shall
certify the financial statements incorporated by reference in the Registration
Statement and the Prospectus (or any amendment or supplement thereto) are
independent public accountants as required by the Act.
(r) The historical financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in financial
position of the Partnership on the basis stated in the Registration Statement at
the respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Partnership.
(s) The execution and delivery of, and the performance by the General
Partner and the Partnership of their obligations under, this Agreement have been
duly and validly authorized by the General Partner and the Partnership, and this
Agreement has been duly executed and delivered by the General Partner and the
Partnership and constitutes the valid and legally binding agreement of the
General Partner and the Partnership, enforceable against the General Partner and
the Partnership in accordance with its terms, except (i) as rights to indemnity
and contribution hereunder may be limited by federal or state securities laws
and (ii) as enforcement generally may be subject to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles.
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(t) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), subsequent to the respective dates as
of which such information is given in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), none of the Companies has
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Companies, and there has not been any change in the capital stock, or material
increase in the short-term debt or long-term debt, of the Partnerships, or any
material adverse change, or any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), business, net worth or results of operations of the
Partnerships.
(u) Each of the Partnerships has good and marketable title to all
property (real and personal) described in the Prospectus as being owned by it,
free and clear of all liens, claims, security interests or other encumbrances
except such as are described in the Registration Statement or except as do not
materially interfere with the ownership or benefits of ownership of such
property, taken as a whole, and all the property described in the Prospectus as
being held under lease by each of the Partnerships is held by it under valid,
subsisting and enforceable leases.
(v) The General Partner and the Partnership have not distributed and,
prior to the later to occur of (i) the Closing Date and (ii) completion of the
distribution of the Offered Subordinated Units, will not distribute any offering
material in connection with the offering and sale of the Offered Subordinated
Units other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act.
(w) The Companies have such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own their respective properties and to conduct their business in
the manner described in the Prospectus, subject to such qualifications as may be
set forth in the Prospectus, except such consents, approvals, authorizations,
orders, registrations or qualifications which, if not obtained, would not,
individually or in the aggregate, have a material adverse effect upon the
properties, business, general affairs, management, condition (financial or
otherwise), financial position, security holders' equity, results of operations
or prospects of the Partnerships, or upon the holders of Subordinated Units; the
Companies have fulfilled and performed all their material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus, except such consents, approvals, authorizations, orders,
registrations or qualifications which, if not obtained, would not, individually
or in the aggregate, have a material adverse effect upon the properties,
business, general affairs, management, condition (financial or otherwise),
financial position, security holders' equity, results of operations or prospects
of the Partnerships, or upon the holders of Subordinated Units; and, except as
described in the Prospectus, none of such permits contains any restriction that
is materially burdensome to the Companies.
(x) The General Partner and the Partnership maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as
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necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(y) The Companies have filed all tax returns required to be filed, which
returns are complete and correct, and none of the Companies is in default in the
payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto.
(z) No person other than the General Partner has any right to require
registration of any Units of limited partner interests of the Partnership
because of the filing of the Registration Statement, the sale of the Offered
Subordinated Units or consummation of the Transactions contemplated by this
Agreement.
(aa) Neither of the Partnerships nor any person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with the Partnership does or conducts business in or with
the government of Cuba or with any person or affiliate located in Cuba. If prior
to the completion of the distribution of the Offered Subordinated Units, the
Partnership commences engaging in business in or with the government of Cuba or
with any person or affiliate located in Cuba, the Partnership will comply with
all the provisions of Florida Statutes, Section 517.075, relating to issuers
doing business with Cuba.
(bb) None of the Companies is, or as of the Closing Date will be, an
"investment company" as that term is defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"), or subject to regulation under
the Investment Company Act.
(cc) None of the Companies is a "public utility company" or a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," as such
terms are defined in the Public Utility Company Act of 1935, as amended; none of
the Companies is subject to regulation under the Public Utility Holding Company
Act of 1935, as amended.
7. Additional Representations and Warranties of the General Partner. The
General Partner represents and warrants to each Underwriter that:
(a) The General Partner now has, and on the Closing Date and any Option
Closing Date will have, valid and marketable title to the Offered Subordinated
Units, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer.
(b) The General Partner now has, and on the Closing Date and any Option
Closing Date will have, full legal right, power and authorization, and any
approval required by law, to sell, assign transfer and deliver the Offered
Subordinated Units in the manner provided in this Agreement, and upon delivery
of and payment for such Offered Subordinated Units hereunder, the several
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Underwriters will acquire valid and marketable title to such Offered
Subordinated Units free and clear of any lien, claim, security interest, or
other encumbrance.
(c) The General Partner has not taken, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of any class of the Units to
facilitate the sale or resale of the Offered Subordinated Units, except for the
lock-up arrangements described in the Prospectus.
8. Representations and Warranties of Ferrell. Ferrell represents and
warrants to, and agrees with, each of the Underwriters that:
(a) Ferrell directly owns the Incentive Distribution Rights; such
Incentive Distribution Rights are duly authorized by the Partnership Agreement
and are validly issued, fully paid and non-assessable (except as such non-
assessability may be affected by matters described in the Prospectus under the
caption "The Partnership Agreement--Limited Liability"); and Ferrell owns such
Incentive Distribution Rights free and clear of all liens, encumbrances, charges
or claims.
(b) This Agreement has been duly authorized, executed and delivered by
Ferrell;
(c) The sale of the Offered Subordinated Units by the General Partner,
and the execution, delivery and performance by the Partnership, the General
Partner and Ferrell, as the case may be, of this Agreement and the consummation
by the Partnership, the General Partner and Ferrell, as the case may be, of the
Transactions will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default or cause an acceleration of
any obligation under, or result in the imposition or creation of (or the
obligation to create or impose) a Lien with respect to, any material bond, note,
debenture or other evidence of indebtedness or any material indenture, mortgage,
deed of trust, loan agreement, contract, lease or other agreement or instrument
to which Ferrell is a party or by which Ferrell is bound or to which any of its
properties or assets is subject, nor will such action result in any breach or
violation of the provisions of the charter or bylaws of Ferrell, or contravene
any order of any court or governmental agency or body having jurisdiction over
Ferrell or any of its properties, or violate or conflict with any statute, rule
or regulation or administrative or court decree applicable to Ferrell or any of
its properties; and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the performance by Ferrell of its obligations under this Agreement.
(d) Ferrell has not taken, directly or indirectly, any action designed
to or that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Units to facilitate the sale or resale of the
Offered Subordinated Units, except for the lock-up arrangements described in the
Prospectus.
9. Indemnification and Contribution. (a) The General Partner and the
Partnership, jointly and severally, agree to indemnify and hold harmless each of
you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue
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statement or alleged untrue statement of a material fact contained in any
Prepricing Prospectus or in the Registration Statement or the Prospectus or in
any amendment or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the General Partner and the Partnership by
or on behalf of any Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Offered Subordinated Units by such Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the Act and the regulations thereunder,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the General Partner and the
Partnership has delivered the Prospectus to the several Underwriters in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
General Partner and the Partnership may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the General Partner and the Partnership, such
Underwriter or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the indemnifying parties have agreed in
writing to pay such fees and expenses, (ii) the indemnifying parties have failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the indemnifying parties and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and any indemnifying party by the
same counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them (in which
case the indemnifying party shall not have the right to assume the defense of
such action, suit or proceeding on behalf of such Underwriter or such
controlling person). It is understood, however, that the indemnifying parties
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by Smith Barney Inc., and
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that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, which consent shall
not be unreasonably withheld, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the General Partner, the Partnership, the General Partner's
directors and officers who sign the Registration Statement and any person who
controls the General Partner and the Partnership within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the General Partner and the Partnership to each
Underwriter, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through you expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the General Partner, the Partnership, any of
the General Partner directors, any such officer or any such controlling person
based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the General Partner
and the Partnership by paragraph (b) above (except that if the General Partner
and the Partnership shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the General Partner, the
Partnership, the General Partner's directors, any such officer and any such
controlling person shall have the rights and duties given to the Underwriters by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 9 is unavailable
to an indemnified party under paragraph (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the General
Partner and the Partnership on the one hand and the Underwriters on the other
hand from the offering of the Offered Subordinated Units, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the General
Partner and the Partnership on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the General Partner
and the Partnership on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the General Partner and the Partnership
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in
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the table on the cover page of the Prospectus; provided that, in the event that
the Underwriters shall have purchased any Option Subordinated Units hereunder,
any determination of the relative benefits received by the General Partner and
the Partnership, on the one hand, or the Underwriters, on the other hand, from
the offering of the Offered Subordinated Units shall include the net proceeds
(before deducting expenses) received by the General Partner and the Partnership,
and the underwriting discounts and commissions received by the Underwriters,
from the sale of such Option Subordinated Units, in each case computed on the
basis of the respective amounts set forth in the notes to the table on the cover
page of the Prospectus. The relative fault of the General Partner and the
Partnership on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the General Partner and the
Partnership on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The General Partner and the Partnership and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
9 were determined by a pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
paragraph (d) above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (d) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Subordinated Units underwritten by it and
distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to the respective numbers
of Initial Subordinated Units set forth opposite their names in Schedule I
hereto (or such numbers of Initial Subordinated Units increased as set forth in
Section 12 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
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representations and warranties of the General Partner and the Partnership set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the General Partner, the Partnership,
the General Partner's directors or officers or any person controlling the
General Partner and the Partnership, (ii) acceptance of any Offered Subordinated
Units and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the General Partner, the Partnership, the General Partner's
directors or officers or any person controlling the General Partner, the
Partnership, shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 9.
10. Conditions of Underwriters' Obligations. The several obligations of the
Underwriters to purchase the Firm Units hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Offered Subordinated Units
may commence, the Registration Statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the date
hereof, or at such later date and time as shall be consented to in writing by
you, and all filings, if any, required by Rules 424 and 430A under the Act shall
have been timely made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been instituted or, to the knowledge of the General Partner and the
Partnership or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the registration
statement or the prospectus or otherwise) shall have been complied with to your
satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, properties, net
worth, or results of operations of the Partnerships not contemplated by the
Prospectus, which in your opinion, as Representatives of the several
Underwriters, would materially adversely affect the market for the Offered
Subordinated Units, or (ii) any event or development relating to or involving
the General Partner and the Partnership or any officer or director of the
General Partner which makes any statement made in the Prospectus untrue or
which, in the opinion of the General Partner and the Partnership and their
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Offered Subordinated Units.
(c) You shall have received on the Closing Date, an opinion of Andrews &
Kurth, L.L.P., counsel for the General Partner and the Partnership, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
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(i) The Partnership is a limited partnership duly organized and
validly existing under the laws of the State of Delaware, with full partnership
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus.
(ii) The Operating Partnership is a limited partnership duly
organized and validly existing under the laws of the State of Delaware, with
full partnership power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus.
(iii) The General Partner is the sole general partner of the
Partnership with a general partner interest in the Partnership of 1%; such
general partner interest is duly authorized by the Partnership Agreement and was
validly issued to the General Partner and is fully paid; and the General Partner
owns such general partner interest free and clear of any lien, adverse claim,
security interest, equity, or other encumbrance.
(iv) The General Partner is the sole general partner of the
Operating Partnership with a general partner interest in the Operating
Partnership of 1.0101%; such general partner interest is duly authorized by the
Operating Partnership Agreement and was validly issued to the General Partner
and is fully paid; and the General Partner owns such general partner interest
free and clear of any lien, adverse claim, security interest, equity, or other
encumbrance.
(v) The Partnership is the sole limited partner of the Operating
Partnership, with a limited partner interest in the Operating Partnership of
98.9899%; such limited partner interest is authorized by the Operating
Partnership Agreement, has been validly issued and is fully paid and non-
assessable (except as such non-assessability may be affected by matters
described in the Prospectus under the caption "The Partnership Agreement--
Limited Liability"); and the Partnership owns such limited partner interest in
the Operating Partnership free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance.
(vi) The Partnership Agreement Amendments have been duly and
validly approved by the General Partner, and no approval of the limited partners
of the Partnership is required for their adoption; the Partnership Agreement,
including the Partnership Agreement Amendments, has been duly authorized,
executed and delivered by the General Partner and is a valid and legally binding
agreement of the General Partner, enforceable against the General Partner in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equitable principles; and the
Operating Partnership Agreement has been duly authorized, executed and delivered
by the General Partner and the Partnership and is a valid and legally binding
agreement of the General Partner and the Partnership, enforceable against the
General Partner and the Partnership in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors, rights and to general
equitable principles.
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(vii) The number of authorized and outstanding Units of each
class are set forth in the most recent balance sheet of the Partnership
incorporated by reference into the Prospectus, and the Units of each class of
the Partnership conform in all material respects as to legal matters to the
descriptions thereof contained in the Prospectus;
(viii) All Units of the Partnership outstanding at or issued on
the date hereof, including without limitation the Offered Subordinated Units and
the Junior Subordinated Units, have been duly authorized and validly issued and
are fully paid and nonassessable (except as such non-assessability may be
affected by matters described in the Prospectus under the caption "Partnership
Agreement--Limited Liability");
(ix) The form of certificates for the Subordinated Units
conforms to the requirements of the Delaware Revised Limited Partnership Act;
(x) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the best
knowledge of such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(xi) Neither the offer, sale or delivery of the Offered
Subordinated Units, the execution, delivery or performance of this Agreement,
compliance by the Partnership with the provisions hereof nor consummation by the
Partnership of the Transactions contemplated hereby conflicts, or will conflict
with, or constitutes, or will constitute, a breach of, or a default under, the
Partnership Agreement;
(xii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Partnership (except as have been obtained under the Act and the Exchange Act or
such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Offered Subordinated Units) for the sale of the
Offered Subordinated Units to the Underwriters as contemplated by this
Agreement;
(xiii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and the
notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act; and each
of the Incorporated Documents (except for the financial statements and the notes
thereto and the schedules and other financial and statistical data included
therein, as to which counsel need not express any opinion) complies as to form
in all material respects with the Exchange Act and the rules and regulations of
the Commission thereunder;
(xiv) The statements in the Registration Statement and the
Prospectus under the captions "Prospectus Summary - The Partnership,"
"Prospectus Summary - Risk Factors -
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Conflicts of Interest and Fiduciary Responsibilities," "Prospectus Summary - The
Offering," "Risk Factors - Conflicts of Interest and Fiduciary
Responsibilities," "Cash Distribution Policy," "Conflicts of Interest and
Fiduciary Responsibilities," "Description of the Subordinated Units," "The
Partnership Agreement," "Selling Unitholder and Units Eligible for Future Sale"
and "Underwriting" and in the Registration Statement in Item 14, in each case
insofar as such statements constitute descriptions of this Agreement and the
Partnership Agreements or summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for with
respect to this Agreement and such Partnership Agreements, legal matters,
documents and proceedings and fairly summarize the matters referred to therein.
(xv) The opinion of Andrews & Kurth L.L.P. that is filed as
Exhibit 8 to the Registration Statement is confirmed and the Underwriters may
rely upon such opinion as if it were addressed to them.
(xvi) Such counsel shall have participated in conferences with
officers and other representatives of the Companies, counsel for the Companies,
representatives of the independent accountants of the Companies and
Underwriters' representatives, at which the contents of the Registration
Statement and the Prospectus and related matters were discussed. Although they
shall not pass upon, and shall not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained or incorporated by
reference in the Registration Statement and the Prospectus (except for the
statements contained in the second clause of paragraph (vii) and paragraph (xv)
of their opinion, upon which they shall pass), they shall advise you that, on
the basis of the foregoing (relying as to materiality to a large extent upon
officers and other representatives of the Companies and upon Underwriters'
representatives), no facts have come to their attention which lead them to
believe that the Registration Statement (other than (i) the financial statements
and related schedules included or incorporated by reference therein, including
the notes thereto and the auditors' reports thereon, (ii) the other financial
information included or incorporated by reference therein and (iii) the exhibits
thereto, as to which such counsel has not been asked to comment), as of its
effective date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (other than (i) the
financial statements included or incorporated by reference therein, including
the notes thereto and the auditors' reports thereon, and (ii) the other
financial information included or incorporated by reference therein, as to which
such counsel has not been asked to comment), as of its issue date, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may (A) rely in respect of matters
of fact upon certificates of the Partnerships and of officers and employees of
the General Partner and upon information obtained from public officials and upon
other counsel issued in connection with the sale of the Offered Subordinated
Units and Transactions, and may assume that all documents examined by such
counsel are genuine, (B) state that their opinion is limited to federal laws,
the Delaware Revised Limited Partnership Act, the Delaware General Corporation
Law and the laws of the State of Texas and Missouri, (C) state that they express
no opinion with respect to the title of any of the Companies to any real or
personal property transferred by or to them, (D) state that they express no
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opinion with respect to state or local taxes or tax statutes to which any of the
limited partners of the Partnership or the Companies may be subject and (E)
state that their opinion is furnished as special counsel for the Companies to
you, and is solely for your benefit.
(d) You shall have received on the Closing Date, an opinion of Bryan
Cave, corporate counsel for the General Partner and the Partnership, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) The Companies have full corporate power and authority or
partnership power and authority, as the case may be, and all necessary
governmental authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental regulatory officials and
bodies (except where the failure so to have any such authorizations, approvals,
orders, licenses, certificates, franchises or permits, individually or in the
aggregate, would not have a material adverse effect on the business, properties,
operations or financial condition of the Companies), to own their respective
properties and to conduct their respective businesses as now being conducted, as
described in the Prospectus;
(ii) The General Partner has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own, lease and operate its
properties, to conduct its business and to act as general partner of the
Partnership and the Operating Partnership, in each case as described in the
Registration Statement and the Prospectus. The General Partner has been duly
qualified or registered as a foreign corporation for the transaction of
business, and is in good standing, in every state except Alaska, Delaware,
Hawaii and New Hampshire, and there are no other jurisdictions where the nature
of its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Partnerships.
(iii) All of the issued and outstanding shares of capital stock
of the General Partner have been duly authorized and validly issued and are
fully paid and non-assessable and are free of any preemptive or similar rights;
and all of the issued and outstanding shares of capital stock of the General
Partner are owned by Ferrell, free and clear of any lien, adverse claim,
security interest, equity, or other encumbrance;
(iv) The Partnership is duly registered and qualified to conduct
its business in each jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material adverse
effect on the condition (financial or other), business, properties, net worth or
results of operations of the Partnerships;
(v) The Operating Partnership has been duly qualified or
registered as a foreign limited partnership for the transaction of business, and
is in good standing, in every state except Alaska, Delaware, Hawaii and New
Hampshire, and there are no other jurisdictions where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the
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condition (financial or other), business, properties, net worth or results of
operations of the Partnerships;
(vi) Ferrell has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Kansas, with
full corporate power and authority to own, lease and operate its properties, and
conduct its businesses; and Ferrell has full corporate power and authority to
execute, deliver and perform this Agreement;
(vii) This Agreement has been duly authorized, executed and
delivered by Ferrell and is a valid, legal and binding agreement of Ferrell,
enforceable against Ferrell in accordance with its terms, except as enforcement
of rights to indemnity and contribution hereunder may be limited by Federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of Ferrell's obligations hereunder may be
limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights generally
and by general equitable principles;
(viii) Neither the offer, sale or delivery of the Offered
Subordinated Units, the execution, delivery or performance of this Agreement,
compliance by the General Partner with the provisions hereof nor consummation by
the General Partner of the Transactions contemplated hereby conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
the certificate of incorporation or bylaws of the General Partner;
(ix) Neither the offer, sale or delivery of the Subordinated
Units, the execution, delivery or performance of this Agreement, compliance by
the General Partner and the Partnership with the provisions hereof nor
consummation by the General Partner and the Partnership of the Transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, any agreement, indenture, lease or
other instrument to which the General Partner or the Partnership is a party or
by which either of them or any of their respective properties is bound that is
an exhibit to the Registration Statement or to any Incorporated Document, or is
known to such counsel after reasonable inquiry, or will result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Companies, nor will any such action result in any violation of any existing
law, regulation, ruling (assuming compliance with all applicable state
securities and Blue Sky laws), judgment, injunction, order or decree known to
such counsel after reasonable inquiry, applicable to the Companies or any of
their respective properties;
(x) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
General Partner (except as have been obtained under the Act and the Exchange Act
or such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Offered Subordinated Units) for the sale of the
Offered Subordinated Units to the Underwriters as contemplated by this
Agreement;
(xi) The sale of the Offered Subordinated Units by the General
Partner and the execution, delivery and performance by the General Partner, the
Partnership and Ferrell of this
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Agreement and the consummation by the General Partner, the Partnership and
Ferrell of the Transactions will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default or cause an acceleration
of any obligation under, or result in the imposition or creation of (or the
obligation to create or impose) a lien with respect to, any bond, note,
debenture or other evidence of indebtedness or any indenture, mortgage, deed of
trust, loan agreement, contract, lease or other agreement or instrument relating
to indebtedness for borrowed money known to such counsel to which the Companies
or Ferrell is a party or by which the Companies or Ferrell is bound or to which
any of the property or assets of the Companies or Ferrell is subject, excluding
in each case any conflict, breach, default or acceleration which, individually
or in the aggregate, would not have a material adverse effect upon the holders
of the Subordinated Units or on the properties, business, general affairs,
management, prospects, condition (financial or otherwise), financial position,
security holders' equity or results of operations of the Partnerships, the
General Partner or Ferrell; or violate the provisions of the charter or bylaws
of the General Partner or Ferrell; nor will the sale of the Offered Subordinated
Units by the General Partner, and the execution and delivery by the Partnership,
the General Partner and Ferrell, as the case may be, of this Agreement or the
Partnership Agreement Amendments violate the Delaware General Corporation Law,
Delaware Revised Limited Partnership Act or any federal law of the United States
or law of the State of Missouri or any rules or regulations adopted by a
governmental agency thereof applicable to the Companies or Ferrell, excluding in
each case any violation which, individually or in the aggregate, would not have
a material adverse effect upon the holders of the Subordinated Units or on the
properties, business, general affairs, management, prospects, condition
(financial or otherwise), financial position, security holders' equity or
results of operations of the Partnerships, the General Partner or Ferrell;
(xii) To the best knowledge of such counsel after reasonable
inquiry, there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement or any Incorporated Document that are not
described or filed as required;
(xiii) The General Partner has corporate power and authority and
to sell and deliver the Offered Subordinated Units to be sold to the
Underwriters as provided herein, the Partnership has partnership power and
authority to enter into this Agreement and this Agreement has been duly
authorized, executed and delivered by the General Partner and the Partnership
and is a valid, legal and binding agreement of the General Partner and the
Partnership, enforceable against the General Partner and the Partnership in
accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by Federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the General Partner and the Partnership's obligations
hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and by general equitable principles;
(xiv) Neither the General Partner nor either of the Partnerships
is in violation of its certificate of incorporation or bylaws or Partnership
Agreement;
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(xv) To the best knowledge of such counsel after reasonable
inquiry, other than as described or contemplated in the Prospectus (or any
supplement thereto), there are no legal or governmental proceedings pending or
threatened against any of the Companies, or to which any of them or any of their
property is subject, which are required to be described in the Registration
Statement or Prospectus (or any amendment or supplement thereto);
(xvi) To the best knowledge of such counsel after reasonable
inquiry, none of the Companies is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Companies or
of any decree of any court or governmental agency or body having jurisdiction
over the Companies;
(xvii) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, and
such counsel does not know of any commitment, plan or arrangement to issue, any
Units of or other interests in the Partnership or any security convertible into
or exchangeable or exercisable for Units of or other interests in the
Partnership; and
(xviii) Except as described in the Prospectus, there is no
holder of any security of the Partnership or any other person who has the right,
contractual or otherwise, to cause the Partnership to sell or otherwise issue to
them, or to permit them to underwrite the sale of, the Offered Subordinated
Units or the right to have any Units or other securities of the Partnership
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
Units or other securities of the Partnership.
(xix) Upon delivery of the Offered Subordinated Units pursuant
to this Agreement and payment therefor as contemplated herein, the Underwriters
will acquire good and marketable title to the Offered Subordinated Units free
and clear of any lien, claim, security interest, or other encumbrance,
restriction on transfer or other defect in title.
(xx) Except as described in the Prospectus and except as
provided in Section 5.2(e) of the Partnership Agreement, there are no preemptive
rights or other rights to subscribe for or to purchase, nor any restriction upon
the voting or transfer of, any limited partner interests pursuant to either of
the Partnership Agreements.
(xxi) The Offered Subordinated Units have been approved for
listing on the New York Stock Exchange, subject only to official notice of
issuance.
Additionally, such counsel shall state that they have participated in
conferences with officers and other representatives of the Companies, counsel
for the Companies, representatives of the independent accountants of the
Companies and Underwriters' representatives, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed.
Although they shall not pass upon, and shall not assume any responsibility for,
the accuracy, completeness or fairness of the statements contained or
incorporated by reference in the Registration Statement and the Prospectus, they
shall advise you that, on the basis of the foregoing (relying as to materiality
to a large extent upon officers and other representatives of the Companies and
upon Underwriters'
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representatives), no facts have come to their attention which lead them to
believe that the Registration Statement (other than (i) the financial statements
and related schedules included or incorporated by reference therein, including
the notes thereto and the auditors' reports thereon, (ii) the other financial
and statistical information included or incorporated by reference therein and
(iii) the exhibits thereto, as to which we have not been asked to comment), as
of the date of the Transactions, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
(other than (i) the financial statements included or incorporated by reference
therein, including the notes thereto and the auditors' reports thereon, and (ii)
the other financial and statistical information included or incorporated by
reference therein, as to which we have not been asked to comment), as of its
issue date and as of the date hereof, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(e) You shall have received on the Closing Date an opinion of Baker &
Botts, L.L.P., counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with respect
to the matters referred to in clauses (viii), (x), (xiii) and (xvi) of the
foregoing paragraph (c) and clause (xiii) of the foregoing paragraph (d) and
such other related matters as you may request.
(f) On or before the first Closing Date, the Partnership Agreement shall
have been amended to create junior subordinated units (the "Junior Subordinated
Units") representing limited partner interests in the Partnership; and such
amendments to the Partnership Agreement (the "Partnership Agreement Amendments")
shall have been duly approved by all necessary partnership action and shall be
in full force and effect.
(g) On or before the first Closing Date, the Partnership issued
7,593,721 Junior Subordinated Units to the General Partner in exchange for an
identical number of Subordinated Units; such Junior Subordinated Units, when
issued and delivered to the General Partner upon such terms, will be validly
issued, fully paid and nonassessable (except as such nonassessability may be
affected by matters described in the Prospectus under the caption "Partnership
Agreement--Limited Liability") and free of any preemptive or similar rights.
(h) On or before the first Closing Date, the General Partner shall have
exchanged 7,593,721 Subordinated Units with the Partnership for an identical
number of Junior Subordinated Units, and shall own such Junior Subordinated
Units free and clear of any lien, adverse claim, security interest, equity or
other encumbrance. The offering and sale of the Subordinated Units and the
exchange of the Junior Subordinated Units are sometimes herein referred to as
the "Transactions."
(i) You shall have received letters addressed to you, as Representatives
of the several Underwriters, and dated the date hereof and the Closing Date from
Deloitte & Touche LLP, independent certified public accountants, substantially
in the forms heretofore approved by you.
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(j) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Partnerships, shall be contemplated by
the Commission at or prior to the Closing Date; (ii) there shall not have been
any change in the partnership interests of the Partnerships nor any material
increase in the short-term or long-term debt of the Partnerships (other than in
the ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Partnerships;
(iv) the Partnerships shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Partnerships other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the General Partner, the Partnership
and Ferrell contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
General Partner and Ferrell (or such other officers as are acceptable to you),
to the effect set forth in this Section 10(j) and in Section 10(k) hereof.
(k) None of the General Partner, the Partnership and Ferrell shall have
failed at or prior to the Closing Date to have performed or complied with any of
its agreements herein contained and required to be performed or complied with by
it hereunder at or prior to the Closing Date.
(l) The Offered Subordinated Units shall have been listed, subject to
notice of issuance, on the New York Stock Exchange.
(m) The General Partner and the Partnership shall have furnished or
caused to be furnished to you such further certificates and documents as you
shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the General Partner
and delivered to you, as Representatives of the Underwriters, or to counsel for
the Underwriters, shall be deemed a representation and warranty by the General
Partner and, if such certificate is delivered by the General Partner in its
capacity as the General Partner of the Partnership, the Partnership to each
Underwriter as to the statements made therein.
Any certificate or document signed by any officer of Ferrell and delivered
to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by Ferrell.
-27-
<PAGE>
The several obligations of the Underwriters to purchase Option Subordinated
Units hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (i) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Option Subordinated Units.
11. Expenses. The Partnership agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by General Partner
and the Partnership of their obligations hereunder: (i) the preparation,
printing or reproduction, and filing with the Commission of the registration
statement (including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
registration statement, each Prepricing Prospectus, the Prospectus, the
Incorporated Documents, and all amendments or supplements to any of them, as may
be reasonably requested for use in connection with the offering and sale of the
Offered Subordinated Units; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Offered Subordinated Units,
including any stamp taxes in connection with the sale of the Offered
Subordinated Units; (iv) the printing (or reproduction) and delivery of this
Agreement, the Blue Sky Memorandum and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Offered
Subordinated Units; (v) the listing of the Offered Subordinated Units on the New
York Stock Exchange; (vi) the registration or qualification of the Subordinated
Units for offer and sale under the securities or Blue Sky laws of the several
states as provided in Section 5(g) hereof (including the reasonable fees,
expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the Blue Sky Memorandum
and such registration and qualification); (vii) the filing fees and the fees and
expenses of counsel for the Underwriters in connection with any filings required
to be made with the National Association of Securities Dealers, Inc.; (viii) the
transportation and other expenses incurred by or on behalf of the General
Partner's and the Partnership's representatives in connection with presentations
to prospective purchasers of the Offered Subordinated Units; and (ix) the fees
and expenses of the Partnership's accountants and the fees and expenses of
counsel (including local and special counsel) for the General Partner and the
Partnership.
12. Effective Date of Agreement. This Agreement shall become effective: (i)
upon the execution and delivery hereof by the parties hereto; or (ii) if, at the
time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Offered Subordinated Units may commence,
when notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the General
Partner and the Partnership, by notifying you, or by you, as Representatives of
the several Underwriters, by notifying the General Partner and the Partnership.
If any one or more of the Underwriters shall fail or refuse to purchase
Offered Subordinated Units which it or they are obligated to purchase hereunder
on the Closing Date, and the aggregate number of Offered Subordinated Units
which such defaulting Underwriter or Underwriters are
-28-
<PAGE>
obligated but fail or refuse to purchase is not more than one-tenth of the
aggregate number of Offered Subordinated Units which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Offered
Subordinated Units set forth opposite its name in Schedule I hereto bears to the
aggregate number of Offered Subordinated Units set forth opposite the names of
all non-defaulting Underwriters or in such other proportion as you may specify
in accordance with Section 20 of the Master Agreement Among Underwriters of
Smith Barney Inc., to purchase the Offered Subordinated Units which such
defaulting Underwriter or Underwriters are obligated, but fail or refuse, to
purchase. If any one or more of the Underwriters shall fail or refuse to
purchase Offered Subordinated Units which it or they are obligated to purchase
on the Closing Date and the aggregate number of Offered Subordinated Units with
respect to which such default occurs is more than one-tenth of the aggregate
number of Offered Subordinated Units which the Underwriters are obligated to
purchase on the Closing Date and arrangements satisfactory to you and the
General Partner and the Partnership for the purchase of such Offered
Subordinated Units by one or more non-defaulting Underwriters or other party or
parties approved by you and the General Partner and the Partnership are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the General Partner
and the Partnership. In any such case which does not result in termination of
this Agreement, either you or the General Partner and the Partnership shall have
the right to postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any such default of any such Underwriter under this
Agreement. The term "Underwriter" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule I hereto who, with
your approval and the approval of the General Partner and the Partnership,
purchases Offered Subordinated Units which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to termination
in your absolute discretion, without liability on the part of any Underwriter to
the General Partner or the Partnership, by notice to the General Partner and the
Partnership, if prior to the Closing Date or any Option Closing Date (if
different from the Closing Date and then only as to the Option Subordinated
Units), as the case may be, (i) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York, Texas or Missouri shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
or continue the offering of the Offered Subordinated Units at the offering price
to the public set forth on the cover page of the Prospectus or to enforce
contracts for the resale of the Offered Subordinated Units by the Underwriters.
Notice of such termination may be given to the General Partner and the
Partnership by telegram, telecopy or telephone and shall be subsequently
confirmed by letter.
-29-
<PAGE>
14. Information Furnished by the Underwriters. The statements set forth in
the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first, third and fifth paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the General Partner and the
Partnership, at the office of the General Partner and the Partnership at One
Liberty Plaza, Liberty, Missouri 64068, Attention: President; or (ii) if to you,
as Representatives of the several Underwriters, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the General Partner and the Partnership, its directors and
officers, and the other controlling persons referred to in Section 9 hereof and
their respective successors and assigns, to the extent provided herein, and no
other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns"
as used in this Agreement shall include a purchaser from any Underwriter of any
of the Offered Subordinated Units in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement among
the General Partner and the Partnership and the several Underwriters.
Very truly yours,
FERRELLGAS PARTNERS, L.P.
By:
----------------------------
[Title]
FERRELLGAS COMPANIES, INC.
-30-
<PAGE>
By:
----------------------------
[Title]
FERRELLGAS COMPANIES, INC.
By:
----------------------------
[Title]
-31-
<PAGE>
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
---------------------------
Managing Director
-32-
<PAGE>
SCHEDULE I
NAME OF COMPANY
<TABLE>
<CAPTION>
Underwriter Number of Number of
Firm Units Underwriter Firm Units
<S> <C> <C> <C>
Smith Barney Inc......................
Goldman, Sachs & Co...................
Donaldson, Lufkin & Jenrette..........
A.G. Edwards & Sons, Inc..............
PaineWebber Incorporated..............
TOTAL:
</TABLE>
-33-
<PAGE>
CERTIFICATE EVIDENCING SUBORDINATED UNITS
REPRESENTING LIMITED PARTNER INTERESTS
FERRELLGAS PARTNERS, L.P.
No. Subordinated 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 Subordinated Units representing limited partner
interests in the Partnership (the "Subordinated 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 Subordinated Units represented by this
Certificate. The rights, preferences and limitations of the Subordinated Units
are set forth in, and this Certificate and the Subordinated Units represented
hereby are issued and shall in all respects be subject to the terms and
provisions of, the Amended and Restated Agreement of Limited Partnership of
FERRELLGAS PARTNERS, L.P., as amended by Amendment No. 1 thereto and as further
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
[REVERSE OF CERTIFICATE]
<PAGE>
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 Minors
tenants in common Act . . . . . . . . . . . . . . .
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF SUBORDINATED 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
43-1698480. The Internal Revenue Service has issued Ferrellgas Partners, L.P.
the following tax shelter registration number: 94201000010
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.
2
<PAGE>
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.
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)
_____________________________ Subordinated 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 Subordinated Units evidenced hereby will be
registered on the books of the Partnership, unless the Certificate evidencing
the Subordinated Units to be transferred is surrendered for registration or
transfer and an Application for Transfer of Subordinated 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 Subordinated 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 Subordinated Units.
_____________________________________________________
3
<PAGE>
APPLICATION FOR TRANSFER OF SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name
of the Assignee of the Subordinated 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 Amended and
Restated Agreement of Limited Partnership of Ferrellgas Partners, L.P. (the
"Partnership"), as amended by Amendment No. 1 thereto and as further 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) grants 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
4
<PAGE>
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:
I. Individual Interest Holder
A. I am not a non-resident alien for purposes of U.S. income
taxation.
B. My U.S. taxpayer identifying number (Social Security Number) is
__________________________________________________________.
C. My home address is
__________________________________________________________.
II. Partnership, Corporate or Other Interest-Holder
A. __________________________________________________________.
(Name of Interest-Holder)
is not a foreign corporation, foreign partnership, foreign
trust or foreign trust (as those terms are defined in the
Code and Treasury Regulations).
B. The interest-holder's U.S. employer identification number is
__________________________________________________________.
C. 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 statements
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
5
<PAGE>
________________________________________________________________________________
(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 Subordinated
Units shall be made to the best of the Assignee's knowledge.
6
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Ferrellgas Partners, L.P. on Form S-3 of our reports dated September 24, 1997,
appearing in the Annual Report on Form 10-K of Ferrellgas Partners, L.P. for the
year ended July 31, 1997 and to the references to us under the headings
"Experts" and "Selected Historical Consolidated Financial and Operating Data" in
the Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
Kansas City, Missouri
November 20, 1997
