S-1/A
1
d97853a3sv1za.txt
AMENDMENT NO. 3 TO FORM S-1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 2002
REGISTRATION STATEMENT NO. 333-91706
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MARTIN MIDSTREAM PARTNERS L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 4449 AND 5171 05-0527861
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
4200 STONE ROAD
KILGORE, TEXAS 75662
(903) 983-6200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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RUBEN S. MARTIN
MARTIN MIDSTREAM PARTNERS L.P.
4200 STONE ROAD
KILGORE, TEXAS 75662
(903) 983-6200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
C. NEEL LEMON, III JEFFREY A. CHAPMAN
CURTIS B. ANDERSON THOMAS P. MASON
BAKER BOTTS L.L.P. VINSON & ELKINS L.L.P.
2001 ROSS AVENUE 2001 ROSS AVENUE
700 TRAMMELL CROW CENTER 3700 TRAMMELL CROW CENTER
DALLAS, TEXAS 75201-2980 DALLAS, TEXAS 75201
TELEPHONE: (214) 953-6500 TELEPHONE: (214) 220-7700
FACSIMILE: (214) 953-6503 FACSIMILE: (214) 220-7716
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(1)(2) REGISTRATION FEE
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Common units representing
limited partnership
interests.................. 3,450,000 $21.00 $72,450,000 $6,665
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(1) Includes 450,000 common units issuable upon exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
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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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 2002
PROSPECTUS
3,000,000 COMMON UNITS
(MARTIN MIDSTREAM PARTNERS L.P. LOGO)
REPRESENTING LIMITED PARTNER INTERESTS
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Martin Midstream Partners L.P. is a partnership recently formed by Martin
Resource Management Corporation. This is the initial public offering of our
common units. We expect the initial public offering price to be between $19.00
and $21.00 per unit. Holders of common units are entitled to receive
distributions of available cash of $0.50 per quarter, or $2.00 on an annualized
basis, before any distributions are paid on our subordinated units. We will only
make distributions to the extent we have sufficient cash from our operations
after the establishment of cash reserves and payment of expenses, including cost
reimbursements to our general partner. Our subordinated units also represent
limited partner interests in us and will be owned by Martin Resource Management
Corporation and its affiliates. We have applied to list the common units on the
Nasdaq National Market under the symbol "MMLP."
YOU SHOULD CONSIDER THE RISKS WHICH WE HAVE DESCRIBED IN "RISK FACTORS"
BEGINNING ON PAGE 15 BEFORE BUYING OUR COMMON UNITS. These risks include the
following:
- Our available cash from operating surplus in 2001 would have been
insufficient to pay minimum quarterly distributions on all our units. We
may not have sufficient cash in the future to pay the minimum quarterly
distribution on all units each quarter.
- Our business could be adversely impacted by seasonality and weather.
- We may not be able to retain existing customers or acquire new customers
because of the highly competitive nature of our business.
- Cost reimbursements we pay Martin Resource Management Corporation may be
substantial and will reduce the cash available for distribution to
unitholders.
- Martin Resource Management Corporation and its affiliates have conflicts
of interest and limited fiduciary responsibilities, which may permit them
to favor their own interests to your detriment. At the closing of this
offering, common unitholders will not have sufficient voting power to
elect or remove our general partner without the consent of Martin
Resource Management Corporation.
- Unitholders have less power to elect or remove management than holders of
common stock in a corporation.
- You may not have limited liability if a court finds we have not complied
with applicable statutes or that unitholder action constitutes control of
our business.
- You will experience immediate and substantial dilution of $14.34 per
common unit.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions.
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PER COMMON UNIT TOTAL
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Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Martin Midstream Partners
L.P....................................................... $ $
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The underwriters may purchase up to an additional 450,000 common units from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
The underwriters expect to deliver the units to purchasers on or before
, 2002.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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RAYMOND JAMES
A.G. EDWARDS & SONS, INC.
RBC CAPITAL MARKETS
THE DATE OF THIS PROSPECTUS IS , 2002
[INSIDE FRONT COVER]
[MAP DEPICTING LOCATION OF PARTNERSHIP'S ASSETS AND OPERATIONS
WITH PHOTOGRAPHS OF OPERATING ASSETS OF PARTNERSHIP.]
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY.......................................... 1
Martin Midstream Partners L.P............................. 1
Summary of Risk Factors................................... 2
Risks Relating to Our Business......................... 2
Risks Relating to an Investment in the Common Units.... 3
Tax Risks.............................................. 4
Business Strategy......................................... 5
Competitive Strengths..................................... 5
Our Relationship with Martin Resource Management.......... 5
Partnership Structure and Management...................... 6
The Offering.............................................. 9
Summary Historical and Pro Forma Financial and Operating
Data................................................... 11
Summary of Conflicts of Interest and Fiduciary
Responsibilities....................................... 14
RISK FACTORS................................................ 15
Risks Relating to Our Business............................ 15
We may not have sufficient cash after the establishment
of cash reserves and payment of our general partner's
expenses to enable us to pay the minimum quarterly
distribution each quarter............................. 15
The assumptions underlying the financial forecast in
Appendix E are subject to significant business,
economic, regulatory and competitive risks and
uncertainties that could cause actual results to
differ materially from those forecasted............... 15
Adverse weather conditions could reduce our results of
operations and ability to make distributions to our
unitholders........................................... 16
We expect to receive a material portion of our net
income and cash available for distribution from our
non-controlling 49.5% limited partner interest in CF
Martin Sulphur, L.P. ................................. 16
We may have to sell our interest or buy the other
partnership interests in CF Martin Sulphur, L.P. at a
time when it may not be in our best interest to do
so.................................................... 16
If CF Martin Sulphur, L.P. issues additional interests,
our ownership interest in this partnership would be
diluted. Consequently, our share of CF Martin Sulphur,
L.P.'s distributable cash would be reduced, which
could adversely affect our ability to make
distributions to our unitholders...................... 17
If we incur material liabilities that are not fully
covered by insurance, such as liabilities resulting
from accidents on rivers or at sea, spills, fires or
explosions, our results of operations and ability to
make distributions to our unitholders could be
adversely affected.................................... 17
The price volatility of hydrocarbon products and
by-products can reduce our results of operations and
ability to make distributions to our unitholders...... 17
Restrictions in our debt agreements may prevent us from
making distributions to our unitholders............... 18
If we do not have sufficient capital resources for
acquisitions or opportunities for expansion, our
growth will be limited................................ 18
Future acquisitions and expansions may not be
successful, may substantially increase our
indebtedness and contingent liabilities, and may
create integration difficulties....................... 18
Segments of our business are seasonal and could cause
our revenues to vary.................................. 19
The highly competitive nature of our industry could
adversely affect our results of operations and ability
to make distributions to our unitholders.............. 19
i
PAGE
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Our business is subject to federal, state and local
laws and regulations relating to environmental, safety
and other regulatory matters. The violation of, or the
cost of compliance with, these laws and regulations
could adversely affect our results of operations and
ability to make distributions to our unitholders...... 19
The loss or insufficient attention of key personnel
could negatively impact our results of operations and
ability to make distributions to our unitholders.
Additionally, if neither Ruben Martin nor Scott Martin
is the chief executive officer of our general partner,
amounts we owe under our credit facility may become
immediately due and payable........................... 19
Our loss of significant commercial relationships with
Martin Resource Management following this offering
could adversely impact our results of operations and
ability to make distributions to our unitholders...... 20
Our business would be adversely affected if operations
at our transportation, terminalling and distribution
facilities were interrupted. Our business would also
be adversely affected if the operations of our
customers and suppliers were interrupted.............. 20
Our marine transportation business would be adversely
affected if we do not satisfy the requirements of the
Jones Act or if the Jones Act were modified or
eliminated............................................ 21
Our marine transportation business would be adversely
affected if the United States government purchases or
requisitions any of our vessels under the Merchant
Marine Act............................................ 21
Regulation affecting the domestic tank vessel industry
may limit our ability to do business, increase our
costs and adversely impact our results of operations
and ability to make distributions to our
unitholders........................................... 21
Risks Relating to an Investment in the Common Units....... 22
Cost reimbursements we pay to Martin Resource
Management may be substantial and will reduce our cash
available for distribution to our unitholders......... 22
Martin Resource Management has conflicts of interest
and limited fiduciary responsibilities, which may
permit it to favor its own interests to the detriment
of our unitholders.................................... 22
Unitholders have less power to elect or remove
management than holders of common stock in a
corporation. At the closing of this offering, common
unitholders will not have sufficient voting power to
elect or remove our general partner without the
consent of Martin Resource Management................. 23
Our general partner's discretion in determining the
level of our cash reserves may adversely affect our
ability to make cash distributions to our
unitholders........................................... 24
You may not have limited liability if a court finds
that we have not complied with applicable statutes or
that unitholder action constitutes control of our
business.............................................. 24
Our partnership agreement contains provisions that
reduce the remedies available to unitholders for
actions that might otherwise constitute a breach of
fiduciary duty by our general partner................. 24
We may issue additional common units without your
approval, which would dilute your ownership
interest.............................................. 25
The control of our general partner may be transferred
to a third party, and that party could replace our
current management team, without unitholder consent.
Additionally, if Martin Resource Management no longer
controls our general partner, amounts we owe under our
credit facility may become immediately due and
payable............................................... 26
Our general partner has a limited call right that may
require you to sell your common units at an
undesirable time or price............................. 26
Martin Resource Management and its affiliates may
engage in limited competition with us................. 26
You may have limited liquidity for your units, a
trading market may not develop for the units and you
may not be able to resell your units at the initial
public offering price................................. 26
You will experience immediate and substantial dilution
of $14.34 per common unit............................. 27
Tax Risks................................................. 27
ii
PAGE
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The IRS could treat us as a corporation for tax
purposes, which would substantially reduce the cash
available for distribution to unitholders............. 27
A successful IRS contest of the federal income tax
positions we take may adversely affect the market for
our common units and the costs of any contest will be
borne by our general partner and all of the
unitholders........................................... 27
You may be required to pay taxes on your share of our
income even if you do not receive any cash
distributions from us................................. 27
Tax gain or loss on the disposition of our common units
could be different than expected...................... 28
Tax-exempt entities, regulated investment companies and
foreign persons face unique tax issues from owning
common units that may result in adverse tax
consequences to them.................................. 28
We will register as a tax shelter, which may increase
the risk of an IRS audit of us or a unitholder........ 28
We treat a purchaser of our common units as having the
same tax benefits without regard to the seller's
identity. The IRS may challenge this treatment, which
could adversely affect the value of the common
units................................................. 28
You will likely be subject to state, local and foreign
taxes and return filing requirements as a result of
investing in our common units......................... 29
FORWARD-LOOKING STATEMENTS.................................. 29
USE OF PROCEEDS............................................. 29
CAPITALIZATION.............................................. 31
DILUTION.................................................... 33
CASH DISTRIBUTION POLICY.................................... 34
Distributions of Available Cash........................... 34
Operating Surplus and Capital Surplus..................... 34
Subordination Period...................................... 35
Distributions of Available Cash from Operating Surplus
during the Subordination Period........................ 38
Distributions of Available Cash from Operating Surplus
after the Subordination Period......................... 38
Incentive Distribution Rights............................. 38
Percentage Allocations of Available Cash from Operating
Surplus and Hypothetical Annualized Yield.............. 39
Distributions from Capital Surplus........................ 39
Adjustment to the Minimum Quarterly Distribution and
Target Distribution Levels............................. 40
Distributions of Cash upon Liquidation.................... 40
CASH AVAILABLE FOR DISTRIBUTION............................. 43
Pro forma available cash from operating surplus during
2001 or for the six months ended June 30, 2002 would
not have been sufficient to pay the minimum quarterly
distribution on all units.............................. 43
We believe we will have sufficient available cash from
operating surplus following this offering to pay the
minimum quarterly distribution on all units through
September 30, 2003..................................... 43
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA...................................................... 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 48
Overview.................................................. 48
Sources of Revenues....................................... 52
Results of Operations..................................... 53
Liquidity and Capital Resources........................... 65
Seasonality............................................... 68
iii
PAGE
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Impact of Inflation....................................... 69
Environmental Matters..................................... 69
Recent Accounting Pronouncements.......................... 69
Quantitative and Qualitative Disclosures About Market
Risk................................................... 70
BUSINESS.................................................... 71
Overview.................................................. 71
Primary Lines of Business................................. 72
Business Strategy......................................... 72
Competitive Strengths..................................... 73
Marine Transportation Business............................ 74
Terminalling Business..................................... 76
LPG Distribution Business................................. 79
Fertilizer Business....................................... 81
CF Martin Sulphur, L.P. .................................. 83
Our Relationship with Martin Resource Management.......... 87
Insurance................................................. 90
Title to Properties....................................... 91
Environmental and Regulatory Matters...................... 91
Employees................................................. 94
Litigation................................................ 94
MANAGEMENT.................................................. 95
Management of Martin Midstream Partners L.P. ............. 95
Directors and Executive Officers of Martin Midstream GP
LLC.................................................... 95
Reimbursement of Expenses of Our General Partner.......... 97
Executive Compensation.................................... 97
Compensation of Directors................................. 97
Martin Midstream Partners L.P. Long-Term Incentive Plan... 97
Martin Resource Management Employee Benefit Plans......... 99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 102
Distributions and Payments to the General Partner and its
Affiliates............................................. 102
Agreements Governing the Transactions..................... 103
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 108
Conflicts of Interest..................................... 108
Fiduciary Responsibilities................................ 111
DESCRIPTION OF THE COMMON UNITS............................. 113
The Units................................................. 113
Transfer Agent and Registrar.............................. 113
Transfer of Common Units.................................. 113
DESCRIPTION OF THE SUBORDINATED UNITS....................... 114
Limited Voting Rights..................................... 115
Distributions upon Liquidation............................ 115
iv
PAGE
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THE PARTNERSHIP AGREEMENT................................... 116
Organization and Duration................................. 116
Purpose................................................... 116
Power of Attorney......................................... 116
Capital Contributions..................................... 116
Limited Liability......................................... 117
Voting Rights............................................. 118
Issuance of Additional Securities......................... 119
Amendment of the Partnership Agreement.................... 120
Action Relating to our Operating Partnership.............. 122
Merger, Sale or Other Disposition of Assets............... 122
Termination and Dissolution............................... 123
Liquidation and Distribution of Proceeds.................. 123
Withdrawal or Removal of the General Partner.............. 123
Transfer of General Partner Interest and Incentive
Distribution Rights.................................... 125
Transfer of Ownership Interests in General Partner........ 125
Change of Management Provisions........................... 125
Limited Call Right........................................ 125
Meetings and Voting....................................... 126
Status as Limited Partner or Assignee..................... 127
Non-citizen Assignees; Redemption......................... 127
Indemnification........................................... 127
Books and Reports......................................... 128
Right to Inspect our Books and Records.................... 128
Registration Rights....................................... 128
UNITS ELIGIBLE FOR FUTURE SALE.............................. 129
MATERIAL TAX CONSEQUENCES................................... 130
Partnership Status........................................ 131
Limited Partner Status.................................... 132
Tax Consequences of Unit Ownership........................ 132
Tax Treatment of Operations............................... 137
Disposition of Common Units............................... 138
Uniformity of Units....................................... 139
Tax-Exempt Organizations and Other Investors.............. 140
Administrative Matters.................................... 140
State, Local, Foreign and Other Tax Considerations........ 142
INVESTMENT IN MARTIN MIDSTREAM PARTNERS L.P. BY EMPLOYEE
BENEFIT PLANS............................................. 143
UNDERWRITING................................................ 145
VALIDITY OF THE COMMON UNITS................................ 147
EXPERTS..................................................... 148
WHERE YOU CAN FIND MORE INFORMATION......................... 148
FINANCIAL STATEMENTS........................................ F-1
v
APPENDIX A -- FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF MARTIN MIDSTREAM PARTNERS L.P.
APPENDIX B -- APPLICATION FOR TRANSFER OF COMMON UNITS
APPENDIX C -- GLOSSARY OF TERMS
APPENDIX D -- CALCULATION OF AVAILABLE CASH FROM OPERATING SURPLUS
APPENDIX E -- FINANCIAL FORECAST
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE AN OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS, AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
Until , 2002 (the 25th day after the date of this prospectus),
all dealers effecting transactions in our common units, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
vi
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the financial
statements and the notes to those financial statements. The information
presented in this prospectus assumes an initial offering price of $20.00 and
that the underwriters' over-allotment option is not exercised. You should read
"Summary of Risk Factors" beginning on page 2 and "Risk Factors" beginning on
page 15 for information about important factors you should consider before
buying common units. We include a glossary of some of the terms used in this
prospectus in Appendix C.
Our business described below is being contributed to us by Martin Resource
Management Corporation. References in this prospectus to "we," "ours," "us" or
like terms when used in a historical context refer to the assets and operations
of Martin Resource Management Corporation's business that are being contributed
to us in connection with this offering. References in this prospectus to Martin
Midstream Partners L.P., "we," "ours," "us" or like terms when used in the
present tense or prospectively refer to Martin Midstream Partners L.P., the
issuer of securities in this offering. References in this prospectus to "Martin
Resource Management" refer to Martin Resource Management Corporation and its
subsidiaries, unless the context otherwise requires. We refer to liquefied
petroleum gas as "LPG" in this prospectus. We refer to services associated with
the delivery and storage of liquid hydrocarbons between producers and ultimate
consumers of such products as "midstream logistical services" in this
prospectus.
MARTIN MIDSTREAM PARTNERS L.P.
We provide marine transportation, terminalling, distribution and midstream
logistical services for producers and suppliers of hydrocarbon products and
by-products, specialty chemicals and other liquids. We also manufacture and
market sulfur-based fertilizers and related products. Hydrocarbon products and
by-products are produced primarily by major and independent oil and gas
companies who often turn to independent third parties, such as us, for the
transportation and disposition of these products. In addition to these major and
independent oil and gas companies, our primary customers include independent
refiners, large chemical companies, fertilizer manufacturers and other wholesale
purchasers of hydrocarbon products and by-products.
We operate primarily in the Gulf Coast region of the United States. This
region is a major hub for petroleum refining and natural gas processing. We
provide our marine transportation and midstream logistical services and
distribute LPGs primarily to customers who are located in this region or in
close proximity to ports located along the Gulf of Mexico Intracoastal Waterway
and the Mississippi River inland waterway system. The fertilizer and related
products we manufacture are sold throughout the United States. For the year
ended December 31, 2001, we had total revenues of approximately $163.1 million,
total operating income of approximately $11.2 million and EBITDA of
approximately $16.9 million.
Our primary business lines can be generally described as follows:
- Marine Transportation Business. Upon the closing of this offering, we
will own a marine fleet of 23 inland tank barges, 12 inland pushboats and
two offshore tug/barge tanker units which transport hydrocarbon products
and by-products. We provide these transportation services on a fee basis
primarily under annual contracts. For the year ended December 31, 2001,
our marine transportation business generated approximately 18% of our
total revenues and approximately 65% of our total operating income
(excluding indirect selling, general and administrative expenses).
- Terminalling Business. We operate three terminal facilities that provide
storage and handling services for producers and suppliers of hydrocarbon
products and by-products, specialty chemicals and other liquids. The nine
product tanks we own at these facilities have an aggregate storage
capacity of approximately 879,000 barrels. We generally charge a fixed
fee for our terminalling services and we have several long-term
terminalling contracts with customers. For the year ended December 31,
2001, our terminalling business generated approximately 3% of our total
revenues and
1
approximately 15% of our total operating income (excluding indirect
selling, general and administrative expenses).
- LPG Distribution Business. We purchase LPGs primarily from oil refiners
and natural gas processors. We store LPGs in our supply and storage
facilities for resale to propane retailers and industrial LPG users in
Texas and the southeastern United States. We own three LPG supply and
storage facilities with an aggregate storage capacity of approximately
132,000 gallons and we lease approximately 128 million gallons of
underground storage capacity. We generally try to coordinate our sales
and purchases of LPGs based on the same daily price index of LPGs in
order to decrease the impact of LPG price volatility on our
profitability. For the year ended December 31, 2001, our LPG distribution
business generated approximately 60% of our total revenues and
approximately 9% of our total operating income (excluding indirect
selling, general and administrative expenses).
- Fertilizer Business. We manufacture and sell fertilizer products, which
are primarily sulfur-based, and other sulfur-related products to regional
wholesale distributors and industrial users. For the year ended December
31, 2001, our fertilizer business generated approximately 19% of our
total revenues and approximately 12% of our total operating income
(excluding indirect selling, general and administrative expenses).
We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P., a limited partnership formed by Martin
Resource Management and CF Industries, Inc. in November 2000. This partnership
collects and aggregates, transports, stores and markets molten sulfur supplied
by oil refiners and natural gas processors. Martin Resource Management and CF
Industries control this partnership through equal ownership of its general
partner. Martin Resource Management manages the day-to-day operations of CF
Martin Sulphur, L.P. under a long-term services agreement. We account for this
limited partner interest using the equity method of accounting, which requires
us to report only the equity earnings from our limited partner interest. For the
year ended December 31, 2001, our equity in earnings of CF Martin Sulphur, L.P.
constituted approximately 22% of our total income before income taxes. However,
we did not receive cash distributions from CF Martin Sulphur, L.P. equal to this
amount. Please read "Selected Historical and Pro Forma Financial and Operating
Data."
Our principal executive offices are located at 4200 Stone Road, Kilgore,
Texas 75662, and our phone number is (903) 983-6200.
SUMMARY OF RISK FACTORS
An investment in our common units involves risks associated with our
business, our partnership structure and the tax characteristics of common units.
Please carefully read the risks relating to these matters described under "Risk
Factors."
RISKS RELATING TO OUR BUSINESS
- We may not have sufficient cash after the establishment of cash reserves
and payment of our general partner's expenses to enable us to pay the
minimum quarterly distribution each quarter.
- The assumptions underlying the financial forecast in Appendix E are
subject to significant business, economic, regulatory and competitive
risks and uncertainties that could cause actual results to differ
materially from those forecasted.
- Adverse weather conditions could reduce our results of operations and
ability to make distributions to our unitholders.
- We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P.
2
- We may have to sell our interest, or buy the other partnership interests
in CF Martin Sulphur, L.P. at a time when it may not be in our best
interest to do so.
- If CF Martin Sulphur, L.P. issues additional interests, our ownership
interest in this partnership would be diluted. Consequently, our share of
CF Martin Sulphur, L.P.'s distributable cash would be reduced, which
could adversely affect our ability to make distributions to our
unitholders.
- If we incur material liabilities that are not fully covered by insurance,
such as liabilities resulting from accidents on rivers or at sea, spills,
fires or explosions, our results of operations and ability to make
distributions to our unitholders could be adversely affected.
- The price volatility of hydrocarbon products and by-products may reduce
our results of operations and ability to make distributions to our
unitholders.
- Restrictions in our debt agreements may prevent us from making
distributions.
- If we do not have sufficient capital resources for acquisitions or
opportunities for expansion, our growth will be limited.
- Future acquisitions and expansions may not be successful, may
substantially increase our indebtedness and contingent liabilities, and
may create integration difficulties.
- Segments of our business are seasonal and could cause our revenues to
vary.
- The highly competitive nature of our industry could adversely affect our
results of operations and ability to make distributions to our
unitholders.
- Our business is subject to federal, state and local laws and regulations
relating to environmental, safety and other regulatory matters, and the
violation of or the cost of complying with these laws and regulations
could adversely affect our results of operations and ability to make
distributions to our unitholders.
- The loss or insufficient attention of key personnel could negatively
impact our results of operations and ability to make distributions to our
unitholders. Additionally, if neither Ruben Martin nor Scott Martin is
the chief executive officer of our general partner, amounts we owe under
our credit facility may become immediately due and payable.
- Our loss of significant commercial relationships with Martin Resource
Management following this offering could adversely impact our results of
operations and ability to make distributions to our unitholders.
- Our business would be adversely affected if operations at our
transportation, terminalling and distribution facilities were
interrupted. Our business would also be adversely affected if the
operations of our customers or suppliers were interrupted.
- Our marine transportation business would be adversely affected if we do
not satisfy the requirements of the Jones Act or if the Jones Act were
modified or eliminated.
- Our marine transportation business would be adversely affected if the
United States government purchases or requisitions any of our vessels
under the Merchant Marine Act.
- Regulations affecting the domestic tank vessel industry may limit our
ability to do business, increase our costs and adversely impact our
results of operations and ability to make distributions to our
unitholders.
RISKS RELATING TO AN INVESTMENT IN THE COMMON UNITS
- Cost reimbursements due Martin Resource Management may be substantial and
will reduce our cash available for distribution to our unitholders.
3
- Martin Resource Management has conflicts of interests and limited
fiduciary responsibilities, which may permit it to favor its own
interests to the detriment of our unitholders.
- Unitholders have less power to elect or remove management than holders of
common stock in a corporation. At the closing of this offering, common
unitholders will not have sufficient voting power to elect or remove our
general partner without the consent of Martin Resource Management.
- Our general partner's discretion in determining the level of our cash
reserves may adversely affect our ability to make cash distributions to
our unitholders.
- You may not have limited liability if a court finds we have not complied
with applicable statutes or that unitholder action constitutes control of
our business.
- The partnership agreement contains provisions that reduce the remedies
available to unitholders for actions that might otherwise constitute a
breach of fiduciary duty by our general partner.
- We may issue additional common units without your approval, which would
dilute your ownership interest.
- The control of our general partner may be transferred to a third party,
and that party could replace our current management team, without
unitholder consent. Additionally, if Martin Resource Management no longer
controls our general partner, amounts we owe under our credit facility
may become immediately due and payable.
- Our general partner has a limited call right that may require you to sell
your common units at an undesirable time or price.
- Martin Resource Management and its affiliates may engage in limited
competition with us.
- You may have limited liquidity for your units, a trading market may not
develop for the units and you may not be able to resell your units at the
initial public offering price.
- You will experience immediate and substantial dilution of $14.34 per
common unit.
TAX RISKS
- The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to unitholders.
- A successful IRS contest of the federal income tax positions we take may
adversely affect the market for our common units and the costs of any
contest will be borne by our unitholders and our general partner.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions from us.
- Tax gain or loss on the disposition of our common units could be
different than expected.
- Tax-exempt entities, regulated investment companies and foreign persons
face unique tax issues from owning common units that may result in
adverse tax consequences to them.
- We will register as a tax shelter, which may increase the risk of an IRS
audit of us or a unitholder.
- We treat a purchaser of our common units as having the same tax benefits
without regard to the seller's identity. The IRS may challenge this
treatment, which could adversely affect the value of the common units.
- You will likely be subject to state, local and foreign taxes and return
filing requirements as a result of investing in our common units.
4
BUSINESS STRATEGY
We intend to manage our operations to enable us to pay the minimum
quarterly distribution on all of our units, to increase our per unit cash flow,
and to increase the overall value of our assets on a per unit basis. We expect
to pursue these objectives by:
- Expanding services to existing customers by evaluating their needs and
identifying additional services that we could provide utilizing our asset
base;
- Pursuing strategic acquisitions that strengthen or complement our
existing operations and services;
- Attracting new customers in our current markets to expand and increase
utilization of our existing assets;
- Expanding into new geographic markets in which our expertise would allow
us to achieve desirable returns relative to new capital invested; and
- Establishing additional long-term strategic alliances with significant
customers to achieve operational synergies.
COMPETITIVE STRENGTHS
We believe we are well positioned to execute our business strategy because
of the following competitive strengths:
- We operate a diversified asset base and integrated distribution network.
- We own specialized transportation equipment and storage facilities.
- The experience and operational expertise of our management team.
- We believe we will have a strong industry reputation and established
relationships with suppliers and customers.
- We expect to have financial flexibility following the offering.
OUR RELATIONSHIP WITH MARTIN RESOURCE MANAGEMENT
We were recently formed by Martin Resource Management, a privately-held
company whose initial predecessor was incorporated in 1951 as a supplier of
products and services to drilling rig contractors. Since then, Martin Resource
Management has expanded its operations through acquisitions and internal
expansion initiatives as its management identified and capitalized on the needs
of producers and purchasers of hydrocarbon products and by-products and other
bulk liquids.
After this offering, we will continue to be closely affiliated with Martin
Resource Management as a result of the following relationships:
- Ownership. Martin Resource Management owns an approximate 57.5% limited
partner interest in us. Additionally, our general partner, a wholly-owned
subsidiary of Martin Resource Management, owns a 2.0% general partner
interest in us and owns our incentive distribution rights.
- Management. Martin Resource Management will direct our business
operations through its ownership and control of our general partner. We
expect to benefit from our relationship with Martin Resource Management
through access to a significant pool of management expertise and
established relationships throughout the energy industry. We do not have
employees. Martin Resource Management employees will be responsible for
conducting our business and operating our assets on our behalf. Our
partnership agreement requires us to reimburse Martin Resource Management
for all direct and indirect expenses it incurs or payments it makes on
our behalf or in connection with the operation of our business. Under an
omnibus agreement we have entered into with Martin Resource Management,
the amount we will be required to reimburse Martin Resource
5
Management for indirect general and administrative expenses and corporate
overhead allocated to us will be capped at $1.0 million during the first year of
the agreement. This cap may increase in subsequent years. Reimbursement of
direct administrative and general expenses is not subject to this cap.
Martin Resource Management also licenses certain of its trademarks and
tradenames to us under this omnibus agreement.
- Commercial. We anticipate that Martin Resource Management, which will
retain some business operations following our formation, will be an
important supplier and customer of ours. We anticipate that we will
purchase ground transportation services, underground storage services,
terminal throughput services, LPG products and sulfuric acid from Martin
Resource Management. These purchases from Martin Resource Management
would have accounted for approximately 9%, 7% and 6% of our total cost of
products sold in 1999, 2000 and 2001, respectively. In addition, we
anticipate we will purchase marine fuel from Martin Resource Management,
which we account for as an operating expense. Conversely, we anticipate
we will provide marine transportation, terminalling services, fertilizer
supply and LPG distribution services to Martin Resource Management. These
sales to Martin Resource Management would have accounted for
approximately 3%, 4% and 4% of our total revenues in 1999, 2000 and 2001,
respectively. Regarding services and products we will purchase from
Martin Resource Management, we will:
- obtain ground transportation services from Martin Resource Management
under a three-year motor carrier agreement;
- lease underground storage for LPGs from Martin Resource Management
under a three-year storage lease;
- purchase marine fuel and sulfuric acid under three-year agreements; and
- obtain use of a LPG truck loading and unloading and pipeline
distribution terminal under a three-year throughput agreement.
Regarding services Martin Resource Management will purchase from us, we
will provide:
- terminalling services to Martin Resource Management under a three-year
agreement; and
- marine transportation services to Martin Resource Management under a
three-year agreement.
Subject to limitations set forth in the omnibus agreement, Martin Resource
Management will agree to not compete against us in our primary business lines
for so long as it controls our general partner. Please read "Certain
Relationships and Related Transactions -- Omnibus Agreement" for a further
discussion of the scope and limitations of this non-competition restriction.
Please also read "Business -- Our Relationship with Martin Resource Management"
for a further discussion of our relationship with Martin Resource Management and
a discussion of its retained operations.
While our relationship with Martin Resource Management is a significant
benefit, it is also a source of potential conflicts. Please read "Conflicts of
Interest and Fiduciary Responsibilities."
PARTNERSHIP STRUCTURE AND MANAGEMENT
All of our operations will be conducted through, and our operating assets
will be owned by, our operating partnership, Martin Operating Partnership L.P.
Upon the closing of this offering of the common units and the related
transactions:
- Martin Midstream GP LLC, our general partner, will own the 2.0% general
partner interest in us;
- Martin Resource Management will own 4,253,362 subordinated units
representing an approximate 57.5% limited partner interest in us;
- we will own all of the limited partner interests in our operating
partnership; and
- we will own all of the membership interests in the general partner of our
operating partnership.
6
Our general partner is entitled to distributions on its general partner
interest and to distributions, if any, on its incentive distribution rights. Our
general partner has sole responsibility for conducting our business and for
managing our operations. Our general partner will not receive any management fee
or other compensation in connection with its management of our business, but
will be entitled to be reimbursed for all direct and, subject to some
limitations, indirect expenses incurred on our behalf. Please read "Certain
Relationships and Related Transactions -- Omnibus Agreement."
We also own a non-controlling 49.5% limited partner interest in CF Martin
Sulphur, L.P., a limited partnership formed by Martin Resource Management and CF
Industries in November 2000. We do not own any interest in CF Industries. The
chart on the following page depicts the organization and ownership of Martin
Midstream Partners L.P., our operating partnership, and CF Martin Sulphur, L.P.
after giving effect to this offering of the common units and the related
formation transactions.
7
[CHART]
8
THE OFFERING
Common units offered to the
public........................ 3,000,000 common units.
3,450,000 common units if the underwriters
exercise their over-allotment option in full.
Units outstanding after this
offering...................... 3,000,000 common units and 4,253,362
subordinated units, representing an approximate
40.5% and 57.5% limited partner interest in us,
respectively.
Cash distributions............ We intend to make minimum quarterly
distributions of $0.50 per common unit to the
extent we have sufficient cash from operations
after the establishment of cash reserves and
payment of expenses, including payments to our
general partner. In general, we will pay any
cash distributions we make each quarter in the
following manner:
- first, 98% to the common units and 2% to our
general partner, until each common unit has
received a minimum quarterly distribution of
$0.50 plus any arrearages from prior
quarters;
- second, 98% to the subordinated units and 2%
to our general partner, until each
subordinated unit has received a minimum
quarterly distribution of $0.50; and
- third, 98% to all units, pro rata, and 2% to
our general partner until each unit has
received a distribution of $0.55 for such
quarter.
If cash distributions exceed $0.55 per unit in
a quarter, our general partner will receive
increasing percentages, up to 50%, of the cash
we distribute in excess of that amount. We
refer to these distributions as "incentive
distributions."
We must distribute all of our cash on hand at
the end of each quarter, less reserves
established by our general partner. We refer to
this cash as "available cash," and we define
its meaning in the partnership agreement and in
the glossary in Appendix C. The amount of
available cash may be greater than or less than
the minimum quarterly distribution.
We believe that, based on the forecast included
in Appendix E, we will have sufficient cash
from operations and our portion of
distributable cash from CF Martin Sulphur, L.P.
for each quarter to make the minimum quarterly
distribution of $0.50 for each quarter through
September 30, 2003. The amount of pro forma
cash available for distribution generated
during 2001 would not have been sufficient to
allow us to pay the minimum quarterly
distribution on all of the units during this
period. Please read "Cash Available for
Distribution."
Subordination period.......... The subordination period will end once we meet
the financial tests in the partnership
agreement, but it generally cannot end before
September 30, 2009. When the subordination
period ends, all subordinated units will
convert into common units on a one-for-one
basis, and the common units will no longer be
entitled to arrearages.
9
Our partnership agreement provides that
subordinated units may convert into common
units prior to September 30, 2009 under certain
circumstances. Please read "Cash Distribution
Policy -- Subordination Period -- Early
Conversion of Subordinated Units."
Issuance of additional
units......................... In general, during the subordination period we
can issue up to 1,500,000 additional common
units, plus an amount, if any, equal to one
half of the number of common units issued
pursuant to the underwriters' over-allotment
option, or 50% of the common units outstanding
immediately after this offering, without
obtaining unitholder approval. We can also
issue an unlimited number of common units for
acquisitions, capital improvements or
repayments of certain debt that increase cash
flow from operations per unit on a pro forma
basis. Please read "The Partnership
Agreement -- Issuance of Additional
Securities."
Voting rights................. Our general partner will manage and operate us.
Unlike the holders of common stock in a
corporation, you will have only limited voting
rights on matters affecting our business. You
will have no right to elect our general partner
or its directors on an annual or other
continuing basis. The general partner may not
be removed except by a vote of the holders of
at least 66 2/3% of the outstanding units,
including any units owned by our general
partner and its affiliates, including Martin
Resource Management. At the closing of this
offering, the general partner will own enough
units to prevent its removal. Furthermore, any
units held by a person that owns 20% or more of
any class of units then outstanding, other than
the general partner, its affiliates, their
transferees, and persons who acquired such
units with the prior approval of the directors
of the general partner, cannot vote on any
matter.
Limited call right............ If at any time our general partner and its
affiliates, including Martin Resource
Management, own 80% or more of the outstanding
common units, our general partner has the
right, but not the obligation, to purchase all
of the remaining common units at a price not
less than the then-current market price of the
common units.
Estimated ratio of taxable
income to distributions....... We estimate that if you hold the common units
you purchase in this offering through December
31, 2006, you will be allocated, on a
cumulative basis, an amount of federal taxable
income for that period that will be
approximately 20% of the cash distributed to
you with respect to that period. Please read
"Material Tax Consequences -- Tax Consequences
of Unit Ownership -- Ratio of Taxable Income to
Distributions" for the basis of this estimate.
Exchange listing.............. We have applied to list the common units on the
Nasdaq National Market under the symbol "MMLP."
10
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows selected historical financial and operating data
of the Martin Midstream Partners Predecessor and pro forma financial and
operating data of Martin Midstream Partners L.P. for the periods and as of the
dates indicated. Martin Midstream Partners Predecessor is the term used to
describe certain assets, liabilities and operations currently owned by Martin
Resources Management Corporation that will be transferred to Martin Midstream
Partners L.P. upon completion of this offering. Such operations relate to the
following four primary lines of business:
- marine transportation services for hydrocarbon products and by-products;
- terminalling of hydrocarbon products and by-products;
- distribution of LPGs; and
- manufacturing and marketing fertilizer products, which are primarily
sulfur-based, and other sulfur-related products.
The selected historical financial data as of December 31, 2000 and 2001 and
for the years ended December 31, 1999, 2000 and 2001 are derived from the
audited combined financial statements of Martin Midstream Partners Predecessor.
The selected historical financial data as of December 31, 1997, 1998 and 1999
and for the years ended December 31, 1997 and 1998 and as of June 30, 2002 and
for the six months ended June 30, 2001 and 2002 are derived from the unaudited
combined financial statements of Martin Midstream Partners Predecessor.
Our molten sulphur business operations were transferred to CF Martin
Sulphur, L.P. in November 2000. Therefore, revenues, operating costs and
operating income were reflected in the historical combined income statements
prior to that time, and, subsequently, have been reflected through our
non-controlling 49.5% limited partnership interest in CF Martin Sulphur, L.P.
under the equity method of accounting.
The selected pro forma financial data as of June 30, 2002 and for the year
ended December 31, 2001 and the six months ended June 30, 2002 are derived from
the unaudited pro forma financial statements of Martin Midstream Partners L.P.
These pro forma financial statements show the pro forma effect of the transfer
of the Martin Midstream Partners Predecessor to our operating partnership, this
offering and related transactions. The pro forma balance sheet assumes this
offering and related transactions occurred as of June 30, 2002 and the pro forma
statements of income assume this offering and related transactions occurred on
January 1, 2001.
We define EBITDA as net income plus interest expense, income taxes and
depreciation and amortization expense. As described in the following paragraph,
we use EBITDA as a supplemental measure to evaluate our business, other
comparable companies and potential acquisitions opportunities. We also
understand that such data is used by investors to assess our historical ability
to service our indebtedness and make cash distributions to unitholders. However,
the term EBITDA is not defined under generally accepted accounting principles
and EBITDA is not a measure of operating income, operating performance or
liquidity presented in accordance with generally accepted accounting principles.
When assessing our operating performance or our liquidity, you should not
consider this data in isolation or as a substitute for our net income, cash flow
from operating activities or other cash flow data calculated in accordance with
generally accepted accounting principles. In addition, our EBITDA may not be
comparable to EBITDA or similarly titled measures utilized by other companies
since such other companies may not calculate EBITDA in the same manner as we do.
We use EBITDA as a supplemental financial measure to assess:
- the ability of our assets to generate cash sufficient for us to pay
interest costs and to make cash distributions to our unitholders;
- the financial performance of our assets;
11
- our liquidity and performance over time, and in relation to other
companies who own similar assets and who we believe calculate EBITDA in a
manner similar to us; and
- in some cases, for valuation purposes when determining the
appropriateness of the purchase price of assets we are considering
acquiring.
Although we use EBITDA to assess our ability to generate cash sufficient to pay
interest costs and make cash distributions to our unitholders, the amount of
cash available for such payments may be subject to our ability to reserve cash
for other uses, such as debt repayments, capital expenditures and operating
activities.
You should note that our EBITDA and our net income includes our equity in
the earnings of CF Martin Sulphur, L.P., in which we own a non-controlling 49.5%
limited partnership interest. Under the equity method of accounting, we include
in our earnings our proportionate share of CF Martin Sulphur, L.P.'s income or
losses. However, the amount of our proportionate share of the earnings or losses
of CF Martin Sulphur, L.P. may differ from the actual amount of cash, if any,
that is distributed to us. As a result, the amount of our EBITDA in any
particular period may be significantly higher than the amount of cash we
generate in that period.
For example, for the years ended December 31, 2000 and 2001, our EBITDA was
$16.1 million and $16.9 million, respectively, and our equity in the earnings of
CF Martin Sulphur, L.P. was $0.3 million and $1.6 million, respectively.
However, we did not receive any cash distributions from CF Martin Sulphur, L.P.
during the 2000 period and only received cash distributions of $0.4 million
during the 2001 period. For the six-months ended June 30, 2001 and 2002, our
EBITDA was $10.3 million and $8.0 million, respectively, and our equity in the
earnings of CF Martin Sulphur, L.P. was $0.7 million and $1.7 million,
respectively. However, we only received cash distributions from CF Martin
Sulphur, L.P. during the 2001 period of $0.4 million and did not receive any
cash distributions during the 2002 period. On a pro forma basis, for the year
ended December 31, 2001 and for the six-months ended June 30, 2002, our EBITDA
was $16.9 million and $8.0 million, respectively, and our equity in the earnings
of CF Martin Sulphur, L.P. was $1.6 million and $1.7 million, respectively.
However, on a pro forma basis, we only received cash distributions from CF
Martin Sulphur, L.P. during the 2001 period of $0.4 million and did not receive
any cash distributions during the 2002 period. Please read "Business -- CF
Martin Sulphur, L.P. -- Management and Ownership -- Distributions" for more
information related to cash distributions from this partnership.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets to maintain the existing operating
capacity of our assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand the existing operating
capacity of our assets, whether through construction or acquisition. Repair and
maintenance expenditures associated with existing assets that are minor in
nature and do not extend the useful life of existing assets are treated as
operating expenses as incurred.
We derived the information in the following table from, and that
information should be read together with and is qualified in its entirety by
reference to, the historical combined and pro forma financial statements and the
accompanying notes included elsewhere in this prospectus. The table should be
read together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
12
MARTIN MIDSTREAM
MARTIN MIDSTREAM PARTNERS PREDECESSOR -- HISTORICAL COMBINED PARTNERS L.P.
------------------------------------------------------------------------ PRO FORMA
SIX MONTHS -------------------------
ENDED YEAR SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED ENDED
---------------------------------------------------- ----------------- DECEMBER 31, JUNE 30,
1997 1998 1999 2000 2001 2001 2002 2001 2002
-------- -------- -------- -------- -------- ------- ------- ------------ ----------
($ IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues.................. $140,743 $142,203 $172,895 $199,813 $163,118 $98,540 $68,340 $162,788 $68,243
Cost of products sold..... 109,698 103,446 129,934 150,063 119,767 73,518 48,475 120,074 48,671
Operating expenses........ 17,897 20,183 22,557 25,993 20,472 11,455 10,018 19,766 9,751
Selling, general, and
administrative........... 4,562 7,344 8,747 7,880 7,513 3,974 3,374 7,754 3,510
Depreciation and
amortization............. 4,250 5,578 6,914 6,413 4,122 2,008 2,216 3,977 2,136
-------- -------- -------- -------- -------- ------- ------- -------- -------
Total costs and
expenses............... 136,407 136,551 168,152 190,349 151,874 90,955 64,083 151,571 64,068
-------- -------- -------- -------- -------- ------- ------- -------- -------
Operating income.......... 4,336 5,652 4,743 9,464 11,244 7,585 4,257 11,217 4,175
Equity in earnings
(losses) of
unconsolidated
entities................. -- -- (110) 192 1,477 698 1,470 1,641 1,654
Interest expense.......... (3,322) (4,650) (7,049) (7,949) (5,390) (2,895) (2,039) (1,399) (699)
Other income (expense).... 143 115 296 70 82 41 15 81 15
-------- -------- -------- -------- -------- ------- ------- -------- -------
Income (loss) before
income taxes............. 1,157 1,117 (2,120) 1,777 7,413 5,429 3,703 11,540 5,145
Income taxes.............. 422 500 (501) 847 2,735 1,990 1,333 -- --
-------- -------- -------- -------- -------- ------- ------- -------- -------
Net income (loss)......... $ 735 $ 617 $ (1,619) $ 930 $ 4,678 $ 3,439 $ 2,370 $ 11,540 $ 5,145
======== ======== ======== ======== ======== ======= ======= ======== =======
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.............. $ 86,545 $110,808 $123,275 $102,384 $ 88,953 $89,267 $84,690 $86,141
Due to affiliates......... 15,265 44,581 54,317 39,096 36,796 35,263 32,820 --
Long-term debt............ 28,571 26,082 24,274 10,691 7,845 8,484 7,422 29,000
Owner's equity (partners'
capital)................. 14,153 14,769 13,150 14,080 18,758 17,519 21,128 45,509
CASH FLOW DATA:
Net cash flow provided by
(used in):
Operating activities..... $ 9,009 $ 5,274 $ 6,537 $ 1,621 $ 11,144 $ 7,280 $ 6,666
Investing activities..... (16,148) (28,321) (14,592) (3,084) (6,809) (1,750) (2,112)
Financing activities..... 7,182 23,194 7,947 1,421 (4,400) (5,629) (4,374)
OTHER FINANCIAL DATA:
EBITDA(1)................. $ 8,729 $ 11,345 $ 11,843 $ 16,139 $ 16,925 $10,332 $ 7,958 $ 16,916 $ 7,980
Maintenance capital
expenditures............. 2,092 3,364 3,479 1,934 2,465 640 107
Expansion capital
expenditures............. 13,406 2,257 11,652 2,010 3,764 523 1,909
-------- -------- -------- -------- -------- ------- -------
Total capital
expenditures............. $ 15,498 $ 5,621 $ 15,131 $ 3,944 $ 6,229 $ 1,163 $ 2,016
======== ======== ======== ======== ======== ======= =======
---------------
(1) Under the equity method of accounting, these amounts include our equity in
the earnings of CF Martin Sulphur, L.P., which was formed in November 2000
and in which we own a noncontrolling 49.5% limited partnership interest, in
the amounts of $318 and $1,641 for the years ended December 31, 2000 and
2001, respectively, $742 and $1,654 for the six months ended June 30, 2001
and 2002, respectively, and, on a pro forma basis, $1,641 for the year ended
December 31, 2001 and $1,654 for the six months ended June 30, 2002.
However, we did not receive any cash distributions from CF Martin Sulphur,
L.P. during the 2000 period, only $394 in cash distributions during the 2001
periods and no cash distributions during the 2002 period.
13
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Martin Midstream GP LLC, our general partner, has a legal duty to manage us
in a manner beneficial to our unitholders. This legal duty originates in
statutes and judicial decisions and is commonly referred to as a "fiduciary"
duty. Because our general partner is owned by Martin Resource Management,
however, its officers and directors have fiduciary duties to manage the business
of our general partner in a manner beneficial to Martin Resource Management and
its shareholders.
The officers and directors of our general partner have significant
relationships with, and responsibilities to, Martin Resource Management. As a
result of these relationships, conflicts of interest may arise in the future
between us and our unitholders, on the one hand, and our general partner and
Martin Resource Management, on the other hand. For a more detailed description
of the conflicts of interest and fiduciary responsibilities of our general
partner, please read "Conflicts of Interest and Fiduciary Responsibilities."
The partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions that might otherwise
constitute breaches of our general partner's fiduciary duty. By purchasing a
common unit, you are treated as having consented to various actions contemplated
in the partnership agreement and conflicts of interest that, without such
consent, might otherwise be considered a breach of fiduciary or other duties
under applicable state law.
We have entered into an agreement with Martin Resource Management under
which Martin Resource Management has generally agreed not to engage in our
businesses as described in this prospectus. In addition, this agreement:
- addresses indemnification obligations of Martin Resource Management to
us;
- requires us to reimburse Martin Resource Management for direct and
indirect general and administrative expenses (subject to a cap on the
reimbursement of indirect general and administrative expenses and
corporate overhead allocations);
- prohibits us from entering into certain agreements with Martin Resource
Management without the approval of the conflicts committee of the board
of directors of our general partner;
- provides for the license of intellectual property from Martin Resource
Management to us; and
- addresses certain rights Martin Resource Management has in relation to
the management of, and our interest in, CF Martin Sulphur, L.P.
For a more detailed discussion of this agreement, please read "Certain
Relationships and Related Transactions -- Omnibus Agreement."
We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P., a limited partnership created in November
2000 by Martin Resource Management, its affiliates and CF Industries. CF
Industries owns the other 49.5% limited partner interest. CF Martin Sulphur,
L.P. is managed by its general partner, CF Martin Sulphur, L.L.C., which is
owned equally by CF Industries and Martin Resource Management. Each of Martin
Resource Management and CF Industries is entitled to elect two managers to the
four-person board of managers of the general partner of CF Martin Sulphur, L.P.
and, as a result of this ownership and management structure, neither Martin
Resource Management nor CF Industries has individual control over CF Martin
Sulphur, L.P. The general partner of CF Martin Sulphur, L.P. has fiduciary
duties to act in the best interests of CF Martin Sulphur, L.P. and its limited
partners. As a result, the general partner of CF Martin Sulphur, L.P. may make
decisions that are in the best interests of CF Martin Sulphur, L.P. but that may
not be in our best interest. These decisions may relate to, among other matters,
cash distributions to us as a limited partner, capital expenditures, borrowings,
issuance of new partnership securities and operations. For a more detailed
discussion of the ownership and management structure of CF Martin Sulphur, L.P.,
please read "Business -- CF Martin Sulphur, L.P. -- Management and Ownership."
14
RISK FACTORS
Limited partner interests are inherently different from the capital stock
of a corporation. You should carefully consider the following risk factors
together with all of the other information included in this prospectus in
evaluating an investment in the common units. If any of the following risks were
actually to occur, our business, financial condition or results of operations
could be materially adversely affected. In that case, we might not be able to
pay distributions on our common units, the trading price of our common units
could decline and you could lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS
WE MAY NOT HAVE SUFFICIENT CASH AFTER THE ESTABLISHMENT OF CASH RESERVES AND
PAYMENT OF OUR GENERAL PARTNER'S EXPENSES TO ENABLE US TO PAY THE MINIMUM
QUARTERLY DISTRIBUTION EACH QUARTER.
Our available cash from operating surplus would have been insufficient in
2001 to pay the minimum quarterly distribution on all our units. We may not have
sufficient available cash each quarter in the future to pay the minimum
quarterly distribution on all our units. Please read "Cash Available for
Distribution." Under the terms of the partnership agreement, we must pay our
general partner's expenses and set aside any cash reserve amounts before making
a distribution to our unitholders. The amount of cash we can distribute on our
common units principally depends upon the amount of net cash generated from our
operations, which will fluctuate from quarter to quarter based on, among other
things:
- the costs of acquisitions, if any;
- the prices of hydrocarbon products and by-products;
- fluctuations in our working capital;
- the level of capital expenditures we make;
- restrictions contained in our debt instruments and our debt service
requirements;
- our ability to make working capital borrowings under our revolving credit
facility; and
- the amount, if any, of cash reserves established by our general partner
in its discretion.
You should also be aware that the amount of cash we have available for
distribution depends primarily on our cash flow, including cash flow from
working capital borrowings, and not solely on profitability, which will be
affected by non-cash items. In addition, our general partner determines the
amount and timing of asset purchases and sales, capital expenditures,
borrowings, issuances of additional partnership securities and the establishment
of reserves, each of which can affect the amount of cash that is distributed to
our unitholders. As a result, we may make cash distributions during periods when
we record losses and may not make cash distributions during periods when we
record net income.
THE ASSUMPTIONS UNDERLYING THE FINANCIAL FORECAST IN APPENDIX E ARE SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC, REGULATORY AND COMPETITIVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
FORECASTED.
The financial forecast set forth in Appendix E includes our forecast of
statements of operations for the twelve months ending September 30, 2003. The
financial forecast has been prepared by management and we have not received an
opinion or report on it from any independent accountants. In addition, Appendix
E includes a calculation of available cash from operating surplus based on the
financial forecast. The assumptions underlying the financial forecast and are
subject to significant business, economic, regulatory and competitive risks and
uncertainties that could cause actual results to differ materially from those
forecasted. If the forecast results are not achieved, we may not be able to pay
the full minimum quarterly distribution or any amount on the common units or
subordinated units, in which event the market price of the common units may
decline materially.
15
ADVERSE WEATHER CONDITIONS COULD REDUCE OUR RESULTS OF OPERATIONS AND ABILITY
TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
Our distribution network and operations are primarily concentrated in the
Gulf Coast region and along the Mississippi River inland waterway. Weather in
these regions is often severe and can be a major factor in our day-to-day
operations. Our marine transportation operations can be significantly delayed,
impaired or postponed by adverse weather conditions, such as fog in the winter
and spring months, and certain river conditions. Additionally, our marine
transportation operations and our assets in the Gulf of Mexico, including our
barges, pushboats, tugboats and terminals, can be adversely impacted or damaged
by hurricanes, tropical storms, tidal waves or other related events.
National weather conditions have a substantial impact on the demand for our
products. Unusually warm weather during the winter months can cause a
significant decrease in the demand for LPG products, fuel oil and gasoline.
Likewise, extreme weather conditions (either wet or dry) can decrease the demand
for fertilizer. For example, an unusually wet spring can delay planting of
seeds, which can leave insufficient time to apply fertilizer at the planting
stage. Conversely, drought conditions can kill or severely stunt the growth of
crops, thus eliminating the need to nurture plants with fertilizer. Any of these
or similar conditions could result in a decline in our net income and cash flow,
which would reduce our ability to make distributions to our unitholders.
WE EXPECT TO RECEIVE A MATERIAL PORTION OF OUR NET INCOME AND CASH AVAILABLE
FOR DISTRIBUTION FROM OUR NON-CONTROLLING 49.5% LIMITED PARTNER INTEREST IN CF
MARTIN SULPHUR, L.P.
We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P., a limited partnership organized by Martin
Resource Management and CF Industries in November 2000. For example, we forecast
that approximately 22% of our available cash from operating surplus will result
from cash distributions from this partnership and approximately 27% of our net
income will be attributable to our interest in CF Martin Sulphur, L.P. during
the 12-month period ending September 30, 2003. Please read our "Financial
Forecast" located at Appendix E. CF Industries owns the remaining 49.5% limited
partner interest. We have virtually no rights or control over the operations or
management of cash generated by this entity. CF Martin Sulphur, L.P. is managed
by its general partner, which is owned equally by CF Industries and Martin
Resource Management. Deadlocks between CF Industries and Martin Resource
Management over issues relating to the operation of CF Martin Sulphur, L.P.
could have an adverse impact on its results of operations and, consequently, the
amount and timing of cash generated by its operations that is available for
distribution to its partners, including us as a limited partner.
Additionally, the partnership agreement for CF Martin Sulphur, L.P.
requires this entity to make cash distributions to its limited partners subject
to the discretion of its general partner, other than in limited circumstances.
As a result, we will be substantially dependent upon the discretion of the
general partner with respect to the amount and timing of cash distributions from
this entity. If the general partner of this entity does not distribute the cash
generated by its operations to its limited partners, as a result of a deadlock
between CF Industries and Martin Resource Management or for any other reason,
our cash flow and quarterly distributions would be reduced significantly.
WE MAY HAVE TO SELL OUR INTEREST OR BUY THE OTHER PARTNERSHIP INTERESTS IN CF
MARTIN SULPHUR, L.P. AT A TIME WHEN IT MAY NOT BE IN OUR BEST INTEREST TO DO
SO.
The CF Martin Sulphur, L.P. partnership agreement contains a buy-sell
mechanism that could be implemented by a partner under certain circumstances.
Please read "Business -- CF Martin Sulphur, L.P. -- Management and
Ownership -- Buy-Sell Right" for a discussion of this buy-sell mechanism. As a
result of this buy-sell mechanism, we could be forced to either sell our limited
partner interest or buy the limited and general partner interests of CF
Industries in CF Martin Sulphur, L.P. at a time when it would not be in our best
interest. In addition, we may not have sufficient cash or available borrowing
capacity under our revolving credit facility to allow us to elect to purchase
the limited and general partner interest
16
of CF Industries, in which case we may be forced to sell our limited partner
interest as a result of this buy-sell mechanism when we would otherwise prefer
to keep this interest. Further, if CF Industries implements this buy-sell
mechanism and we decide to use cash from operations or obtain financing to
purchase CF Industries' interest in this partnership, this transaction could
adversely impact our ability to make distributions to our unitholders.
Conversely, if we are required to sell our interest in this partnership and
thereby lose our share of distributable income from its operations, our ability
to make subsequent distributions to our unitholders could be adversely affected.
IF CF MARTIN SULPHUR, L.P. ISSUES ADDITIONAL INTERESTS, OUR OWNERSHIP INTEREST
IN THIS PARTNERSHIP WOULD BE DILUTED. CONSEQUENTLY, OUR SHARE OF CF MARTIN
SULPHUR, L.P.'S DISTRIBUTABLE CASH WOULD BE REDUCED, WHICH COULD ADVERSELY
AFFECT OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
CF Martin Sulphur, L.P. has the ability under its partnership agreement to
issue additional general and limited partner interests. If CF Martin Sulphur,
L.P. issues additional interests, our ownership percentage in CF Martin Sulphur,
L.P., and our share of CF Martin Sulphur, L.P.'s distributable cash, will
decrease. This decrease in our ownership interest could reduce the amount of
cash distributions we receive from CF Martin Sulphur, L.P. and could adversely
affect our ability to make distributions to our unitholders.
IF WE INCUR MATERIAL LIABILITIES THAT ARE NOT FULLY COVERED BY INSURANCE, SUCH
AS LIABILITIES RESULTING FROM ACCIDENTS ON RIVERS OR AT SEA, SPILLS, FIRES OR
EXPLOSIONS, OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR
UNITHOLDERS COULD BE ADVERSELY AFFECTED.
Our operations are subject to the operating hazards and risks incidental to
marine transportation, terminalling and the distribution of hydrocarbon products
and by-products and other industrial products. These hazards and risks include:
- accidents on rivers or at sea and other hazards that could result in
releases, spills and other environmental damages, personal injuries, loss
of life and suspension of operations;
- leakage of LPGs and other hydrocarbon by-products;
- fires and explosions;
- damage to transportation, terminalling and storage facilities, and
surrounding properties caused by natural disasters; and
- terrorist attacks or sabotage.
As a result, we may be a defendant in various legal proceedings and litigation.
Although we maintain insurance, such insurance may not be adequate to protect us
from all material expenses related to potential future claims for personal and
property damage. If we incur material liabilities that are not covered by
insurance, our operating results, cash flow and ability to make distributions to
our unitholders could be adversely affected.
Changes in the insurance markets attributable to the September 11, 2001
terrorist attacks may make some types of insurance more difficult or expensive
for us to obtain. As a result of the September 11 attacks and the risk of future
terrorist attacks, we may be unable to secure the levels and types of insurance
we would otherwise have secured prior to September 11. Moreover, the insurance
that may be available to us may be significantly more expensive than our
existing insurance coverage.
THE PRICE VOLATILITY OF HYDROCARBON PRODUCTS AND BY-PRODUCTS CAN REDUCE OUR
RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
We and our affiliates purchase hydrocarbon products and by-products such as
molten sulfur, sulfur derivatives, fuel oil, LPGs, asphalt and other bulk
liquids and sell these products to wholesale and bulk customers and to other end
users. We also generate revenues through the terminalling of certain products
for third parties. The price and market value of hydrocarbon products and
by-products can be volatile. On
17
occasion, our revenues have been adversely affected by this volatility during
periods of decreasing prices that resulted in a reduction in the value and
resale price of our inventory. Future price volatility could have an adverse
impact on our results of operations, cash flow and ability to make distributions
to our unitholders.
RESTRICTIONS IN OUR DEBT AGREEMENTS MAY PREVENT US FROM MAKING DISTRIBUTIONS
TO OUR UNITHOLDERS.
Upon the closing of this offering, we expect our total outstanding
long-term indebtedness to be approximately $31.4 million, composed of
approximately $6.4 million of debt under our revolving credit facility and $25
million of term debt. Our payment of principal and interest on our debt will
reduce the cash available for distribution to our unitholders. In addition, we
will be prohibited by our revolving credit facility from making cash
distributions during an event of default, if the payment of a distribution would
cause an event of default under any of our debt agreements or, after giving
effect to any distribution, we would then have less than $5 million of borrowing
availability thereunder. Our leverage and various limitations in our revolving
credit facility may reduce our ability to incur additional debt, engage in some
transactions and capitalize on acquisition or other business opportunities that
could increase cash flows and distributions to our unitholders.
IF WE DO NOT HAVE SUFFICIENT CAPITAL RESOURCES FOR ACQUISITIONS OR
OPPORTUNITIES FOR EXPANSION, OUR GROWTH WILL BE LIMITED.
We intend to explore acquisition opportunities in order to expand our
operations and increase our profitability. We may finance acquisitions through
public and private equity financing, or we may use our limited partnership
interests for all or a portion of the consideration to be paid in acquisitions.
Distributions of cash with respect to these equity securities or limited partner
interests may reduce the amount of cash distributions that would otherwise be
made on the common units. In addition, in the event our limited partnership
interests do not maintain a sufficient valuation, or potential acquisition
candidates are unwilling to accept our limited partnership interests as all or
part of the consideration, we may be required to use our cash resources, if
available, or rely on other financing arrangements to pursue acquisitions. If we
use funds from operations, other cash resources or increased borrowings for an
acquisition, the acquisition could adversely impact our ability to make our
minimum quarterly distributions to our unitholders. Please read "Cash Available
for Distribution -- Pro forma available cash from operating surplus during 2001
would not have been sufficient to pay the minimum quarterly distribution on all
units." Additionally, if we do not have sufficient capital resources, or are not
able to obtain financing on terms acceptable to us, for acquisitions, our
ability to implement our growth strategies may be adversely impacted.
FUTURE ACQUISITIONS AND EXPANSIONS MAY NOT BE SUCCESSFUL, MAY SUBSTANTIALLY
INCREASE OUR INDEBTEDNESS AND CONTINGENT LIABILITIES, AND MAY CREATE
INTEGRATION DIFFICULTIES.
As part of our business strategy, we intend to acquire businesses or assets
we believe complement our operations. These acquisitions may require substantial
capital and the incurrence of additional indebtedness. If we make acquisitions,
our capitalization and results of operations may change significantly. You will
not have the opportunity to evaluate the economic, financial and other relevant
information that we will consider in determining the application of these funds
and other resources. Further, any acquisition could result in:
- the discovery of material undisclosed liabilities of the acquired
business or assets;
- the unexpected loss of key employees or customers from the acquired
businesses;
- difficulties resulting from our integration of the operations, systems
and management of the acquired business; and
- an unexpected diversion of our management's attention from other
operations.
18
If any of our future acquisitions are unsuccessful or result in unanticipated
events, such acquisitions could adversely affect our results of operations, cash
flow and ability to make distributions to our unitholders.
SEGMENTS OF OUR BUSINESS ARE SEASONAL AND COULD CAUSE OUR REVENUES TO VARY.
The demand for LPGs is highest in the winter. Therefore, revenues from our
LPG distribution business is higher in the winter than in other seasons. Our
fertilizer business experiences an increase in demand during the spring, which
increases the revenue generated by this business line in this period compared to
other periods. The seasonality of the revenue from these business lines may
cause our results of operations to vary on a quarter to quarter basis and thus
could cause our cash available for quarterly distributions to fluctuate from
period to period.
THE HIGHLY COMPETITIVE NATURE OF OUR INDUSTRY COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
We operate in a highly competitive marketplace in each of our primary
business segments. Most of our competitors in each segment are larger companies
with greater financial and other resources than we possess. We may lose
customers and future business opportunities to our competitors and any such
losses could adversely affect our results of operations and ability to make
distributions to our unitholders.
OUR BUSINESS IS SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS
RELATING TO ENVIRONMENTAL, SAFETY AND OTHER REGULATORY MATTERS. THE VIOLATION
OF, OR THE COST OF COMPLIANCE WITH, THESE LAWS AND REGULATIONS COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR
UNITHOLDERS.
Our business is subject to a wide range of environmental, safety and other
regulatory laws and regulations. For example, our operations are subject to
permit requirements and increasingly stringent regulations under numerous
environmental laws, such as the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, and similar state and local laws. Please read
"Business -- Environmental and Regulatory Matters." Our costs could increase due
to more strict pollution control requirements or liabilities resulting from
compliance with future required operating or other regulatory permits. New
environmental regulations might adversely impact our results of operations and
ability to pay distributions to our unitholders. Federal and state agencies also
could impose additional safety requirements, any of which could adversely affect
our results of operations and ability to make distributions to our unitholders.
On August 7, 2000, a spill of molten sulfur occurred at our Stanolind
terminal near Beaumont, Texas, which at the time was owned and operated by our
affiliate Martin Gas Sales, Inc. To avoid protracted litigation and possible
criminal claims against employees, our affiliate Martin Gas Sales agreed to
plead guilty to a single felony violation of the federal Clean Water Act and was
sentenced to pay a $50,000 fine. Please read "Business -- Environmental and
Regulatory Matters -- Clean Water Act" for a discussion of this event. Martin
Resource Management will indemnify us under the omnibus agreement for any losses
we suffer within five years of this offering that relate to, or result from,
this event.
In May 2001, the Occupational Safety and Health Administration cited us for
alleged safety violations at our facility in Plainview, Texas. We contested the
alleged violations and the matter was settled in April 2002. As part of the
settlement, the alleged violations were dismissed and we agreed to pay a small
fine. If any of our facilities are found to violate similar requirements in the
future we could be subjected to increased fines, in some cases up to ten times
the amount of the standard fine, as a result of this event.
THE LOSS OR INSUFFICIENT ATTENTION OF KEY PERSONNEL COULD NEGATIVELY IMPACT
OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR
UNITHOLDERS. ADDITIONALLY, IF NEITHER RUBEN MARTIN NOR SCOTT MARTIN IS THE
CHIEF EXECUTIVE OFFICER OF OUR GENERAL PARTNER, AMOUNTS WE OWE UNDER OUR
CREDIT FACILITY MAY BECOME IMMEDIATELY DUE AND PAYABLE.
Our success will be largely dependent upon the continued services of
members of the senior management team of Martin Resource Management. Those
senior executive officers have significant
19
experience in our businesses and have developed strong relationships with a
broad range of industry participants. The loss of any of these executives could
have a material adverse effect on our relationships with these industry
participants, our results of operations and our ability to make distributions to
our unitholders. Additionally, if neither Ruben Martin nor Scott Martin is the
chief executive officer of our general partner, the lender under our credit
facility could declare amounts outstanding thereunder immediately due and
payable. If such event occurs, we may be required to refinance our debt on
unfavorable terms, which could negatively impact our results of operations and
our ability to make distribution to our unitholders.
We do not have employees. We will rely solely on officers and employees of
Martin Resource Management to operate and manage our business. Martin Resource
Management conducts businesses and activities of its own in which we have no
economic interest. There could be competition for the time and effort of the
officers and employees who provide services to our general partner. If these
officers and employees do not or cannot devote sufficient attention to the
management and operation of our business, our results of operation and ability
to make distributions to our unitholders may be reduced.
OUR LOSS OF SIGNIFICANT COMMERCIAL RELATIONSHIPS WITH MARTIN RESOURCE
MANAGEMENT FOLLOWING THIS OFFERING COULD ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
Following this offering, Martin Resource Management will provide us with
various services and products pursuant to various commercial contracts. Please
read "Certain Relationships and Related Transactions" for a discussion of these
contracts. The loss of any of these services provided by Martin Resource
Management could have a material adverse impact on our results of operations,
cash flow and ability to make distributions to our unitholders.
Additionally, we will provide marine transportation and terminalling
services to Martin Resource Management following this offering to support its
retained businesses under various commercial contracts. Please read "Certain
Relationships and Related Transactions" for a discussion of these contracts. The
loss of Martin Resource Management as a customer could have material adverse
impact on our results of operations, cash flow and ability to make distributions
to our unitholders.
OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF OPERATIONS AT OUR TRANSPORTATION,
TERMINALLING AND DISTRIBUTION FACILITIES WERE INTERRUPTED. OUR BUSINESS WOULD
ALSO BE ADVERSELY AFFECTED IF THE OPERATIONS OF OUR CUSTOMERS AND SUPPLIERS
WERE INTERRUPTED.
Our operations are dependent upon our terminalling and storage facilities
and various means of transportation. We are also dependent upon the
uninterrupted operations of certain facilities owned or operated by our
suppliers and customers. Any significant interruption at these facilities or
inability to transport products to or from these facilities or to or from our
customers for any reason would adversely affect our results of operations, cash
flow and ability to make distributions to our unitholders. Operations at our
facilities and at the facilities owned or operated by our suppliers and
customers could be partially or completely shut down, temporarily or
permanently, as the result of any number of circumstances that are not within
our control, such as:
- catastrophic events;
- environmental remediations;
- labor difficulties; and
- disruptions in the supply of our products to our facilities or means of
transportation.
Additionally, terrorist attacks and acts of sabotage could target oil and gas
production facilities, refineries, processing plants and other infrastructure
facilities. Any interruptions at our facilities, facilities owned or operated by
our suppliers or customers, or in the oil and gas industry as a whole caused by
such attacks or
20
acts could have a material adverse affect on our results of operations, cash
flow and ability to make distributions to our unitholders.
OUR MARINE TRANSPORTATION BUSINESS WOULD BE ADVERSELY AFFECTED IF WE DO NOT
SATISFY THE REQUIREMENTS OF THE JONES ACT OR IF THE JONES ACT WERE MODIFIED OR
ELIMINATED.
The Jones Act is a federal law that restricts domestic marine
transportation in the United States to vessels built and registered in the
United States. Furthermore, the Jones Act requires that the vessels be manned
and owned by United States citizens. Please read "Business -- Environmental and
Regulatory Matters -- Jones Act." If we fail to comply with these requirements,
our vessels lose their eligibility to engage in coastwise trade within United
States domestic waters.
The requirements that our vessels be United States built and manned by
United States citizens, the crewing requirements and material requirements of
the Coast Guard and the application of United States labor and tax laws
significantly increase the costs of United States flag vessels when compared
with foreign flag vessels. During the past several years, certain interest
groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag
competition for trades and cargoes reserved for United States flag vessels under
the Jones Act and cargo preference laws. If the Jones Act were to be modified to
permit foreign competition that would not be subject to the same United States
government imposed costs, we may need to lower the prices we charge for our
services in order to compete with foreign competitors, which would adversely
affect our cash flow and ability to make distributions to our unitholders.
OUR MARINE TRANSPORTATION BUSINESS WOULD BE ADVERSELY AFFECTED IF THE UNITED
STATES GOVERNMENT PURCHASES OR REQUISITIONS ANY OF OUR VESSELS UNDER THE
MERCHANT MARINE ACT.
We are also subject to the Merchant Marine Act of 1936, which provides
that, upon proclamation by the President of the United States of a national
emergency or a threat to the national security, the United States Secretary of
Transportation may requisition or purchase any vessel or other watercraft owned
by United States citizens (including us, provided that we are considered a
United States citizen for this purpose.) If one of our pushboats, tugboats or
tank barges were purchased or requisitioned by the United States government
under this law, we would be entitled to be paid the fair market value of the
vessel in the case of a purchase or, in the case of a requisition, the fair
market value of charter hire. However, if one of our pushboats or tugboats is
requisitioned or purchased and its associated tank barge is left idle, we would
not be entitled to receive any compensation for the lost revenues resulting from
the idled barge. We also would not be entitled to be compensated for any
consequential damages we suffer as a result of the requisition or purchase of
any of our pushboats, tugboats or tank barges. If any of our vessels are
purchased or requisitioned for an extended period of time by the United States
government, such transactions could have a material adverse affect on our
results of operations, cash flow and ability to make distributions to our
unitholders.
REGULATION AFFECTING THE DOMESTIC TANK VESSEL INDUSTRY MAY LIMIT OUR ABILITY
TO DO BUSINESS, INCREASE OUR COSTS AND ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
The U.S. Oil Pollution Act of 1990, or OPA 90, provides for the phase out
of single-hull vessels and the phase-in of the exclusive operation of
double-hull tank vessels in U.S. waters. Please read "Business -- Environmental
and Regulatory Matters -- Oil Pollution Act." Under OPA 90, substantially all
tank vessels that do not have double hulls will be phased out by 2015 and will
not be permitted to come to U.S. ports or trade in U.S. waters. The phase out
dates vary based on the age of the vessel and other factors. All of our offshore
tank barges are double-hull vessels and have no phase out date. We have six
inland single-hull barges that will be phased out in the year 2015. The phase
out of these single-hull vessels in accordance with OPA 90 may require us to
make substantial capital expenditures, which could adversely affect our
operations and market position and reduce our cash available for distribution.
21
RISKS RELATING TO AN INVESTMENT IN THE COMMON UNITS
COST REIMBURSEMENTS WE PAY TO MARTIN RESOURCE MANAGEMENT MAY BE SUBSTANTIAL
AND WILL REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION TO OUR UNITHOLDERS.
Under the omnibus agreement, Martin Resource Management will provide us
with corporate staff and support services on behalf of our general partner that
are substantially identical in nature and quality to the services it conducted
for our business prior to our formation. The omnibus agreement requires us to
reimburse Martin Resource Management for the costs and expenses it incurs in
rendering these services, including an overhead allocation to us of Martin
Resource Management's indirect general and administrative expenses from its
corporate allocation pool. These payments may be substantial. For example, based
on the assumptions set forth in Appendix E, we estimate that we will reimburse
Martin Resource Management for approximately $15.1 million of costs and expenses
for the 12-month period ending September 30, 2003. Payments to Martin Resource
Management will reduce the amount of available cash for distribution to our
unitholders. Please read "Conflicts of Interest and Fiduciary
Responsibilities -- We will reimburse our general partner and Martin Resource
Management for their expenses" and "Certain Relationships and Related
Transactions -- Omnibus Agreement."
MARTIN RESOURCE MANAGEMENT HAS CONFLICTS OF INTEREST AND LIMITED FIDUCIARY
RESPONSIBILITIES, WHICH MAY PERMIT IT TO FAVOR ITS OWN INTERESTS TO THE
DETRIMENT OF OUR UNITHOLDERS.
Following this offering, Martin Resource Management will own an approximate
57.5% limited partner interest in us and will own and control our general
partner, which will own our 2.0% general partner interest and incentive
distribution rights. Conflicts of interest may arise between Martin Resource
Management and our general partner, on the one hand, and our unitholders, on the
other hand. As a result of these conflicts, our general partner may favor its
own interests and the interests of Martin Resource Management over the interests
of our unitholders. Potential conflicts of interest between us, Martin Resource
Management and our general partner could occur in many of our day-to-day
operations including, among others, the following situations:
- Officers of Martin Resource Management who will provide services to us
will also devote significant time to the businesses of Martin Resource
Management and will be compensated by Martin Resource Management for that
time.
- We own a non-controlling 49.5% limited partnership interest in CF Martin
Sulphur, L.P., which operates a business involving the acquisition,
handling and sale of molten sulfur. As a limited partner, we have
virtually no rights or control over the operation and management of this
entity. The day-to-day operation and control of this partnership is
managed by its general partner, CF Martin Sulphur, L.L.C., which is owned
equally by CF Industries and Martin Resource Management. Because we have
very limited control over the operations and management of CF Martin
Sulphur, L.P., we are subject to the risks that this business may be
operated in a manner that would not be in our interest. For example, the
amount of cash distributed to us from CF Martin Sulphur, L.P. could
decrease if it uses a significant amount of cash from operations or
additional debt to make significant capital expenditures or acquisitions.
- Neither the partnership agreement nor any other agreement requires Martin
Resource Management to pursue a business strategy that favors us or
utilizes our assets or services. Martin Resource Management's directors
and officers have a fiduciary duty to make these decisions in the best
interests of the shareholders of Martin Resource Management without
regard to the best interests of the common unitholders.
- Martin Resource Management may compete with us, subject to the
limitations set forth in the omnibus agreement.
- Our general partner is allowed to take into account the interests of
parties other than us, such as Martin Resource Management, in resolving
conflicts of interest, which has the effect of reducing its fiduciary
duty to our unitholders.
22
- Under the partnership agreement, our general partner may limit its
liability and reduce its fiduciary duties, while also restricting the
remedies available to our unitholders for actions that, without the
limitations and reductions, might constitute breaches of fiduciary duty.
As a result of purchasing units, our unitholders will consent to some
actions and conflicts of interest that, without such consent, might
otherwise constitute a breach of fiduciary or other duties under
applicable state law.
- Our general partner determines which costs incurred by Martin Resource
Management are reimbursable by us.
- The partnership agreement does not restrict our general partner from
causing us to pay it or its affiliates for any services rendered on terms
that are fair and reasonable to us or from entering into additional
contractual arrangements with any of these entities on our behalf.
- Our general partner controls the enforcement of obligations owed to us by
Martin Resource Management.
- Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
- In some instances, our general partner may cause us to borrow funds to
permit us to pay cash distributions, even if the purpose or effect of the
borrowing is to make a distribution on the subordinated units, to make
incentive distributions or to accelerate the expiration of the
subordination period.
- Our general partner has broad discretion to establish financial reserves
for the proper conduct of our business. These reserves also will affect
the amount of cash available for distribution. Our general partner may
establish reserves for distribution on the subordinated units, but only
if those reserves will not prevent us from distributing the full minimum
quarterly distribution, plus any arrearages, on the common units for the
following four quarters.
Please read "Certain Relationships and Related Transactions -- Omnibus
Agreement" and "Conflicts of Interest and Fiduciary
Responsibilities -- Conflicts of Interest."
UNITHOLDERS HAVE LESS POWER TO ELECT OR REMOVE MANAGEMENT THAN HOLDERS OF
COMMON STOCK IN A CORPORATION. AT THE CLOSING OF THIS OFFERING, COMMON
UNITHOLDERS WILL NOT HAVE SUFFICIENT VOTING POWER TO ELECT OR REMOVE OUR
GENERAL PARTNER WITHOUT THE CONSENT OF MARTIN RESOURCE MANAGEMENT.
Unlike the holders of common stock in a corporation, unitholders have only
limited voting rights on matters affecting our business and therefore limited
ability to influence management's decisions regarding our business. Unitholders
did not elect our general partner or its directors and will have no right to
elect our general partner or its directors on an annual or other continuing
basis. Martin Resource Management elects the directors of our general partner.
Although our general partner has a fiduciary duty to manage our partnership in a
manner beneficial to us and our unitholders, the directors of our general
partner also have a fiduciary duty to manage our general partner in a manner
beneficial to Martin Resource Management and its shareholders.
If unitholders are dissatisfied with the performance of our general
partner, they will have a limited ability to remove our general partner. Our
general partner generally may not be removed except upon the vote of the holders
of at least 66 2/3% of the outstanding units voting together as a single class.
Because our general partner and its affiliates, including Martin Resource
Management, will initially control approximately 58.6% of all the units, our
general partner initially cannot be removed without the consent of it and its
affiliates.
If our general partner is removed without cause during the subordination
period and units held by our general partner and its affiliates are not voted in
favor of removal, all remaining subordinated units will automatically be
converted into common units and any existing arrearages on the common units will
be extinguished. A removal under these circumstances would adversely affect the
common units by prematurely eliminating their contractual right to distributions
and liquidation preference over the
23
subordinated units, which preferences would otherwise have continued until we
had met certain distribution and performance tests. Cause is narrowly defined to
mean that a court of competent jurisdiction has entered a final, non-appealable
judgment finding our general partner liable for actual fraud, gross negligence
or willful or wanton misconduct in its capacity as our general partner. Cause
does not include most cases of charges of poor management of our business, so
the removal of our general partner because of the unitholders' dissatisfaction
with our general partner's performance in managing our partnership will most
likely result in the termination of the subordination period.
Unitholders' voting rights are further restricted by the partnership
agreement provision prohibiting any units held by a person owning 20% or more of
any class of units then outstanding, other than our general partner, its
affiliates, their transferees and persons who acquired such units with the prior
approval of our general partner's directors, from voting on any matter. In
addition, the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our operations, as
well as other provisions limiting the unitholders' ability to influence the
manner or direction of management.
As a result of these provisions, it will be more difficult for a third
party to acquire our partnership without first negotiating the acquisition with
our general partner. Consequently, it is unlikely the trading price of our
common units will ever reflect a takeover premium.
OUR GENERAL PARTNER'S DISCRETION IN DETERMINING THE LEVEL OF OUR CASH RESERVES
MAY ADVERSELY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS TO OUR
UNITHOLDERS.
The partnership agreement requires our general partner to deduct from
operating surplus cash reserves it determines in its reasonable discretion to be
necessary to fund our future operating expenditures. In addition, the
partnership agreement permits our general partner to reduce available cash by
establishing cash reserves for the proper conduct of our business, to comply
with applicable law or agreements to which we are a party or to provide funds
for future distributions to partners. These cash reserves will affect the amount
of cash available for distribution to our unitholders.
YOU MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT WE HAVE NOT COMPLIED
WITH APPLICABLE STATUTES OR THAT UNITHOLDER ACTION CONSTITUTES CONTROL OF OUR
BUSINESS.
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. You could be held liable in some circumstances for our
obligations to the same extent as a general partner if a court determined that:
- we had been conducting business in any state without compliance with the
applicable limited partnership statute; or
- the right or the exercise of the right by our unitholders as a group to
remove or replace our general partner, to approve some amendments to the
partnership agreement, or to take other action under the partnership
agreement constituted participation in the "control" of our business.
The general partner generally has unlimited liability for the obligations
of the partnership, such as its debts and environmental liabilities, except for
those contractual obligations of the partnership that are expressly made without
recourse to our general partner. In addition, under some circumstances, a
unitholder may be liable to us for the amount of a distribution for a period of
three years from the date of the distribution. Please read "The Partnership
Agreement -- Limited Liability" for a discussion of the implications of the
limitations on liability to a unitholder.
OUR PARTNERSHIP AGREEMENT CONTAINS PROVISIONS THAT REDUCE THE REMEDIES
AVAILABLE TO UNITHOLDERS FOR ACTIONS THAT MIGHT OTHERWISE CONSTITUTE A BREACH
OF FIDUCIARY DUTY BY OUR GENERAL PARTNER.
The partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for
24
actions that would otherwise constitute breaches of our general partner's
fiduciary duties. For example, our partnership agreement:
- permits our general partner to make a number of decisions in its "sole
discretion." This entitles our general partner to consider only the
interests and factors that it desires, and it has no duty or obligation
to give any consideration to any interest of, or factors affecting, us,
our affiliates or any limited partner;
- provides that our general partner is entitled to make other decisions in
its "reasonable discretion" which may reduce the obligations to which our
general partner would otherwise be held;
- generally provides that affiliated transactions and resolutions of
conflicts of interest not involving a required vote of unitholders must
be "fair and reasonable" to us and that, in determining whether a
transaction or resolution is "fair and reasonable," our general partner
may consider the interests of all parties involved, including its own;
and
- provides that our general partner and its officers and directors will not
be liable for monetary damages to us, our limited partners or assignees
for errors of judgment or for any acts or omissions if our general
partner and those other persons acted in good faith.
If you choose to purchase a common unit, you will be treated as having
consented to the various actions contemplated in the partnership agreement and
conflicts of interest that might otherwise be considered a breach of fiduciary
duties under applicable state law. Please read "Conflicts of Interest and
Fiduciary Responsibilities -- Fiduciary Responsibilities."
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH WOULD DILUTE
YOUR OWNERSHIP INTEREST.
During the subordination period, our general partner, without the approval
of our unitholders, may cause us to issue up to 1,500,000 additional common
units plus an amount, if any, equal to one half of the number of common units
issued pursuant to the underwriters' over-allotment option. Our general partner
may also cause us to issue an unlimited number of additional common units or
other equity securities of equal rank with the common units, without unitholder
approval, in a number of circumstances such as:
- the issuance of common units in connection with acquisitions that
increase cash flow from operations on a pro forma, per unit basis;
- the conversion of subordinated units into common units;
- the conversion of units of equal rank with the common units into common
units under some circumstances; or
- the conversion of our general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner.
After the subordination period, we may issue an unlimited number of limited
partner interests of any type without the approval of our unitholders. The
partnership agreement does not give our unitholders the right to approve our
issuance of equity securities ranking junior to the common units at any time.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- our unitholders' proportionate ownership interest in us will decrease;
- the amount of cash available for distribution on a per unit basis may
decrease;
- because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of the
minimum quarterly distribution will be borne by our common unitholders
will increase;
25
- the relative voting strength of each previously outstanding unit will
diminish; and
- the market price of the common units may decline.
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY, AND
THAT PARTY COULD REPLACE OUR CURRENT MANAGEMENT TEAM, WITHOUT UNITHOLDER
CONSENT. ADDITIONALLY, IF MARTIN RESOURCE MANAGEMENT NO LONGER CONTROLS OUR
GENERAL PARTNER, AMOUNTS WE OWE UNDER OUR CREDIT FACILITY MAY BECOME
IMMEDIATELY DUE AND PAYABLE.
Our general partner may transfer its general partner interest to a third
party in a merger or in a sale of all or substantially all of its assets without
the consent of the unitholders. Furthermore, there is no restriction in the
partnership agreement on the ability of the owner of our general partner to
transfer its ownership interest in our general partner to a third party. A new
owner of our general partner could replace the directors and officers of our
general partner with its own designees and to control the decisions taken by our
general partner.
If, at any time, Martin Resource Management no longer controls our general
partner, the lender under our credit facility may declare all amounts
outstanding thereunder immediately due and payable. If such event occurs, we may
be required to refinance our debt on unfavorable terms, which could negatively
impact our results of operations and our ability to make distribution to our
unitholders.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own more than 80% of
the common units, our general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining common units held by unaffiliated
persons at a price not less than the then-current market price. As a result, you
may be required to sell your common units at an undesirable time or price and
may not receive any return on your investment. You may also incur a tax
liability upon a sale of your units. No provision in our partnership agreement,
or in any other agreement we have with our general partner or Martin Resource
Management, prohibits our general partner or its affiliates from acquiring more
than 80% of our common units. For additional information about this call right
and your potential tax liability, please read "The Partnership
Agreement -- Limited Call Right" and "-- Tax Risks -- Tax gain or loss on the
disposition of our common units could be different than expected."
MARTIN RESOURCE MANAGEMENT AND ITS AFFILIATES MAY ENGAGE IN LIMITED
COMPETITION WITH US.
Martin Resource Management and its affiliates may engage in limited
competition with us. For a description of the non-competition provisions of the
omnibus agreement, please read "Certain Relationships and Related
Transactions -- Omnibus Agreement." If Martin Resource Management does engage in
competition with us, we may lose customers or business opportunities, which
could have an adverse impact on our results of operations, cash flow and ability
to make distributions to our unitholders.
YOU MAY HAVE LIMITED LIQUIDITY FOR YOUR UNITS, A TRADING MARKET MAY NOT
DEVELOP FOR THE UNITS AND YOU MAY NOT BE ABLE TO RESELL YOUR UNITS AT THE
INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for the common
units. After this offering, there will be only 3,000,000 publicly-traded units.
We do not know the extent to which investor interest will lead to the
development of a trading market for the common units or how liquid that market
might be. You may not be able to resell your common units at or above the
initial public offering price. Additionally, the lack of liquidity may result in
wide bid-ask spreads, contribute to significant fluctuations in the market price
of the common units and limit the number of investors who are able to buy the
common units.
26
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF $14.34 PER COMMON
UNIT.
The assumed initial public offering price of $20.00 per unit exceeds our
pro forma net tangible book value of $5.66 per unit after this offering. Based
on an assumed initial public offering price of $20.00, you will incur immediate
and substantial dilution of $14.34 per common unit. This dilution is due in
large part to the fact that our general partner and its affiliates acquired
interests in us at equivalent per unit prices less than the public offering
price. Please read "Dilution."
TAX RISKS
You should read "Material Tax Consequences" for a full discussion of the
expected material federal income tax consequences of owning and disposing of
common units.
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS.
The anticipated after-tax economic benefit of an investment in us depends
largely on our classification as a partnership for federal income tax purposes.
We have not requested, and do not plan to request, a ruling from the IRS on this
or any other matter affecting us.
If we were treated as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, which is currently a maximum of
35%. Distributions to you would generally be taxed again to you as corporate
distributions, and no income, gains, losses, or deductions would flow through to
you. Because a tax would be imposed upon us as a corporation, the cash available
for distribution to unitholders would be substantially reduced. Although it is
not possible to predict the amount of corporate-level tax that would be due in a
given year, it is likely that our ability to make minimum quarterly
distributions would be impaired. Consequently, treatment of us as a corporation
would result in a material reduction in the anticipated cash flow and after-tax
return to you and therefore would likely result in a substantial reduction in
the value of the common units.
Current law may change so as to cause us to be taxable as a corporation for
federal income tax purposes or otherwise subject us 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 us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then the minimum quarterly distribution amount and
the target distribution amount will be adjusted to reflect the impact of that
law on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY AFFECT THE MARKET FOR OUR COMMON UNITS AND THE COSTS OF ANY CONTEST
WILL BE BORNE BY OUR GENERAL PARTNER AND ALL OF THE UNITHOLDERS.
We have not requested a ruling from the IRS with respect to our treatment
as a partnership for federal income tax purposes or any other matter affecting
us. The IRS may adopt positions that differ from our counsel's conclusions
expressed in this prospectus. It may be necessary to resort to administrative or
court proceedings to sustain some or all of our counsel's conclusions or the
positions we take. A court may not agree with some or all our counsel's
conclusions or the positions we take. Our counsel has not rendered an opinion on
certain matters affecting us. Any contest with the IRS may materially and
adversely impact the market for our common units and the prices at which they
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by all of our unitholders and our general partner.
YOU MAY BE REQUIRED TO PAY TAXES ON YOUR SHARE OF OUR INCOME EVEN IF YOU DO
NOT RECEIVE ANY CASH DISTRIBUTIONS FROM US.
You will be required to pay federal income taxes and, in some cases, state,
local and foreign income taxes on your share of our taxable income even if you
receive no cash distributions from us. You may not
27
receive cash distributions from us equal to your share of our taxable income or
even the tax liability that results from the taxation of your share of our
taxable income.
TAX GAIN OR LOSS ON THE DISPOSITION OF OUR COMMON UNITS COULD BE DIFFERENT
THAN EXPECTED.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common units.
Prior distributions in excess of the total net taxable income you were allocated
for a common unit, which decreased your tax basis in that common unit, will, in
effect, become taxable income to you if the common unit is sold at a price
greater than your tax basis in that common unit, even if the price you receive
is less than your original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income to you. Should the IRS
successfully contest some positions we take, you could recognize more gain on
the sale of units than would be the case under those positions, without the
benefit of decreased income in prior years. In addition, if you sell your units,
you may incur a tax liability in excess of the amount of cash you receive from
the sale.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS FACE
UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM.
Investment in common units by tax-exempt entities such as individual
retirement accounts (known as IRAs), regulated investment companies (known as
mutual funds) and non-U.S. persons raises issues unique to them. For example,
virtually all of our income allocated to organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
will be unrelated business income and will be taxable to them. Very little of
our income will be qualifying income to a regulated investment company.
Distributions to non-U.S. persons will be reduced by withholding taxes at the
highest effective tax rate applicable to individuals, and non-U.S. persons will
be required to file federal income tax returns and pay tax on their share of our
taxable income.
WE WILL REGISTER AS A TAX SHELTER, WHICH MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR A UNITHOLDER.
We intend to register with the IRS as a "tax shelter." We will advise you
of our tax shelter registration number once that number has been assigned. The
federal income tax laws require that some types of entities, including some
partnerships, register as "tax shelters" in response to the perception that they
claim tax benefits that may be unwarranted. As a result, we may be audited by
the IRS and tax adjustments could be made. Any unitholder owning less than a 1%
profits interest in us has very limited rights to participate in the income tax
audit process. Further, any adjustments in our tax returns will lead to
adjustments in our unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. You will bear
the cost of any expense incurred in connection with an examination of your tax
return.
WE TREAT A PURCHASER OF OUR COMMON UNITS AS HAVING THE SAME TAX BENEFITS
WITHOUT REGARD TO THE SELLER'S IDENTITY. THE IRS MAY CHALLENGE THIS TREATMENT,
WHICH COULD ADVERSELY AFFECT THE VALUE OF THE COMMON UNITS.
Because we cannot match transferors and transferees of common units and
because of other reasons, we will adopt depreciation positions that may not
conform to all aspects of the Treasury regulations. Please read "Material Tax
Consequences -- Tax Consequences of Unit Ownership -- Section 754 Election." A
successful IRS challenge to those positions could adversely affect the amount of
tax benefits available to you. It also could affect the timing of these tax
benefits or the amount of gain from the sale of common units and could have a
negative impact on the value of our common units or result in audit adjustments
to your tax returns. Please read "Material Tax Consequences -- Uniformity of
Units" for a further discussion of the effect of, and reasons for, the
depreciation and amortization positions we will adopt.
28
YOU WILL LIKELY BE SUBJECT TO STATE, LOCAL AND FOREIGN TAXES AND RETURN FILING
REQUIREMENTS AS A RESULT OF INVESTING IN OUR COMMON UNITS.
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state, local and foreign income taxes, unincorporated
business taxes and estate, inheritance, or intangible taxes that are imposed by
the various jurisdictions in which we do business or own property. You will
likely be required to file state, local and foreign income tax returns and pay
state and local income taxes in some or all of the various jurisdictions in
which we do business or own property and may be subject to penalties for failure
to comply with those requirements. We will initially own property and conduct
business in Alabama, Arizona, Arkansas, Georgia, Florida, Illinois, Louisiana,
Mississippi, Texas and Utah. We may do business or own property in other states
or foreign countries in the future. It is your responsibility to file all
federal, state, local and foreign tax returns. Our counsel has not rendered an
opinion on the state, local or foreign tax consequences of an investment in our
common units.
FORWARD-LOOKING STATEMENTS
Statements included in this prospectus that are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions or forecasts related
thereto), including the information set forth in Appendix E, are forward-
looking statements. These statements can be identified by the use of
forward-looking terminology including "forecast," "may," "believe," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. We and our representatives may from time to time make other oral or
written statements that are also forward-looking statements.
These forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.
Because these forward-looking statements involve risks and uncertainties,
actual results could differ materially from those expressed or implied by these
forward-looking statements for a number of important reasons, including those
discussed under "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
At the closing of this offering, we expect to:
- receive net proceeds of approximately $53.0 million from this offering,
assuming the sale of the 3,000,000 common units at a public offering
price of $20.00 per common unit and after deducting underwriting
discounts and offering expenses which we estimate to be $7.0 million;
- borrow $25.0 million under a term loan with RBC Capital Markets; and
- borrow approximately $6.4 million from our $35.0 million revolving credit
facility with RBC Capital Markets.
As a result of these transactions, we expect to receive approximately $84.4
million of net proceeds. We intend to use these proceeds to:
- repay the outstanding principal balance plus accrued but unpaid interest
and prepayment fees, for a cash payment of approximately $34.7 million,
under our assumed senior subordinated notes with J.P. Morgan Partners,
which notes have an interest rate of 16.50% and a maturity date of
December 16, 2006;
- repay the outstanding principal balance plus accrued but unpaid interest
and prepayment fees, for a cash payment of approximately $20.4 million,
under our assumed term loan with General Electric
29
Capital Corporation, which loan currently has an interest rate of 5.41%
and a maturity date of April 16, 2005, and is secured by certain of our
vessels, property, plants and equipment;
- repay the outstanding principal balance plus accrued but unpaid interest,
for a cash payment of approximately $17.7 million, under our assumed
revolving credit facility with JPMorgan Chase Bank, which facility
currently has an interest rate of 4.82% and a maturity date of April 16,
2004, and is secured by our inventories, receivables and certain other
assets;
- repay the outstanding principal balance plus accrued but unpaid interest,
for a cash payment of approximately $8.2 million, under our promissory
note with U.S. Bancorp Leasing & Financial, which note currently has an
interest rate of 5.16% and a maturity date of September 20, 2007, and is
secured by certain of our vessels;
- purchase two barges subject to our assumed lease-buy back arrangement
with U.S. Bancorp Leasing & Financial, for a cash payment of
approximately $2.9 million; and
- pay transaction expenses associated with our new revolving and term
credit facility described above.
The proceeds from any exercise of the underwriters' over-allotment option
will be used to repay borrowings under our revolving credit facility and the
balance, if any, will be added to our working capital and used for general
corporate purposes.
30
CAPITALIZATION
The following table shows:
- our historical capitalization as of June 30, 2002;
- our pro forma capitalization as of June 30, 2002, adjusted to reflect the
transfer of assets, liabilities and operations to the operating
partnership;
- our pro forma capitalization as of June 30, 2002, adjusted to reflect the
debt we will assume from Martin Resource Management in connection with
this offering; and
- our pro forma capitalization as of June 30, 2002, adjusted to reflect the
application of the net proceeds we receive in this offering in the manner
described under "Use of Proceeds."
- our pro forma capitalization as of June 30, 2002, adjusted to reflect the
application of the net proceeds we receive in this offering and our
borrowings in the manner described under "Use of Proceeds."
This table should be read together with, and is qualified in its entirety
by, reference to our historical combined and pro-forma financial statements and
the accompanying notes included elsewhere in this prospectus. You should also
read this table in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AS OF JUNE 30, 2002
----------------------------------------------------------------
PRO FORMA FOR PRO FORMA FOR
TRANSFER OF ASSETS, ASSUMPTION OF
LIABILITIES AND MARTIN RESOURCE PRO FORMA
HISTORICAL OPERATIONS TO MANAGEMENT FOR THE
COMBINED OPERATING PARTNERSHIP DEBT(b) OFFERING(c) PRO FORMA
---------- --------------------- --------------- ----------- ---------
(IN THOUSANDS)
Cash and cash equivalents.............. $ 242 $ 242 $ 242 $ 53,242 $ 2,937
======= ======= ======== ======== =======
Long-term debt:
Due to affiliates.................... $32,820 $28,192 $ --(a) $ -- $ --
Term debt............................ 7,422(d) 7,422(d) 28,151 28,151 25,000
Subordinated debt.................... -- -- 30,000 30,000 --
Revolving credit facility............ -- -- 15,400 15,400 --
New revolving credit facility........ -- -- -- -- 4,000
------- ------- -------- -------- -------
Total long-term debt(e)........... 40,242 35,614 73,551 73,551 29,000
Combined Equity........................ 21,128 23,574 (14,363)(a) -- --
Partners equity:
Common Unitholders................... -- -- -- 53,000 53,000
Subordinated Unitholders............. -- -- -- (7,341) (7,341)
General partner...................... -- -- -- (150) (150)
------- ------- -------- -------- -------
Total Combined Equity (Partners'
Capital)........................ 21,128 23,574 (14,363) 45,509 45,509
------- ------- -------- -------- -------
Total capitalization............ $61,370 $59,188 $ 59,188 $119,060 $74,509
======= ======= ======== ======== =======
---------------
(a) Reflects the elimination of intercompany payables in connection with the
issuance of our equity to Martin Resource Management and its affiliates.
(b) Reflects our assumption of the following debt of Martin Resource Management
upon the closing of this offering:
- $20.7 million of term debt with General Electric Capital Corporation. The
difference between the carrying amount of this debt at June 30, 2002 and
the $20.4 million to be repaid with a portion of
31
the net proceeds of this offering is attributable to principal payments
and interest accrued between June 30, 2002 and the anticipated closing of
this offering and prepayment fees due on repayment.
- $30.0 million of subordinated debt with J.P. Morgan Partners. The
difference between the carrying amount of this debt at June 30, 2002 and
the $34.7 million to be repaid with a portion of the net proceeds of this
offering is attributable to interest accrued between June 30, 2002 and
the anticipated closing of this offering and prepayment fees due on
repayment.
- $15.4 million of amounts owed under a credit facility with JPMorgan Chase
Bank. The difference in the carrying amount of this debt at June 30, 2002
and the $17.7 million to be repaid with a portion of the net proceeds of
this offering is attributable to additional borrowings between June 30,
2002 and the anticipated closing of this offering.
(c) Reflects the application of the net proceeds we receive from this offering
and the borrowings we incur in connection with the closing of this
offering, in the manner described under "Use of Proceeds."
(d) $8.4 million term note, $1.0 million of which is payable within one year,
with U.S. Bancorp Leasing & Financial. The difference between the carrying
amount of this note at June 30, 2002 and the $8.2 million to be repaid with
a portion of the net proceeds of this offering is attributable to principal
paid between June 30, 2002 and the anticipated closing of this offering.
(e) At the anticipated closing of this offering, we expect our long-term
indebtedness to be approximately $31.4 million, consisting of $25 million
of term debt and $6.4 million borrowed under our revolving credit facility.
Please read "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Liquidity and Capital Resources."
32
DILUTION
Dilution is the amount by which the offering price paid by the purchasers
of common units sold in this offering will exceed the net tangible book value
per unit after this offering. Pro forma net tangible book value per unit
represents the amount of total tangible assets less total liabilities, divided
by the pro forma number of units then outstanding. On a pro forma basis as of
June 30, 2002, after giving effect to this offering of common units and the
related transactions, our net tangible book value was $41.9 million, or $5.66
per unit. Purchasers of common units in this offering will experience immediate
dilution in net tangible book value per common unit for financial accounting
purposes, as illustrated in the following table.
Assumed initial public offering price per common unit....... $20.00
Less: Pro forma net tangible book value per unit after the
offering(1)(2)............................................ 5.66
------
Immediate dilution in net tangible book value per common
unit to new investors..................................... $14.34
======
---------------
(1) The net tangible book value does not include intangible assets with a book
value of $3.6 million.
(2) Determined by dividing the total number of units (3,000,000 common units,
4,253,362 subordinated units and the 2% general partner interest, which has
a dilutive effect equivalent to 148,028 units) to be outstanding after this
offering into our pro forma net tangible book value after giving effect to
the application of the net proceeds of this offering.
The following table sets forth the number of units that we will issue and
the total consideration contributed to us by our general partner and its
affiliates in respect of their interest and units and by the purchasers of
common units in this offering upon the closing of the transactions contemplated
by this prospectus.
UNITS ACQUIRED TOTAL CONSIDERATION
------------------- -------------------
NUMBER PERCENT AMOUNT PERCENT
--------- ------- -------- --------
(IN THOUSANDS)
General partner and affiliates(1)(2)............ 4,401,390 59.5% $(7,491) (14.3)%
New investors................................... 3,000,000 40.5% $60,000 114.3%
--------- ----- ------- -----
Total...................................... 7,401,390 100.0% $52,509 100.0%
========= ===== ======= =====
---------------
(1) Upon the closing of the transactions contemplated by this prospectus, Martin
Resource Management will own 4,253,362 subordinated units, and our general
partner will own a 2% general partner interest, in Martin Midstream Partners
L.P. having a dilutive effect equivalent to 148,028 units.
(2) The assets contributed by our general partner and its affiliates were
recorded at historical cost in accordance with generally accepted accounting
principles. Book value of the consideration provided by our general partner
and its affiliates, as of June 30, 2002, after giving effect to the
application of the net proceeds of this offering, is as follows:
(IN THOUSANDS)
Book value of net assets contributed before assumption of
Martin Resource Management debt........................... $ 23,574
Conversion to equity of amount due to Martin Resource
Management and affiliates................................. 28,192
Assumption of Martin Resource Management debt and accrued
interest and prepayment fees.............................. (70,388)
Elimination of deferred income taxes........................ 11,131
--------
Total consideration......................................... $ (7,491)
========
33
CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
General. Within 45 days after the end of each quarter, beginning with the
quarter ending December 31, 2002, we will distribute all of our available cash
to unitholders of record on the applicable record date. We will adjust the
minimum quarterly distribution for the period from the closing of this offering
through December 31, 2002, based on the actual length of the period.
During the subordination period, which we define below and in the glossary
located as Appendix C, the common units will have the right to receive
distributions of available cash from operating surplus in an amount equal to the
minimum quarterly distribution of $0.50 per quarter, plus any arrearages in the
payment of the minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from operating surplus may
be made on the subordinated units.
Definition of Available Cash. We define available cash in the glossary
located at Appendix C, and it generally means, for each fiscal quarter, all cash
on hand at the end of the quarter:
- less the amount of cash our general partner determines in its reasonable
discretion is necessary or appropriate to:
- provide for the proper conduct of our business;
- comply with applicable law, any of our debt instruments, or other
agreements; or
- provide funds for distributions to our unitholders and to our general
partner for any one or more of the next four quarters;
- plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our revolving credit facility and in all cases are used
solely for working capital purposes or to pay distributions to partners.
Intent to Distribute the Minimum Quarterly Distribution. We intend to
distribute to the holders of common units and subordinated units on a quarterly
basis at least the minimum quarterly distribution of $0.50 per unit, or $2.00
per year, to the extent we have sufficient cash from our operations after
establishment of cash reserves and payment of expenses, including payments to
our general partner. There is no guarantee, however, that we will pay the
minimum quarterly distribution on the common units in any quarter, and we will
be prohibited from making any distributions to unitholders if it would cause an
event of default, or an event of default is existing, under our revolving credit
facility.
Restrictions on Our Ability to Distribute Available Cash Contained in Our
Credit Agreement. Our ability to distribute available cash is contractually
restricted by the terms of our credit facility. Our credit facility will contain
covenants requiring us to maintain certain financial ratios. We will be
prohibited from making any distributions to unitholders if the distribution
would cause an event of default, or an event of default is existing, under our
credit facility or, if after giving effect to any distribution, we would then
have less than $5 million of borrowing availability thereunder. Please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Description of Our Credit
Facility."
OPERATING SURPLUS AND CAPITAL SURPLUS
General. All cash distributed to unitholders will be characterized as
either "operating surplus" or "capital surplus." We will distribute available
cash from operating surplus differently than available cash from capital
surplus.
34
Definition of Operating Surplus. We define operating surplus in the
glossary located at Appendix C. For any period it generally means:
- our cash balance at the closing of this offering; plus
- $8.5 million (as described below); plus
- all of our cash receipts after the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales or other dispositions of assets
outside the ordinary course of business; plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less
- all of our operating expenditures after the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures; less
- the amount of cash reserves our general partner deems necessary or
advisable to provide funds for future operating expenditures.
Definition of Capital Surplus. We also define capital surplus in the
glossary located at Appendix C. It will generally be generated only by:
- borrowings other than working capital borrowings;
- sales of debt and equity securities; and
- sales or other disposition of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
distributed in excess of operating surplus, regardless of its source, as capital
surplus. As reflected above, operating surplus includes $8.5 million in addition
to our cash balance at the closing of this offering, cash receipts from our
operations and cash from working capital borrowings. This amount does not
reflect actual cash on hand at closing that is available for distribution to our
unitholders. Rather, it is a provision that will enable us, if we choose, to
distribute as operating surplus up to $8.5 million of cash we receive in the
future from non-operating sources, such as asset sales, issuances of securities,
and long-term borrowings, that would otherwise be distributed as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.
SUBORDINATION PERIOD
General. During the subordination period, which we define below and in the
glossary located at Appendix C, the common units will have the right to receive
distributions of available cash from operating surplus in an amount equal to the
minimum quarterly distribution of $0.50 per quarter, plus any arrearages in the
payment of the minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from operating surplus may
be made on the subordinated units. The purpose of the subordinated units is to
increase the likelihood that during the subordination period there will be
available cash to be distributed on the common units.
35
Definition of Subordination Period. We define the subordination period in
the glossary located at Appendix C. The subordination period will extend until
the first day of any quarter beginning after September 30, 2009 in which each of
the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the "adjusted operating surplus" (as defined below) generated during each
of the three consecutive, non-overlapping four-quarter periods
immediately preceding that date equaled or exceeded the sum of the
minimum quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted basis and
the related distribution on the 2% general partner interest during those
periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
Early Conversion of Subordinated Units. Before the end of the
subordination period, a portion of the subordinated units may convert into
common units on a one-for-one basis immediately after the distribution of
available cash to the partners in respect of any quarter ending on or after:
- September 30, 2005 with respect to 20% of the subordinated units;
- September 30, 2006 with respect to 20% of the subordinated units;
- September 30, 2007 with respect to 20% of the subordinated units; and
- September 30, 2008 with respect to 20% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter
each of the following occurs:
- distributions of available cash from operating surplus on the common
units and the subordinated units equal or exceed the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
However, the early conversion of the second, third or fourth 20% of the
subordinated units may not occur until at least one year following the early
conversion of the first, second or third 20% of the subordinated units, as the
case may be.
In addition to the early conversion of subordinated units described above,
20% of the subordinated units may convert into common units on a one-for-one
basis prior to the end of the subordination period if at the end of a quarter
ending on or after September 30, 2005 each of the following occurs:
- distributions of available cash from operating surplus on each common
unit and subordinated unit equaled or exceeded $2.50 for each of the two
consecutive, non-overlapping four-quarter periods immediately preceding
that date;
- the adjusted operating surplus generated during each of the two
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of a distribution of $2.50 on all
of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
36
This additional early conversion is a one time occurrence.
Finally, 20% of the subordinated units may convert into common units on a
one-for-one basis prior to the end of the subordination period if at the end of
a quarter ending on or after September 30, 2005 each of the following occurs:
- distributions of available cash from operating surplus on each common
unit and subordinated unit equaled or exceeded $3.00 for each of the two
consecutive, non-overlapping four-quarter periods immediately preceding
that date;
- the adjusted operating surplus generated during each of the two
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of a distribution of $3.00 on all
of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
This additional early conversion is a one time occurrence.
Generally, the earliest possible date by which all subordinated units may
be converted into common units is September 30, 2007.
Definition of Adjusted Operating Surplus. We define adjusted operating
surplus in the glossary located at Appendix C and for any period it generally
means:
- operating surplus generated with respect to that period; less
- any net increase in working capital borrowings with respect to that
period; less
- any net reduction in cash reserves for operating expenditures with
respect to that period not relating to an operating expenditure made with
respect to that period; plus
- any net decrease in working capital borrowings with respect to that
period; plus
- any net increase in cash reserves for operating expenditures with respect
to that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net increases in
working capital borrowings and net drawdowns of reserves of cash generated in
prior periods.
Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by our general partner and
its affiliates are not voted in favor of such removal:
- the subordination period will end and each subordinated unit will
immediately convert into one common unit;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market
value of those interests at the time.
37
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter during the subordination period in the following manner:
- First, 98% to all common unitholders, pro rata, and 2% to our general
partner until we distribute for each outstanding unit an amount equal to
the minimum quarterly distribution for that quarter;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination
period;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we distribute for each outstanding unit an amount equal to the
minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.
INCENTIVE DISTRIBUTION RIGHTS
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. Our general partner currently holds the incentive distribution
rights but may transfer these rights separately from its general partner
interest, subject to restrictions in the partnership agreement.
If for any quarter:
- we have distributed available cash from operating surplus on each common
unit and subordinated unit in an amount equal to the minimum quarterly
distribution; and
- we have distributed available cash from operating surplus on each
outstanding common unit in an amount necessary to eliminate any
cumulative arrearages in payment of the minimum quarterly distribution;
then we will distribute any additional available cash from operating surplus for
that quarter among the unitholders and our general partner in the following
manner:
- First, 98% to all unitholders, pro rata, and 2% to our general partner,
until each unitholder receives a total of $0.55 per unit for that quarter
(the "first target distribution");
- Second, 85% to all unitholders, pro rata, and 15% to our general partner,
until each unitholder receives a total of $0.625 per unit for that
quarter (the "second target distribution");
- Third, 75% to all unitholders, pro rata, and 25% to our general partner,
until each unitholder receives a total of $0.75 per unit for that quarter
(the "third target distribution");
- Thereafter, 50% to all unitholders, pro rata, and 50% to our general
partner.
In each case, the amount of the target distribution set forth above is exclusive
of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution.
38
PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AND HYPOTHETICAL
ANNUALIZED YIELD
The following table illustrates the percentage allocations of the
additional available cash from operating surplus between the unitholders and our
general partner up to the various target distribution levels and a hypothetical
annualized percentage yield to be realized by a unitholder at each target
distribution level. For purposes of the following table, we calculated the
annualized percentage yield on a pretax basis assuming that:
- the common unit was purchased at an amount equal to the assumed initial
public offering price of $20.00 per common unit;
- we distributed each quarter during the first year following the
investment the amount set forth under the column "Total Quarterly
Distribution Target Amount;" and
- the quarterly distribution amounts shown do not include any common unit
arrearages.
The amounts set forth under "Marginal Percentage Interest in Distributions" are
the percentage interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and including the
corresponding amount in the column "Total Quarterly Distribution Target Amount,"
until available cash from operating surplus we distribute reaches the next
target distribution level, if any. The percentage interests shown for the
unitholders and our general partner for the minimum quarterly distribution are
also applicable to quarterly distribution amounts that are less than the minimum
quarterly distribution.
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
TOTAL QUARTERLY HYPOTHETICAL --------------------
DISTRIBUTION ANNUALIZED GENERAL
TARGET AMOUNT YIELD UNITHOLDER PARTNER
------------------------ --------------------- ---------- -------
Minimum Quarterly
Distribution....... $0.50 10% 98% 2%
First Target
Distribution....... up to $0.55 up to 11% 98% 2%
Second Target
Distribution....... above $0.55 up to $0.625 above 11% up to 12.5% 85% 15%
Third Target
Distribution....... above $0.625 up to $0.75 above 12.5% up to 15% 75% 25%
Thereafter........... above $0.75 above 15% 50% 50%
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus, if any, in the following
manner:
- First, 98% to all unitholders, pro rata, and 2% to our general partner,
until we distribute for each common unit that was issued in this offering
an amount of available cash from capital surplus equal to the initial
public offering price;
- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner, until we distribute for each common unit an amount of available
cash from capital surplus equal to any unpaid arrearages in payment of
the minimum quarterly distribution on the common units; and
- Thereafter, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per unit
is referred to as the "unrecovered initial unit price." Each time a distribution
of capital surplus is made, the minimum
39
quarterly distribution and the target distribution levels will be reduced in the
same proportion as the corresponding reduction in the unrecovered initial unit
price. Because distributions of capital surplus will reduce the minimum
quarterly distribution, after any of these distributions are made, it may be
easier for our general partner to receive incentive distributions and for the
subordinated units to convert into common units. Any distribution of capital
surplus before the unrecovered initial unit price is reduced to zero, however,
cannot be applied to the payment of the minimum quarterly distribution or any
arrearages.
Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will then make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to our
general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:
- the minimum quarterly distribution;
- target distribution levels;
- unrecovered initial unit price;
- the number of common units issuable during the subordination period
without a unitholder vote; and
- the number of common units into which a subordinated unit is convertible.
For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance of additional
units for cash or property.
In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For example, if we
became subject to a maximum marginal federal and effective state and local
income tax rate of 38%, then the minimum quarterly distribution and the target
distributions levels would each be reduced to 62% of their previous levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon our
liquidation, to the extent required to permit common unitholders to receive
their unrecovered initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid arrearages in
payment of the minimum quarterly distribution on the common units. However,
there may not be sufficient gain upon our liquidation to enable the holders of
common units to fully recover all of these amounts, even though there may be
cash available for distribution to the holders
40
of subordinated units. Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive distribution rights
of our general partner.
Manner of Adjustments for Gain. The manner of the adjustment for gain is
set forth in the partnership agreement. If our liquidation occurs before the end
of the subordination period, we will allocate any gain to the partners in the
following manner:
- First, to our general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner until the capital account for each common unit is equal to the
sum of:
(1) the unrecovered initial unit price; plus
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum quarterly
distribution;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to our
general partner until the capital account for each subordinated unit is
equal to the sum of:
(1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
- Fourth, 98% to all unitholders, pro rata, and 2% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the first target distribution per unit
over the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the minimum quarterly distribution
per unit that we distributed 98% to the unitholders, pro rata, and 2% to
the general partner, for each quarter of our existence;
- Fifth, 85% to all unitholders, pro rata, and 15% to our general partner,
pro rata, until we allocate under this paragraph an amount per unit equal
to:
(1) the sum of the excess of the second target distribution per unit
over the first target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the minimum quarterly distribution
per unit that we distributed 85% to the units, pro rata, and 15% to our
general partner, pro rata, for each quarter of our existence;
- Sixth, 75% to all unitholders, pro rata, and 25% to our general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the third target distribution per unit
over the second target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the first target distribution per
unit that we distributed 75% to the unitholders, pro rata, and 25% to our
general partner for each quarter of our existence;
- Thereafter, 50% to all unitholders, pro rata, and 50% to our general
partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.
41
Manner of Adjustments for Losses. Upon our liquidation, we will generally
allocate any loss to our general partner and the unitholders in the following
manner:
- First, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to our general partner until
the capital accounts of the subordinated unitholders have been reduced to
zero;
- Second, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to our general partner until
the capital accounts of the common unitholders have been reduced to zero;
and
- Thereafter, 100% to our general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first priority above will no longer be applicable.
Adjustments to Capital Accounts. We will make adjustments to capital
accounts upon the issuance of additional units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and our general partner in the same manner as
we allocate gain or loss upon liquidation. In the event that we make positive
adjustments to the capital accounts upon the issuance of additional units, we
will allocate any later negative adjustments to the capital accounts resulting
from the issuance of additional units or upon our liquidation in a manner that
results, to the extent possible, in the general partner's capital account
balances equaling the amount that they would have been if no earlier positive
adjustments to the capital accounts had been made.
42
CASH AVAILABLE FOR DISTRIBUTION
We intend to pay each quarter, to the extent we have sufficient available
cash from operating surplus after payment of expenses, including payments to our
general partner, the minimum quarterly distribution of $0.50 per unit, or $2.00
per year, on all the common units and subordinated units. We believe we will
have sufficient available cash from operating surplus to allow us to make the
full minimum quarterly distribution on all the outstanding units for each
quarter through September 30, 2003. Available cash for any quarter will consist
generally of all cash on hand at the end of that quarter, plus working capital
borrowings after the end of the quarter, as adjusted for the establishment of
cash reserves. Operating surplus generally consists of cash on hand at closing
of this offering, cash generated from operations after deducting related
expenditures (including our general partner's expenses) and other items, plus
working capital borrowings after the end of the quarter, plus $8.5 million. The
definitions of available cash and operating surplus are in the glossary located
at Appendix C.
The amounts of available cash from operating surplus needed to pay the
minimum quarterly distribution for one quarter and for four quarters on the
common units, the subordinated units, and the general partner interest to be
outstanding immediately after this offering are approximately:
ONE QUARTER FOUR QUARTERS
----------- -------------
(IN THOUSANDS)
Common units................................................ $1,500 $ 6,000
Subordinated units.......................................... $2,127 $ 8,507
2.0% general partner interest............................... $ 74 $ 296
------ -------
Total.................................................. $3,701 $14,803
====== =======
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS DURING 2001 OR FOR THE SIX
MONTHS ENDED JUNE 30, 2002 WOULD NOT HAVE BEEN SUFFICIENT TO PAY THE MINIMUM
QUARTERLY DISTRIBUTION ON ALL UNITS.
If we had completed the transactions contemplated in this prospectus on
January 1, 2001, pro forma available cash from operating surplus generated
during 2001 would have been approximately $12.0 million. This amount would have
been sufficient to allow us to pay the full minimum quarterly distribution on
the common units and approximately 67% of the minimum quarterly distribution on
the subordinated units. Pro forma available cash from operating surplus
generated during the six months ended June 30, 2002 would have been
approximately $5.6 million. This amount would have been sufficient to allow us
to pay the full minimum quarterly distribution on the common units and
approximately 58% of the minimum quarterly distribution on the subordinated
units.
We derived the amounts of pro forma available cash from operating surplus
shown above from our pro forma financial statements in the manner described in
Appendix D. The pro forma adjustments are based upon currently available
information and specific estimates and assumptions. These pro forma financial
statements do not purport to present our results of operations had the
transactions contemplated in this prospectus actually been completed as of the
dates indicated. In addition, available cash from operating surplus as defined
in the partnership agreement is a cash accounting concept, while our pro forma
financial statements have been prepared on an accrual basis. As a result, you
should only view the amount of pro forma available cash from operating surplus
as a general indication of the amount of available cash from operating surplus
that we might have generated had we been formed in earlier periods.
A more complete explanation of the pro forma adjustments can be found in
the notes to our pro forma combined financial statements beginning on page F-6.
WE BELIEVE WE WILL HAVE SUFFICIENT AVAILABLE CASH FROM OPERATING SURPLUS
FOLLOWING THIS OFFERING TO PAY THE MINIMUM QUARTERLY DISTRIBUTION ON ALL UNITS
THROUGH SEPTEMBER 30, 2003.
We believe that, following the closing of this offering, we will have
sufficient available cash from operating surplus to allow us to make the full
minimum quarterly distribution on all common and
43
subordinated units for each quarter through September 30, 2003. Our belief is
based on our financial forecast in Appendix E.
You should read the notes and the other information in Appendix E carefully
for a discussion of the material assumptions underlying the financial forecast.
The financial forecast presents, to the best of our knowledge and belief, the
expected results of our operations for the forecast period. The financial
forecast is based on certain assumptions and reflects our judgment of conditions
we expect to exist and the course of action we expect to take. The assumptions
disclosed herein are those that we believe are significant to the financial
forecast. We believe our actual results of operation will approximate those
reflected in the financial forecast; however, we can give you no assurance that
the forecasted results will be achieved. There will likely be differences
between the forecast and the actual results and those differences may be
material. If the forecast is not achieved, we may not be able to pay the full
minimum quarterly distribution or any amount on the common units. The financial
forecast has been prepared by management. Our independent auditors have not
examined, compiled or otherwise applied procedures to the financial forecast
presented herein and, accordingly, do not express an opinion or any other form
of assurance on it.
When considering the financial forecast, you should keep in mind the risk
factors and other cautionary statements under the heading "Risk Factors -- Risks
Relating to Our Business" beginning on page 15, and elsewhere in this
prospectus. Any of these factors or the other risks discussed in this prospectus
could cause our financial condition and results of operations to vary
significantly from those set forth in Appendix E.
44
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows selected historical financial and operating data
of the Martin Midstream Partners Predecessor and pro forma financial and
operating data of Martin Midstream Partners L.P. for the periods and as of the
dates indicated.
The selected historical financial data as of December 31, 2000 and 2001 and
for the years ended December 31, 1999, 2000 and 2001 are derived from the
audited combined financial statements of Martin Midstream Partners Predecessor.
The selected historical financial data as of December 31, 1997, 1998 and 1999
and for the years ended December 31, 1997 and 1998 and as of June 30, 2002 and
for the six months ended June 30, 2001 and 2002 are derived from the unaudited
combined financial statements of Martin Midstream Partners Predecessor.
Our molten sulphur business operations were transferred to CF Martin
Sulphur L.P. in November 2000. Therefore, revenues, operating costs and
operating income were reflected in the historical combined income statements
prior to that time, and, subsequently, have been reflected through our
non-controlling 49.5% limited partnership interest in CF Martin Sulphur, L.P.
under the equity method of accounting.
The selected pro forma financial data as of June 30, 2002 and for the year
ended December 31, 2001 and the six months ended June 30, 2002 are derived from
the unaudited pro forma financial statements of Martin Midstream Partners, L.P.
These pro forma financial statements show the pro forma effect of the transfer
of the Martin Midstream Partners Predecessor to our operating partnership, this
offering and related transactions. The pro forma balance sheet assumes this
offering and related transactions occurred as of June 30, 2002 and the pro forma
statements of income assume this offering and related transactions occurred on
January 1, 2001.
We define EBITDA as net income plus interest expense, income taxes and
depreciation and amortization expense. As described in the following paragraph,
we use EBITDA as a supplemental measure to evaluate our business, other
comparable companies and potential acquisitions opportunities. We also
understand that such data is used by investors to assess our historical ability
to service our indebtedness and make cash distributions to unitholders. However,
the term EBITDA is not defined under generally accepted accounting principles
and EBITDA is not a measure of operating income, operating performance or
liquidity presented in accordance with generally accepted accounting principles.
When assessing our operating performance or our liquidity, you should not
consider this data in isolation or as a substitute for our net income, cash flow
from operating activities or other cash flow data calculated in accordance with
generally accepted accounting principles. In addition, our EBITDA may not be
comparable to EBITDA or similarly titled measures utilized by other companies
since such other companies may not calculate EBITDA in the same manner as we do.
We use EBITDA as a supplemental financial measure to assess:
- the ability of our assets to generate cash sufficient for us to pay
interest costs and to make cash distributions to our unitholders;
- the financial performance of our assets;
- our liquidity and performance over time, and in relation to other
companies who own similar assets and who we believe calculate EBITDA in a
manner similar to us; and
- in some cases, for valuation purposes when determining the
appropriateness of the purchase price of assets we are considering
acquiring.
Although we use EBITDA to assess our ability to generate cash sufficient to pay
interest costs and make cash distributions to our unitholders, the amount of
cash available for such payments may be subject to our ability to reserve cash
for other uses, such as debt repayments, capital expenditures and operating
activities.
You should note that our EBITDA and our net income includes our equity in
the earnings of CF Martin Sulphur, L.P.,in which we own a non-controlling 49.5%
limited partnership interest. Under the
45
equity method of accounting, we include in our earnings our proportionate share
of CF Martin Sulphur, L.P.'s income or losses. However, the amount of our
proportionate share of the earnings or losses of CF Martin Sulphur, L.P. may
differ from the actual amount of cash, if any, that is distributed to us. As a
result, the amount of our EBITDA in any particular period may be significantly
higher than the amount of cash we generate in that period.
For example, for the years ended December 31, 2000 and 2001, our EBITDA was
$16.1 million and $16.9 million, respectively, and our equity in the earnings of
CF Martin Sulphur, L.P. was $0.3 million and $1.6 million, respectively.
However, we did not receive any cash distributions from CF Martin Sulphur, L.P.
during the 2000 period and only received cash distributions of $0.4 million
during the 2001 period. For the six-months ended June 30, 2001 and 2002, our
EBITDA was $10.3 million and $8.0 million, respectively, and our equity in the
earnings of CF Martin Sulphur, L.P. was $0.7 million and $1.7 million,
respectively. However, we only received cash distributions from CF Martin
Sulphur, L.P. during the 2001 period of $0.4 million and did not receive any
cash distributions during the 2002 period. On a pro forma basis, for the year
ended December 31, 2001 and for the six-months ended June 30, 2002, our EBITDA
was $16.9 million and $8.0 million, respectively, and our equity in the earnings
of CF Martin Sulphur, L.P. was $1.6 million and $1.7 million, respectively.
However, on a pro forma basis, we only received cash distributions from CF
Martin Sulphur, L.P. during the 2001 period of $0.4 million and did not receive
any cash distributions during the 2002 period. Please read "Business -- CF
Martin Sulphur, L.P. -- Management and Ownership -- Distributions" for more
information related to cash distributions from this partnership.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets to maintain the existing operating
capacity of our assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand the existing operating
capacity of our assets, whether through construction or acquisition. Repair and
maintenance expenditures associated with existing assets that are minor in
nature and do not extend the useful life of existing assets are treated as
operating expenses as incurred.
46
We derived the information in the following table from, and that
information should be read together with and is qualified in its entirety by
reference to, the historical combined and pro forma financial statements and the
accompanying notes included elsewhere in this prospectus. The table should be
read together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
MARTIN MIDSTREAM PARTNERS PREDECESSOR -- HISTORICAL COMBINED
-----------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- -------------------------
1997 1998 1999 2000 2001 2001 2002
----------- ----------- ----------- -------- -------- ----------- -----------
($ IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues................... $140,743 $142,203 $172,895 $199,813 $163,118 $98,540 $68,340
Cost of products sold...... 109,698 103,446 129,934 150,063 119,767 73,518 48,475
Operating expenses......... 17,897 20,183 22,557 25,993 20,472 11,455 10,018
Selling, general, and
administrative............ 4,562 7,344 8,747 7,880 7,513 3,974 3,374
Depreciation and
amortization.............. 4,250 5,578 6,914 6,413 4,122 2,008 2,216
-------- -------- -------- -------- -------- ------- -------
Total costs and
expenses................ 136,407 136,551 168,152 190,349 151,874 90,955 64,083
-------- -------- -------- -------- -------- ------- -------
Operating income........... 4,336 5,652 4,743 9,464 11,244 7,585 4,257
Equity in earnings (losses)
of unconsolidated
entities.................. -- -- (110) 192 1,477 698 1,470
Interest expense........... (3,322) (4,650) (7,049) (7,949) (5,390) (2,895) (2,039)
Other income (expense)..... 143 115 296 70 82 41 15
-------- -------- -------- -------- -------- ------- -------
Income (loss) before income
taxes..................... 1,157 1,117 (2,120) 1,777 7,413 5,429 3,703
Income taxes............... 422 500 (501) 847 2,735 1,990 1,333
-------- -------- -------- -------- -------- ------- -------
Net income (loss).......... $ 735 $ 617 $ (1,619) $ 930 $ 4,678 $ 3,439 $ 2,370
======== ======== ======== ======== ======== ======= =======
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............... $ 86,545 $110,808 $123,275 $102,384 $ 88,953 $89,267 $84,690
Due to affiliates.......... 15,265 44,581 54,317 39,096 36,796 35,263 32,820
Long-term debt............. 28,571 26,082 24,274 10,691 7,845 8,484 7,422
Owner's equity (partners'
capital).................. 14,153 14,769 13,150 14,080 18,758 17,519 21,128
CASH FLOW DATA:
Net cash flow provided by
(used in):
Operating activities...... $ 9,009 $ 5,274 $ 6,537 $ 1,621 $ 11,144 $ 7,280 $ 6,666
Investing activities...... (16,148) (28,321) (14,592) (3,084) (6,809) (1,750) (2,112)
Financing activities...... 7,182 23,194 7,947 1,421 (4,400) (5,629) (4,374)
OTHER FINANCIAL DATA:
EBITDA(1).................. $ 8,729 $ 11,345 $ 11,843 $ 16,139 $ 16,925 $10,332 $ 7,958
Maintenance capital
expenditures.............. 2,092 3,364 3,479 1,934 2,465 640 107
Expansion capital
expenditures.............. 13,406 2,257 11,652 2,010 3,764 523 1,909
-------- -------- -------- -------- -------- ------- -------
Total capital
expenditures.............. $ 15,498 $ 5,621 $ 15,131 $ 3,944 $ 6,229 $ 1,163 $ 2,016
======== ======== ======== ======== ======== ======= =======
MARTIN MIDSTREAM
PARTNERS L.P.
PRO FORMA
-------------------------
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
2001 2002
------------ ----------
($ IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues................... $162,788 $68,243
Cost of products sold...... 120,074 48,671
Operating expenses......... 19,766 9,751
Selling, general, and
administrative............ 7,754 3,510
Depreciation and
amortization.............. 3,977 2,136
-------- -------
Total costs and
expenses................ 151,571 64,068
-------- -------
Operating income........... 11,217 4,175
Equity in earnings (losses)
of unconsolidated
entities.................. 1,641 1,654
Interest expense........... (1,399) (699)
Other income (expense)..... 81 15
-------- -------
Income (loss) before income
taxes..................... 11,540 5,145
Income taxes............... -- --
-------- -------
Net income (loss).......... $ 11,540 $ 5,145
======== =======
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............... $86,141
Due to affiliates.......... --
Long-term debt............. 29,000
Owner's equity (partners'
capital).................. 45,509
CASH FLOW DATA:
Net cash flow provided by
(used in):
Operating activities......
Investing activities......
Financing activities......
OTHER FINANCIAL DATA:
EBITDA(1).................. $ 16,916 $ 7,980
Maintenance capital
expenditures..............
Expansion capital
expenditures..............
Total capital
expenditures..............
---------------
(1) Under the equity method of accounting, these amounts include our equity in
the earnings of CF Martin Sulphur, L.P., which was formed in November 2000
and in which we own a non-controlling 49.5% limited partnership interest, in
the amounts of $318 and $1,641 for the years ended December 31, 2000 and
2001, respectively, $742 and $1,654 for the six months ended June 30, 2001
and 2002, respectively, and, on a pro forma basis, $1,641 for the year ended
December 31, 2001 and $1,654 for the six months ended June 30, 2002.
However, we did not receive any cash distributions from CF Martin Sulphur,
L.P. during the 2000 period, only $394 in cash distributions during the 2001
periods and no cash distributions during the 2002 period.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with the historical and pro forma combined
financial statements and the notes thereto included in this prospectus. For more
detailed information regarding the basis for presentation for the following
information, you should read the notes to the historical combined financial
statements included in this prospectus.
OVERVIEW
We are a Delaware limited partnership formed by Martin Resource Management
to receive the transfer of substantially all of the assets, liabilities and
operations of the Martin Midstream Partners Predecessor. We provide marine
transportation, terminalling, distribution and midstream logistical services for
producers and suppliers of hydrocarbon products and by-products, specialty
chemicals and other liquids. We also manufacture and market sulfur-based
fertilizers and related products. Hydrocarbon products and by-products are
produced primarily by major and independent oil and gas companies who often turn
to independent third parties, such as us, for the transportation and disposition
of these products. In addition to these major and independent oil and gas
companies, our primary customers include independent refiners, large chemical
companies, fertilizer manufacturers and other wholesale purchasers of
hydrocarbon products and by-products.
The historical results of the Martin Midstream Partners Predecessor are
derived from the audited historical combined financial statements of the Martin
Midstream Partners Predecessor included in this prospectus. Our assets,
liabilities and operations represent substantially all of the assets,
liabilities and operations of Martin Midstream Partners Predecessor and will be
contributed to our operating partnership upon the closing of this offering. We
have prepared the historical combined financial statements of the Martin
Midstream Partners Predecessor and this discussion and analysis as if the
operations of the predecessor had been operated as a stand-alone business for
the periods presented.
We analyze and report our results of operations on a segment basis. Our
four operating segments are as follows:
- marine transportation services for hydrocarbon products and by-products;
- terminalling of hydrocarbon products and by-products;
- distribution of LPGs; and
- manufacturing and marketing fertilizer products, which are primarily
sulfur-based, and other sulfur-related products.
In November 2000, Martin Resource Management and CF Industries formed CF
Martin Sulphur, L.P., a limited partnership. This partnership collects and
aggregates, transports, stores and markets molten sulfur. Prior to November
2000, Martin Resource Management operated this molten sulfur business as part of
its LPG distribution business which was recently contributed to us in connection
with our formation. Therefore, prior to November 2000, our results of operations
included 100% of the results of this molten sulfur business. Since November
2000, we have accounted for our 49.5% limited partner interest in CF Martin
Sulphur, L.P. on the equity method since we do not control this entity. As a
result, subsequent to the formation of CF Martin Sulphur, L.P., we have not
included any portion of the revenue, operating costs or operating income
attributable to this partnership in our results of operations or in the results
of operations of any of our operating segments. Rather, we have included only
our share of its net income in our statement of operations. Consequently, the
following discussion of our results of operations includes:
- information relating to the molten sulfur business we operated prior to
November 2000 as part of our LPG distribution operating segment, and
48
- information relating to the net income attributable to our interest in CF
Martin Sulphur, L.P. subsequent to its formation in November 2000, which
is contained in our "equity in earnings (losses) of unconsolidated
entities" line item in our historical combined financial statements.
Under the equity method of accounting, we do not include any individual
assets or liabilities of CF Martin Sulphur, L.P. on our balance sheet; instead,
we carried our book investment as a single amount within the "other liabilities"
caption on our balance sheet through December 31, 2001. Subsequently we carry
our book investment as a single amount within the "other assets" caption on our
balance sheet. Please read "-- Critical Accounting Policies -- Equity Method
Investment" below. We have not guaranteed the repayment of any debt of CF Martin
Sulphur, L.P. and we should not otherwise be required to repay any obligations
of CF Martin Sulphur, L.P. if it defaults on any such obligations. Please read
"Business -- CF Martin Sulphur, L.P." and the notes to the historical combined
financial statements for a more detailed discussion of this entity and our
accounting treatment of our ownership interest in this entity.
Since our operations were part of a taxable consolidated group during the
periods covered by the historical combined financial statements, our financial
statements include the effects of applicable income taxes in order to comply
with generally accepted accounting principles. Upon the closing of this
offering, we do not expect to be subject to federal or state income taxes.
Therefore, our financial statements subsequent to the offering will not include
the effects of any income taxes.
Upon the closing of this offering, we will incur additional expenses
relating to the reporting requirements under federal securities laws as well as
additional expenses relating to the preparation of tax reporting information for
our limited partners. These additional expenses are not reflected in our
historical results of operations or in our pro forma results of operations
included elsewhere in this prospectus. Please read "Martin Midstream Partners
L.P. Pro Forma Combined Financial Statements" included elsewhere in this
prospectus.
We do not have any off-balance sheet financing arrangements and we do not
engage in commodity contract trading or hedging activities.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on the historical combined financial statements of the
Martin Midstream Partners Predecessor. We prepared these financial statements in
conformity with generally accepted accounting principles. The preparation of
these financial statements required us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We based our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances.
Our results may differ from these estimates. Currently, we believe that our
accounting policies do not require us to make estimates using assumptions about
matters that are highly uncertain. However, we have described below the critical
accounting policies that we believe could impact our combined financial
statements most significantly.
You should also read Note 1, Summary of Significant Accounting Policies, to
our historical financial statements in conjunction with this Management's
Discussion and Analysis of Financial Condition and Results of Operations. Some
of the more significant estimates in these financial statements include the
amount of the allowance for doubtful accounts receivable and the benefit period
for the amortization of goodwill and other intangibles. One of our more
significant estimates is the determination of the fair value of our reporting
units under SFAS No. 142. Please read "-- Recent Accounting Pronouncements."
Product Exchanges. We enter into product exchange agreements with third
parties whereby we agree to exchange LPGs with third parties. We record the
balance of LPGs due to other companies under these agreements at quoted market
product prices and the balance of LPGs due from other companies at the lower of
cost or market. Cost is determined using the first-in, first-out (or FIFO)
method.
49
Revenue Recognition. For our marine transportation segment, we recognize
revenue for contracted trips upon completion of the trips. For time charters, we
recognize revenue based on the daily rate. For our terminalling segment, we
recognize revenue monthly for storage contracts based on the contracted monthly
tank fixed fee. For throughput contracts, we recognize revenue based on the
volume moved through our terminals at the contracted rate. For our LPG
distribution segment, we recognize revenue for product delivered by truck upon
the delivery of LPGs to our customers, which occurs when the customer physically
receives the product. When product is sold in storage, or by pipeline, we
recognize revenue when the customer receives the product from either the storage
facility or pipeline. For our fertilizer segment, we recognize revenue when the
customer takes title to the product, either at our plant or the customer's
facility.
Equity Method Investment. We use the equity method of accounting for our
interest in CF Martin Sulphur, L.P. because we only own a non-controlling 49.5%
limited partner interest in this partnership. In accordance with EITF Issue
89-7, Exchange of Assets or Interest in a Subsidiary for a Non-Controlling
Equity Interest in a New Entity, we did not recognize a gain in our 2000
combined financial statements when we contributed our molten sulfur business to
CF Martin Sulphur, L.P. because we concluded we had an implied commitment to
support the operations of the partnership as a result of our role as a supplier
of product to the partnership and our relationship to Martin Resource
Management, which guarantees the debt of the partnership.
As a result of the non-recognition of this gain, the amount we initially
recorded as an investment in CF Martin Sulphur, L.P. on our balance sheet is
less than the amount of our underlying equity in the partnership as recorded on
the books of CF Martin Sulphur, L.P. We are amortizing such excess amount over
20 years, the expected life of the net assets contributed to the partnership, as
additional equity in earnings of CF Martin Sulphur, L.P. in our statements of
operations.
Environmental Liabilities. We have historically not experienced
circumstances requiring us to account for environmental remediation obligations.
If such circumstances arise, we would estimate remediation obligations utilizing
a remediation feasibility study and any other related environmental studies that
we may elect to perform. We would record changes to our estimated environmental
liability as circumstances change or events occur, such as the issuance of
revised orders by governmental bodies or court or other judicial orders and our
evaluation of the likelihood and amount of the related eventual liability.
OUR RELATIONSHIP WITH MARTIN RESOURCE MANAGEMENT
Our sales to Martin Resource Management accounted for approximately:
- 4% and 5% of our total revenues during the six months ended June 30, 2001
and June 30, 2002, and 3%, 4% and 4% of our total revenues in 1999, 2000
and 2001, respectively;
- 16% and 18% of our marine transportation revenues during the six months
ended June 30, 2001 and June 30, 2002, and 19%, 14% and 14% of our marine
transportation revenues in 1999, 2000 and 2001, respectively;
- 9% and 8% of our terminalling revenues during the six months ended June
30, 2001 and June 30, 2002, respectively, and 24%, 16% and 10% of our
terminalling revenues in 1999, 2000 and 2001, respectively; and
- 7% and 8% of our fertilizer revenues during the six months ended June 30,
2001 and June 30, 2002, respectively, and 6%, 7%, and 5% of our
fertilizer revenue in each of 1999, 2000, and 2001, respectively.
In the aggregate, our purchases of land transportation services, storage
services, LPG products and sulfuric acid from Martin Resource Management
accounted for approximately 7% and 8% of our total cost of products sold during
the six months ended June 30, 2001 and June 30, 2002, respectively, and 9%, 7%
and 6% of our total cost of products sold in 1999, 2000 and 2001, respectively.
We also purchase marine
50
fuel and LPG truck loading costs from Martin Resource Management and we account
for these purchases as an operating expense.
Following this offering we will continue to be both an important supplier
to and customer of Martin Resource Management. We will provide marine
transportation and terminalling services to Martin Resource Management under the
following agreements. Each agreement will have a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term.
- We will provide marine transportation services to Martin Resource
Management under an agreement on a spot-contract basis. We will charge
fees to Martin Resource Management under this agreement based on
applicable market rates. Additionally, Martin Resource Management will
agree for a three year period under this agreement to use our four
vessels that are currently not subject to term agreements in a manner
such that we will receive at least $5.6 million annually for the use of
these vessels by Martin Resource Management and third parties.
- Martin Resource Management will lease one of our tanks at our Tampa
terminal under a terminal services agreement. The tank lease fee will be
fixed for the first year of the agreement and will be adjusted annually
thereafter based on a price index.
We will continue to purchase land transportation services, underground
storage services, sulfuric acid and marine fuel from Martin Resource Management.
We will also have exclusive access to and use of a truck loading and unloading
terminal and pipeline distribution system owned by Martin Resource Management at
Mont Belvieu, Texas. We will purchase these products and services under the
following agreements. Each agreement will have a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term.
- Martin Resource Management will agree to transport LPG shipments and
other liquid products under a motor carrier agreement. Our shipping rates
will be fixed for the first year of the agreement, subject to certain
cost adjustments. After the first year, shipping rates may be adjusted as
we and Martin Resource Management mutually agree or in accordance with a
price index.
- We will lease 120 million gallons of underground storage capacity in
Arcadia, Louisiana from Martin Resource Management under an underground
storage agreement. Our per-unit cost under this agreement will be fixed
for the first year of the agreement and will be adjusted annually
thereafter based on a price index.
- We will purchase sulfuric acid and marine fuel on a spot-contract basis
at a set margin over Martin Resource Management's cost under product
supply agreements.
- We will use Martin Resource Management's Mont Belvieu truck loading and
unloading terminal and pipeline distribution system under a throughput
agreement. Our throughput fees will be fixed for the first year of the
agreement and then will be adjusted on an annual basis thereafter in
accordance with a price index.
With the exception of marine transportation services, which we will provide
to Martin Resource Management at applicable market rates, the pricing and rates
of all of these agreements were based the same prices and rates in place prior
to this offering.
Martin Resource Management will direct our business operations through its
ownership and control of our general partner and under an omnibus agreement. We
are required to reimburse Martin Resource Management for all direct and indirect
expenses it incurs or payments it makes on our behalf or in connection with the
operation of our business. Under the omnibus agreement, the amount we will be
required to reimburse Martin Resource Management for indirect general and
administrative expenses and corporate overhead allocated to us will be capped at
$1.0 million during the first year of the agreement. In each of the following
four years, this amount may be increased by no more than the percentage increase
in the consumer price index for the applicable year. In addition, our general
partner will have the right to
51
agree to further increases in connection with expansions of our operations
through the acquisition or construction of new assets or businesses.
OUR RELATIONSHIP WITH CF MARTIN SULPHUR, L.P.
We will be both an important supplier to and customer of CF Martin Sulphur,
L.P. We have chartered one of our offshore tug/barge tanker units to CF Martin
Sulphur, L.P. for a guaranteed daily rate, subject to certain adjustments. This
charter has an unlimited term but may be cancelled by CF Martin Sulphur, L.P.
upon 90 days notice. After the execution of this agreement, CF Martin Sulphur,
L.P. paid to have this tug/barge tanker unit reconfigured to carry molten
sulfur. In the event CF Martin Sulphur, L.P. terminates this charter agreement,
we are obligated to reimburse CF Martin Sulphur, L.P. for a portion of such
reconfiguration costs. As of February 25, 2002, our aggregate reimbursement
liability would have been approximately $2.6 million. This amount decreases by
approximately $300,000 annually based on an amortization rate.
We did not have significant revenues from CF Martin Sulphur, L.P. prior to
2002. As a result of our charter agreement, revenues from our relationship with
CF Martin Sulphur, L.P. accounted for approximately 28% of our total marine
transportation revenues for the six months ended June 30, 2002.
In addition, we purchase all our sulfur from CF Martin Sulphur, L.P. at its
cost under a sulfur supply contract. This agreement has an annual term, which is
renewable for subsequent one-year periods.
We only own a non-controlling 49.5% limited partner interest in CF Martin
Sulphur, L.P. CF Martin Sulphur, L.P. is managed by its general partner which is
jointly owned and controlled by CF Industries and Martin Resource Management.
Martin Resource Management also conducts the day-to-day operations of CF Martin
Sulphur, L.P. under a long-term services agreement. Please read "Business -- CF
Martin Sulphur, L.P."
SOURCES OF REVENUES
Our sources of revenues include:
- Marine transportation revenues derived primarily from agreements with
customers who pay us according to a rate based on either the number of
days the customer uses our services or the number of shipments. Operating
expenses for our marine transportation business segment consist primarily
of salaries, fuel, maintenance, repairs and insurance.
- Terminalling revenues derived primarily from agreements with customers
who pay us a negotiated rate based on the storage capacity of the leased
tank. These agreements typically have terms in excess of one year.
Operating expenses for our terminalling business segment consist
primarily of salaries, utilities, maintenance, repairs and insurance.
- LPG distribution revenues derived from storing and selling LPGs. Prior to
November 2000, this segment included revenues derived from the
distribution of molten sulfur. The molten sulfur distribution and storage
operations were transferred to CF Martin Sulphur, L.P. in November 2000.
- Fertilizer and related product revenues derived from selling these
products to wholesale distributors and industrial customers. The costs of
products sold in our fertilizer business consist primarily of the cost of
the raw materials and associated production costs.
We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P. For example, we forecast that approximately
22% of our available cash from operating surplus will result from cash
distributions we receive from this partnership and approximately 27% of our net
income will be attributable to our interest in CF Martin Sulphur, L.P. during
the 12-month period ending September 30, 2003. Please read our "Financial
Forecast" located at Appendix E. As discussed above in "Critical Accounting
Policies", we account for this interest using the equity method of accounting
since we do not control this partnership. Under this method, we record our
portion of the net income of CF Martin Sulphur, L.P. as income in our
52
statement of operations. Also, there is a difference between the amount we
initially recorded as an investment on our balance sheet and the amount of our
underlying equity as recorded on the books of CF Martin Sulphur, L.P. This
difference is being amortized in the amount shown in our "equity in earnings
(losses) of unconsolidated entities" line item in our statement of operations.
The amount recorded in "equity in earnings (losses) of unconsolidated entities"
represented 14% and 45% of our net income before taxes for the six months ended
June 30, 2001 and June 30, 2002, respectively, and 22% of our net income before
taxes in 2001. However, we did not receive cash distributions from CF Martin
Sulphur, L.P. during these periods equal to these amounts. Please read "Selected
Historical and Pro Forma Financial and Operating Data."
RESULTS OF OPERATIONS
We evaluate segment performance on the basis of operating income, which is
derived by subtracting cost of products sold, operating expenses, selling,
general and administrative expenses, and depreciation and amortization expense
from revenues. The following table sets forth operating income by segment, and
equity in earnings (losses) of unconsolidated entities, for the Martin Midstream
Partners Predecessor for the years ended December 31, 1999, 2000, and 2001 and
the six months ended June 30, 2001 and 2002. The results of operations for the
first six months of the year are not necessarily indicative of the results of
operations which might be expected for the entire year.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------- -----------------------------------
1999 PERCENT 2000 PERCENT 2001 PERCENT 2001 PERCENT 2002 PERCENT
------ ------- ------ ------- ------- ------- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT FOR PERCENTS)
Operating income (loss)
Marine transportation...... $2,036 43% $5,395 57% $ 7,787 69% $4,876 64% $1,408 33%
Terminalling............... (439) (9)% 418 4% 1,750 16% 733 10% 918 22%
LPG Distribution........... 4,437 93% 3,880 41% 1,064 10% 1,416 19% 943 22%
Fertilizer................. (560) (12)% 624 7% 1,402 12% 916 12% 1,352 32%
Indirect selling, general
and administrative
expenses................. (731) (15)% (853) (9)% (759) (7)% (356) (5)% (364) (9)%
------ --- ------ --- ------- --- ------ ---- ------ ---
Operating income......... $4,743 100% $9,464 100% $11,244 100% $7,585 100% $4,257 100%
====== === ====== === ======= === ====== ==== ====== ===
Equity in earnings (losses)
of unconsolidated
entities................... $ (110) $ 192 $ 1,477 $ 698 $1,470
Our results of operations are discussed on a comparative basis below. We
discuss items we do not allocate on a segment basis, such as interest expense,
income tax expense, and indirect selling, general and administrative expenses,
as well as our equity in earnings (losses) of unconsolidated entities, after the
comparative discussion of our results of operations.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Our total revenues were $68.3 million for the six months ended June 30,
2002 compared to $98.5 million for the six months ended June 30, 2001, a
decrease of $30.2 million, or 31%. Our cost of products sold was $48.5 million
for the six months ended June 30, 2002 compared to $73.5 million for the six
months ended June 30, 2001, a decrease of $25.0 million, or 34%. Our total
operating expenses were $10.0 million for the six months ended June 30, 2002
compared to $11.5 million for the six months ended June 30, 2001, a decrease of
$1.4 million, or 13%.
Our total selling, general and administrative expenses were $3.4 million
for the six months ended June 30, 2002 compared to $4.0 million for the six
months ended June 30, 2001, a decrease of $0.6 million, or 15%. Total
depreciation and amortization was $2.2 million for six months ended June 30,
2002 compared to $2.0 million for the six months ended June 30, 2001, an
increase of $0.2 million, or 10%. Our operating income was $4.3 million for the
six months ended June 30, 2002 compared to $7.6 million for the six months ended
June 30, 2001, a decrease of $3.3 million or 44%.
53
The results of operations are described in greater detail on a segment
basis below.
Marine Transportation Business
The following table summarizes our results of operations in our marine
transportation segment.
SIX MONTHS
ENDED JUNE 30,
-----------------
2001 2002
------- -------
(IN THOUSANDS)
Revenues.................................................... $16,339 $11,651
Operating expenses.......................................... 9,932 8,598
------- -------
Operating margin.......................................... 6,407 3,053
Selling, general and administrative expenses................ 302 227
Depreciation and amortization............................... 1,229 1,418
------- -------
Operating income.......................................... $ 4,876 $ 1,408
======= =======
Revenues. Our marine transportation revenues decreased $4.7 million, or
29%, for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001. This decrease was primarily due to lower rates charged for our
services, lower demand for our services and the temporary non-use of two of our
offshore barge units. The decrease in demand for our services, as well as the
decrease in our rates, was due primarily to an industry-wide decrease in the
transportation of fuel oil. In the first six months of 2001, higher natural gas
prices created additional demand for fuel oil as a substitute for natural gas.
When natural gas prices declined by the end of the second quarter of 2001, the
demand for and price of fuel oil returned to normal levels. Additionally, we
placed one of our offshore barge units in a shipyard for 56 days during the
first quarter of 2002. This unit historically carried fuel oil and was placed in
a shipyard in order to modify it to carry molten sulfur. We placed another of
our offshore barge units in a shipyard for repairs and maintenance. The
unavailability of these two barge units resulted in a decrease in revenues
during the first six months of 2002. These vessels are both currently in
operation and under term contracts, one of which is with CF Martin Sulphur, L.P.
Operating expenses. Operating expenses decreased $1.3 million, or 13%, for
the six months ended June 30, 2002 compared to the six months ended June 30,
2001. This decrease was due primarily to lower expenses incurred while two of
our barge units were in a shipyard for the conversion and maintenance discussed
above.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 25%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. This decrease was
due primarily to a reduction of certain management personnel which occurred in
the fourth quarter of 2001.
Depreciation and Amortization. Depreciation and amortization increased
$0.2 million, or 15%, for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001. This increase was due primarily to depreciation of
maintenance capital expenditures made during 2001.
In summary, our marine transportation operating income decreased $3.5
million, or 71%, for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001.
54
Terminalling Business.
The following table summarizes our results of operations in our
terminalling segment.
SIX MONTHS ENDED
JUNE 30,
-----------------
2001 2002
------- -------
(IN THOUSANDS)
Revenues.................................................... $2,317 $2,392
Operating expenses.......................................... 669 677
------ ------
Operating margin.......................................... 1,648 1,715
Selling, general and administrative expenses................ 738 651
Depreciation and amortization............................... 177 146
------ ------
Operating income.......................................... $ 733 $ 918
====== ======
Revenues. Our terminalling revenues increased $0.1 million, or 3%, for the
six months ended June 30, 2002 compared to the six months ended June 30, 2001.
This slight increase was the result of an increase in revenue generated from our
two newly constructed asphalt tanks, which we put into service in May 2002,
offset by one of our tanks at our Tampa terminal being out of service for
repairs for 162 days during the first six months of 2002. This tank was placed
back in service in the third quarter of 2002.
Operating expenses. Operating expenses were $0.7 million for both six
month periods.
Selling, general and administrative expenses. Selling, general, and
administrative expenses were $0.7 million for both six month periods.
Depreciation and amortization. Depreciation and amortization was $0.1
million for the six months ended June 30, 2002 compared to $0.2 million for the
six months ended June 30, 2001, a decrease of 18%.
In summary, our terminalling operating income increased $0.2 million, or
25%, for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001.
LPG Distribution Business
The following table summarizes our results of operations in our LPG
distribution segment.
SIX MONTHS ENDED
JUNE 30,
-----------------
2001 2002
------- -------
(IN THOUSANDS)
Revenues.................................................... $61,062 $38,379
Cost of products sold....................................... 57,709 35,751
Operating expenses.......................................... 841 738
------- -------
Operating margin.......................................... 2,512 1,890
Selling, general and administrative expenses................ 970 764
Depreciation and amortization............................... 126 183
------- -------
Operating income.......................................... $ 1,416 $ 943
======= =======
Revenues. Our LPG distribution revenues decreased $22.7 million, or 37%,
for the six months ended June 30, 2002 compared to the six months ended June 30,
2001. This decrease was primarily due to decreases in LPG sales prices. Our
average LPG sales price, on a per gallon basis, during the first six months of
2002 was 36% lower than our average price during the first six months of 2001.
This decrease in price primarily resulted from an industry-wide decrease in the
demand for LPGs during the winter of 2001/2002 compared to the winter of
2000/2001 because of colder than normal temperatures during the
55
first quarter of 2001. Our LPG sales volume decreased 1% during the first six
months of 2002 when compared to the same six month period in 2001.
Cost of products sold. Our cost of products sold decreased $22.0 million,
or 38%, for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001, which approximated our decrease in sales. This decrease was
primarily due to a 37% decrease in the average price per gallon for product for
the first six months of 2002 as compared to the first six months of 2001.
Operating expenses. Operating expenses were $0.7 million for the six ended
months June 30, 2002 compared to $0.8 million for the six months ended June 30,
2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 21%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. This decrease was
primarily due to a lower amount of incentive compensation in the first quarter
of 2002 as compared to the first quarter of 2001. We paid a bonus in the first
quarter of 2001 because of extraordinary operating results occurring in such
quarter. This was a one-time bonus payment and was not part of an annual or
other incentive compensation program.
Depreciation and amortization. Depreciation and amortization increased
$0.1 million for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001.
In summary, our LPG distribution operating income decreased $0.5 million,
or 33%, for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001.
Fertilizer Business
The following table summarizes our results of operations in our fertilizer
segment.
SIX MONTHS ENDED
JUNE 30,
-----------------
2001 2002
------- -------
(IN THOUSANDS)
Revenues.................................................... $18,822 $15,918
Cost of products sold and operating expenses................ 15,822 12,729
------- -------
Operating margin.......................................... 3,000 3,189
Selling, general and administrative expenses................ 1,608 1,368
Depreciation and amortization............................... 476 469
------- -------
Operating income.......................................... $ 916 $ 1,352
======= =======
Revenues. Our fertilizer business revenues decreased $2.9 million, or 15%,
for the six months ended June 30, 2002 compared to the six months ended June 30,
2001. Although we sold approximately the same volume of product during both six
month periods, this decrease was due primarily to a drop in sales of our
premium, higher-priced products. This decrease in the sales of our premium
products was partially offset by an increase in sales of our lower-priced
products. Our average sales price, on a per ton basis, during the first six
months of 2002 was 14% lower than our average sales price during the first six
months of 2001. Our higher sales during 2001 were primarily the result of an
unusually large order under a term contract for one of our higher-priced
products. Consequently, our revenues were higher in the first six months of 2001
as compared to the first six months of 2002.
Cost of products sold and operating expenses. Our cost of products sold
and operating expenses decreased $3.1 million, or 20%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. As mentioned, we
sold a higher proportion of lower-priced products in the first six months of
2002 as compared to the first six months of 2001. Consequently, although the
volume of products we sold, and therefore the volume of raw materials we
purchased, was approximately the same in each six month period, we purchased
less higher-priced raw materials for our premium products in 2002. Therefore,
our average raw material cost, on a per ton basis, was lower during the first
six months of 2002 when compared to the first six months of 2001.
56
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 15%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001.
Depreciation and amortization. Depreciation and amortization was $0.5
million for both six month periods.
In summary, our fertilizer operating income increased $0.4 million, or 48%,
for the six months ended June 30, 2002 compared to the six months ended June 30,
2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our total revenues were $163.1 million in 2001 compared to $199.8 million
in 2000, a decrease of $36.7 million, or 18%. Our cost of products sold was
$119.8 million in 2001 compared to $150.1 million in 2000, a decrease of $30.3
million, or 20%. Our total operating expenses were $20.5 million in 2001
compared to $26.0 million in 2000, a decrease of $5.5 million, or 21%.
Our total selling, general and administrative expenses were $7.5 million in
2001 compared to $7.9 million in 2000, a decrease of $0.4 million, or 5%.
Depreciation and amortization was $4.1 million in 2001 compared to $6.4 million
in 2000, a decrease of $2.3 million, or 36%. Our operating income was $11.2
million in 2001 compared to $9.5 million in 2000, an increase of $1.8 million,
or 19%.
These results of operations are discussed in greater detail on a segment
basis below.
Marine Transportation Business
The following table summarizes our results of operations in our marine
transportation segment.
YEAR ENDED
DECEMBER 31,
-----------------
2000 2001
------- -------
(IN THOUSANDS)
Revenues.................................................... $26,060 $28,637
Operating expenses........................................ 17,272 17,845
------- -------
Operating margin....................................... 8,788 10,792
Selling, general and administrative expenses.............. 390 506
Depreciation and amortization............................. 3,003 2,499
------- -------
Operating income....................................... $ 5,395 $ 7,787
======= =======
Revenues. Our marine transportation revenues increased $2.6 million, or
10%, in 2001 compared to 2000. This increase was primarily due to increased
demand for our fuel oil barge services. The increase in demand for fuel oil
transportation resulted from a dramatic increase in natural gas prices in early
2001, which lead industrial customers to switch to fuel oil as a substitute for
natural gas. This increase in demand also resulted in an increase in the rates
we were able to charge for our services.
Operating expenses. Operating expenses increased $0.6 million, or 3%, in
2001 compared to 2000. This increase in operating expenses was attributable to
the increased utilization of our marine transportation assets.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 30%, in 2001 compared to
2000, primarily due to an increase in personnel costs associated with the hiring
of maintenance personnel to internalize maintenance costs.
Depreciation and amortization. Depreciation and amortization decreased
$0.5 million, or 17%, in 2001 compared to 2000.
In summary, our marine transportation operating income increased $2.4
million, or 44%, in 2001 compared to 2000.
57
Terminalling Business
The following table summarizes our results of operations in our
terminalling segment.
YEAR ENDED
DECEMBER 31,
---------------
2000 2001
------ ------
(IN THOUSANDS)
Revenues.................................................... $3,978 $4,368
Operating expenses........................................ 1,678 1,075
------ ------
Operating margin....................................... 2,300 3,293
Selling, general and administrative expenses.............. 1,425 1,277
Depreciation and amortization............................. 457 266
------ ------
Operating income....................................... $ 418 $1,750
====== ======
Revenues. Our terminalling revenues increased $0.4 million, or 10%, in
2001 compared to 2000. This increase was primarily due to one contract renewal
and one new contract we executed in early 2000. Our contract renewal related to
a sulfuric acid storage contract at our Tampa terminal, which enabled us to
increase our storage rates for this tank. Our new contract related to the
leasing of one of our tanks in Tampa we historically leased to an affiliate. The
new customer paid higher rates than the rates we charged to our affiliate. The
increase in revenues in 2001 as compared to 2000 is the result of these two
contracts being in place during all of 2001 while they were in place for only a
portion of the year in 2000.
Operating expenses. Operating expenses decreased $0.6 million, or 36%, in
2001 compared to 2000. This decrease was due primarily to the loss of expenses
associated with the molten sulfur tank in our Tampa terminal, which we
contributed to CF Martin Sulphur, L.P. in November 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 10%, in 2001 compared to
2000.
Depreciation and amortization. Depreciation and amortization decreased
$0.2 million, or 42%, in 2001 compared to 2000.
In summary, our terminalling operating income increased $1.3 million, or
319%, in 2001 compared to 2000.
LPG Distribution Business
The following table summarizes our results of operations in our LPG
distribution segment.
YEAR ENDED
DECEMBER 31,
------------------
2000 2001
-------- -------
(IN THOUSANDS)
Revenues.................................................... $143,799 $98,615
Cost of products sold....................................... 128,834 93,664
Operating expenses.......................................... 7,041 1,538
-------- -------
Operating margin.......................................... 7,924 3,413
Selling, general, and administrative expenses............... 2,118 1,963
Depreciation and amortization............................... 1,926 386
-------- -------
Operating income.......................................... $ 3,880 $ 1,064
======== =======
LPG revenue................................................. $104,974 $98,615
Sulphur revenue............................................. $ 38,825 $ --
58
As discussed previously, our molten sulphur business operations were
transferred to CF Martin Sulphur, L.P. in November 2000. Therefore, revenues,
operating costs and operating income were reflected in the historical combined
income statements prior to that time, and, subsequently, have been reflected
through our 49.5% limited partnership interest CF Martin Sulphur under the
equity method of accounting.
Revenues. Our distribution revenues decreased $45.2 million, or 31%, in
2001 compared to 2000. In November 2000, we contributed our molten sulfur
storage and distribution business to CF Martin Sulphur, L.P. Prior to this
transaction, we reported revenues from this business in this segment.
Approximately 86% of our $45.2 million decline in revenues in this segment
during 2001, or $38.8 million, was attributable to the loss of our molten sulfur
business revenues. The remaining 14% of this decrease, or $6.4 million, was
primarily due to an industry-wide decrease in the demand and sales price of LPGs
during 2001 compared to 2000. This decrease in demand and sales price was
primarily caused by warmer temperatures during much of 2001. Our average LPG
sales price during 2001 was 8% lower than our average sales price during 2000.
The impact of this decrease in price on our revenues was partially offset by an
increase in our sales volume in 2001. Our LPG sales volume during 2001 was 2%
higher than our sales volume during 2000. This increased volume was a result of
increased demand of certain industrial customers, whose demand is not affected
significantly by temperature changes.
Cost of products sold. Our cost of products sold decreased $35.2 million,
or 27%, in 2001 compared to 2000. This decrease is due primarily to the
contribution of our molten sulfur storage and distribution business to CF Martin
Sulphur, L.P. and the decrease in the sales prices of LPGs for the reasons
described above.
Operating expenses. Our distribution operating expenses decreased $5.5
million, or 78%, in 2001 compared to 2000. This decrease was due primarily to
expenses we no longer incurred after the contribution of our molten sulfur
storage and distribution business to CF Martin Sulphur, L.P.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 7%, in 2001 compared to 2000.
Depreciation and amortization. Depreciation and amortization decreased
$1.5 million, or 80%, in 2001 compared to 2000. This decrease was due primarily
to the contribution of our molten sulfur storage and distribution business to CF
Martin Sulphur, L.P. in November 2000.
In summary, our LPG distribution operating income decreased $2.8 million,
or 73%, in 2001 compared to 2000.
Fertilizer Business
The following table summarizes our results of operations in our fertilizer
segment.
YEAR ENDED
DECEMBER 31,
---------------------
2000 2001
--------- ---------
(IN THOUSANDS, EXCEPT
PER TON AMOUNTS)
Revenues.................................................... $25,976 $31,498
Cost of products sold and operating expenses................ 21,231 26,117
------- -------
Operating margin.......................................... 4,745 5,381
Selling, general and administrative expenses................ 3,094 3,009
Depreciation and amortization............................... 1,027 970
------- -------
Operating income.......................................... $ 624 $ 1,402
======= =======
Revenues. Our fertilizer business revenues increased $5.5 million, or 21%,
in 2001 compared to 2000. Our sales volume during 2001 was about the same as our
sales volume during 2000. Our increase in revenues was primarily due to
increases in our sales of higher-priced fertilizer products, which resulted in a
59
higher average per ton sales price. In particular, we had an unusually large
order under a term contract for one of our higher-priced products during 2001.
Consequently, our average sales price, on a per ton basis, during 2001 was 21%
higher than our average sales price during 2000.
Cost of products sold and operating expenses. Our cost of products sold
and operating expenses increased $4.9 million, or 23%, in 2001 compared to 2000.
This increase in cost of products sold and operating expenses was primarily the
result of our increased production of higher-priced products that required more
expensive raw materials.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 3%, in 2001 compared to 2000.
Depreciation and amortization. Depreciation and amortization was $1.0
million for both 2001 and 2000.
In summary, our fertilizer operating income increased $0.8 million, or
125%, in 2001 compared to 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our total revenues were $199.8 million in 2000 compared to $172.9 million
in 1999, an increase of $26.9 million, or 16%. Our cost of products sold was
$150.1 million in 2000 compared to $129.9 million in 1999, an increase of $20.1
million, or 15%. Our total operating expenses were $26.0 million in 2000
compared to $22.6 million in 1999, an increase of $3.4 million, or 15%.
Our total selling, general and administrative expenses were $7.9 million in
2000 compared to $8.7 million in 1999, a decrease of $0.9 million, or 10%.
Depreciation and amortization was $6.4 million in 2000 compared to $6.9 million
in 1999, a decrease of $0.5 million, or 7%. Our operating income was $9.5
million in 2000 compared to $4.7 million in 1999, an increase of $4.7 million,
or 100%.
These results of operations are discussed in greater detail on a segment
basis below.
Marine Transportation Business
The following table summarizes our results of operations in our marine
transportation segment.
YEAR ENDED
DECEMBER 31,
-----------------
1999 2000
------- -------
(IN THOUSANDS)
Revenues.................................................... $19,004 $26,060
Operating expenses.......................................... 13,736 17,272
------- -------
Operating margin.......................................... 5,268 8,788
Selling, general and administrative expenses................ 187 390
Depreciation and amortization............................... 3,045 3,003
------- -------
Operating income.......................................... $ 2,036 $ 5,395
======= =======
Revenues. Our marine transportation revenues increased $7.1 million, or
37%, in 2000 compared to 1999. This increase was primarily due to an increase in
the use of our offshore marine transportation services as the result of one of
our offshore barge units being used for 300 days during 2000, compared to only
75 days during 1999. This barge was in a shipyard for 151 days during 1999 while
it was being converted to carry fuel oil instead of specialty chemicals. This
barge unit was also not used for an additional 139 days during 1999 while its
companion tug was being repaired for damages caused by an engine room fire. To a
lesser extent, the rates we were able to charge for our marine transportation
services increased. This increase was a result of increased market demand due to
improved overall economic conditions.
60
Operating expenses. Our marine transportation operating expenses increased
$3.5 million, or 26%, in 2000 compared to 1999. This increase was due primarily
to the increased expenses we incurred because of the higher utilization of our
barge units during 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses for our marine transportation business increased $0.2
million, or 109%, in 2000 compared to 1999. In 2000, we decided to perform more
general maintenance services for our vessels rather than using third parties to
perform these services. The increase in selling, general and administrative
expenses in 2000 was due to hiring additional personnel to perform these
maintenance services.
Depreciation and amortization. Depreciation and amortization was $3.0
million for both 2000 and 1999.
In summary, our marine transportation operating income increased $3.4
million, or 165%, in 2000 compared to 1999.
Terminalling Business
The following table summarizes our results of operations in our
terminalling segment.
YEAR ENDED
DECEMBER 31,
---------------
1999 2000
------ ------
(IN THOUSANDS)
Revenues.................................................... $2,988 $3,978
Operating expenses........................................ 1,471 1,678
------ ------
Operating margin....................................... 1,517 2,300
Selling, general, and administrative expenses............. 1,353 1,425
Depreciation and amortization............................. 603 457
------ ------
Operating income (loss)................................ $ (439) $ 418
====== ======
Revenues. Our terminalling revenues increased $1.0 million, or 33%, in
2000 compared to 1999. This increase was primarily due to one contract renewal,
one new contract we executed in early 2000 and the use of an asphalt tank for
the entire year in 2000. Our contract renewal related to a sulfuric acid storage
contract at our Tampa terminal and we were able to increase our storage rates
for this tank as a result of this renewal. Our new contract related to the
leasing of one of our tanks in Tampa we had historically leased to an affiliate.
The new customer paid higher rates than the rates we charged to our affiliate.
Finally, we completed the construction of an asphalt tank at our Tampa terminal
in August 1999. Therefore, our revenues increased in 2000 as the result of
leasing this tank for 12 months in 2000, as compared to approximately four
months in 1999.
Operating expenses. Our terminalling operating expenses increased $0.2
million, or 14%, in 2000 compared to 1999. This increase in expenses is
primarily due to operating a new asphalt tank at our Tampa terminal we completed
in August 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.4 million for both 2000 and 1999.
Depreciation and amortization. Depreciation and amortization decreased
$0.1 million, or 24%, in 2000 compared to 1999.
In summary, our terminalling operating income was $0.4 million in 2000
compared to an operating loss of $0.4 million in 1999, an increase of $0.8
million.
61
LPG Distribution Business
The following table summarizes our results of operations in our LPG
distribution segment.
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
---------- ----------
(IN THOUSANDS)
Revenues.................................................... $123,683 $143,799
Cost of products sold....................................... 107,417 128,834
Operating expenses.......................................... 7,332 7,041
-------- --------
Operating margin.......................................... 8,934 7,924
Selling, general, and administrative expenses............... 2,368 2,118
Depreciation and amortization............................... 2,129 1,926
-------- --------
Operating income.......................................... $ 4,437 $ 3,880
======== ========
LPG revenue................................................. $ 68,067 $104,974
Sulphur revenue............................................. $ 55,616 $ 38,825
Revenues. Our distribution revenues increased $20.1 million, or 16%, in
2000 compared to 1999.
This increase was primarily due to increases in LPG sales prices. Our
average LPG sales price during 2000 was 67% higher than our average price during
1999. This average price increase resulted from industry-wide inventory
shortages of LPGs caused by increased LPG consumption due to colder than normal
temperatures during the fourth quarter of 2000. Our LPG sales volume during 2000
was 7% lower than our sales volume during 1999. This decrease was primarily due
to decreased demand from certain industrial customers, whose demand for LPGs is
not affected significantly by temperature changes.
We also stored and distributed molten sulfur in addition to LPGs in this
business segment during 1999 and for approximately 11 months in 2000. The
increase in revenues attributable to our LPG business was offset by decreases in
revenues attributable to our molten sulfur business. While our LPG business
revenues increased from $68.1 million in 1999 to $105.0 million in 2000, an
increase of 54%, our molten sulfur business revenues decreased to $38.8 million
in 2000 from $55.6 million in 1999, a decrease of 30%. This decrease in molten
sulfur revenues was primarily due to a 17% decrease in the average price of
molten sulfur in 2000 and the fact that we only operated our molten sulfur
business for 11 months during 2000 prior to our contribution of this business to
CF Martin Sulphur, L.P. in November 2000.
Cost of products sold. Our cost of products sold increased $21.4 million,
or 20%, in 2000 compared to 1999. This increase was primarily due to our higher
cost of LPGs during late 2000, which was only partially offset by our lower cost
of molten sulfur.
Operating expenses. Our distribution operating expenses decreased $0.3
million, or 4%, in 2000 compared to 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 11%, in 2000 compared to
1999.
Depreciation and amortization. Depreciation and amortization decreased
$0.2 million, or 10%, in 2000 compared to 1999.
In summary, our LPG distribution operating income decreased $0.6 million,
or 13%, in 2000 compared to 1999.
62
Fertilizer Business
The following table summarizes our results of operations in our fertilizer
segment.
YEAR ENDED
DECEMBER 31,
---------------------
1999 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PER TON AMOUNTS)
Revenues.................................................... $27,220 $25,976
Cost of products sold and operating expenses................ 22,534 21,231
------- -------
Operating margin.......................................... 4,686 4,745
Selling, general and administrative expenses................ 4,108 3,094
Depreciation and amortization............................... 1,138 1,027
------- -------
Operating income (loss)................................... $ (560) $ 624
======= =======
Revenues. Fertilizer revenues decreased $1.2 million, or 5%, in 2000
compared to 1999. This decrease was primarily due to a decrease in the volume of
product sold. Our sales volume during 2000 was 5% lower than our sales volume
during 1999. We experienced an unusual increase in demand of certain
agricultural fertilizer products in 1999, which did not repeat in 2000.
Cost of products sold and operating expenses. Our cost of products sold
and operating expenses decreased $1.3 million, or 6%, in 2000 compared to 1999,
primarily due to the decrease in the volume of the products we sold during 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.0 million, or 25%, in 2000 compared to
1999. This decrease was primarily due to reductions in the number of personnel
in sales and administration attributable to this segment. This reduction in the
number of personnel occurred in connection with an acquisition of a company we
completed in 1998.
Depreciation and amortization. Depreciation and amortization decreased
$0.1 million, or 10%, in 2000 compared to 1999.
In summary, our fertilizer operating income was $0.6 million in 2000
compared to an operating loss of $0.6 million in 1999, an increase of $1.2
million.
STATEMENT OF OPERATIONS ITEMS AS A PERCENTAGE OF REVENUES
In the aggregate, our cost of products sold, operating expenses, selling,
general and administrative expenses, and depreciation and amortization have
remained relatively constant as a percentage of revenues for the six months
ended June 30, 2001 and June 30, 2002 and during 1999, 2000 and 2001. The
following table summarizes, on a comparative basis, these items of our statement
of operations as a percentage of our revenues.
PERCENT OF GROSS
REVENUES FOR THE
PERCENT OF GROSS REVENUES FOR SIX MONTHS
THE YEAR ENDED DECEMBER 31, ENDED JUNE 30
------------------------------ ----------------
1999 2000 2001 2001 2002
------ ------ ------ ----- -----
Revenues.................................. 100% 100% 100% 100% 100%
Cost of products sold..................... 75% 75% 73% 75% 71%
Operating expenses........................ 13% 13% 13% 12% 15%
Selling, general and administrative
expenses................................ 5% 4% 5% 4% 5%
Depreciation and amortization............. 4% 3% 3% 2% 3%
63
EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED ENTITIES
Equity in earnings (losses) of unconsolidated entities primarily relates to
our 49.5% non-controlling limited partner interest in CF Martin Sulphur, L.P. In
addition this line item includes our 50% interest in a sulfur fungicide joint
venture. This joint venture interest will be retained by Martin Resource
Management.
Equity in earnings of unconsolidated entities for the six months ended June
30, 2002 increased $0.8 million, or 111%, compared to the six months ended June
30, 2001, due to the improved operating results of CF Martin Sulphur, L.P. CF
Martin Sulphur, L.P. sold 43% more tons of sulfur during the first six months of
2002 when compared to the same period in 2001. This increase was primarily due
to the new tug/barge tanker unit we chartered to CF Martin Sulphur, L.P. which
was put into service in February 2002. Additionally, CF Martin Sulphur, L.P.'s
average margin of products sold during the first six months of 2002 increased
approximately 31% when compared to its average margin for the same period in
2001. In 2001, equity in earnings of unconsolidated entities increased by $1.3
million over 2000, substantially due to earnings from CF Martin Sulphur L.P. for
a full twelve months in 2001 compared to only one month in 2000. For the year
ended 2000, equity in earnings of unconsolidated entities was $0.2 million
compared to a loss of $0.1 million substantially due to the results of
operations of the sulfur fungicide joint venture.
Equity in earnings of CF Martin Sulphur, L.P. includes amortization of the
difference between our book investment in the partnership and our related
underlying equity balance. The original amount of such difference included a
deferred gain of approximately $3.0 million. Such amortization amounted to $0.3
million for each of the six months ended June 30, 2002 and 2001, and $0.5
million for the year ended December 31, 2001.
INTEREST EXPENSE
Our interest expense for all operations was $2.0 million for the six months
ended June 30, 2002 compared to $2.9 million for the six months ended June 30,
2001, a decrease of $0.9 million, or 30%. This decrease was primarily due to
lower interest rates on our variable rate debt in 2002 compared to 2001.
Our interest expense for all operations was $5.4 million in 2001 compared
to $7.9 million in 2000, a decrease of $2.6 million, or 32%. This decrease was
primarily due to our reduced debt resulting from the debt assumed by CF Martin
Sulphur, L.P. in connection with the contribution of our molten sulfur storage
and distribution business to it in November 2000.
Our interest expense for all operations was $7.9 million in 2000 compared
to $7.0 million in 1999, an increase of $0.9 million, or 13%. Interest expense
was higher primarily as a result of our financing greater investments in
accounts receivable and inventory in 2000 compared to 1999.
INCOME TAX EXPENSE
Our effective tax rates for the six months ended June 30, 2002 and June 30,
2001 were 36% and 37%, respectively. Our effective tax rates for 2001, 2000 and
1999 were 37%, 48% and 24%, respectively. Our effective tax rates differed from
the federal tax rate of 34% primarily as a result of state income taxes and the
non-deductibility of certain goodwill amortization for book purposes.
INDIRECT SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Indirect selling, general, and administrative expense remained constant at
$0.4 million for the six months ended June 30, 2002 and June 30, 2001. Indirect
selling, general, and administrative expenses decreased $0.1 million, or 11%, to
$0.8 million in 2001 compared to $0.9 million in 2000. Indirect selling,
general, and administrative expenses grew $0.1 million, or 17%, to $0.9 million
in 2000 compared to $0.7 million in 1999.
In our historical combined financial statements, Martin Resource Management
allocated to us a portion of its indirect selling, general and administrative
expenses for services such as accounting,
64
engineering, information technology and risk management. We based this
allocation on the percentage of time spent by Martin Resource Management
personnel that provide such centralized services. Generally accepted accounting
principles also permit other methods for allocating these expenses, such as
basing the allocation on the percentage of revenues contributed by a segment.
The allocation of these expenses between Martin Resource Management and us is
subject to a number of judgments and estimates, regardless of the method used.
We can provide no assurances that our method of allocation, in the past or in
the future, is or will be the most accurate or appropriate method of allocating
these expenses. Other methods could result in a higher allocation of selling,
general and administrative expenses to us, which would reduce our net income.
Under our omnibus agreement with Martin Resource Management, the amount we will
be required to reimburse Martin Resource Management for indirect general and
administrative expenses and corporate overhead allocated to us will be capped at
$1.0 million during the first year of this agreement. This cap will be subject
to increases in subsequent years. Please read "Certain Relationships and Related
Transactions -- Omnibus Agreement."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
For the six months ended June 30, 2002, cash increased $0.2 million as a
result of $6.7 million provided by operating activities, $2.1 million used in
investing activities and $4.4 million used in financing activities. For the six
months ended June 30, 2001, cash decreased $0.1 million as a result of $7.3
million provided by operating activities, $1.8 million used in investing
activities and $5.6 million used in financing activities.
In 2001, cash decreased $0.1 million as a result of $11.1 million provided
by operating activities, $6.8 million used in investing activities, and $4.4
million used in financing activities. In 2000, cash remained constant as a
result of $1.6 million provided by operating activities, $3.1 million used in
investing activities, and $1.4 million provided by financing activities. In
1999, cash decreased by $0.1 million as a result of $6.5 million provided by
operating activities, $14.6 million used in investing activities, and $7.9
million provided by financing activities.
For the periods presented, our investing activities consisted primarily of
capital expenditures. Generally, our capital expenditure requirements have
consisted, and we expect that our capital requirements will continue to consist,
of:
- maintenance capital expenditures, which are capital expenditures made to
replace assets to maintain our existing operations and to extend the
useful lives of our assets; and
- expansion capital expenditures, which are capital expenditures made to
grow our business, to expand and upgrade our existing marine
transportation, terminalling, storage and manufacturing facilities, and
to construct new plants, storage facilities, terminalling facilities and
new marine transportation assets.
For the six months ended June 30, 2002 and 2001, our capital expenditures
for property and equipment were $2.0 million and $1.2 million, respectively. For
2001, 2000 and 1999, our capital expenditures for property and equipment were
$6.2 million, $3.9 million and $15.1 million, respectively.
As to each period:
- For the six months ended June 30, 2002, we spent $1.9 million for
expansion and $0.1 million for maintenance.
- For the six months ended June 30, 2001, we spent $0.5 million for
expansion and $0.6 million for maintenance.
- In 2001, we spent $3.8 million for expansion and $2.5 million for
maintenance.
65
- In 2000, we spent $2.0 million for expansion and $1.9 million for
maintenance.
- In 1999, we spent $11.7 million for expansion and $3.5 million for
maintenance.
In 2001, our expansion capital expenditures were primarily for the
conversion of an inland tug barge unit to equip it to carry asphalt, the
construction of two new asphalt tanks and the addition of a new fertilizer line
at one of our plants. Our maintenance capital expenditures were primarily made
in our marine transportation business for required Coast Guard dry dockings of
our vessels.
In 2000, our expansion capital expenditures were primarily to complete a
new fertilizer plant in Seneca, Illinois and upgrade a tank at our Tampa
terminal. Our maintenance capital expenditures were primarily made in our marine
transportation business for required Coast Guard dry dockings of our vessels.
In 1999, our expansion capital expenditures were primarily to upgrade an
offshore barge unit to haul fuel oil rather than specialty chemicals, to build a
new asphalt tank at our Tampa terminal and two new sulfur tanks at our Stanolind
terminal and to begin construction of a new fertilizer plant in Seneca,
Illinois. Maintenance capital expenditures were primarily made in our marine
transportation business for Coast Guard dry dockings and to repair one of our
offshore tugs that was damaged by an engine room fire. We also incurred
maintenance capital expenditures for maintenance at some of our fertilizer
plants.
For all periods presented, financing activities consisted of payments of
long term debt to financial lenders and net borrowings from or payments to
affiliates pursuant to intercompany loans. Additionally, for all periods
presented, we used our net borrowings to finance increases in working capital
and for capital expenditures. For the six months ended June 30, 2001 our net
payments were $5.6 million and for the six months ended June 30, 2002, our net
payments were $4.4 million. We had net borrowings of $7.9 million and $1.4
million in 1999 and 2000 respectively. In 2001, we had net payments of $4.4
million.
CAPITAL RESOURCES
Historically, we have generally satisfied our working capital requirements
and funded our capital expenditures with cash generated from operations and
borrowings. We expect our primary sources of funds for short-term liquidity
needs will be cash flows from operations, borrowings under our revolving credit
facility and cash distributions received from CF Martin Sulphur, L.P.
In connection with this offering, we will assume certain debt of Martin
Resource Management, which on June 30, 2002 had an aggregate outstanding balance
of approximately $66.1 million. We expect to use the proceeds of this offering
and borrowings under our new term and revolving credit facility to repay all of
this assumed debt upon the closing of this offering. After the closing of this
offering, we expect to have approximately $31.4 million of indebtedness,
consisting of outstanding borrowings of $25.0 million under our new term loan
and approximately $6.4 million under our new $35.0 million revolving credit
facility. As of June 30, 2002, on a pro forma basis, we would have had
approximately $29.0 million of indebtedness, consisting of outstanding
borrowings of $25 million under our assumed term loan and approximately $4.0
million under our assumed revolving credit facility. Please read
"Capitalization."
We expect our maintenance capital expenditures to be approximately $2.5 for
the 12-month period following this offering. At the completion of this offering,
we plan to acquire two asphalt barges for $2.9 million that we currently lease.
We do not expect to make significant expansion capital expenditures during this
period, although we cannot assure you that we will not significantly increase
these expenditures if, for example, we have an opportunity to acquire a business
or asset that would complement our existing business on favorable terms.
We believe that cash generated from operations and our borrowing capacity
under our revolving credit facility, as well as cash distributed to us from CF
Martin Sulphur, L.P. will be sufficient to meet our working capital
requirements, anticipated capital expenditures and scheduled debt payments for
the 12-month period following this offering.
66
Total Contractual Cash Obligations. A summary of our total contractual
cash obligations, as of December 31, 2001, is as follows:
PAYMENT DUE BY PERIOD
------------------------------------------------------------
TOTAL DUE IN DUE IN DUE IN
TYPE OF OBLIGATION(1) OBLIGATION 2002 2003-2004 2005-2006 DUE THEREAFTER
--------------------- ---------- ------ --------- --------- --------------
(IN THOUSANDS)
Long-term debt.................. $ 8,815 $ 970 $2,761 $3,061 $2,023
Operating leases................ 2,897 861 1,445 591 --
------- ------ ------ ------ ------
Total contractual cash
obligations................... 11,712 1,831 4,206 $3,652 $2,023
======= ====== ====== ====== ======
---------------
(1) Under our charter agreement with CF Martin Sulphur, L.P., we could be
obligated to reimburse CF Martin Sulphur, L.P. for a portion of the
expenditures CF Martin Sulphur, L.P. incurred in connection with
reconfiguring a tug/barge tanker unit to carry molten sulfur. We believe
that the risk is remote that we will ever be required to pay any amounts to
CF Martin Sulphur, L.P. under this reimbursement obligation. Therefore, we
did not include this obligation in this table. As of February 25, 2002, our
aggregate reimbursement liability would have been approximately $2.6
million. This amount decreases by approximately $300,000 annually based on
an amortization rate.
We have no commercial commitments such as lines of credit or guarantees
that might result from a contingent event that would require our performance
pursuant to a funding commitment.
DESCRIPTION OF OUR CREDIT FACILITY
In connection with the closing of this offering, we will enter into a new
syndicated term loan and revolving credit facility led by Royal Bank of Canada,
as administrative agent, lead arranger and book runner. This facility will
include a three year $35.0 million revolving credit facility comprised of (i) a
$25.0 million working capital subfacility that will be used for ongoing working
capital needs and general partnership purposes and (ii) a $10.0 million
subfacility that may be used to finance permitted acquisitions and capital
expenditures. It will also include a three-year $25.0 million term loan
facility, all of which will be drawn at the closing of this offering to acquire
assets and repay indebtedness assumed in connection with such acquisition.
Our obligations under the credit facility will be secured by substantially
all of our assets, including, without limitation, inventory, accounts
receivable, vessels, equipment and fixed assets. We may prepay all amounts
outstanding under this facility at any time without penalty.
Indebtedness under the credit facility will bear interest at either LIBOR
plus an applicable margin or the base rate plus an applicable margin. We expect
that the applicable margin for LIBOR loans will range from 1.75% to 2.75% and
the applicable margin for base rate loans will range from 0.75% to 1.75%. We
will incur a commitment fee on the unused portions of the revolving credit
facility.
In addition, we expect that the credit facility will contain various
covenants, which, among other things, will limit our ability to:
- incur indebtedness;
- grant certain liens;
- merge or consolidate unless we are the survivor;
- sell all or substantially all of our assets;
- make acquisitions;
- make certain investments;
67
- make capital expenditures;
- make distributions other than from available cash;
- create obligations for some lease payments;
- engage in transactions with affiliates; or
- engage in other types of business.
We also expect that the credit facility will also contain covenants, which,
among other things, will require us to maintain specified ratios of:
- EBITDA (as defined in the credit facility), pro forma for any asset
acquisition, to interest expense of not less than 3.0 to 1.0;
- EBITDA minus maintenance capital expenditures to interest expense,
principal payments and distributions to unitholders of not less than 1.0
to 1.0;
- total debt to EBITDA, pro forma for any asset acquisition, of not more
than 3.5 to 1.0;
- current assets to current liabilities of not less than 1.1 to 1.0; and
- an orderly liquidation value of pledged fixed assets to the aggregate
outstanding principal amount of our term indebtedness and our revolving
acquisition subfacility of not less than 2.0 to 1.0.
Also, the credit facility will contain covenants requiring us to maintain a
minimum tangible net worth of $37 million and to have not less than $5 million
of borrowing availability under our revolving credit facility after giving
effect to the payment of any distributions to unitholders. The amount we are
able to borrow under our revolving credit facility for working capital purposes,
up to $25 million, will be based on a formula calculated to measure our
borrowing base. Under this formula, our borrowing base will be reduced by
$375,000 per quarter during the entire three year term of our revolving credit
facility. If our business does not expand, this quarterly reduction may decrease
the amount we may borrow under our revolving credit facility and could result in
quarterly mandatory prepayments to the extent that borrowings under our revolver
exceed the revised borrowing base.
Other than mandatory prepayments that would be triggered by certain asset
dispositions, the issuance of subordinated indebtedness or as required under the
above noted borrowing base reductions, the credit facility will require interest
only payments on a quarterly basis. All outstanding principal and unpaid
interest must be paid on the third anniversary of the facility. The credit
facility will contain customary events of default, including, without
limitation, payment defaults, cross-defaults to other material indebtedness,
bankruptcy-related defaults, change of control defaults and litigation-related
defaults.
SEASONALITY
A substantial portion of our revenues are dependent on sales prices of
products, particularly LPGs and fertilizers, which fluctuate in part based on
winter and spring weather conditions. The demand for LPGs is strongest during
the winter heating season. For example, we received approximately 36% of our
total revenues from our LPG distribution business during the year 2001 in the
first quarter of that year, as compared to approximately 19% during the third
quarter of 2001. The demand for fertilizers is strongest during the early spring
planting season. For example, we received approximately 31% of our total
revenues from our fertilizer business during the year 2001 in the second quarter
of that year, as compared to approximately 17% during the third quarter of 2001.
However, our marine transportation and terminalling businesses, and the molten
sulfur business of CF Martin Sulphur, L.P., are typically not impacted by
seasonal fluctuations. We expect to derive a majority of our net income from
these lines of business and our interest in CF Martin Sulphur, L.P. Please read
"Business -- LPG Distribution Business -- Seasonality" and
"Business -- Fertilizer Business -- Seasonality." Therefore, we do not expect
that our overall net income will be impacted by seasonality factors.
68
IMPACT OF INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on our results of operations in 1999, 2000, 2001
or the first quarter of 2002. However, inflation remains a factor in the United
States economy and could increase our cost to acquire or replace property, plant
and equipment as well as our labor and supply costs. We cannot assure you that
we will be able to pass along increased costs to our customers.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations adopted by
various governmental authorities in the jurisdictions in which these operations
are conducted. We incurred no significant environmental costs, liabilities or
expenditures to mitigate or eliminate environmental contamination during 1999,
2000, 2001 or the first quarter of 2002. Under the omnibus agreement, Martin
Resource Management will indemnify us for five years after the closing of this
offering against:
- certain potential environmental liabilities associated with the assets it
contributed to us relating to events or conditions that occur or exist
before the closing of this offering, and
- any payments we are required to make, as a successor in interest to
affiliates of Martin Resource Management, under environmental indemnity
provisions contained in the contribution agreement associated with the
contribution of assets by Martin Resource Management to CF Martin
Sulphur, L.P. in November 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 discontinues goodwill amortization over its
estimated useful life; rather, goodwill will be subject to a fair-value based
impairment test in the year of adoption and on an annual basis. Similarly,
goodwill associated with equity-method investments will no longer be amortized.
With regard to intangible assets, SFAS No. 142 states that an acquired
intangible asset should be recognized separately if the benefit of the
intangible asset is obtained through contractual rights or if the intangible
asset can be sold, transferred, licensed, rented or exchanged, without regard to
the acquirer's intent. Net goodwill of $2.9 million as of December 31, 2001 will
no longer be amortized subsequent to the adoption of SFAS No. 142, effective
January 1, 2002, but will be subject to fair-value based impairment test
initially and one on an annual basis. We completed the initial test in the
second quarter of 2002 with no indication of impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." SFAS No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred, with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. We are evaluating the future financial effects of adopting SFAS No.
143 and expect to adopt the standard effective January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and APB Opinion No. 30, "Reporting the Results of
Operation-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objective of SFAS No. 144 is to establish one accounting model for long-lived
assets to be disposed of by sale as well as resolve implementation issues
related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1,
2002, did not have a material impact on our financial condition or results of
operations.
69
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices. The principal market risk to which we are exposed is commodity
price risk for LPGs. We also incur, to a lesser extent, risks related to
interest rate fluctuations.
Commodity Price Risk. Our LPG storage and distribution business is a
"margin-based" business in which our gross profits depend on the excess of our
sales prices over our supply costs. As a result, our profitability is sensitive
to changes in the market price of LPGs. LPGs are a commodity and the price we
pay for them can fluctuate significantly in response to supply and other market
conditions over which we have no control. When there are sudden and sharp
decreases in the market price of LPGs, we may not be able to maintain our
margins. Consequently, sudden and sharp decreases in the wholesale cost of LPGs
could reduce our gross profits. We attempt to minimize our exposure to market
risk by maintaining a balanced inventory position by matching our physical
inventories and purchase obligations with sales commitments. We do not acquire
and hold inventory or derivative financial instruments for the purpose of
speculating on price changes that might expose us to indeterminable losses.
Interest Rate Risk. We will be exposed to changes in interest rates as a
result of our term loan and revolving credit facility, each of which will have a
floating interest rate. We expect to have $30.2 million of indebtedness
outstanding under this facility at the closing of this offering. The impact of a
1% increase in interest rates on this amount of debt would result in an increase
in interest expense, and a corresponding decrease in income before taxes of
approximately $0.3 million annually.
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BUSINESS
OVERVIEW
We provide marine transportation, terminalling, distribution and midstream
logistical services for producers and suppliers of hydrocarbon products and
by-products, specialty chemicals and other liquids. We also manufacture and
market sulfur-based fertilizers and related products. Hydrocarbon products and
by-products are produced primarily by major and independent oil and gas
companies who often turn to independent third parties, such as us, for the
transportation and disposition of these products. In addition to these major and
independent oil and gas companies, our primary customers include independent
refiners, large chemical companies, fertilizer manufacturers and other wholesale
purchasers of hydrocarbon products and by-products.
We operate primarily in the Gulf Coast region of the United States. This
region is a major hub for petroleum refining and natural gas processing. We
provide our marine transportation and midstream logistical services and
distribute LPGs primarily to customers who are located in this region or in
close proximity to ports located along the Gulf of Mexico Intracoastal Waterway
and the Mississippi River inland waterway system. The fertilizer and related
products we manufacture are sold throughout the United States. We believe our
primary business lines, and our relationship with Martin Resource Management,
allow us to provide our customers a unique offering of integrated services and
products. Our business lines are described below.
We were recently formed by Martin Resource Management, a privately-held
company whose initial predecessor was incorporated in 1951 as a supplier of
products and services to drilling rig contractors. Since then, Martin Resource
Management has expanded its operations through acquisitions and internal
expansion initiatives as its management identified and capitalized on the needs
of producers and purchasers of hydrocarbon products and by-products and other
bulk liquids. Martin Resource Management will retain control over our operations
through its ownership of our general partner, as well as a significant ownership
interest in us through its ownership of approximately 57.5% of our limited
partner interests in the form of subordinated units.
Martin Resource Management has operated our businesses for several years.
Martin Resource Management began operating our LPG distribution business in the
1950s. It began our marine transportation business in the late 1980s. It entered
into our fertilizer and terminalling businesses in the early 1990s. In recent
years, Martin Resource Management has increased the size of our asset base
through expansions and strategic acquisitions. For example, in 1997 and 1998, we
acquired a total of 18 tank barges and 11 pushboats for our marine
transportation business in two acquisitions. Additionally, in 1998 we acquired
fertilizer plants in Odessa and Plainview, Texas, as well as plants in Salt Lake
City, Utah and Maricopa, Arizona. In 1999 and 2000, we built three new tanks and
upgraded a fourth tank at our terminalling facilities. Finally, we built our
fertilizer plant in Seneca, Illinois in 1999 and 2000.
We were formed to be a publicly-traded limited partnership primarily to
reduce the cost of capital associated with the businesses contributed to us by
Martin Resource Management, which we believe will enhance our ability to more
efficiently expand our operations. We believe having access to the public
capital markets will provide us with more favorable financing options.
Additionally, being a publicly-traded limited partnership should enhance our
ability to use our limited partner interests as consideration in future
acquisitions. We were formed as a limited partnership because limited
partnerships, unlike corporations, do not incur federal income tax liability if
they meet certain requirements. Please read "Material Tax
Consequences -- Partnership Status."
Martin Resource Management is not contributing all of its operations to us
and will continue to operate its retained businesses after the closing of this
offering. These retained businesses do not overlap with our operations in any
material respect. We will be an important customer and supplier of these
businesses. Please read "-- Our Relationship With Martin Resource Management"
for a discussion of this topic.
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PRIMARY LINES OF BUSINESS
We organize our operations into four general lines of business that can be
summarized as follows:
- Marine Transportation Business. Upon the closing of this offering, we
will own a marine fleet of 23 inland tank barges, 12 inland pushboats and
two offshore tug/barge tanker units that transport hydrocarbon products
and by-products. We provide these transportation services on a fee basis
primarily under annual contracts.
- Terminalling Business. We operate three terminal facilities that provide
storage and handling services for hydrocarbon products and by-products,
specialty chemicals and other liquids. The nine product tanks we own at
these facilities have an aggregate storage capacity of approximately
879,000 barrels. We generally charge a fixed fee for our terminalling
services and we have several long-term terminalling contracts with
customers.
- LPG Distribution Business. We purchase LPGs primarily from oil refiners
and natural gas processors. We store LPGs in our supply and storage
facilities for resale to propane retailers and industrial LPG users in
Texas and the southeastern United States. We own three LPG supply and
storage facilities with an aggregate storage capacity of approximately
132,000 gallons and we lease approximately 128 million gallons of
underground storage capacity. We generally try to coordinate our sales
and purchases of LPGs based on the same daily price index for LPGs in
order to decrease the impact of LPG price fluctuations on our
profitability.
- Fertilizer Business. We manufacture and sell fertilizer products, which
are primarily sulfur-based, and other sulfur related products to regional
wholesale distributors and industrial users.
We expect to receive a material portion of our net income and cash
available for distribution from our non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P., a limited partnership formed by Martin
Resource Management and CF Industries in November 2000. This partnership
collects and aggregates, transports, stores and markets molten sulfur supplied
by oil refiners and natural gas processors. Martin Resource Management and CF
Industries control this partnership through equal ownership of its general
partner. Martin Resource Management manages the day-to-day operations of CF
Martin Sulphur, L.P. under a long-term services agreement. We account for this
limited partner interest using the equity method of accounting, which requires
us to report only the equity earnings from our limited partner interest.
BUSINESS STRATEGY
We believe our business strategy will enable us to increase our revenues
and cash flow. The key components of our strategy are to:
- Expand Services Provided to Existing Customers. We generally begin a
relationship with a customer by transporting or marketing a limited range
of products or providing a limited range of other services or products.
We believe expanding our service and product offerings to existing
customers is the most efficient and cost effective method of utilizing
our asset base and customer relationships to achieve internal growth in
revenues and cash flow. We believe significant opportunities exist to
provide additional services and products to existing customers.
- Pursue Strategic Acquisitions. Martin Resource Management has grown
successfully in the past through strategic acquisitions. We expect to
continue this strategy by consistently surveying the marketplace to
identify and pursue acquisitions that expand the services and products we
offer or that expand our geographic presence. In acquiring other
businesses, we will attempt to utilize our industry knowledge, network of
customers and suppliers and strategic asset base to operate the acquired
businesses more efficiently and competitively, thereby increasing
revenues and cash flow.
- Attract New Customers in Existing Geographic Markets. Our marine
transportation operations are primarily focused in the Gulf Coast region
and along the southern portion of the nation's inland waterway system. We
will seek to identify and pursue opportunities to expand our customer
base for
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our marine transportation business in our existing geographic markets. We
sell our fertilizer products throughout the United States and we sell our
industrial sulfur products primarily in the eastern United States. We
will seek to expand our customer base for these products in these
geographic markets.
- Expand Geographically. We intend to identify and assess other attractive
geographic markets for our services and products based on the market
dynamics and the cost to penetrate such markets. We typically enter a new
market through an acquisition or by securing at least one major customer
or supplier and then dedicating or purchasing assets for operation in the
new market. Once in a new territory, we seek to expand our operations
within this new territory both by targeting new customers and by selling
additional services and products to the original customers in the
territory.
- Pursue Strategic Alliances. Many of our larger customers are
establishing strategic alliances with midstream logistics management
service providers to address logistical and transportation problems or
achieve operational synergies. These strategic alliances are typically
structured differently than our regular commercial relationships, with
the goal that such relationship would result in us providing or receiving
a more comprehensive package of services and/or products to or from the
customer or supplier. Martin Resource Management has periodically held
discussions with its and our customers and suppliers to form strategic
alliances. For example, CF Martin Sulphur, L.P., is a strategic alliance
with CF Industries. We intend to pursue similar strategic alliances with
significant customers in the future.
COMPETITIVE STRENGTHS
We believe we are well positioned to execute our business strategy because
of the following competitive strengths:
- Asset Base and Integrated Distribution Network. We operate a diversified
asset base that, together with the services provided by Martin Resource
Management, enables us to offer our customers an integrated distribution
network consisting of transportation, terminalling and midstream
logistical services while minimizing our dependence on the availability
and pricing of services provided by third parties. Our integrated
distribution network enables us to provide customers a complementary
portfolio of transportation, terminalling, distribution and midstream
logistical services for hydrocarbon products and by-products.
- Specialized Transportation Equipment and Storage Facilities. We have the
assets and expertise to handle and transport certain hydrocarbon products
and by-products with unique requirements for transportation and storage,
such as molten sulfur, asphalt and sulfuric acid. For example, we own
facilities and resources to transport molten sulfur and asphalt, which
must be maintained at temperatures between approximately 275 and 350
degrees Fahrenheit to remain in liquid form.
- Experienced Management Team and Operational Expertise. Members of our
management team have, on average, more than 22 years of experience in the
industries in which we operate. Further, members of our management team
have been employed by Martin Resource Management, on average, for 19
years. Our management team has a successful track record of creating
internal growth and completing acquisitions. We believe our management
team's experience and familiarity of our industry and businesses are
important assets that will assist us in implementing our business
strategies and pursuing our growth strategies.
- Strong Industry Reputation and Established Relationships With Suppliers
and Customers. We believe Martin Resource Management has established a
reputation in our industry as a reliable and cost-effective supplier of
services to our customers and has a track record of safe, efficient
operation of our facilities. Our management has also established
long-term relationships with many of our suppliers and customers. We
believe we will benefit from our management's reputation and track
record, and from these long-term relationships.
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- Financial Flexibility. After the application of the proceeds we receive
from this offering, we will have approximately $18.6 million of our $35.0
million revolving credit facility available for working capital purposes.
We will also have $10.0 million under such revolving facility, all of
which will be available after this offering, for internal growth and
acquisitions. We believe the borrowings available under our revolving
credit facility and our ability to issue additional partnership units
should provide us with the financial flexibility to enable us to pursue
expansion and acquisition opportunities.
MARINE TRANSPORTATION BUSINESS
INDUSTRY OVERVIEW
The United States inland waterway system is a vast and heavily used
transportation system. This inland waterway system is composed of a network of
interconnected rivers and canals that serve as water highways and is used to
transport over 1.1 billion tons of products annually. This waterway system
extends approximately 26,000 miles, 12,000 miles of which are generally
considered significant for domestic commerce.
The Gulf Coast region is a major hub for petroleum refining, representing
approximately 40% of total United States daily refining capacity. Approximately
two-thirds of United States refining capacity expansion in the 1990s occurred in
this region. The hydrocarbon refining process generates products and by-products
that require transportation in large quantities from the refinery or processor.
Convenient access to and use of this waterway system by the petroleum and
petrochemical industry is a major reason for the current location of United
States refineries and petrochemical facilities. Recent growth in refining and
natural gas processing capacity has increased the volume of hydrocarbon products
and by-products transported within the Gulf Coast region, which consequently has
increased the need for transportation, storage and distribution facilities.
OUR MARINE FLEET
We own a fleet of inland and offshore tows that provide marine
transportation of hydrocarbon products and by-products produced in oil refining
and natural gas processing. Our marine transportation system operates on the
United States inland waterway system, primarily between domestic ports along the
Gulf of Mexico Intracoastal Waterway, the Mississippi River system and the
Tennessee-Tombigbee Waterway system. The marine transportation industry uses
pushboats and tugboats as power sources and tank barges for freight capacity.
The combination of the power source and tank barge freight capacity is called a
tow. Our inland tows generally consist of one pushboat and one to three tank
barges, depending upon the horsepower of the pushboat, the river or canal
capacity and conditions, and customer requirements. Our offshore tows consist of
one tugboat, with much greater horsepower than an inland pushboat, and one large
tank barge.
We transport asphalt, fuel oil, gasoline, sulfur and other bulk liquids.
Our inland barge fleet has an average age of approximately 16 years, as compared
to the industry average of approximately 22 years. The following is a brief
description of the marine vessels we use in our marine transportation business:
NUMBER
CLASS OF EQUIPMENT IN CLASS CAPACITY/HORSEPOWER DESCRIPTION OF PRODUCTS CARRIED
------------------ -------- ------------------- -------------------------------
Inland tank barges...... 3 20,000 bbl and under Asphalt, fuel oil and
gasoline(2)
Inland tank barges...... 20(1) 20,000 - 30,000 bbl Asphalt, fuel oil and
gasoline(2)
Inland pushboats........ 12 800 - 1,800 horsepower N/A
Offshore tank barges.... 2 40,000 bbl and 12,500 Sulfur and asphalt
long-tons
Offshore tugboats....... 2 3,200 - 7,200 horsepower N/A
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---------------
(1) We lease two of these barges from U.S. Bancorp Leasing & Financial. Pursuant
to a written contract to purchase these barges with U.S. Bancorp Leasing &
Financial, we expect to acquire them at or about the closing of this
offering.
(2) One of our three inland tank barges with capacity of 20,000 bbl and under,
and seven of our 20 inland tank barges with capacity of 20,000 to 30,000
bbl, are specialized and equipped to transport asphalt.
Our largest marine transportation customers include major and independent
oil and gas refining companies, petroleum marketing companies, CF Martin
Sulphur, L.P. and Martin Resource Management. We conduct our marine
transportation services under spot contracts and under term contracts that
typically range from one to 12 months in length.
In order to maintain a balance of pricing flexibility and stable cash flow,
we strive to maintain an appropriate mix of spot versus term contracts, based on
current market conditions. Upon the closing of this offering, we will enter into
a three-year charter agreement with Martin Resource Management for the use of
four of our marine vessels on a spot-contract basis subject to the availability
of such vessels at the time of Martin Resource Management's request. This
contract covers our four vessels that are not currently subject to term
agreements. The fees we will charge Martin Resource Management will be based on
the then applicable market rates we charge third parties on a spot-contract
basis. Additionally, Martin Resource Management will agree for a period of three
years to use these four vessels in a manner such that we will receive at least
$5.6 million annually for the use of these vessels by Martin Resource Management
and third parties. In the event we do not receive at least $5.6 million annually
for the use of these vessels, Martin Resource Management will pay us any
deficiency within 30 days after the end of the applicable 12-month period. We
expect this agreement will allow us to maintain historic cash flow levels from
our marine vessels not currently chartered under term contracts.
We have chartered one of our offshore tug/barge tanker units to CF Martin
Sulphur, L.P. for a guaranteed daily rate, subject to certain adjustments. This
rate was determined on an arm's-length basis and was based on rates we charged
third parties at the time. This charter has an unlimited term but may be
cancelled by CF Martin Sulphur, L.P. upon 90 days notice. We do not have the
right to terminate this agreement. However, we believe CF Martin Sulphur, L.P.
will not terminate this charter in the near future because CF Martin Sulphur,
L.P. has multi-year delivery commitments requiring it to use this offshore
tug/barge tanker unit or risk not being able to meet its delivery commitments.
COMPETITION
We compete primarily with other marine transportation companies. The marine
barging industry has experienced significant consolidation in the past few
years. Currently, the top five liquid carriers control more than 60% of tank
barges as compared to only 37% in 1993. The total number of tank barges and
pushboats that operate in the inland waters of the United States declined from
approximately 4,200 in 1982 to approximately 2,900 in 1993 and has remained
relatively constant at 2,900 since 1993. We believe the earlier decrease
primarily resulted from:
- the increasing age of the domestic tank barge fleet, resulting in
retirements;
- a reduction in tax incentives, which previously encouraged speculative
construction of new equipment;
- stringent operating standards to adequately address safety and
environmental risks;
- the elimination of government programs supporting small refineries;
- an increase in environmental regulations mandating expensive equipment
modification; and
- more restrictive and expensive insurance.
75
There are several barriers to entry into the marine transportation industry
that discourage the emergence of new competitors. Examples of these barriers to
entry include:
- significant start-up capital requirements;
- the costs and operational difficulties of complying with stringent safety
and environmental regulations;
- the cost and difficulty in obtaining insurance; and
- the number and expertise of personnel required to support marine fleet
operations.
We believe the reduction of the number of tank barges, the consolidation among
barging companies and the significant barriers to entry in the industry have
resulted in a more stabilized and favorable pricing environment for our marine
transportation services.
We believe we compete favorably with many of our competitors. Historically,
competition within the marine transportation business was based primarily on
price. However, we believe customers are placing an increased emphasis on
safety, environmental compliance, quality and the availability of a single
source of supply of a diversified package of services. In particular, we believe
customers are increasingly seeking transportation vendors that can offer marine,
land, rail and terminal distribution services, as well as provide operational
flexibility, safety, environmental and financial responsibility, adequate
insurance and quality consistent with the customer's own operations and
policies. We operate a diversified asset base that, together with the services
provided by Martin Resource Management, enables us to offer our customers an
integrated distribution network consisting of transportation, terminalling,
distribution and midstream logistical services for hydrocarbon products and
by-products.
In addition to competitors who provide marine transportation services, we
also compete with providers of other modes of transportation, such as rail tank
cars, tractor-trailer tank trucks and, to a limited extent, pipelines. We
believe we offer a competitive advantage over rail tank cars and tractor-trailer
tank trucks because marine transportation is a more efficient, and generally
less expensive, mode of transporting hydrocarbon products and by-products. For
example, a typical two inland barge unit carries a volume of product equal to
approximately 80 rail cars or 250 tanker trucks. Pipelines generally provide a
less expensive form of transportation than marine transportation. However,
pipelines are not able to transport most of the products we transport and are
generally a less flexible form of transportation because they are limited to the
fixed point-to-point distribution of commodities in high volumes over extended
periods of time.
SEASONALITY
The demand for our marine transportation business is subject to some
seasonality factors. Our asphalt shipments are generally higher during April
through November when weather allows for efficient road construction. However,
demand for marine transportation of sulfur, fuel oil and gasoline is directly
related to production of these products in the oil refining and natural gas
processing business which is fairly stable.
TERMINALLING BUSINESS
INDUSTRY OVERVIEW
The United States petroleum distribution system moves petroleum products
and by-products from oil refinery and natural gas processing facilities to end
users. This distribution system is comprised of a network of terminals, storage
facilities, pipelines, tankers, barges, rail cars and trucks. Terminals play a
key role in moving these products throughout the distribution system by
providing storage, blending and other ancillary services.
In the 1990's, the petroleum industry entered a period of consolidation.
Refiners and marketers developed large-scale, cost-efficient operations
resulting in several refinery acquisitions, combinations, alliances and joint
ventures. This consolidation resulted in major oil companies integrating the
various
76
components of their businesses, including terminalling. However, major
integrated oil companies later concentrated their focus and resources on their
core competencies of exploration, production, refining and retail marketing and
examined ways to lower their distribution costs. Additionally, the Federal Trade
Commission required some divestitures of terminal assets in markets in which
merged companies, alliances and joint ventures were regarded as having excessive
market power. As a result of these factors, oil and gas companies began to
increasingly rely on third parties such as us to perform many terminalling
services.
Additionally, although many large energy and chemical companies own
terminalling facilities, these companies also use third party terminalling
services. Major energy and chemical companies typically have a strong demand for
terminals owned by independent operators when such terminals are strategically
located at or near key transportation links, such as deep-water ports. Major
energy and chemical companies also need independent terminal storage when their
owned storage facilities are inadequate, either because of lack of capacity, the
nature of the stored material or specialized handling requirements.
The Gulf Coast region is a major hub for petroleum refining, representing
approximately 40% of total United States daily refining capacity. Approximately
two-thirds of United States refining capacity expansion in the 1990s occurred in
this region. Growth in the refining and natural gas processing industries has
increased the volume of hydrocarbon products and by-products that are
transported within the Gulf Coast region, which consequently has increased the
need for terminalling services.
DESCRIPTION OF TERMINAL FACILITIES
We operate a marine terminal in Tampa, Florida and a marine terminal in
Beaumont, Texas. We also own an inland rail unloading terminal in Mont Belvieu,
Texas. Our terminal assets are located at strategic distribution points for the
products we handle and are in close proximity to our customers. Further, the
location and composition of our terminals are structured to complement our other
businesses and reflect our strategy to provide a broad range of integrated
services in the handling and transportation of hydrocarbon products and
by-products. We developed our terminalling assets by acquiring existing
terminalling facilities and then customizing and upgrading these facilities as
needed to integrate the facilities into our hydrocarbon product and by-product
transportation network and to more effectively service customers. We expect to
continue to acquire facilities and customize them as part of our growth
strategy.
Our terminal facilities provide storage and handling services for asphalt,
sulfur, sulfuric acid, fuel oil, and other hydrocarbon products and by-products.
Our terminalling customers are primarily large oil refining and natural gas
processing companies. We charge a fixed monthly fee for the use of our
facilities, based on the capacity of the applicable tank. We conduct a
substantial portion of our terminalling operations under long-term contracts,
which enhances the stability and predictability of our operations and cash flow.
We attempt to balance our short term and long term terminalling contracts in
order to allow us to maintain a consistent level of cash flow while maintaining
flexibility to earn higher storage revenues when demand for storage space
increases. We also continually evaluate opportunities to add services and
increase access to our terminals to attract more customers and create additional
revenues.
The following is a brief summary of our terminals:
TERMINAL LOCATION TANKS(3) CAPACITY PRODUCTS DESCRIPTION
-------- -------- -------- -------- -------- -----------
Tampa(1)............. Tampa, Florida 7 719,000 Bbls. Asphalt, fuel Marine terminal,
oil and sulfuric loading/unloading
acid for vessels,
barges, trucks
Stanolind(2)......... Beaumont, Texas 2 160,000 Bbls. Asphalt and fuel Marine terminal,
oil loading/unloading
for vessels,
barges, trucks
Mont Belvieu......... Mont Belvieu, Texas N/A 20 rail car Propane- Rail car
spaces propylene mix unloading
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---------------
(1) This terminal is located on land owned by the Tampa Port Authority and
leased to us under a lease which expires in December, 2006.
(2) A portion of this terminal is located on land owned by Martin Resource
Management and on land we own. We use marine terminal, loading and
unloading, and other common use facilities owned by Martin Resource
Management under a perpetual use, ingress-egress and utility facilities
easement.
(3) In addition to the tanks listed in the table, CF Martin Sulphur, L.P. owns
one tank at our Tampa terminal and three tanks at the Stanolind terminal.
Martin Resource Management owns two tanks at the Stanolind terminal.
Tampa Terminal. Our largest terminal complex is located on approximately
10 acres owned by the Tampa Port Authority in Tampa, Florida. Our lease with the
Tampa Port Authority has a 10-year term which expires on December 15, 2006. We
acquired the above ground assets at this terminal in March 1995 to provide a
terminalling venue for our sulfur marketing operations. Since March 1995, we
have constructed a 16,000 long-ton sulfur tank and a 42,000 barrel fuel oil tank
and have made modifications to other tanks at the complex to comply with
regulatory and industry standards. We own seven tanks at our Tampa terminal with
approximately 719,000 barrels of storage capacity in the aggregate. CF Martin
Sulphur, L.P. also owns a 16,000 long-ton sulfur tank at this facility.
Our Tampa terminal has:
- storage capacity for hydrocarbon products and by-products consisting
primarily of asphalt, sulfuric acid and fuel oil;
- a concrete, deep-water ship dock capable of receiving large vessels and
barges;
- a second barge dock that accommodates tug fueling and inland barge
loading;
- 10 truck loading bays; and
- inline blending capability for both asphalt and fuel oil customers.
Stanolind Terminal. Our Stanolind terminal is located on approximately 11
acres owned by Martin Resource Management and us on the Neches River in
Beaumont, Texas. We own the land on which our tanks are located. Martin Resource
Management owns the land on which the vessel, barge and truck loading and
unloading, and other common use facilities are located. We have full access to
our tanks and full use of the marine terminal, loading and unloading and other
common use facilities at this terminal under a perpetual easement. Please read
"Certain Relationships and Related Transactions -- Agreements Governing the
Transactions -- Other Agreements" for a summary of this easement. We acquired
this terminal in 1997. Thereafter, we added two sulfur tanks and truck unloading
facilities at this facility. The terminal can handle both inland and offshore
marine vessels. Our Stanolind terminal has:
- storage capacity for various products, including asphalt and fuel oil;
- assets to handle products transported by vessel, barge and truck;
- one dock deep enough to accommodate vessels and barges simultaneously;
and
- capabilities for the transfer of asphalt and fuel oil from vessel to
barge.
We own two 80,000 barrel asphalt tanks at this terminal. CF Martin Sulphur, L.P.
owns three sulfur tanks at this terminal, which have an aggregate capacity of
46,500 long tons. Martin Resource Management owns two sulfuric acid tanks at
this terminal, which have an aggregate capacity of 50,000 short tons. CF Martin
Sulphur, L.P. is constructing a rail spur to provide rail access to the
Stanolind terminal. This rail spur should be completed on or around January 1,
2003.
Mont Belvieu Rail Unloading Terminal. We own an inland rail unloading
terminal located at Mont Belvieu, Texas. At this terminal, we unload and measure
hydrocarbon by-products and transport
78
these products via a half-mile pipeline to Enterprise Products Texas Operating
L.P.'s LPG fractionator facility. Our fees for the use of this facility are
based on the number of gallons unloaded at the terminal.
COMPETITION
We compete with independent terminal operators and major energy and
chemical companies that own their own terminalling facilities. We believe many
customers prefer to contract with independent terminal operators rather than
terminal operators owned by integrated energy and chemical companies, that may
have refining or marketing interests that compete with the customers.
Independent terminal owners generally compete on the basis of the location
and versatility of terminals, service and price. A favorably-located terminal
has access to various cost effective transportation modes, both to and from the
terminal, such as waterways, railroads, roadways and pipelines. Terminal
versatility depends upon the operator's ability to handle diverse products, some
of which have complex or specialized handling and storage requirements. The
service function of a terminal includes, among other things, the safe storage of
product at specified temperature, moisture and other conditions, and receiving
and delivering product to and from the terminal. All of these services must be
in compliance with applicable environmental and other regulations.
We believe we successfully compete for terminal customers because of the
strategic location of our terminals along the Gulf Coast, our integrated
transportation services, our reputation, the prices we charge for our services
and the quality and versatility of our services. Additionally, while some
companies have significantly more terminalling capacity than us, our terminals,
not all terminalling facilities located in the markets we serve are equipped to
properly handle specialty products such as asphalt, sulfur or sulfuric acid. As
a result, our facilities typically command higher terminal fees when compared to
fees charged for terminalling of other petroleum products.
LPG DISTRIBUTION BUSINESS
INDUSTRY OVERVIEW
LPG is a by-product of oil refining and natural gas processing. LPG
consists of hydrocarbons that are vapors at normal temperatures and pressures
but change to liquid at moderate pressures. The main constituent of LPG is
propane, and LPG is often generally referred to as propane. Other LPG products
include butanes and natural gasoline.
Propane is used as a heating fuel, an engine fuel, an industrial fuel and
as a petrochemical feedstock in the production of ethylene and propylene. Butane
is used as a petrochemical feedstock in the production of ethylene and butadiene
(a key ingredient in synthetic rubber), as a blendstock for motor gasoline and
to derive isobutene through isomerization. Natural gasoline, a mixture of
pentanes and heavier hydrocarbons, is used primarily as motor gasoline blend
stock or petrochemical feedstock.
OUR LPG FACILITIES
We purchase LPGs primarily from major domestic oil refiners and natural gas
processors. We transport LPGs using Martin Resource Management's land
transportation fleet or by contracting with common carriers, owner-operators and
railroad tank cars. We typically enter into annual contracts with independent
retail distributors to deliver their estimated annual volume requirements based
on prevailing market prices. We believe dependable delivery is very important to
these customers and in some cases may be more important than price. We ensure
adequate supply of LPGs, including during times of peak demand, through:
- storage of propane purchased in off-peak months,
- efficient use of the transportation fleet of vehicles owned by Martin
Resource Management, and
- product management expertise to obtain supplies when needed.
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The following is a brief description of our owned and leased LPG
facilities:
LPG FACILITY(1) LOCATION CAPACITY DESCRIPTION
--------------- -------- -------- -----------
Retail terminals..... Kilgore, Texas 90,000 gallons Retail propane
distribution
Longview, Texas 30,000 gallons
Henderson, Texas 12,000 gallons
Storage.............. Arcadia, Louisiana(2) 120 million gallons Underground
storage
Hattiesburg, Mississippi(3) 5.25 million gallons
Mont Belvieu, Texas(3) 2.5 million gallons
---------------
(1) In addition, under a three-year throughput agreement we are entitled to the
sole access to and use of a truck loading and unloading and pipeline
distribution terminal owned by Martin Resource Management and located at
Mont Belvieu, Texas. This terminal facility has a storage capacity of
330,000 gallons.
(2) We lease our underground storage at Arcadia, Louisiana from Martin Resource
Management under a three-year product storage agreement, which is renewable
on an yearly basis thereafter subject to a redetermination of the lease rate
for each subsequent year.
(3) We lease our underground storage at Hattiesburg, Mississippi and Mont
Belvieu, Texas from third parties under one-year lease agreements, which we
have renewed annually for more than 20 years.
Our above ground storage facilities have one or more 12,000 or 30,000
gallon storage tanks. We lease underground storage capacity of 120 million
gallons in Arcadia, Louisiana from Martin Resource Management. We also lease 2.5
million gallons of underground storage in Mont Belvieu, Texas and 5.25 million
gallons at Hattiesburg, Mississippi from third parties under one-year lease
agreements. As a result of our and Martin Resource Management's distribution
system and storage capacity, we have the ability to buy and store large volumes
of LPGs that allow us to achieve product cost savings and avoid shortages during
periods of tight supply.
Our LPG customers consist of retail propane distributors, industrial
processors and refiners. We sell approximately 58% of our LPG volume to
independent retail propane distributors located in Texas and the southeastern
United States and approximately 42% of our LPG volume to refiners and industrial
processors.
COMPETITION
We compete with large integrated LPG producers and marketers, as well as
small local independent marketers. LPGs compete primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability.
SEASONALITY
The level of LPG supply and demand is subject to changes in domestic
production, weather, inventory levels and other factors. While production is not
seasonal, residential and wholesale demand is highly seasonal. This imbalance
causes increases in inventories during summer months when consumption is low and
decreases in inventories during winter months when consumption is high. If
inventories are low at the start of the winter, higher prices are more likely to
occur during the winter. Additionally, abnormally cold weather can put extra
upward pressure on prices during the winter because there are less readily
available sources of additional supply except for imports which are less
accessible and may take several weeks to arrive. General economic conditions and
inventory levels have a greater impact on industrial and refinery use of LPGs
than the weather.
Although the LPG industry is subject to seasonality factors, such factors
generally do not affect our LPG distribution business because we do not consume
LPGs. We generally maintain consistent margins in
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our LPG distribution business because we attempt to pass increases and decreases
in the cost of LPGs directly to our customers. We generally try to coordinate
our sales and purchases of LPGs based on the same daily price index of LPGs in
order to decrease the impact of LPG price volatility on our profitability.
FERTILIZER BUSINESS
INDUSTRY OVERVIEW
Fertilizers are manufactured chemicals containing nutrients known to
improve the fertility of soils. Nitrogen, phosphorus, potassium and sulfur are
the four most important nutrients for crop growth. These nutrients are found
naturally in soils. However, soils used for agriculture become depleted of these
nutrients and frequently require fertilizers rich in these essential nutrients
to restore fertility. The Fertilizer Institute estimates that the earth's soil
contains less than 20% of organic plant nutrients needed to meet worldwide food
production needs. As a result, we believe mineral fertilizer production will
continue to be an important industrial market.
The fertilizer market is primarily driven by agricultural demand. Worldwide
consumption of mineral fertilizers grew from 117 million tons in 1980 to 138
million tons in 1990, and remained relatively flat from 1990 to 2000. Despite
the relative stagnation in the past ten years, we expect the worldwide
fertilizer market to grow over the next two decades. The United Nations
estimates that the world population will reach 7.7 billion by 2020, an increase
of 35% from 5.7 billion in 1995. The United Nations also estimates that the
world population in 2020 will require an estimated 40% more grain than the world
population in 1999 and that most of this increase in production will need to be
produced on existing cultivated land through increased yield per acre.
Consequently, we expect agricultural demand for fertilizer products to increase
to support the greater agricultural output requirements for the increase in
population.
Industrial sulfur products are used in a wide variety of industries. For
example, these products are used in power plants, paper mills, auto and tire
manufacturing plants, food processing plants, road construction, cosmetics and
pharmaceuticals. The largest consumers of industrial sulfur products are power
plants, paper mills and rubber products manufacturers.
OUR OPERATIONS AND PRODUCTS
We entered the fertilizer manufacturing business in 1990 through an
acquisition. We acquired two additional fertilizer manufacturing companies in
1998. Over the next two years we expended significant resources to replace and
update facilities and other assets at the companies, and to integrate each of
the businesses into our business. These acquisitions have subsequently increased
the profitability of our fertilizer business.
Fertilizer and related sulfur products are a natural extension of our
business because of our access to sulfur and our distribution capabilities. This
business allows us to leverage our relationship with CF Martin Sulphur, L.P. by
using our access to its sulfur to produce a value added product for the
fertilizer and industrial sulfur market. Please read "Business -- CF Martin
Sulphur, L.P. -- Our Commercial Relationship with CF Martin Sulphur, L.P." Our
annual fertilizer and industrial sulfur products sales have grown from
approximately 61,715 tons in 1997 to approximately 157,000 tons in 2001 as a
result of acquisitions and internal growth.
We manufacture and market the following fertilizer and related sulfur
products:
- Plant nutrient sulfur products. We produce plant nutrient and
agricultural ground sulfur products at our two facilities in Odessa,
Texas. We also produce plant nutrient sulfur at our facility in Seneca,
Illinois. Our plant nutrient sulfur product is a 90% degradable sulfur
product marketed under the Disper-Sul(R) trade name and sold throughout
the United States to direct application agricultural markets. Our
agricultural ground sulfur products are used primarily in the western
United States on grapes and vegetable crops.
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- Ammonium sulfate products, NPK products and related blended products. We
produce various grades of ammonium sulfate including coarse and standard
grades, a 40% ammonium sulfate solution and a Kosher-approved food grade
material. We also produce ammonium sulfate, nitrogen-
phosphorus-potassium products (commonly referred to as NPK products). Our
NPK products are an ammoniated phosphate fertilizer containing nitrogen,
phosphorus and potash that we manufacture so all particles have a uniform
composition. These products primarily serve direct application
agricultural markets within a 400-mile radius of our manufacturing plant
in Plainview, Texas. We blend our ammonium sulfate to make custom grades
of lawn and garden fertilizer at our facilities in Salt Lake City, Utah
and Maricopa, Arizona. We package these custom grade products under both
proprietary and private labels and sell them to major retail
distributors, and other retail customers, of these products.
- Industrial sulfur products. We produce industrial sulfur products such
as emulsified sulfur, elemental pastille sulfur, and industrial ground
sulfur products. We produce emulsified sulfur at our Texarkana, Texas
facility. Emulsified sulfur is primarily used to control the sulfur
content in the pulp and paper manufacturing processes. We produce
elemental pastille sulfur at our two Odessa, Texas facilities and at our
Seneca, Illinois facility. Elemental pastille sulfur is used to increase
the efficiency of the coal-fired precipitators in the power industry.
These industrial ground sulfur products are also used in a variety of
dusting and wettable sulfur applications such as rubber manufacturing,
fungicides, sugar and animal feeds.
OUR FERTILIZER PLANTS
The following is a brief description of our fertilizer plants:
FACILITY LOCATION CAPACITY DESCRIPTION
-------- -------- -------- -----------
Two fertilizer plants Odessa, Texas 70,000 tons/year Dry sulfur fertilizer production
Fertilizer plant Seneca, Illinois 36,000 tons/year Dry sulfur fertilizer production
Fertilizer plant Plainview Texas 180,000 tons/year Fertilizer production
Fertilizer plant Salt Lake City, Utah 25,000 tons/year Blending and packaging
Fertilizer plant Maricopa, Arizona 12,000 tons/year Blending and packaging
Industrial sulfur
blending plant Texarkana, Texas 18,000 tons/year Emulsified sulfur production
In the United States, fertilizer is generally sold to farmers through local
dealers. These dealers are typically owned and supplied by much larger wholesale
distributors. We sell primarily to these wholesale distributors, as well as to a
small number of independent dealers throughout the United States. Our industrial
sulfur products are marketed primarily in the eastern United States, where many
paper manufacturers and power plants are located.
Our fertilizer products are sold in accordance with our price lists that
vary from state to state. We update our price lists periodically to make
seasonal pricing adjustments. If necessary, we adjust our price lists more
frequently to maintain competitive pricing. These products are sold at
negotiated prices, generally set on an annual basis. The pricing in our
industrial products business is generally very stable throughout any particular
year. We transport our fertilizer and industrial sulfur products to our
customers using third party common carriers. We utilize rail shipments for large
volume and long distance shipments where available.
COMPETITION
We compete with several other large fertilizer and sulfur products
manufacturers. However, we believe our close proximity to our customers is a
competitive advantage for us. Because our manufacturing plants are located close
to our customer base, we are able to save on freight costs and respond quickly
to customer requests, and we also believe we have greater insight about local
market conditions. Additionally,
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we believe our relationship with CF Martin Sulphur, L.P. affords us a secure and
reliable source of sulfur materials.
SEASONALITY
Sales of our agricultural fertilizer are partly seasonal as a result of
increased demand during the growing season. Sales of our industrial sulfur-based
products, however, are generally consistent throughout the year. In 2001,
approximately 29% of our product sales volumes were to industrial users.
CF MARTIN SULPHUR, L.P.
CF Martin Sulphur, L.P., a limited partnership formed by Martin Resource
Management and CF Industries in November 2000, operates a molten sulfur
distribution and marketing business. We own a non-controlling 49.5% limited
partner interest in this partnership. CF Industries owns the remaining 49.5%
limited partner interest. CF Industries is one of North America's largest
interregional cooperatives, owned by and serving nine regional farm supply
cooperatives. Through thousands of member-owned sales outlets, CF Industries'
nitrogen and phosphate fertilizers reach over one million farmers and ranchers
in 48 states and the Canadian provinces of Ontario and Quebec. CF Industries is
the third largest phosphate fertilizer producer in Florida. Our 49.5% interest
in CF Martin Sulphur is subject to a buy-sell agreement which is described in
more detail in "Management and Ownership" below.
SULFUR INDUSTRY OVERVIEW
Sulfur is a natural element and is required to produce a variety of
industrial products. In the United States, approximately 11 million tons of
sulfur is consumed annually, with the Tampa, Florida area being the largest
single market. Currently, all sulfur produced in the United States is "recovered
sulfur," or sulfur that is a by-product from oil refineries and natural gas
processing plants. Sulfur production in the United States is principally located
along the Gulf Coast, along major inland waterways and in some areas of the
western United States.
Sulfur is an important plant nutrient and is used in the manufacture of
phosphate fertilizers. Approximately 53% of worldwide sulfur consumption is
currently used for phosphate fertilizers, with the balance used for industrial
purposes. The primary application of sulfur in fertilizers occurs in the form of
sulfuric acid. Burning sulfur creates sulfur dioxide, which is subsequently
oxidized and dissolved in water to create sulfuric acid. The sulfuric acid is
then combined with phosphate rock to make phosphoric acid, the base material for
most high-grade phosphate fertilizers.
In addition to agricultural applications, sulfur (usually in the form of
sulfuric acid) is essential for manufacturing pharmaceuticals, paper, chemicals,
paint, steel, petroleum and other products. Sulfuric acid is the most commonly
produced chemical in the world.
BUSINESS AND ASSETS OF CF MARTIN SULPHUR, L.P.
CF Martin Sulphur, L.P. gathers molten sulfur from refiners, primarily
located on the Gulf Coast, and from natural gas processing plants, primarily
located in the southwestern United States. CF Martin Sulphur, L.P. transports
sulfur by inland and offshore barges, rail cars and trucks and handles over 1.5
million long tons of sulfur annually. Recovered sulfur is mainly kept in liquid
form from production to usage at a temperature of approximately 275 degrees
Fahrenheit. Because of the temperature requirement, the sulfur industry uses
specialized equipment to store and transport molten sulfur. CF Martin Sulphur,
L.P. has the necessary transportation and storage assets and expertise to handle
the unique requirements for transportation and storage of molten sulfur.
The term of CF Martin Sulphur, L.P.'s commercial contracts typically range
from one to five years in length. The prices in such contracts are usually tied
to a published market indicator and fluctuate, typically quarterly, according to
the price movement of the indicator. CF Martin Sulphur, L.P. also provides barge
transportation and tank storage to large integrated oil companies that produce
sulfur and fertilizer
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manufacturers that consume sulfur under transportation and storage contracts
that range from three to five years in duration. CF Martin Sulphur, L.P. also
leases a 12,500-ton ocean going barge and a tug from us under an annual
renewable contract.
CF Martin Sulphur, L.P. leases approximately 170 railcars equipped to
transport molten sulfur. It also has the following major marine assets it uses
to ship molten sulfur from our Beaumont, Texas terminal to our Tampa, Florida
terminal:
ASSET CLASS OF EQUIPMENT CAPACITY/HORSEPOWER PRODUCTS TRANSPORTED
----- ------------------ ------------------- --------------------
Margaret Sue................. Offshore tank barge 10,450 long tons Molten sulfur
M/V Martin Explorer.......... Offshore tugboat 7,200 horsepower N/A
Poseidon(1).................. Offshore tank barge 12,500 long tons Molten sulfur
Orion(1)..................... Offshore tugboat 7,200 horsepower N/A
M/V Martin Express........... Inland pushboat 1,200 horsepower N/A
MGM 101...................... Inland tank barge 2,450 long tons Molten sulfur
MGM 102...................... Inland tank barge 2,450 long tons Molten sulfur
---------------
(1) We own the Poseidon and Orion and lease them to CF Martin Sulphur, L.P.
The following is a brief description of the tanks owned by CF Martin
Sulphur, L.P. and located at our terminals:
TOTAL
TERMINAL LOCATION TANKS AGGREGATE CAPACITY PRODUCTS STORED
-------- -------- ----- ------------------ ---------------
Tampa....................... Tampa, Florida 1 16,000 long tons Molten sulfur
Stanolind................... Beaumont, Texas 3 46,500 long tons Molten sulfur
OUR COMMERCIAL RELATIONSHIP WITH CF MARTIN SULPHUR, L.P.
We have chartered one of our offshore tug/barge tanker units to CF Martin
Sulphur, L.P. for a guaranteed daily rate, subject to certain adjustments. This
charter has an unlimited term but may be cancelled by CF Martin Sulphur, L.P.
upon 90 days notice. However, we believe CF Martin Sulphur, L.P. will not
terminate this charter in the near future because CF Martin Sulphur, L.P. has
multi-year delivery commitments requiring it to use this offshore tank/barge
unit or risk not being able to meet their delivery commitments. After the
execution of this agreement, CF Martin Sulphur, L.P. paid to have this tug/barge
tanker unit reconfigured to carry molten sulfur. In the event CF Martin Sulphur,
L.P. terminates this charter, we are obligated to reimburse CF Martin Sulphur,
L.P. for a portion of such reconfiguration costs. As of February 25, 2002, our
aggregate reimbursement liability would have been approximately $2.6 million.
This amount decreases by approximately $300,000 annually based on an
amortization rate.
We did not have significant revenues from CF Martin Sulphur, L.P. prior to
2002. However, as a result of this charter agreement, revenues from our
relationship with CF Martin Sulphur, L.P. accounted for approximately 28% of our
total marine transportation revenues for the six month period ended June 30,
2002.
We also have a sulfur supply agreement with CF Martin Sulphur, L.P. under
which we purchase all of our sulfur from CF Martin Sulphur, L.P. at its cost.
This agreement has an annual year term, which is renewable for subsequent one
year periods.
COMPETITION
Ten phosphate fertilizer manufacturers together consume in excess of 80% of
the total United States production of sulfur. These companies buy from resellers
as well as directly from producers. CF Martin Sulphur, L.P. owns or leases two
of the four vessels currently used to transport molten sulfur between Tampa,
Florida and United States ports on the Gulf of Mexico. Its primary competition
consists of
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producers that sell their production directly to a fertilizer manufacturer that
has its own transportation assets, or foreign suppliers from Mexico or Venezuela
that may sell into the Florida market.
MANAGEMENT AND OWNERSHIP
Management. CF Martin Sulphur, L.P. is managed and operated by its general
partner which is equally owned and controlled by Martin Resource Management and
CF Industries. We have virtually no control over the operations or management of
CF Martin Sulphur, L.P. The partnership's general partner, CF Martin Sulphur,
L.L.C., is operated by a board of four managers, two of which are designated by
Martin Resource Management and two of which are designated by CF Industries. The
managers designated by CF Industries have the sole authority to cause CF Martin
Sulphur, L.L.C. to act in regard to certain tax matters and in regard to certain
relationships between CF Martin Sulphur, L.P. and Martin Resource Management.
Likewise, the managers designated by Martin Resource Management have the sole
authority to cause CF Martin Sulphur, L.L.C. to act in regard to certain
relationships between CF Martin Sulphur, L.P., on the one hand, and CF
Industries and its affiliates on the other hand. For all other matters, all
actions of the board of managers require the unanimous vote of a properly
constituted quorum of managers. The presence of at least one manager designated
by each of CF Industries and Martin Resource Management must be present to
constitute a proper quorum for the transaction of company business. Martin
Resource Management manages the day-to-day operations of CF Martin Sulphur, L.P.
under a long-term services agreement.
Non-Competition Covenant. Each of Martin Resource Management and CF
Industries agreed that for so long as it owns an interest in CF Martin Sulphur,
L.P., and for five years after the disposition of its interest, it will not
engage in any business that competes, directly or indirectly, with the
partnership in the gathering, aggregation, transportation and sale of molten
sulfur. This covenant not to compete does not restrict or prohibit the parties
from continuing certain businesses the parties operated prior to the formation
of the partnership, such as Martin Resource Management's business of
transporting sulfur by truck for third parties as a carrier, or holding certain
passive investments. As a result of our 49.5% interest in CF Martin Sulphur,
L.P., we will be subject to this agreement not to compete.
Distributions. Generally, distributions of cash from the partnership will
be allocated among partners on the basis of each partner's ownership interest.
The partnership agreement of CF Martin Sulphur, L.P. states that distributions
of cash from the partnership to its partners, including us, will be subject to
the discretion of its general partner, except that the partnership is required
to make cash distributions, to the extent cash is available, as follows:
- quarterly distributions of cash to partners to cover any required
quarterly federal and state tax payments (based on the assumption that
all partners pay federal income tax at the highest rate applicable to
corporations and based on other assumptions with respect to state taxes),
provided the cash distribution for a quarter does not exceed 25% of the
forecasted cash available for distribution for the relevant year; and
- annual distributions of cash generated by operations in excess of the
amounts CF Martin Sulphur, L.L.C. determines are necessary to retain for
future working capital and the operation of the partnership's business,
anticipated capital expenditures and required debt service payments.
If the general partner of CF Martin Sulphur, L.P. does not declare a
distribution for a period of a calendar quarter or longer, CF Martin Sulphur,
L.P. must make the following distributions:
- not later than ten business days prior to the date during any calendar
quarter that any partner will be required to make an estimated income tax
payment to any federal or state tax authority in respect of its share of
CF Martin Sulphur, L.P.'s taxable income during such period, CF Martin
Sulphur, L.P. must make a cash distribution to each partner equal to the
approximate amount described immediately above in the first bullet point;
and
- not later than the 90th day following each fiscal year end, CF Martin
Sulphur, L.P. must make an additional cash distribution to its partners
in an amount equal to the positive difference between
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each partner's share of CF Martin Sulphur, L.P.'s distributable cash and
the sum of distributions already made to that partner in respect of such
fiscal year.
Other than a $790,000 cash distribution in May 2001, CF Martin Sulphur,
L.P. has not generally made cash distributions from its formation in November
2000 to the date of this prospectus. Instead, the four managers of CF Martin
Sulphur, L.L.C. decided to generally use the partnership's distributable cash
for capital expenditures rather than financing such expenditures. However,
Martin Resource Management has advised us that it believes that on a
going-forward basis, the amount of cash distributions from CF Martin Sulphur,
L.P. will increase above historical levels and be made on a quarterly basis as a
result of the mandatory distribution provisions described above.
Transfer Restrictions. Generally, we and the other partners in CF Martin
Sulphur, L.P. are prohibited from transferring our interests in the partnership
to a third party until November 2005. Thereafter, a partner may only transfer
its interest if:
- the general partner consents to the transfer;
- the partner transfers its entire interest in the partnership;
- the person acquiring the interest does not compete with the business of
the non-transferring partners as conducted on the date of the proposed
transfer;
- the purchase price consists solely of cash;
- the non-transferring partners are given a right of first refusal to
purchase the interest on the same terms and conditions as the third party
offer; and
- the transfer otherwise complies with the provisions contained in the
partnership agreement of CF Martin Sulphur, L.P.
Buy-Sell Right. Upon a change of control of either Martin Resource
Management or CF Industries, the other party has the right to implement a
buy-sell right contained in the CF Martin Sulphur, L.P. partnership agreement.
In addition, this buy-sell right can also be implemented in the event that
Martin Resource Management no longer controls our general partner. If
implemented, this buy-sell mechanism requires the party subject to the change of
control to specify in good faith the fair market value of CF Martin Sulphur,
L.P. The other party then has the right for a specified period of time to either
sell its and its affiliates' limited and general partner interests to the other
party, or buy the limited and general partner interests owned by the other party
and its affiliates, at a price that, in either case, is based upon the
proportionate share of this value.
Additionally, beginning in November 2005, any partner may implement a
buy-sell right contained in the CF Martin Sulphur, L.P. partnership agreement
that would require the initiating party to either sell the limited and general
partner interests owned by it and its affiliates to the other party, or buy the
limited and general partner interests owned by the other party and its
affiliates at a negotiated price or, if a price cannot be agreed upon, at a
price based upon the proportionate share of the fair market value of CF Martin
Sulphur, L.P. as determined in good faith by the initiating party. This buy-sell
right may be exercised by any partner, but only once a year following each
anniversary date of the partnership agreement beginning November 2005. The
partnership agreement also provides for a similar buy-sell mechanism if Ruben
Martin, who is also our chief executive officer, is removed from the office of
president of CF Martin Sulphur, L.L.C. under prescribed circumstances.
The partnership agreement of CF Martin Sulphur, L.P. provides that these
buy-sell rights may be exercised by CF Industries with respect to the general
and limited partner interests owned directly or indirectly by Martin Resource
Management and us. Consequently, our 49.5% limited partner interest in CF Martin
Sulphur, L.P. will be treated as though it was owned directly by Martin Resource
Management for so long as Martin Resource Management is subject to this buy-sell
right.
Conversely, these buy-sell rights may be exercised by Martin Resource
Management and us with respect to the general and limited partner interests in
CF Martin Sulphur, L.P. owned directly or indirectly
86
by CF Industries. Martin Resource Management has agreed with us that it will not
exercise these buy-sell rights without our prior written consent. If Martin
Resource Management elects, with our consent, to exercise its right to purchase
the general and limited partner interests CF Industries owns in CF Martin
Sulphur, L.P., the purchase price for and ownership of the interests will be
allocated between us and Martin Resource Management in accordance with our
respective ownership interests in CF Martin Sulphur, L.P. Martin Resource
Management has also agreed with us that it will not sell or transfer its
interest in CF Martin Sulphur, L.L.C. without our prior written consent, except
in circumstances when Martin Resource Management is obligated to sell such
interest pursuant to either the limited liability company agreement of CF Martin
Sulphur, L.L.C. or the partnership agreement of CF Martin Sulphur, L.P.
OUR RELATIONSHIP WITH MARTIN RESOURCE MANAGEMENT
Following the closing of this offering, Martin Resource Management will be
engaged in the following principal business activities:
- providing land transportation of various liquids using a fleet of
approximately 310 trucks and road vehicles and approximately 650 road
trailers;
- distributing fuel oil, sulfuric acid, marine fuel and other liquids;
- providing marine bunkering and other shore-based marine services in
Mobile, Alabama;
- operating a small crude oil gathering business in Stephens, Arkansas;
- operating an underground LPG storage facility in Arcadia, Louisiana;
- supplying employees and services for the operation of our business;
- operating, for its account, our account and the account of CF Martin
Sulphur, L.P., the docks, roads, loading and unloading facilities and
other common use facilities or access routes at our Stanolind terminal;
and
- operating, solely for our account, an LPG truck loading and unloading and
pipeline distribution terminal in Mont Belvieu, Texas.
In many cases, Martin Resource Management did not contribute these
businesses to us because they would generate "non-qualifying income" for
purposes of Section 7704 of the Internal Revenue Code. Generally, if 90% of our
income is not "qualifying income" for purposes of Section 7704, we will be taxed
as a corporation, which is a taxable entity, rather than a partnership, which is
not a taxable entity. If we are taxed as a corporation, we would be required to
pay taxes on our taxable income which would decrease the amount of our cash
available for distribution to our unitholders. Therefore, Martin Resource
Management only contributed businesses it believed would generate enough
"qualifying income" to allow us to avoid being taxed as a corporation. Please
read "Material Tax Consequences -- Partnership Status" for a more detailed
discussion of this topic.
Some of the operations retained by Martin Resource Management would
generate qualifying income for the purposes described above. However, Martin
Resource Management did not contribute these operations to us because it
believed such operations either did not complement our core business strategy,
did not provide consistent or significant positive cash flow or involved too
much risk or uncertainty when compared to the net revenues produced by those
operations.
After this offering, we will continue to be closely affiliated with Martin
Resource Management as result of the following relationships.
Ownership. Martin Resource Management owns an approximate 57.5% limited
partner interest in us. Additionally, Martin Resource Management owns our
general partner which owns a 2.0% general partner interest in us and our
incentive distribution rights.
Management. Martin Resource Management will direct our business operations
through its ownership and control of our general partner. We expect to benefit
from our relationship with Martin
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Resource Management by gaining access to a significant pool of management
expertise and established relationships throughout the energy industry. We do
not have employees. Martin Resource Management employees will be responsible for
conducting our business and operating our assets on our behalf.
The omnibus agreement requires us to reimburse Martin Resource Management
for all direct and indirect expenses it incurs or payments it makes on our
behalf or in connection with the operation of our business. We estimate that
based on the assumptions set forth in Appendix E, we will reimburse Martin
Resource Management for approximately $14.1 million of direct costs and expenses
during the 12-month period ending September 30, 2003. The direct expenses Martin
Resource Management will incur on our behalf will consist primarily of our
allocable portion of salaries and employee benefits costs of its employees who
will provide direct support for our operations. There is no monetary limitation
on the amount we will be required to reimburse Martin Resource Management for
direct expenses. Under the omnibus agreement, the amount we will be required to
reimburse Martin Resource Management for indirect general and administrative
expenses and corporate overhead allocated to us will be capped at $1.0 million
during the first year of this agreement. Thereafter, this cap will be subject to
increases in subsequent years. We expect that we will reimburse Martin Resource
Management for approximately $1.0 million of indirect expenses during the
12-month period ending September 30, 2003. These indirect expenses will cover
all of the centralized corporate functions Martin Resource Management will
provide for us, such as accounting, treasury, clerical billing, information
technology, administration of insurance, general office expenses and employee
benefit plans and other general corporate overhead functions we share with
Martin Resource Management retained businesses. Please read
"Management -- Reimbursement of Our General Partner."
Martin Resource Management also licenses certain of its trademarks and
tradenames to us under this omnibus agreement.
Commercial. We anticipate we will be both a significant customer and
supplier of the retained products and services offered by Martin Resource
Management following this offering. Our motor carrier agreement with Martin
Resource Management provides us with access to Martin Resource Management's
fleet of approximately 310 road vehicles and approximately 650 road trailers to
provide land transportation in the areas served by Martin Resource Management.
Our ability to utilize Martin Resource Management's land transportation
operations is currently a key component of our integrated distribution network.
We will also use the underground storage facilities owned by Martin
Resource Management in our LPG distribution operations. We lease an underground
storage facility from Martin Resource Management in Arcadia, Louisiana with a
storage capacity of 120 million gallons. Our use of this storage facility gives
us greater flexibility in our operations by allowing us to store a sufficient
supply of product during times of decreased demand for use when demand
increases. We may also be able to purchase LPGs at lower prices as a result of
our flexibility to purchase a larger volume of product by storing excess product
in these underground facilities.
In the aggregate, our purchases of land transportation, storage services,
LPG products and sulfuric acid from Martin Resource Management would have
accounted for approximately 9%, 7% and 6% of our total cost of products sold in
1999, 2000 and 2001, respectively. We anticipate we will also purchase marine
fuel from Martin Resource Management which we account for as an operating
expense.
Correspondingly, Martin Resource Management will be one of our significant
customers. It will primarily use our marine transportation, terminalling and LPG
distribution services for its retained operations. We will provide marine
transportation services to Martin Resource Management under a charter agreement
on a spot-contract basis at applicable market rates. We will provide
terminalling services under a terminal services agreement. Our sales to Martin
Resource Management would have accounted for approximately 3%, 4% and 4% of our
total revenues in 1999, 2000 and 2001, respectively.
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Upon the closing of this offering, in addition to the agreements mentioned
above, we will enter into an omnibus agreement with Martin Resource Management.
OMNIBUS AGREEMENT
Concurrently with the closing of this offering, we will enter into an
omnibus agreement with Martin Resource Management. In this agreement:
- Martin Resource Management agrees to not compete with us in the marine
transportation, terminalling, LPG distribution and fertilizer businesses,
subject to the exceptions described more fully in "Certain Relationships
and Related Transactions -- Omnibus Agreement."
- Martin Resource Management agrees to indemnify us for a period of five
years for environmental losses arising prior to this offering, as well as
preexisting litigation and tax liabilities.
- We agree to reimburse Martin Resource Management for the provision of
general and administrative services under the partnership agreement,
provided that indirect general and administrative expenses and allocated
corporate overhead will not exceed $1.0 million during the twelve months
following the closing of this offering. This cap may be increased in
subsequent years. This limitation shall not apply to the cost of any
third party legal, accounting or advisory services received, or the
direct expenses of Martin Resource Management incurred, in connection
with acquisition or business development opportunities evaluated on our
behalf.
- Martin Resource Management agrees to exercise its management rights in CF
Martin Sulphur, L.P. in a manner it reasonably believes is in our best
interests, subject to the limitations described more fully in "Certain
Relationships and Related Transactions -- Omnibus Agreement."
Additionally, Martin Resource Management agrees it will not purchase any
third party interest in this partnership, or sell its or our interest in
this partnership, without our written consent or, in some cases, only as
we direct. In the event we agree to purchase an interest in CF Martin
Sulphur, L.P. from a third party, we and Martin Resource Management agree
that the purchase price for and ownership of such interest shall be
allocated between the us in accordance with our respective ownership
percentages in the partnership.
- We will be prohibited from entering into certain material agreements
between us and Martin Resource Management without the approval of the
conflicts committee of our general partner's board of directors.
MOTOR CARRIER AGREEMENT
Upon the closing of this offering, we will enter into a three-year motor
carrier agreement with Martin Transport, Inc., a wholly owned subsidiary of
Martin Resource Management through which Martin Resource Management operates its
land transportation operations. Under this agreement, Martin Transport will
agree to transport our LPG shipments as well as other liquid products. Our
shipping rates will be fixed for the first year of the agreement, subject to
certain cost adjustments. Thereafter, these rates may be adjusted as we mutually
agree or in accordance with a price index. Additionally, during the term of the
agreement, shipping charges are also subject to fuel surcharges determined on a
weekly basis in accordance with the U.S. Department of Energy's national diesel
price list.
OTHER AGREEMENTS
Upon the closing of this offering:
- We will enter into a terminal services agreement under which we will
provide terminalling services to Martin Resource Management at a set
rate. This agreement will have an initial term of three years. The fees
we charge under this agreement will be fixed the first year of the
agreement and will be adjusted annually thereafter based on a price
index.
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- We will enter into a marine transportation agreement under which we will
provide marine transportation services to Martin Resource Management on a
spot-contract basis. The fees we will charge Martin Resource Management
will be based on applicable market rates. Additionally, Martin Resource
Management will agree for a period of three years to use our four vessels
that are currently not subject to term agreements in a manner such that
we will receive at least $5.6 million annually for the use of these
vessels by Martin Resource Management and third parties.
- We will enter into a product storage agreement under which Martin
Resource Management will provide us underground storage for LPGs. This
agreement will have an initial term of three years. Our per-unit cost
under this agreement will be fixed for the first year of the agreement
and will be adjusted annually based on a price index.
- We will enter into product supply agreements under which Martin Resource
Management will agree to provide us with marine fuel and sulfuric acid.
These agreements will each have an initial term of three years. We will
purchase product at a set margin above Martin Resource Management's cost
for such products during the term of the agreements.
- We will enter into a three-year throughput agreement under which Martin
Resource Management will agree to provide us with sole access to and use
of a LPG truck loading and unloading and pipeline distribution terminal
located at Mont Belvieu, Texas. This agreement will have an initial term
of three years. Our throughput will be fixed for the first year of the
agreement and will be adjusted annually based on an index price.
Finally, Martin Resource Management also granted us a perpetual,
non-exclusive use, ingress-egress and utility facilities easement in connection
with the transfer of our Stanolind terminal assets to us. Please read "Certain
Relationships and Related Transactions -- Omnibus Agreement," "-- Motor Carrier
Agreement" and "-- Other Agreements" for a more complete discussion of our
contracts with Martin Resource Management.
INSURANCE
Loss of, or damage to, our vessels is insured through hull and increased
value insurance policies. Vessel operating liabilities such as collision, cargo,
environmental and personal injury are insured primarily through our
participation in mutual insurance associations and other reinsurance
arrangements, pursuant to which we are potentially exposed to assessments in the
event claims by us or other members exceed available funds and reinsurance.
Protection and indemnity, or P&I, insurance coverage is provided by P&I
associations and other insurance underwriters. Most of our vessels are entered
in P&I associations that are parties to a pooling agreement, known as the
International Group Pooling Agreement, or the Pooling Agreement, through which
approximately 95% of the world's commercial shipping tonnage is reinsured
through a group reinsurance policy. With regard to collision coverage, the first
$1,000,000 of coverage is insured by our hull policy and any excess is insured
by a P&I association. We insure our owned cargo through a domestic insurance
company. We insure cargo owned by third parties through our P&I coverage. As a
member of P&I associations that are parties of the Pooling Agreement, we are
subject to calls payable to the associations of which it is a member, based on
our claims record and the other members of the other P&I associations that are
parties to the Pooling Agreement. Except for our marine operations, we
self-insure against liability exposure up to a pre-determined amount, beyond
which we are covered by catastrophe insurance coverage.
For pollution claims, our insurance covers up to $1 billion of liability
per accident or occurrence. For non-pollution incidents, our insurance covers up
to $2 billion of liability per accident or occurrence. We believe our current
insurance coverage is adequate to protect us against most accident related risks
involved in the conduct of our business and that we maintain appropriate levels
of environmental damage and pollution insurance coverage. However, there can be
no assurance that all risks are adequately insured against, that any particular
claim will be paid by the insurer, or that we will be able to procure adequate
insurance coverage at commercially reasonable rates in the future.
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TITLE TO PROPERTIES
Martin Resource Management will transfer our real and personal property to
us after the date of this prospectus but prior to the closing of this offering.
We believe we will have satisfactory title to our assets. Record title to some
of our real and personal property may continue to be held by Martin Resource
Management after the closing of this offering until we have made the appropriate
filings in jurisdictions in which the assets are located or obtained consents
and approvals for the transfer of assets to us. We anticipate that any such
filings, consents or approvals will be completed or obtained shortly after the
closing of this offering after which we will hold record title to all our
property.
Some of the easements, rights-of-way, permits, licenses or similar
documents relating to the use of the properties that will be transferred to us
require the consent of third parties, which in some cases is a governmental
entity. We believe we will obtain sufficient third-party consents, permits and
authorizations for the transfer of assets necessary for us to operate our
business in all material respects as described in this prospectus. With respect
to any third-party consents, permits or authorizations that have not been
obtained, we believe these consents, permits or authorizations will be obtained
after the closing of this offering, or the failure to obtain these consents,
permits or authorizations will not have a material adverse effect on the
operation of our business.
Title to our property may be subject to encumbrances. We believe none of
these encumbrances materially detract from the value of our properties or our
interest in these properties, or materially interfere with their use in the
operation of our business.
ENVIRONMENTAL AND REGULATORY MATTERS
Our activities are subject to various federal, state and local laws and
regulations, as well as orders of regulatory bodies, governing a wide variety of
matters, including marketing, production, pricing, community right-to-know,
protection of the environment, safety and other matters.
Environmental. We believe our operations and facilities are in substantial
compliance with applicable environmental regulations. However, risks of process
upsets, accidental releases or spills are associated with our operations and
there can be no assurance that significant costs and liabilities will not be
incurred, including those relating to claims for damage to property and persons.
The clear trend in environmental regulation is to place more restrictions
and limitations on activities that may affect the environment, such as emissions
of pollutants, generation and disposal of wastes and use and handling of
chemical substances. The usual remedy for failure to comply with these laws and
regulations is the assessment of administrative, civil and, in some instances,
criminal penalties or, in some circumstances, injunctions. We believe the cost
of compliance with environmental laws and regulations will not have a material
adverse effect on our results of operations or financial condition. However, it
is possible the costs of compliance with environmental laws and regulations will
continue to increase, and thus there can be no assurance as to the amount or
timing of future expenditures for environmental compliance or remediation, and
actual future expenditures may be different from the amounts currently
anticipated. In the event of future increases in costs, we may be unable to pass
on those increases to our customers. We will attempt to anticipate future
regulatory requirements that might be imposed and plan accordingly in order to
remain in compliance with changing environmental laws and regulations and to
minimize the costs of such compliance.
Solid Waste. We currently own or lease, and have in the past owned or
leased, properties that have been used for the manufacturing, processing,
transportation and storage of hydrocarbon products and by-products. Solid waste
disposal practices within oil and gas related industries have improved over the
years with the passage and implementation of various environmental laws and
regulations. Nevertheless, a possibility exists that hydrocarbons and other
solid wastes may have been disposed of on or under various properties owned or
leased by us during the operating history of those facilities. In addition, a
small number of these properties may have been operated by third parties over
whom we had no control as to such entities' handling of hydrocarbons,
hydrocarbon by-products or other wastes and the manner in which
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such substances may have been disposed of or released. State and federal laws
applicable to oil and natural gas wastes and properties have gradually become
more strict and, under such laws and regulations, we could be required to remove
or remediate previously disposed wastes or property contamination, including
groundwater contamination.
We generate both hazardous and nonhazardous solid wastes which are subject
to requirements of the federal Resource Conservation and Recovery Act and
comparable state statutes. From time to time, the U.S. Environmental Protection
Agency ("EPA") has considered making changes in nonhazardous waste standards
that would result in stricter disposal requirements for these wastes.
Furthermore, it is possible some wastes generated by us that are currently
classified as nonhazardous may in the future be designated as "hazardous
wastes," resulting in the wastes being subject to more rigorous and costly
disposal requirements. Changes in applicable regulations may result in an
increase in our capital expenditures or operating expenses.
Superfund. The Federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund" law, and similar
state laws, impose liability without regard to fault or the legality of the
original conduct, on certain classes of persons, including the owner or operator
of a site and companies that disposed or arranged for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the EPA and, in
some cases, third parties to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes of
persons the costs they incur. Although certain hydrocarbons are not subject to
CERCLA's reach because "petroleum" is excluded from CERCLA's definition of a
"hazardous substance," in the course of our ordinary operations we will generate
wastes that may fall within the definition of a "hazardous substance." We may be
responsible under CERCLA for all or part of the costs required to clean up sites
at which such wastes have been disposed. We have not received any notification
that we may be potentially responsible for cleanup costs under CERCLA.
Clean Air Act. Our operations are subject to the Federal Clean Air Act and
comparable state statutes. Amendments to the Clean Air Act adopted in 1990
contain provisions that may result in the imposition of increasingly stringent
pollution control requirements with respect to air emissions from the operations
of our terminal facilities, processing and storage facilities and fertilizer and
related products manufacturing and processing facilities. Such air pollution
control requirements may include specific equipment or technologies, permits
with emissions and operational limitations, pre-approval of new or modified
projects or facilities producing air emissions, and similar measures. For
example, the Mont Belvieu terminal we use is located in the Houston-Galveston
ozone non-attainment area, which is categorized as a "severe" non-attainment
area under the Clean Air Act. "Severe" non-attainment areas are subject to more
restrictive regulations for the issuance of air permits for new or modified
facilities. In addition, existing sources of air emissions in the
Houston-Galveston area are subject to stringent emission reduction requirements.
Failure to comply with applicable air statutes or regulations may lead to the
assessment of administrative, civil or criminal penalties, and/or result in the
limitation or cessation of construction or operation of certain air emission
sources. We believe our operations, including our manufacturing, processing and
storage facilities and terminals, are in substantial compliance with applicable
air emission control requirements.
Clean Water Act. The Federal Water Pollution Control Act, also known as
the Clean Water Act, and similar state laws require containment of potential
discharges of contaminants into federal and state waters. Regulations
promulgated under these laws require entities that discharge into federal and
state waters obtain National Pollutant Discharge Elimination System ("NPDES")
and/or state permits authorizing these discharges. The Clean Water Act and
analogous state laws provide penalties for releases of unauthorized contaminants
into the water and impose substantial liability for the costs of removing spills
from such waters. In addition, the Clean Water Act and analogous state laws
require that individual permits or coverage under general permits be obtained by
covered facilities for discharges of stormwater runoff. We believe we will be
able to obtain, or be included under, these Clean Water Act permits and that
compliance with the conditions of such permits will not have a material effect
on our operations.
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On August 7, 2000, a spill of molten sulfur occurred at our Stanolind
terminal near Beaumont, Texas, which at the time was owned and operated by our
affiliate Martin Gas Sales, Inc. The Texas Department of Health and Texas
Natural Resource Conservation Commission investigated the spill and its
clean-up. These agencies found that there was no impact on public health, and
that there was no reason to remove the solidified sulfur from the river bottom.
However, the United States attorney in Beaumont, Texas, initiated an
investigation under the criminal provisions of the Clean Water Act. To avoid
protracted litigation and possible criminal claims against employees, our
affiliate Martin Gas Sales agreed to plead guilty to a single felony violation
of the federal Clean Water Act and was sentenced to pay a $50,000 fine. As part
of its plea agreement with the United States, Martin Gas Sales also agreed to
implement a remedial program at our Stanolind terminal and our sulfur loading
facility in Tampa, Florida. Martin Gas Sales instituted the remedial program as
of March 1, 2002, and we believe that it has been substantially implemented,
although it must remain in affect for five years. Martin Gas Sales does not have
any contracts with the United States that might be affected by a debarment or
listing proceeding, and the United States Attorney's Office has agreed to inform
any agency initiating a debarment or listing proceeding of the implementation of
the remedial program. A previous criminal conviction, however, may result in
increased fines and other sanctions if Martin Gas Sales is subsequently
convicted or pleads guilty to a similar offense in the future. Martin Resource
Management will indemnify us under the omnibus agreement for any losses we
suffer within five years of this offering that relate to or result from, this
event.
Oil Pollution Act. The Oil Pollution Act of 1990, as amended ("OPA")
imposes a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages. The OPA also requires
that all newly constructed tank barges engaged in oil transportation in the
United States be double hulled and all existing single hull tank barges be
retrofitted with double hulls or phased out by 2015. Additionally, the OPA
imposes other requirements, such as the preparation of an oil spill contingency
plan. We believe we are substantially in compliance with all of these
requirements.
Safety Regulation. The Company's marine transportation operations are
subject to regulation by the United States Coast Guard, federal laws, state laws
and certain international treaties. Tank ships, pushboats, tugboats and barges
are required to meet construction and repair standards established by the
American Bureau of Shipping, a private organization, and the United States Coast
Guard and to meet operational and safety standards presently established by the
United States Coast Guard. We believe our marine operations and our terminals
are in substantial compliance with current applicable safety requirements.
Occupational Health Regulations. The workplaces associated with our
manufacturing, processing, terminal and storage facilities are subject to the
requirements of the federal Occupational Safety and Health Act ("OSHA") and
comparable state statutes. We believe we have conducted our operations in
substantial compliance with OSHA requirements, including general industry
standards, record keeping requirements and monitoring of occupational exposure
to regulated substances. In May 2001, Martin Resource Management paid a small
fine in relation to the settlement of alleged OSHA violations at our facility in
Plainview, Texas. Although we believe the amount of this fine and the nature of
these violations were not, as an individual event, material to our business or
operations, this violation may result in increased fines and other sanctions if
we are cited for similar violations in the future. Our marine vessel operations
are also subject to safety and operational standards established and monitored
by the U.S. Coast Guard.
In general, we expect to increase our expenditures relating to compliance
with likely higher industry and regulatory safety standards such as those
described above. These expenditures cannot be accurately estimated at this time,
but we do not expect them to have a material adverse effect on our business.
Jones Act. The Jones Act is a federal law that restricts maritime
transportation between locations in the United States to vessels built and
registered in the United States and owned and manned by United States citizens.
Since we engage in maritime transportation between locations in the United
States, we are
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subject to the provisions of the law. As a result, we are responsible for
monitoring the ownership of our subsidiaries that engage in maritime
transportation and for taking any remedial action necessary to insure that no
violation of the Jones Act ownership restrictions occurs. The Jones Act also
requires that all United States-flag vessels be manned by United States
citizens. Foreign-flag seamen generally receive lower wages and benefits than
those received by United States citizen seamen. This requirement significantly
increases operating costs of United States-flag vessel operations compared to
foreign-flag vessel operations. Certain foreign governments subsidize their
nations' shipyards. This results in lower shipyard costs both for new vessels
and repairs than those paid by United States-flag vessel owners. The United
States Coast Guard and American Bureau of Shipping maintain the most stringent
regime of vessel inspection in the world, which tends to result in higher
regulatory compliance costs for United States-flag operators than for owners of
vessels registered under foreign flags of convenience.
Merchant Marine Act of 1936. The Merchant Marine Act of 1936 is a federal
law that provides that, upon proclamation by the president of the United States
of a national emergency or a threat to the national security, the United States
Secretary of Transportation may requisition or purchase any vessel or other
watercraft owned by United States citizens (including us, provided that we are
considered a United States citizen for this purpose.) If one of our pushboats,
tugboats or tank barges were purchased or requisitioned by the United States
government under this law, we would be entitled to be paid the fair market value
of the vessel in the case of a purchase or, in the case of a requisition, the
fair market value of charter hire. However, if one of our pushboats or tugboats
is requisitioned or purchased and its associated tank barge is left idle, we
would not be entitled to receive any compensation for the lost revenues
resulting from the idled barge. We also would not be entitled to be compensated
for any consequential damages we suffer as a result of the requisition or
purchase of any of our pushboats, tugboats or tank barges.
EMPLOYEES
We do not have any employees. Please read "Business -- Our Relationship
with Martin Resource Management." Martin Resource Management employs
approximately 285 individuals who provide direct support to our operations. None
of these employees are represented by labor unions. To date, Martin Resource
Management has not experienced any work stoppages.
LITIGATION
We are a newly-created entity and we are not currently a party to any
litigation.
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MANAGEMENT
MANAGEMENT OF MARTIN MIDSTREAM PARTNERS L.P.
Martin Midstream GP LLC, as our general partner, will manage our operations
and activities on our behalf. Our general partner is not elected by our
unitholders and will not be subject to re-election in the future. Unitholders
will not directly or indirectly participate in our management or operation. Our
general partner owes a fiduciary duty to our unitholders. Our general partner
will be liable, as general partner, for all of our debts (to the extent not paid
from our assets), except for indebtedness or other obligations that are made
specifically non-recourse to it. However, whenever possible, our general partner
intends to seek indebtedness or other obligations that are non-recourse to our
general partner.
At least three directors of our general partner will serve on a conflicts
committee to review specific matters that the directors believe may involve
conflicts of interest. The conflicts committee will determine if the resolution
of the conflict of interest is fair and reasonable to us. The members of the
conflicts committee may not be officers or employees of our general partner or
directors, officers, or employees of its affiliates and must meet the
independence standards to serve on an audit committee of a board of directors
established by the Nasdaq National Market. Any matters approved by the conflicts
committee will be conclusively deemed to be fair and reasonable to us, approved
by all of our partners, and not a breach by our general partner of any duties it
may owe us or our unitholders. In addition, the members of the conflicts
committee will also serve on an audit committee that will review our external
financial reporting, recommend engagement of our independent auditors and review
procedures for internal auditing and the adequacy of our internal accounting
controls. The members of the conflicts committee will also serve on the
compensation committee, which will oversee compensation decisions for the
officers of our general partner as well as the compensation plans described
below. The initial members of our conflicts committee, audit committee and
compensation committee will be John P. Gaylord, C. Scott Massey and Richard D.
Waters Jr. upon their admission to our board upon the completion of this
offering.
We are managed and operated by the directors and officers of our general
partner. All of our operational personnel will be employees of Martin Resource
Management. All of the officers of our general partner will spend a substantial
amount of time managing the business and affairs of Martin Resource Management
and its other affiliates. These officers may face a conflict regarding the
allocation of their time between our business and the other business interests
of Martin Resource Management. Our general partner intends to cause its officers
to devote as much time to the management of our business and affairs as is
necessary for the proper conduct of our business and affairs.
DIRECTORS AND EXECUTIVE OFFICERS OF MARTIN MIDSTREAM GP LLC
The following table shows information for the directors and executive
officers of our general partner. Executive officers and directors are elected
for one-year terms.
NAME AGE POSITION WITH THE GENERAL PARTNER
---- --- ---------------------------------
Ruben S. Martin........... 51 President, Chief Executive Officer and Director
Robert D. Bondurant....... 44 Executive Vice President and Chief Financial Officer
Donald R. Neumeyer........ 54 Executive Vice President and Chief Operating Officer
Wesley M. Skelton......... 55 Executive Vice President, Chief Administrative Officer and Controller
Scott D. Martin........... 37 General Manager, Marine Operations and Director
John P. Gaylord........... 41 Director Nominee
C. Scott Massey........... 51 Director Nominee
Richard D. Waters Jr...... 52 Director Nominee
Ruben S. Martin will serve as President, Chief Executive Officer and a
member of the Board of Directors of our general partner. Mr. Martin has served
as President of Martin Resource Management since 1981 and has served in various
capacities within the company since 1974. Mr. Martin has also served
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as President of CF Martin Sulphur, LLC, since its inception in 2000. Mr. Martin
holds a bachelor of science degree in industrial management from the University
of Arkansas.
Robert D. Bondurant will serve as Executive Vice President and Chief
Financial Officer of our general partner. Mr. Bondurant joined Martin Resource
Management in 1983 as Controller and subsequently was appointed Chief Financial
Officer and a member of its Board of Directors in 1990. Mr. Bondurant served in
the audit department at Peat Marwick, Mitchell and Co. from 1980 to 1983. Mr.
Bondurant is also the Chief Financial Officer and Secretary of CF Martin
Sulphur, LLC. Mr. Bondurant holds a bachelor of business administration degree
in accounting from Texas A&M University and is a Certified Public Accountant,
licensed in the state of Texas.
Donald R. Neumeyer will serve as Executive Vice President and Chief
Operating Officer of our general partner. Mr. Neumeyer joined Martin Resource
Management in March of 1982 as an operations manager. He has served as Vice
President of Operations and Chief Operating Officer since 1983 and as a Director
since 1990. From 1978 to 1982 Mr. Neumeyer was employed by Crystal Oil Company
of Shreveport, Louisiana as Vice President of Marketing, Refining and Gas
Processing. From 1970 to 1978 Mr. Neumeyer was employed by Mobil Oil Corporation
in various capacities within its pipeline, crude oil, and gas liquid operations.
Mr. Neumeyer holds a bachelor of science in mechanical engineering from Southern
Methodist University in Dallas and is a registered professional engineer in the
state of Texas.
Wesley M. Skelton will serve as Executive Vice President, Controller and
Chief Administrative Officer of our general partner. Mr. Skelton joined Martin
Resource Management in 1981 and has served as Chief Administrative Officer since
1981 and a Director since 1990. Prior to joining Martin Resource Management, Mr.
Skelton served as Treasurer of First Federal Savings & Loan, Marshall Texas from
January 1977 through January 1981 and was employed by Peat Marwick Mitchell & Co
from August 1973 through January 1977. Mr. Skelton holds a bachelor of business
administration degree from the University of Texas, and is a Certified Public
Accountant licensed in the state of Texas.
Scott D. Martin will serve as General Manager, Marine Operations and as a
member of the Board of Directors of our general partner. Mr. Martin has served
as a Director of Martin Resource Management since 1990. He currently serves as
General Manager of Martin Gas Marine and has held a variety of positions in
marketing, transportation, terminalling, finance, operations and business
development with Martin Resource Management since 1980. Mr. Martin holds a
bachelor of science degree in business administration from University of
Arkansas, where he is a member of the Walton Business School advisory board.
John P. Gaylord will serve as a member of the Board of Directors of our
general partner upon the completion of this offering. Mr. Gaylord has served as
the President of Jacintoport Terminal Company since 1992. He originally joined
Jacintoport Terminal Company when it was founded in 1989 as Vice President of
Finance. Jacintoport Terminal Company is the general partner of Chartco Terminal
L.P. which has storage and terminalling operations in Houston, Texas. Mr.
Gaylord holds a bachelor of arts degree from Texas Christian University and a
masters of business administration degree from Southern Methodist University.
C. Scott Massey will serve as a member of the Board of Directors of our
general partner upon the completion of this offering. Mr. Massey has been self
employed as a Certified Public Accountant since 1999. From 1977 to 1998, Mr.
Massey worked for KPMG Peat Marwick, LLP in various positions, including, most
recently, as a Partner in the firm's Tax Practice -- Energy, Real Estate, Timber
from 1986 to 1998. Mr. Massey received a bachelor of business administration
degree from the University of Texas at Austin and a juris doctor degree from the
University of Houston. Mr. Massey is a Certified Public Accountant, licensed in
the states of Louisiana and Texas.
Richard D. Waters, Jr. will serve as a member of the Board of Directors of
our general partner upon the completion of this offering. Mr. Waters is a
partner of JPMorgan Partners, the private equity investing arm of J.P. Morgan
Chase & Co. Prior to joining Chase Capital Partners, the predecessor to JPMorgan
Partners, in 1996, Mr. Waters had served in Chase's Merchant Banking Group since
1986. Mr. Waters
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also serves as a director of NuCo2 Inc. Mr. Waters received a bachelor of arts
degree in economics from Hamilton College and a master of business
administration degree from Columbia University.
REIMBURSEMENT OF EXPENSES OF OUR GENERAL PARTNER
Our general partner will not receive a management fee or other compensation
for its management of Martin Midstream Partners L.P. Our general partner and its
affiliates will be reimbursed for expenses incurred on our behalf. All direct
general and administrative expenses will be charged to us as incurred. Indirect
general and administrative and corporate overhead costs relate to centralized
corporate functions that we share with Martin Resource Management, including
certain accounting, treasury, engineering, information technology, insurance,
administration of employee benefit plans and other corporate services. The
reimbursement amount with respect to indirect general and administrative and
corporate overhead expenses will not exceed $1.0 million for the first year. For
each of the following four years, this amount may be increased by no more than
the percentage increase in the consumer price index and is also subject to
adjustment for expansions of our operations. General and administrative expenses
directly associated with providing services to us (such as legal and accounting
services) are not included in the overhead allocation pool and are therefore not
subject to the $1.0 million cap. The partnership agreement provides that our
general partner will determine the expenses that are allocable to us in any
reasonable manner determined by our general partner in its sole discretion.
Please read "Certain Relationships and Related Transactions -- Omnibus
Agreement."
EXECUTIVE COMPENSATION
We and our general partner were formed in June 2002. Accordingly, our
general partner paid no compensation to its directors and officers with respect
to the 2001 fiscal year. We have not accrued any obligations with respect to
management incentive or retirement benefits for our directors and officers for
the 2001 fiscal year. Officers and employees of our general partner may
participate in employee benefit plans and arrangements sponsored by Martin
Resource Management, including plans which may be established by Martin Resource
Management in the future.
COMPENSATION OF DIRECTORS
Officers of our general partner who also serve as directors will not
receive additional compensation. Our general partner anticipates that each
independent director will receive compensation for attending meetings of the
directors as well as committee meetings. The amount of compensation to be paid
to the independent directors has not yet been determined. In addition, each
independent director will be reimbursed for out-of-pocket expenses in connection
with attending meetings of the directors or committees thereof. Each director
will be fully indemnified by us for actions associated with being a director to
the extent permitted under Delaware law.
MARTIN MIDSTREAM PARTNERS L.P. LONG-TERM INCENTIVE PLAN
Our general partner has adopted the Martin Midstream Partners L.P.
Long-Term Incentive Plan for employees and directors of our general partner and
its affiliates who perform services for us. The long-term incentive plan
consists of two components, restricted units and unit options. The long-term
incentive plan currently permits the grant of awards covering an aggregate of
725,000 common units, 241,667 of which may be awarded in the form of restricted
units and 483,333 of which may be awarded in the form of unit options. The plan
is administered by the compensation committee of our general partner's board of
directors.
Our general partner's board of directors in its discretion may terminate or
amend the long-term incentive plan at any time with respect to any units for
which a grant has not yet been made. Our general partner's board of directors
also has the right to alter or amend the long-term incentive plan or any part of
the plan from time to time, including increasing the number of units that may be
reserved for issuance under the plan subject to any applicable unitholder
approval. However, no change in any outstanding grant
97
may be made that would materially impair the rights of the participant without
the consent of the participant.
RESTRICTED UNITS
A restricted unit is a "phantom" unit that entitles the grantee to receive
a common unit upon the vesting of the phantom unit, or in the discretion of the
compensation committee, cash equivalent to the value of a common unit. The
compensation committee may determine to make grants under the plan to employees
and directors containing such terms as the compensation committee shall
determine under the plan. The compensation committee will determine the period
over which restricted units granted to employees and directors will vest. The
committee may base its determination upon the achievement of specified financial
objectives. In addition, the restricted units will vest upon a change of control
of us, our general partner or Martin Resource Management or if our general
partner ceases to be an affiliate of Martin Resource Management.
If a grantee's employment or membership on the board of directors
terminates for any reason, the grantee's restricted units will be automatically
forfeited unless, and to the extent, the compensation committee provides
otherwise. Common units to be delivered upon the vesting of restricted units may
be common units acquired by our general partner in the open market, common units
already owned by our general partner, common units acquired by our general
partner directly from us or any affiliate of our general partner or any
combination of the foregoing. Our general partner will be entitled to
reimbursement by us for the cost incurred in acquiring common units. If we issue
new common units upon vesting of the restricted units, the total number of
common units outstanding will increase. The committee responsible for the
administration of the long-term incentive plan, in its discretion, may grant
distribution equivalent rights with respect to any restricted unit grants.
We intend the issuance of the common units upon vesting of the restricted
units under the plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate in the equity
appreciation of the common units. Therefore, plan participants will not pay any
consideration for the common units they receive, and we will receive no
remuneration for the units.
UNIT OPTIONS
The long-term incentive plan currently permits the grant of options
covering common units. At the time of this offering, we will not grant common
unit options to directors or employees of our general partner, or its
affiliates. In the future, the compensation committee may determine to make
grants under the plan to employees and directors containing such terms as the
committee shall determine. Unit options will have an exercise price that, in the
discretion of the committee, may not be less than the fair market value of the
units on the date of grant. In general, unit options granted will become
exercisable over a period determined by the compensation committee. In addition,
the unit options will become exercisable upon a change in control of us, our
general partner, Martin Resource Management or if our general partner ceases to
be an affiliate of Martin Resource Management or upon the achievement of
specified financial objectives.
Upon exercise of a unit option, our general partner will acquire common
units in the open market or directly from us or any affiliate of our general
partner or use common units already owned by our general partner, or any
combination of the foregoing. Our general partner will be entitled to
reimbursement by us for the difference between the cost incurred by our general
partner in acquiring these common units and the proceeds received by our general
partner from an optionee at the time of exercise. Thus, the cost of the unit
options will be borne by us. If we issue new common units upon exercise of the
unit options, the total number of common units outstanding will increase, and
our general partner will pay us the proceeds it received from the optionee upon
exercise of the unit option. The unit option plan has been designed to furnish
additional compensation to employees and directors and to align their economic
interests with those of common unitholders.
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MARTIN RESOURCE MANAGEMENT EMPLOYEE BENEFIT PLANS
Martin Resource Management has employee benefit plans for its employees and
consultants who perform services for us. The following summary of these plans is
not complete but outlines the material provisions of these plans.
Martin Resource Management Employee Stock Ownership Plan. Martin Resource
Management maintains an employee stock ownership plan that covers employees who
satisfy certain minimum age and service requirements. This employee stock
ownership plan is referred to in this prospectus as the "ESOP." Under the terms
of the ESOP, Martin Resource Management has the discretion to make contributions
in an amount determined by its board of directors. Those contributions are
allocated under the terms of the ESOP and invested primarily in the common stock
of Martin Resource Management. Participants in the ESOP become 100% vested upon
completing five years of vesting service or upon their attainment of age 65,
permanent disability or death during employment. Any forfeitures of non-vested
accounts are allocated to the accounts of employed participants. Except for
rollover contributions, participants are not permitted to make contributions to
the ESOP.
Martin Resource Management Profit Sharing Plan. Martin Resource Management
maintains a profit sharing plan that covers employees who satisfy certain
minimum age and service requirements. This profit sharing plan is referred to in
this prospectus as the "401(k) Plan." Eligible employees may elect to
participate in the 401(k) Plan by electing pre-tax contributions up to 15% of
their regular compensation and/or a portion of their discretionary bonuses.
Matching contributions are made to the 401(k) Plan in a percentage determined in
the discretion of the board of directors of Martin Resource Management.
Participants in the 401(k) Plan become 100% vested in matching contributions
made for them upon completing five years of vesting service or upon their
attainment of age 65, permanent disability or death during employment.
Martin Resource Management Phantom Stock Plan. Under Martin Resource
Management's phantom stock plan, phantom stock units granted thereunder have a
ten year life and are non-transferable. Each recipient may exercise an election
to receive either
- an equivalent number of shares of Martin Resource Management or
- cash based on the latest valuation of the shares of common stock of
Martin Resource Management held by the ESOP.
Any common stock of Martin Resource Management received cannot be pledged or
encumbered. The recipient must sign an agreement waiving any voting rights with
respect to shares received. Cash elections are paid in five equal annual
installments. A put option, exercisable at the then fair market value of the
common stock, is exercisable by the employee in the event Martin Resource
Management is sold prior to an employee's election to receive common stock or
cash.
Martin Resource Management Non-Qualified Option Plan. In September 1999,
Martin Resource Management adopted a stock option plan designed to retain and
attract qualified management personnel, directors and consultants. Under the
plan, Martin Resource Management is authorized to issue to qualifying parties
from time to time options to purchase up to 1,000 shares of its common stock
with terms not to exceed ten years from the date of grant and at exercise prices
generally not less than fair market value on the date of grant.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our units that
will be issued upon the closing of this offering and the related transactions
and held by beneficial owners of 5% or more of the units, by directors of our
general partner, by each named executive officer and by all directors and
officers of our general partner as a group.
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
COMMON COMMON SUBORDINATED SUBORDINATED TOTAL UNITS
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
------------------------ ------------ ------------- ------------ ------------- -------------
Martin Resource Management....... -- -- 4,253,362 100% 58.6%
Ruben S. Martin(1)............... -- -- 4,253,362 100% 58.6%
Scott D. Martin(1)............... -- -- 4,253,362 100% 58.6%
Donald R. Neumeyer............... -- -- -- -- --
Wesley M Skelton................. -- -- -- -- --
Robert D. Bondurant.............. -- -- -- -- --
John P. Gaylord(2)............... -- -- -- -- --
C. Scott Massey(2)............... -- -- -- -- --
Richard D. Waters Jr.(2)......... -- -- -- -- --
All directors and executive
officers as a group (8
persons)....................... -- -- -- 100% 58.6%
---------------
(1) Includes the 4,253,362 subordinated units owned directly by Martin Resource
Management. Ruben S. Martin beneficially owns securities in Martin Resource
Management representing approximately 51.6% of the voting power thereof and
serves as its Chairman of the Board and President. Scott D. Martin owns
securities in Martin Resource Management representing approximately 51.6% of
the voting power thereof and serves on its Board of Directors. As a result,
each of Ruben S. Martin and Scott D. Martin may be deemed to be the
beneficial owner of the subordinated units owned by Martin Resource
Management.
(2) Director nominee.
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Martin Resource Management owns our general partner and, together with our
general partner, owns approximately 58.6% of our outstanding units. The table
below sets forth information as of the date of this prospectus concerning (i)
the beneficial ownership of the redeemable preferred stock of Martin Resource
Management, (ii) each person owning in excess of 5% of common stock of Martin
Resource Management, and (iii) the common stock ownership of (a) each director
of Martin Resource Management, (b) each executive officer of Martin Resource
Management, and (c) all such executive officers and directors of Martin Resource
Management as a group. Except as indicated, each individual has sole voting and
investment power over all shares listed opposite his or her name.
BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF REDEEMABLE
COMMON STOCK PREFERRED STOCK
----------------------- ----------------------- PERCENT OF
NUMBER OF PERCENT OF NUMBER OF PERCENT OF TOTAL VOTING
NAME OF BENEFICIAL OWNER(1) SHARES OUTSTANDING SHARES OUTSTANDING POWER
--------------------------- --------- ----------- --------- ----------- ------------
Terence Sean Martin.......... 1,269 15.1% 2,527 16.6% 16.1%
R.S. Martin Jr. Children's
Trust No. One f/b/o Angela
Santi Jones(2)............. 1,278 15.2% -- -- 5.4%
Martin Resource Management
Corporation Employee Stock
Ownership Trust(3)......... 735 8.7% -- -- 3.1%
Martin Grandchild's Trust
f/b/o Angela Jones(4)...... -- -- 2,527 16.6% 10.7%
RSM, III Investments,
Ltd.(5).................... 2,267 27.0% -- -- 9.6%
SKM Partnership, Ltd.(6)..... 2,560 30.5% -- -- 10.8%
Ruben S. Martin(2)(3)(4)(5).. 4,574 54.4% 7,600 50.0% 51.6%
Scott D.
Martin(2)(3)(4)(6)......... 4,573 54.4% 7,600 50.0% 51.6%
Donald R. Neumeyer(7)........ 36 * -- -- *
Wesley M. Skelton(3)(7)...... 763 9.0% -- -- 3.2%
Robert D. Bondurant(7)....... 100 1.2% -- -- *
Executive officers and
directors as a Group (5
individuals)............... 7,298 85.2% 12,673 83.4% 84.0%
---------------
* Represents less than 1.0%
(1) The business address of each shareholder, director and executive officer of
Martin Resource Management is c/o Martin Resource Management Corporation,
4200 Stone Road, Kilgore, Texas 75662.
(2) Ruben S. Martin and Scott D. Martin are the co-trustees of the R.S. Martin
Jr. Children's Trust No. One f/b/o Angela Santi Jones and exercise shared
control over the voting and disposition of the securities owned by this
trust. As a result, these persons may be deemed to be the beneficial owners
of the securities held by such trust; thus, the number of shares of common
stock reported herein as beneficially owned by such individuals includes the
1,278 shares owned by such trust.
(3) Ruben S. Martin, Scott D. Martin and Wesley M. Skelton are the co-trustees
of the Martin Resource Management Corporation Employee Stock Ownership Trust
and exercise shared control over the voting and disposition of the
securities owned by this trust. As a result, these persons may be deemed to
be the beneficial owners of the securities held by such trust; thus, the
number of shares of common stock reported herein as beneficially owned by
such individuals includes the 735 shares owned by such trust. Mr. Skelton
disclaims beneficial ownership of these 735 shares.
(4) Ruben S. Martin is the trustee and Scott D. Martin is the successor trustee
of the Martin Grandchild's Trust f/b/o Angela Jones and exercise shared
control over the voting and disposition of the securities owned by this
trust. As a result, these persons may be deemed to be the beneficial owners
of the securities held by such trust; thus, the number of shares of
redeemable preferred stock
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reported herein as beneficially owned by such individuals includes the 2,527
shares owned by such trust.
(5) Ruben S. Martin is the beneficial owner of the general partner of RSM, III
Investments, Ltd. and exercises control over the voting and disposition of
the securities owned by this entity. As a result, he may be deemed to be the
beneficial owner of the securities held by such entity; thus, the number of
shares of preferred stock reported herein as beneficially owned by such
individual includes the 2,267 shares owned by such entity.
(6) Scott D. Martin is the beneficial owner of the general partner of SKM
Partnership, Ltd. and exercises control over the voting and disposition of
the securities owned by this entity. As a result, he may be deemed to be the
beneficial owner of the securities held by such entity; thus, the number of
shares of preferred stock reported herein as beneficially owned by such
individual includes the 2,560 shares owned by such entity.
(7) Messrs. Neumeyer, Skelton and Bondurant have the right to acquire 36, 28 and
100 shares, respectively, by virtue of options issued under Martin Resource
Management's nonqualified stock option plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After this offering, Martin Resource Management will own 4,253,362
subordinated units representing an approximate 57.5% limited partner interest in
us. Our general partner will be a wholly-owned subsidiary of Martin Resource
Management. Our general partner will own a 2.0% general partner interest in us
and the incentive distribution rights. Our general partner's ability, as general
partner, to manage and operate us, and Martin Resource Management's ownership of
an approximate 57.5% limited partner interest in us, effectively gives Martin
Resource Management the ability to veto some of our actions and to control our
management.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with our formation,
ongoing operation and liquidation. These distributions and payments were
determined by and among affiliated entities and, consequently, are not the
result of arm's-length negotiations.
FORMATION STAGE
The consideration received by
our general partner and Martin
Resource Management for the
transfer of assets to us...... - 4,253,362 subordinated units;
- 2% general partner interest; and
- the incentive distribution rights.
OPERATIONAL STAGE
Distributions of available
cash to our general partner... We will generally make cash distributions 98%
to our unitholders, including Martin Resource
Management as holder of all of the subordinated
units, and 2% to our general partner. In
addition, if distributions exceed the minimum
quarterly distribution and other higher target
levels, our general partner will be entitled to
increasing percentages of the distributions, up
to 50%
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of the distributions above the highest target
level as a result of its incentive distribution
rights.
Assuming we have sufficient available cash to
pay the full minimum quarterly distribution on
all of our outstanding units for four quarters,
our general partner would receive distributions
of approximately $0.3 million on its 2.0%
general partner interest and Martin Resource
Management would receive an aggregate annual
distribution of approximately $8.5 million on
its subordinated units.
Payments to our general
partner and its affiliates.... Martin Resource Management will be entitled to
reimbursement for all direct and indirect
expenses it or our general partner incur on our
behalf, including general and administrative
expenses. The direct expenses include the
salaries and benefit costs employees of Martin
Resource Management who provide services to us.
Our general partner has sole discretion in
determining the amount of these expenses. The
indirect expenses include general and
administrative expenses and an allocation of
its corporate overhead. The reimbursement
amount with respect to indirect general and
administrative expenses and the corporate
overhead allocation will not exceed $1.0
million for the first year following this
offering. For each of the following four years,
this amount may be increased by no more than
percentage increase in the consumer price index
for the applicable year. Please read
"-- Omnibus Agreement."
Withdrawal or removal of our
general partner............... If our general partner withdraws or is removed,
its general partner interest and its incentive
distribution rights will either be sold to the
new general partner for cash or converted into
common units, in each case for an amount equal
to the fair market value of those interests.
Please read "The Partnership
Agreement -- Withdrawal or Removal of the
General Partner."
LIQUIDATION STAGE
Liquidation................... Upon our liquidation, the partners, including
our general partner, will be entitled to
receive liquidating distributions according to
their particular capital account balances.
AGREEMENTS GOVERNING THE TRANSACTIONS
We and Martin Resource Management have entered into or will enter into the
various agreements that will effect the transactions relating to this offering,
including the vesting of our assets in, and the assumption of liabilities by,
our us or our subsidiaries, and the application of the proceeds of this
offering. These agreements will not be the result of arm's-length negotiations
and consequently may not be as favorable to us as they might have been if we had
negotiated them with unaffiliated third parties. All of the transaction expenses
incurred in connection with these transactions, including the expenses
associated with vesting assets into our subsidiaries, will be paid from the
proceeds of this offering.
OMNIBUS AGREEMENT
Upon the closing of this offering, we and our general partner will enter
into an omnibus agreement with Martin Resource Management that will govern,
among other things, potential competition and
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indemnification obligations among the parties to the agreement, related party
transactions, the provision of general administration and support services by
Martin Resource Management and our use of certain of Martin Resource
Management's tradenames and trademarks.
Non-Competition Provisions. Martin Resource Management will agree for so
long as Martin Resource Management controls the general partner not to engage in
the business of:
- providing marine transportation of hydrocarbon products and by-products;
- providing terminalling services for hydrocarbon products and by-products;
- distributing LPGs; and
- manufacturing and selling fertilizer products and other sulfur-related
products.
This restriction will not apply to:
- the operation on our behalf of any asset or group of assets owned by us
or our affiliates;
- any business operated by Martin Resource Management at the closing of
this offering, including the following:
- providing land transportation of various liquids,
- distributing fuel oil, sulfuric acid, marine fuel and other liquids,
- providing marine bunkering and other shore-based marine services in
Mobile, Alabama,
- operating a small crude oil gathering business in Stephens, Arkansas,
- operating an underground LPG storage facility in Arcadia, Louisiana, and
- operating, solely for our account, a LPG truck loading and unloading and
pipeline distribution terminal in Mont Belvieu, Texas.
- any business that Martin Resource Management acquires or constructs that
has a fair market value of less than $5.0 million;
- any business that Martin Resource Management acquires or constructs that
has a fair market value of $5.0 million or more if we have been offered
the opportunity to purchase the business for fair market value, and we
decline to do so with the concurrence of our conflicts committee; and
- any business that Martin Resource Management acquires or constructs where
a portion of such business includes a restricted business and the fair
market value of the restricted business is $5.0 million or more and
represents less than 20% of the aggregate value of the entire business to
be acquired or constructed; provided that, following completion of the
acquisition or construction, we are provided the opportunity to purchase
the restricted business.
Indemnification Provisions. Under the omnibus agreement, Martin Resource
Management will indemnify us for five years after the closing of this offering
against:
- certain potential environmental liabilities associated with the operation
of the assets contributed to us, and assets retained, by Martin Resource
Management that relate to events or conditions occurring or existing
before the closing of this offering, and
- any payments we are required to make, as a successor in interest to
affiliates of Martin Resource Management, under environmental indemnity
provisions contained in the contribution agreement associated with the
contribution of assets by Martin Resource Management to CF Martin
Sulphur, L.P. in November 2000.
104
However, Martin Resource Management's maximum liability for this
indemnification obligation will not exceed $7.5 million. Martin Resource
Management will also indemnify us for liabilities relating to:
- legal actions currently pending against Martin Resource Management;
- events and conditions associated with any assets retained by Martin
Resource Management;
- certain defects in the title to the assets contributed to us by Martin
Resource Management that arise within three years after the closing of
this offering to the extent such defects materially and adversely affect
our ownership and operation of such assets;
- our failure to obtain certain consents and permits necessary to conduct
our business to the extent such liabilities arise within three years
after the closing of this offering; and
- certain income tax liabilities attributable to the operation of the
assets contributed to us prior to the time that they were contributed.
Services. Under the omnibus agreement, Martin Resource Management will
provide us with corporate staff and support services that are substantially
identical in nature and quality to the services previously provided by Martin
Resource Management in connection with its management and operation of our
assets during the one-year period prior to the closing date. These services will
include centralized corporate functions, such as accounting, treasury,
engineering, information technology, insurance, administration of employee
benefit plans and other corporate services. Martin Resource Management will be
reimbursed for the costs and expenses it incurs in rendering these services,
including an overhead allocation to us of Martin Resource Management's indirect
general and administrative expenses from its corporate allocation pool. The
reimbursement amount with respect to indirect general and administrative
expenses and the corporate overhead allocation will not exceed $1.0 million for
the first year. For each of the following four years, this amount may be
increased by no more than the percentage increase in the consumer price index
for the applicable year. In addition, our general partner may agree, with the
consent of the conflicts committee of our general partner, to further increases
in connection with expansions of our operations through the acquisition or
construction of new assets or businesses. After this five-year period, our
general partner will determine the general and administrative expenses that will
be allocated to us. Administrative and general expenses directly associated with
providing services to us (such as legal and accounting services) are not
included in the overhead allocation pool and are therefore not subject to the
$1.0 million cap. The provisions of the omnibus agreement regarding Martin
Resource Management's services will terminate if Martin Resource Management
ceases to control our general partner.
Related Party Transactions. The omnibus agreement prohibits us from
entering into any material agreement with Martin Resource Management without the
prior approval of the conflicts committee of our general partner's board of
directors. For purposes of the omnibus agreement, the term material agreements
means any agreement between us and Martin Resource Management that requires
aggregate annual payments in excess of then-applicable limitation on the
reimbursable amount of indirect general and administrative expenses. Please read
"-- Services" above.
License Provisions. Under the omnibus agreement, Martin Resource
Management will grant us a nontransferable, nonexclusive, royalty-free right and
license to use certain of its tradenames and marks, as well as the tradenames
and marks used by some of its affiliates.
Management of CF Martin Sulphur, L.P. Subject to the limitations referred
to below, Martin Resource Management agrees that it will exercise its management
rights regarding the operations of CF Martin Sulphur, L.P. in a manner that it
reasonably believes is in our best interests. Martin Resource Management also
agreed that it will not approve or consent to any amendment to the CF Martin
Sulphur, L.P. partnership agreement without our prior written consent. Please
read "Business -- CF Martin Sulphur, L.P." for a discussion of Martin Resource
Management's management rights regarding the operations of CF Martin Sulphur,
L.P. However, in no event will persons affiliated with Martin Resource
Management who serve as managers of CF Martin Sulphur L.L.C., the general
partner of CF Martin Sulphur, L.P., be required to act in any manner that such
person reasonably believes would violate law or
105
constitute a breach of a fiduciary or similar duty. Except when obligated to do
so, Martin Resource Management also agrees that it will neither sell its or our
interest in CF Martin Sulphur, L.P., nor purchase an interest of a third party
in the partnership, in accordance with the partnership agreement of CF Martin
Sulphur, L.P. without our written consent and, in some cases, only as directed
by us. In the event we and Martin Resource Management agree to purchase an
interest of a third party in CF Martin Sulphur, L.P., we agree that the purchase
price for and ownership of such interest will be allocated between us in
accordance with our respective ownership percentages in the partnership.
Amendment and Termination. The omnibus agreement may be amended by written
agreement of the parties; provided, however that it may not be amended without
the approval of the conflicts committee of our general partner if such amendment
would adversely affect the unitholders. The omnibus agreement, other than the
indemnification provisions and the provisions limiting the amount for which we
will reimburse Martin Resource Management for general and administrative
services performed on our behalf, will terminate if we are no longer an
affiliate of Martin Resource Management.
MOTOR CARRIER AGREEMENT
Upon the closing of this offering, we will enter into a motor carrier
agreement with Martin Transport, Inc., a wholly owned subsidiary of Martin
Resource Management through which Martin Resource Management operates its land
transportation operations. Under the agreement, Martin Transport will agree to
ship our LPG shipments as well as other liquid products.
Term and Pricing. This agreement will have a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term. Our shipping rates
will be fixed for the first year of the agreement, subject to adjustments
resulting from cost items imposed on Martin Transport as the result of
circumstances beyond Martin Transport's control and affecting similarly-
situated private trucking companies. Thereafter, these rates will be adjusted on
at least an annual basis as negotiated by the parties. In the event the parties
are not able to agree on adjustments, the rates previously in effect will be
adjusted according to a price index. Shipping charges under the agreement are
also subject to a fuel surcharge determined each week in accordance with in the
most recent U.S. Department of Energy's national diesel price index.
Indemnification. Martin Transport will indemnify us against all claims
arising out of the negligence or willful misconduct of Martin Transport and its
officers, employees, agents, representatives and subcontractors. We will
indemnify Martin Transport against all claims arising out of the negligence or
willful misconduct of us and our officers, employees, agents, representatives
and subcontractors. In the event a claim is the result of the joint negligence
or misconduct of Martin Transport and us, our indemnification obligations will
be shared in proportion to each party's allocable share of such joint negligence
or misconduct.
OTHER AGREEMENTS
Terminal Services Agreement. We will enter into a terminal services
agreement with Martin Resource Management under which we will provide the
following services for Martin Resource Management at our terminals:
- we will unload, transfer and store products received from vessels or
trucks at the terminal; and
- we will transfer products stored at the terminal to vessels or trucks.
This agreement will have a three-year term and will automatically renew for
consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term.
Marine Transportation Agreement. We will enter into a marine
transportation agreement under which we will provide marine transportation
services to Martin Resource Management on a spot-contract
106
basis at applicable market rates. This agreement will have a three-year term and
will automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term. Additionally, Martin
Resource Management will agree for a three year period to use our four vessels
that are currently not subject to term agreements in a manner such that we will
receive at least $5.6 million annually for the use of these vessels by Martin
Resource Management and third parties.
Underground Storage Agreement. We will enter into a product storage
agreement with Martin Resource Management under which we will lease storage
space at Martin Resource Management's underground storage facility located in
Arcadia, Louisiana. This agreement will have a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term. Our per-unit cost
under this agreement will be fixed for the first year of the agreement and will
be adjusted annually based on a price index. We will indemnify Martin Resource
Management from any damages resulting from our delivery of products that are
contaminated or otherwise fail to conform to the product specifications
established in the agreement, as well as any damages resulting from our
transportation, storage, use or handling of products.
Marine Fuel. We will enter into an agreement with Martin Resource
Management under which Martin Resource Management will provide us with marine
fuel at its docks located in Mobile, Alabama, Theodore, Alabama, Pascagoula,
Mississippi and Tampa, Florida. We will agree to purchase all of our marine fuel
requirements that occur in the areas services by these docks under this
agreement. Martin Resource Management will provide fuel at a set margin of $.035
above its cost on a spot-contract basis. This agreement will have a three-year
term and will automatically renew for consecutive one-year periods unless either
party terminates the agreement by giving written notice to the other party at
least 30 days prior to the expiration of the then-applicable term.
Sulfuric Acid. We will enter into an agreement with Martin Resource
Management under which Martin Resource Management will provide sulfuric acid for
our Plainview facility. We will agree to purchase all of our sulfuric acid
requirements for our Plainview facility under this agreement. Martin Resource
Management will provide sulfuric acid at a set margin of $4.00 per short ton
above its cost on a spot-contract basis. This agreement will have a three-year
term and will automatically renew for consecutive one-year periods unless either
party terminates the agreement by giving written notice to the other party at
least 30 days prior to the expiration of the then-applicable term.
Throughput Agreement. We will enter into a three-year throughput agreement
under which Martin Resource Management will agree to provide us with sole access
to and use of a LPG truck loading and unloading and pipeline distribution
terminal located at Mont Belvieu, Texas. This agreement will have a three-year
term and will automatically renew for consecutive one-year periods unless either
party terminates the agreement by giving written notice to the other party at
least 30 days prior to the expiration of the then-applicable term. Our
throughput fees will be fixed for the first year of the agreement and will be
adjusted annually based on an index price.
Purchaser Use Easement, Ingress-Egress Easement, and Utility Facilities
Easement. We will enter into a Purchaser Use Easement, Ingress-Egress Easement
and Utility Facilities Easement with Martin Resource Management under which we
will have complete, non-exclusive access to, and use of, all marine terminal
facilities, all loading and unloading facilities for vessels, barges and trucks
and other common use facilities located at the Stanolind terminal. This easement
will have a perpetual duration. We will not incur any expenses, costs or other
financial obligations under the easement. Martin Resource Management will be
obligated to maintain, and repair all common use areas and facilities located at
this terminal. We share the use of these common use areas and facilities only
with Martin Resource Management and CF Martin Sulphur, L.P. who also have tanks
located at the Stanolind facility. See "Business -- Terminalling
Business -- Description of Terminal Facilities."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between our general partner and its affiliates (including Martin
Resource Management), on the one hand, and us and our limited partners, on the
other hand. The directors and officers of our general partner have fiduciary
duties to manage our general partner in a manner beneficial to its owners. At
the same time, the directors of our general partner have fiduciary duties to
manage us in a manner beneficial to us and our unitholders.
The partnership agreement contains provisions that allow our general
partner to take into account the interests of parties in addition to our
interests when resolving conflicts of interest. In effect, these provisions
limit our general partner's fiduciary duties to the unitholders. The partnership
agreement also restricts the remedies available to unitholders for actions taken
that, without those limitations, might constitute breaches of fiduciary duty.
Whenever a conflict arises between our general partner or its affiliates, on the
one hand, and us or any other partner, on the other, our general partner will
resolve that conflict. At the request of our general partner or as required by
the omnibus agreement, a conflicts committee of the directors of our general
partner will review conflicts of interest. Our general partner will not be in
breach of its obligations under the partnership agreement or its duties to us or
the unitholders if the resolution of the conflict is considered fair and
reasonable to us. Any resolution is considered fair and reasonable to us if that
resolution is:
- approved by the conflicts committee, although no party is obligated to
seek approval and our general partner may adopt a resolution or course of
action that has not received approval;
- on terms no less favorable to us than those generally being provided to
or available from unrelated third parties; or
- fair to us, taking into account the totality of the relationships between
the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
Unless the resolution is specifically provided for in the partnership
agreement, when resolving a conflict, our general partner may consider:
- the relative interests of the parties involved in the conflict or
affected by the action;
- any customary or accepted industry practices or historical dealings with
a particular person or entity; and
- generally accepted accounting practices or principles and other factors
it considers relevant, if applicable.
Unless our general partner has acted in bad faith when resolving a conflict
of interest in accordance with these standards, the action taken by the general
partner to resolve the conflict of interest will not constitute a breach of its
fiduciary duties.
Conflicts of interest could arise in the situations described below, among
others:
ACTIONS TAKEN BY OUR GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE
FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT
SUBORDINATED UNITS.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding such matters as:
- the amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
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- the issuance of additional units; and
- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by us and our affiliates do not constitute a breach
of any duty owed by our general partner to the unitholders, including borrowings
that have the purpose or effect of:
- enabling our general partner to receive distributions on any subordinated
units or the incentive distribution rights; or
- accelerating the expiration of the subordination period.
For example, if we have not generated sufficient cash from our operations
to pay the minimum quarterly distribution on our common units and on our
subordinated units, then the partnership agreement permits us to borrow funds,
which would enable us to make this distribution on all outstanding units. Please
read "Cash Distribution Policy -- Subordination Period."
The partnership agreement provides that we and our subsidiaries may borrow
funds from our general partner and its affiliates. Our general partner and its
affiliates may not borrow funds from us, our operating partnership or our other
subsidiaries.
WE DO NOT HAVE OFFICERS OR EMPLOYEES AND RELY SOLELY ON OFFICERS AND EMPLOYEES
OF OUR GENERAL PARTNER AND MARTIN RESOURCE MANAGEMENT.
We do not have officers or employees and will rely solely on officers and
employees of Martin Resource Management. Martin Resource Management conducts
businesses and activities of its own in which we have no economic interest.
There could be material competition for the time and effort of these officers
and employees. The officers of our general partner are not required to work full
time on our affairs. These officers are required to devote significant time to
the affairs of Martin Resource Management and are compensated by it for the
services rendered to it.
WE WILL REIMBURSE OUR GENERAL PARTNER AND MARTIN RESOURCE MANAGEMENT FOR THEIR
EXPENSES.
We will reimburse our general partner and Martin Resource Management for
costs incurred in managing and operating us, including costs incurred in
rendering corporate staff and support services to us. The reimbursement amount
with respect to indirect general and administrative services and our allocation
of Martin Resource Management's corporate overhead will not exceed $1.0 million
for the first year following this offering. This cap may be increased in
subsequent years. Administrative and general expenses directly associated with
providing services to us (such as legal and accounting services) are not
included in the overhead allocation pool and are therefore not subject to the
$1.0 million cap. Because we are obligated to reimburse our general partner for
all direct expenses it incurs on our behalf, there is no maximum amount that we
may pay our general partner. The partnership agreement provides that our general
partner will determine the expenses that are allocable to us in any reasonable
manner determined by our general partner in its sole discretion.
OUR GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING OUR OBLIGATIONS.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only to our assets and not
against our general partner or its assets. The partnership agreement provides
that any action taken by our general partner to limit its or our liability is
not a breach of our general partner's fiduciary duties, even if we could have
obtained terms that are more favorable without the limitation on liability.
MARTIN RESOURCE MANAGEMENT HAS JOINT CONTROL OVER CF MARTIN SULPHUR, L.P.
We own a non-controlling 49.5% limited partner interest in CF Martin
Sulphur, L.P., a limited partnership created in November 2000 by Martin Resource
Management and CF Industries. CF Industries owns the other 49.5% limited partner
interest. CF Martin Sulphur, L.P. is managed by its general partner,
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CF Martin Sulphur, L.L.C., which is owned equally by CF Industries and Martin
Resource Management. Each of Martin Resource Management and CF Industries is
entitled to elect two managers to the four-person board of managers of the
general partner of CF Martin Sulphur, L.P. and, as a result of this ownership
and management structure, neither Martin Resource Management nor CF Industries
has individual control over CF Martin Sulphur, L.P. The general partner of CF
Martin Sulphur, L.P. has fiduciary duties to act in the best interests of CF
Martin Sulphur, L.P. and its limited partners. As a result, the general partner
of CF Martin Sulphur, L.P. may make decisions that are in the best interests of
CF Martin Sulphur, L.P. but that may not be in our best interest. These
decisions may relate to, among other matters, cash distributions to partners
(including us as a limited partner), capital expenditures, borrowings, issuance
of new partnership securities and operations. For a more detailed discussion of
the ownership and management structure of CF Martin Sulphur, L.P., please read
"Business -- CF Martin Sulphur, L.P. -- Management and Ownership." Martin
Resource Management also conducts the day-to-day operations of CF Martin
Sulphur, L.P. under a long-term services agreement. Therefore, the management
and operation of CF Martin Sulphur, L.P. may place Martin Resource Management in
circumstances involving conflicting or competing duties it may owe to us, our
general partner, shareholders of Martin Resource Management, its other
affiliates and/or CF Martin Sulphur, L.P.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF OUR GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH US.
Any agreements between us, on the one hand, and our general partner and its
affiliates, on the other, will not grant to the unitholders, separate and apart
from us, the right to enforce the obligations of our general partner and its
affiliates in our favor.
CONTRACTS BETWEEN US, ON THE ONE HAND, AND OUR GENERAL PARTNER AND ITS
AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS.
The partnership agreement allows our general partner to pay itself or its
affiliates for any services rendered, provided these services are rendered on
terms that are fair and reasonable to us. Our general partner may also enter
into additional contractual arrangements with any of its affiliates, including
Martin Resource Management, on our behalf. Neither the partnership agreement nor
any of the other agreements, contracts or arrangements between us and our
general partner and its affiliates are or will be the result of arm's-length
negotiations. Our partnership agreement provides that all of these transactions
entered into after the sale of the common units in this offering are to be on
terms that are fair and reasonable to us.
Our general partner and its affiliates, including Martin Resource
Management, will have no obligation to permit us to use any of their facilities
or assets, except as may be provided in contracts entered into specifically
dealing with that use. Martin Resource Management is not obligated to enter into
any contracts of this kind.
COMMON UNITS ARE SUBJECT TO OUR GENERAL PARTNER'S LIMITED CALL RIGHT.
Our general partner may exercise its right to call and purchase common
units as provided in the partnership agreement or assign this right to one of
its affiliates or to us. Our general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
result, a common unitholder may have his common units purchased from him at an
undesirable time or price. Please read "The Partnership Agreement -- Limited
Call Right."
WE MAY NOT CHOOSE TO RETAIN SEPARATE PROFESSIONALS FOR OURSELVES OR FOR THE
HOLDERS OF COMMON UNITS.
Attorneys, independent accountants and others who perform services for us
are selected by our general partner or the conflicts committee and may perform
services for our general partner and its affiliates, including Martin Resource
Management. We may retain separate counsel for ourselves or the holders of
common units if a conflict of interest arises between Martin Resource
Management, our general partner
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and its affiliates, on the one hand, and us or the holders of common units, on
the other hand, depending on the nature of the conflict. We do not intend to do
so in most cases.
OUR GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH US.
The partnership agreement provides that our general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in us. Except as provided in the partnership
agreement and the omnibus agreement, affiliates of our general partner,
including Martin Resource Management, are not prohibited from engaging in other
businesses or activities, including those that might be in direct competition
with us. Please read our Form of Amended and Restated Agreement of Limited
Partnership that is included as Exhibit A to this prospectus.
FIDUCIARY RESPONSIBILITIES
Our general partner is accountable to us and our unitholders as a
fiduciary. The Delaware Revised Uniform Limited Partnership Act, which we refer
to in this prospectus as the Delaware Act, provides that Delaware limited
partnerships may, in their partnership agreements, reduce or expand the
fiduciary duties owed by the general partner to limited partners and the
partnership. Please read "Certain Relationships and Related
Transactions -- Omnibus Agreement."
The partnership agreement contains various provisions reducing the
fiduciary duties that might otherwise be owed by our general partner. We have
adopted these provisions to allow our general partner to take into account the
interests of other parties in addition to our interests when resolving conflicts
of interest. We believe this is appropriate and necessary because our general
partner's directors have fiduciary duties to manage our general partner in a
manner beneficial both to Martin Resource Management and its shareholders, as
well as to you. Without these modifications, our general partner's ability to
make decisions involving conflicts of interest would be restricted. The
modifications to the fiduciary standards benefit the general partner by enabling
it to take into consideration all parties involved in the proposed action, so
long as the resolution is fair and reasonable to us as described above. These
modifications also strengthen the ability our general partner to attract and
retain experienced and capable directors. These modifications represent a
detriment to the common unitholders because they restrict the remedies available
to unitholders for actions that, without those limitations, might constitute
breaches of fiduciary duty, as described below.
The following is a summary of:
- the fiduciary duties imposed on our general partner by the Delaware
Act,
- material modifications of these duties contained in our partnership
agreement, and
- certain rights and remedies of unitholders contained in the Delaware
Act.
State-law fiduciary duty
standards..................... Fiduciary duties are generally considered to
include an obligation to act with due care and
loyalty. The duty of care, in the absence of a
provision in a partnership agreement providing
otherwise, would generally require a general
partner to act for the partnership in the same
manner as a prudent person would act on his own
behalf. The 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 where a conflict of interest
is present.
Partnership agreement modified
standards..................... The partnership agreement contains provisions
that waive or consent to conduct by our general
partner and its affiliates that might otherwise
raise issues as to compliance with fiduciary
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duties or applicable law. For example, the
partnership agreement permits our general
partner to make a number of decisions in its
"sole discretion." This entitles our general
partner to consider only the interests and
factors that it desires without giving any
consideration to our interests or the interests
of our limited partner. Other provisions of the
partnership agreement provide that our general
partner's actions must be made in its
reasonable discretion. These standards reduce
the obligations to which our general partner
would otherwise be held.
The partnership agreement generally provides
that affiliated transactions and resolutions of
conflicts of interest not involving a required
vote of unitholders must be "fair and
reasonable" to us under the factors previously
set forth. In determining whether a transaction
or resolution is "fair and reasonable," our
general partner may consider interests of all
parties involved, including its own. Please
read "-- Conflicts of Interest" for a summary
of resolutions that would be considered "fair
and reasonable" to us and for a summary of
factors that our general partner may consider
when resolving a conflict of interest. These
standards reduce the obligations to which our
general partner would otherwise be held.
In addition to the other more specific
provisions limiting the obligations of our
general partner, the partnership agreement
further provides that our general partner and
its officers and directors will not be liable
for monetary damages to us, the limited
partners or assignees for errors of judgment or
for any acts or omissions if our general
partner and those other persons acted in good
faith.
Rights and Remedies of
Unitholders................... The Delaware Act generally provides that a
limited partner may institute legal action on
behalf of the partnership to recover damages
from a third party where a general partner has
refused to institute the action or where an
effort to cause a general partner to do so is
not likely to succeed. In addition, the
statutory or case law of some jurisdictions may
permit a limited partner to institute legal
action on behalf of himself and all other
similarly situated limited partners to recover
damages from a general partner for violations
of its fiduciary duties to the limited
partners.
If you purchase any common units, you agree to be bound by the provisions
in the partnership agreement, 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
failure of a limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that person.
The partnership agreement requires us to indemnify our 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 our general partner or these other persons. We must provide
this indemnification if our general partner or these persons acted in good faith
and in a manner they reasonably believed to be in, or (in the case of a person
other than our general partner) not opposed to, our best interests. We also must
provide this indemnification for criminal proceedings if our general partner or
these other persons had no reasonable cause to believe their conduct was
unlawful. Thus, our general partner
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could be indemnified for its negligent acts if it met these requirements
concerning good faith and our best interests. To the extent that these
provisions purport to include indemnification for liabilities arising under the
Securities Act, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and therefore unenforceable. Please
read "The Partnership Agreement -- Indemnification."
DESCRIPTION OF THE COMMON UNITS
THE UNITS
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under the partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units in and
to partnership distributions, please read "Cash Distribution Policy" and
"Description of the Subordinated Units." For a description of the rights and
privileges of limited partners under the partnership agreement, including voting
rights, please read "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
Duties. Mellon Investor Services LLC will serve as transfer agent and
registrar for the common units. We will pay all fees charged by the transfer
agent for transfers of common units, except the following must be paid by
unitholders:
- surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
- special charges for services requested by a holder of a common unit; and
- other similar fees or charges.
We will indemnify the transfer agent, its agents and each of their
stockholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in that capacity, except for any
liability due to any gross negligence or intentional misconduct of the
indemnified person or entity.
Resignation or Removal. The transfer agent may resign, by notice to us, or
be removed by us. The resignation or removal of the transfer agent will become
effective upon our appointment of a successor transfer agent and registrar and
its acceptance of the appointment. If no successor has been appointed and
accepted the appointment within 30 days after notice of the resignation or
removal, our general partner may act as the transfer agent and registrar until a
successor is appointed.
TRANSFER OF COMMON UNITS
The transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a transfer application by the investor. Any subsequent transfers of a common
unit will not be recorded by the transfer agent or recognized by us unless the
transferee executes and delivers a transfer application. By executing and
delivering a transfer application, the transferee of common units:
- becomes the record holder of the common units and is an assignee until
admitted into our partnership as a substituted limited partner;
- automatically requests admission as a substituted limited partner in our
partnership;
- agrees to be bound by the terms and conditions of, and executes, the
partnership agreement;
- represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
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- grants powers of attorney to officers of our general partner and any
liquidator of us as specified in the partnership agreement; and
- makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of our partnership
for the transferred common units upon the consent of our general partner and the
recording of the name of the assignee on our books and records. Our general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and deliver a
transfer application. We are entitled to treat the record holder of a common
unit as the absolute owner. In that case, the beneficial holder's rights are
limited solely to those that it has against the record holder as a result of any
agreement between the beneficial owner and the record holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or other transferee;
and
- the right to transfer the right to seek admission as a substituted
limited partner in our partnership for the transferred common units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application:
- will not receive cash distributions, unless the common units are held in
a nominee or "street name" account and the nominee or broker has executed
and delivered a transfer application; and
- may not receive some federal income tax information or reports furnished
to record holders of common units.
The partnership agreement requires that a transferor of common units must
provide the transferee with all information that may be necessary to transfer
the common units. The transferor is not required to insure the execution of the
transfer application by the transferee and has no liability or responsibility if
the transferee neglects or chooses not to execute and forward the transfer
application to the transfer agent. Please read "The Partnership
Agreement -- Status as Limited Partner or Assignee."
Until a common unit has been transferred on our books, we and the transfer
agent may treat the record holder of the unit as the absolute owner for all
purposes, except as otherwise required by law or applicable stock exchange
regulations.
DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
our partnership, and the rights of holders to participate in distributions to
partners differ from, and are subordinate to, the rights of the holders of
common units. For any given quarter, any available cash will first be
distributed to our general partner and to the holders of common units, until the
holders of common units have received the minimum quarterly distribution plus
any arrearages, and then will be distributed to the holders of subordinated
units. Please read "Cash Distribution Policy."
The subordinated units may also convert into common units under certain
circumstances. Please read "Cash Distribution Policy -- Subordination Period."
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LIMITED VOTING RIGHTS
Holders of subordinated units sometimes vote as a single class together
with the common units and sometimes vote as a class separate from the holders of
common units and, as in the case of holders of common units, will have very
limited voting rights. During the subordination period, common units and
subordinated units each vote separately as a class on the following matters:
- a sale or exchange of all or substantially all of our assets;
- the election of a successor general partner in connection with the
removal of the general partner;
- dissolution or reconstitution of our partnership;
- a merger of our partnership;
- issuance of limited partner interests in some circumstances; and
- some amendments to the partnership agreement including any amendment that
would cause us to be treated as an association taxable as a corporation.
The subordinated units are not entitled to a separate class vote on
approval of the withdrawal of our general partner or the transfer by our general
partner of its general partner interest or incentive distribution rights under
some circumstances. Removal of our general partner requires:
- a 66 2/3% vote of all outstanding units voting as a single class, and
- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as
separate classes.
Under the partnership agreement, our general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially adversely affect unitholders without the approval of any unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If we liquidate during the subordination period, in some circumstances,
holders of outstanding common units will be entitled to receive more per unit in
liquidating distributions than holders of outstanding subordinated units. The
per unit difference will be dependent upon the amount of gain or loss that we
recognize in liquidating our assets. Following conversion of the subordinated
units into common units, all units will be treated the same upon liquidation.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. The form of the partnership agreement is included in this prospectus
as Appendix A. The form of partnership agreement of our operating partnership is
included as an exhibit to the registration statement of which this prospectus
constitutes a part. We will provide prospective investors with a copy of these
agreements upon request at no charge.
We summarize the following provisions of the partnership agreement
elsewhere in this prospectus:
- With regard to distributions of available cash, please read "Cash
Distribution Policy."
- With regard to the transfer of common units, please read "Description of
the Common Units -- Transfer of Common Units."
- With regard to allocations of taxable income and taxable loss, please
read "Material Tax Consequences."
ORGANIZATION AND DURATION
We were organized in June 2002 and will have a perpetual existence.
PURPOSE
Our purposes under the partnership agreement are limited to owning the
equity of the general partner of our operating partnership, serving as the
limited partner of our operating partnership and engaging in any business
activities that may be engaged in by our operating partnership or that are
approved by our general partner. The partnership agreement of our operating
partnership provides that our operating partnership may, directly or indirectly,
engage in:
- its operations as conducted immediately after our initial public
offering;
- any other activity approved by our general partner but only to the extent
that our general partner reasonably determines that, as of the date of
the acquisition or commencement of the activity, the activity generates
"qualifying income" as this term is defined in Section 7704 of the
Internal Revenue Code; or
- any activity that enhances the operations of an activity that is
described in either of the two preceding clauses.
Although our general partner has the ability to cause us and our operating
partnership to engage in activities other than those described in this
prospectus, our general partner has no current plans to do so. Our general
partner is authorized in general to perform all acts as it may deem, in its sole
discretion, necessary to carry out our purposes and to conduct our business.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants our general partner the authority
to amend, and to make consents and waivers under, the partnership agreement.
CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described under "-- Limited Liability."
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LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business 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 possible exceptions, to the amount
of capital he is obligated to contribute to us for his common units plus his
share of any undistributed profits and assets. If it were determined, however,
that the right, or exercise of the right, by the limited partners as a group:
- to remove or replace our general partner;
- to approve some amendments to the partnership agreement; or
- to take other action under the partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner. Neither
the partnership agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were to lose limited
liability through any fault of our general partner. While this does not mean
that a limited partner could not seek legal recourse, we know of no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner if, after the distribution, all liabilities of the limited
partnership, other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specific property of the partnership, would 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 liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds the nonrecourse liability. The
Delaware Act provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was in violation of
the Delaware Act is liable to the limited partnership for the amount of the
distribution for three years. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except the
assignee is not obligated for liabilities unknown to him at the time he became a
limited partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries currently conduct business in 10 states. Maintenance of
our limited liability as a limited partner of our operating partnership may
require compliance with legal requirements in the jurisdictions in which our
operating partnership conducts business, including qualifying our subsidiaries
to do business there. Limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly established in many
jurisdictions. If, by virtue of our limited partner interest in our operating
partnership or otherwise, it were determined that we were conducting business in
any state without compliance with the applicable limited partnership or limited
liability company statute, or that the right or exercise of the right to remove
or replace the general partner of our operating partnership, to approve some
amendments to the partnership agreement of our operating partnership, or to take
other action under the partnership agreement of our operating partnership
constituted "participation in the control" of its business for purposes of the
statutes of any relevant jurisdiction, then we could be held personally liable
for the obligations of our operating partnership under the law of that
jurisdiction to the same extent as its general partner under the circumstances.
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VOTING RIGHTS
The following matters require the unitholder vote specified below. Matters
requiring the approval of a "unit majority" require:
- during the subordination period, the approval of a majority of the
outstanding common units, excluding those common units held by our
general partner and its affiliates, and a majority of the outstanding
subordinated units, voting as separate classes; and
- after the subordination period, the approval of a majority of the
outstanding common units.
MATTER VOTE REQUIREMENT
------ ----------------
Issuance of additional common units or units Unit majority, with certain exceptions
of equal rank with the common units during described under "-- Issuance of Additional
the subordination period Securities."
Issuance of units senior to the common units Unit majority.
during the subordination period
Issuance of units junior to the common units No approval rights.
during the subordination period
Issuance of additional units after the No approval rights.
subordination period
Amendment of the partnership agreement Certain amendments may be made by the general
partner without the approval of the
unitholders. Other amendments generally
require the approval of a unit majority.
Please read "-- Amendment of the Partnership
Agreement."
Merger of our partnership or the sale of all Unit majority. Please read "Merger, Sale or
or substantially all of our assets Other Disposition of Assets."
Dissolution of our partnership Unit majority. Please read "-- Termination
and Dissolution."
Reconstitution of our partnership upon Unit majority.
dissolution
Withdrawal of the general partner The approval of a majority of the outstanding
common units, excluding common units held by
the general partner and its affiliates, is
required for the withdrawal of the general
partner prior to September 30, 2012 in a
manner which would cause a dissolution of our
partnership. Please read "-- Withdrawal or
Removal of the General Partner."
Removal of the general partner Not less than 66 2/3% of the outstanding
units (common and subordinated), including
units held by our general partner and its
affiliates. Please read "-- Withdrawal or
Removal of the General Partner."
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MATTER VOTE REQUIREMENT
------ ----------------
Transfer of the general partner interest Our general partner may transfer its general
partner interest without a vote of our
unitholders in connection with the general
partner's merger or consolidation with or
into, or sale of all or substantially all of
its assets to, a third person. Our general
partner may also transfer all of its general
partner interest to an affiliate without a
vote of our unitholders. The approval of a
majority of the outstanding common units,
excluding common units held by the general
partner and its affiliates, is required in
other circumstances for a transfer of the
general partner interest to a third party
prior to September 30, 2012. Please read
"-- Transfer of General Partner Interests and
Incentive Distribution Rights."
Transfer of incentive distribution rights Except for transfers to an affiliate or
another person as part of the general
partner's merger or consolidation with or
into, or sale of all or substantially all of
its assets to, such affiliate or person, the
approval of a majority of the outstanding
common units is required in most
circumstances for a transfer of the incentive
distribution rights to a third party prior to
September 30, 2012. Please read "-- Transfer
of General Partner Interests and Incentive
Distribution Rights."
Transfer of ownership interests in the No approval required at any time. Please read
general partner "-- Transfer of Ownership Interests in
General Partner."
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement authorizes us to issue an unlimited number of
additional partnership securities and rights to buy partnership securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion without the approval of the unitholders. During
the subordination period, however, except as discussed in the following
paragraph, we may not issue equity securities ranking senior to the common units
or an aggregate of more than 1,500,000 additional common units or units on a
parity with the common units, in each case, plus an amount, if any, equal to one
half of the number of common units issued pursuant to the underwriters'
over-allotment option, without the approval of the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes.
During and after the subordination period, we may issue an unlimited number
of common units as follows:
- upon exercise of the underwriters' over-allotment option;
- upon conversion of the subordinated units;
- under employee benefit plans;
- upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of our general partner;
- in the event of a combination or subdivision of common units;
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- in connection with an acquisition or a capital improvement that increases
cash flow from operations per unit on a pro forma basis; or
- if the proceeds of the issuance are used exclusively to repay up to $15
million of certain of our indebtedness.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of the partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of our general partner, have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, other than upon
exercise of the underwriters' over-allotment option, our general partner will be
required to make additional capital contributions to the extent necessary to
maintain its 2% general partner interest in us. Moreover, our 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 or other
equity securities whenever, and on the same terms that, we issue those
securities to persons other than our general partner and its affiliates, to the
extent necessary to maintain its percentage interest, including its interest
represented by common units and subordinated units, that existed immediately
prior to each issuance. The holders of common units will not have preemptive
rights to acquire additional common units or other partnership securities.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
General. Amendments to the partnership agreement may be proposed only by
or with the consent of our general partner, which consent may be given or
withheld in its sole discretion. In order to adopt a proposed amendment, other
than the amendments discussed below, our general partner must seek written
approval of the holders of the number of units required to approve the amendment
or call a meeting of the limited partners to consider and vote upon the proposed
amendment. Except as described below, an amendment must be approved by a unit
majority.
Prohibited Amendments. No amendment may be made that would:
- enlarge the obligations of any limited partner without its consent,
unless approved by at least a majority of the type or class of limited
partner interests so affected;
- enlarge the obligations of, restrict in any way any action by or rights
of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable by us to our general partner or any of its affiliates
without the consent of our general partner, which may be given or
withheld in its sole discretion;
- change the duration of our partnership;
- provide that our partnership is not dissolved upon an election to
dissolve our partnership by our general partner that is approved by a
unit majority; or
- give any person the right to dissolve our partnership other than our
general partner's right to dissolve our partnership with the approval of
a unit majority.
The provision of the partnership agreement preventing the amendments having the
effects described in any of the clauses above can be amended upon the approval
of the holders of at least 90% of the outstanding units voting together as a
single class.
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No Unitholder Approval. Our general partner may generally make amendments
to the partnership agreement without the approval of any limited partner or
assignee to reflect:
- a change in our name, the location of our principal place of business,
our registered agent or our registered office;
- the admission, substitution, withdrawal, or removal of partners in
accordance with the partnership agreement;
- the reduction in the vote needed to remove the general partner from not
less than 66 2/3% of all outstanding units to a lesser percentage of all
outstanding units;
- an increase in the percentage of a class of units that a person or group
may own without losing their voting rights from 20% to a higher
percentage;
- a change that, in the sole discretion of our general partner, is
necessary or advisable for us to qualify or to continue our qualification
as a limited partnership or a partnership in which the limited partners
have limited liability under the laws of any state or to ensure that
neither we, our operating partnership nor its subsidiaries will be
treated as an association taxable as a corporation or otherwise taxed as
an entity for federal income tax purposes;
- an amendment changing our fiscal or taxable year and any changes that are
necessary as a result of a change in our fiscal or taxable year;
- an amendment that is necessary, in the opinion of our counsel, to prevent
us or our general partner or its directors, officers, agents, or trustees
from in any manner being subjected to the provisions of the Investment
Company Act of 1940, the Investment Advisors Act of 1940, or plan asset
regulations adopted under the Employee Retirement Income Security Act of
1974, whether or not substantially similar to plan asset regulations
currently applied or proposed;
- subject to the limitations on the issuance of additional partnership
securities described above, an amendment that in the discretion of our
general partner is necessary or advisable for the authorization of
additional partnership securities or rights to acquire partnership
securities;
- any amendment expressly permitted in the partnership agreement to be made
by our general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of the partnership agreement;
- any amendment that, in the sole discretion of our general partner, is
necessary or advisable for the formation by us of, or our investment in,
any corporation, partnership or other entity, as otherwise permitted by
the partnership agreement;
- a change in our fiscal year or taxable year and related changes;
- a merger of the partnership or any of its subsidiaries into, or a
conveyance of assets to, a newly-created limited liability entity the
sole purpose of which is to effect a change in the legal form of the
partnership into another limited liability entity; and
- any other amendments substantially similar to any of the matters
described in the clauses above.
In addition, our general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the sole discretion of our general partner:
- do not adversely affect the limited partners (or any particular class of
limited partners) in any material respect;
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- are necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute;
- are necessary or advisable to facilitate the trading of limited partner
interests or to comply with any rule, regulation, guideline or
requirement of any securities exchange or trading system on which the
limited partner interests are or will be listed for trading, compliance
with any of which our general partner deems to be in our best interest
and the best interest of the limited partners;
- are necessary or advisable for any action taken by our general partner
relating to splits or combinations of units under the provisions of the
partnership agreement; or
- are required to effect the intent expressed in this prospectus or the
intent of the provisions of the partnership agreement or are otherwise
contemplated by the partnership agreement.
Opinion of Counsel and Unitholder Approval. Our general partner will not
be required to obtain an opinion of counsel that an amendment will not result in
a loss of limited liability to the limited partners or result in our being
treated as an entity for federal income tax purposes if one of the amendments
described above under "-- No Unitholder Approval" should occur. No other
amendments to the partnership agreement will become effective without the
approval of holders of at least 90% of the units unless we obtain an opinion of
counsel to the effect that the amendment will not affect the limited liability
under applicable law of any of our limited partners or cause us, our operating
partnership or our subsidiaries to be taxable as a corporation or otherwise to
be taxed as an entity for federal income tax purposes (to the extent not
previously taxed as such).
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action must be approved by the affirmative vote of limited
partners constituting not less than the voting requirement sought to be reduced.
ACTION RELATING TO OUR OPERATING PARTNERSHIP
Without the approval of the holders of units representing a unit majority,
our general partner is prohibited from consenting on our behalf or on behalf of
the general partner of our operating partnership to any amendment to the
partnership agreement of our operating partnership or taking any action on our
behalf permitted to be taken by a partner of our operating partnership in each
case that would adversely affect our limited partners (or any particular class
of limited partners) in any material respect.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The partnership agreement generally prohibits our general partner, without
the prior approval of a unit majority, from causing us to, among other things,
sell, exchange or otherwise dispose of all or substantially all of our assets in
a single transaction or a series of related transactions, including by way of
merger, consolidation or other combination, or approving on our behalf the sale,
exchange or other disposition of all or substantially all of the assets of our
subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of our assets without that
approval. Our general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those encumbrances without
that approval.
If conditions specified in the partnership agreement are satisfied, our
general partner may merge us or any of our subsidiaries into, or convey some or
all of our assets to, a newly formed entity if the sole purpose of that merger
or conveyance is to change our legal form into another limited liability entity.
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, a sale of substantially all of our assets or any other
transaction or event.
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TERMINATION AND DISSOLUTION
We will continue as a limited partnership until terminated under the
partnership agreement. We will dissolve upon:
- the election of our general partner to dissolve us, if approved by a unit
majority;
- the sale, exchange or other disposition of all or substantially all of
our assets and properties and our subsidiaries;
- the entry of a judicial order dissolving us; or
- the withdrawal or removal of our general partner or any other event that
results in its ceasing to be our general partner other than by reason of
a transfer of its general partner interest in accordance with the
partnership agreement or withdrawal or removal following approval and
admission of a successor.
Upon a dissolution under the last clause, the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes, may
also elect, within specific time limitations, to reconstitute us and continue
our business on the same terms and conditions described in the partnership
agreement by forming a new limited partnership on terms identical to those in
the partnership agreement and having as general partner an entity approved by
the holders of a majority of the outstanding common units and subordinated
units, voting as separate classes, subject to our receipt of an opinion of
counsel to the effect that:
- the action would not result in the loss of limited liability of any
limited partner; and
- neither our partnership, the reconstituted limited partnership nor our
operating partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of that right to continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of our general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution
Policy -- Distributions of Cash upon Liquidation." The liquidator may defer
liquidation of our assets for a reasonable period or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as our general partner prior to September 30, 2012 without obtaining
the approval of the holders of at least a majority of the outstanding common
units, excluding common units held by our general partner and its affiliates,
and furnishing an opinion of counsel regarding limited liability and tax
matters. On or after September 30, 2012, our general partner may withdraw as
general partner without first obtaining approval of any unitholder by giving 90
days' written notice, and that withdrawal will not constitute a violation of the
partnership agreement. Notwithstanding the foregoing, our general partner may
withdraw without unitholder approval upon 90 days' notice to the limited
partners if at least 50% of the outstanding common units are held or controlled
by one person and its affiliates other than our general partner and its
affiliates. In addition, the partnership agreement permits our general partner
in some instances to sell or otherwise transfer all of its general partner
interest in us without the approval of the unitholders. Please read "-- Transfer
of General Partner Interests and Incentive Distribution Rights."
Upon the withdrawal of our general partner under any circumstances, other
than as a result of a transfer by our general partner of all or a part of its
general partner interest in us, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, may select a
successor
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to that withdrawing general partner. If a successor is not elected, or is
elected but an opinion of counsel regarding limited liability and tax matters
cannot be obtained, we will be dissolved, wound up and liquidated, unless within
180 days after that withdrawal, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, agree in
writing to continue our business and to appoint a successor general partner.
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by our general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of our general partner is also subject to the approval of a successor general
partner by the vote of the holders of a majority of the outstanding common units
and subordinated units, voting as separate classes. The ownership of more than
33 1/3% of the outstanding units by our general partner and its affiliates would
give it the practical ability to prevent its removal. At the closing of this
offering, affiliates of our general partner will own approximately 58.6% of the
outstanding units.
The partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market
value of those interests at the time.
In the event of removal of a general partner under circumstances where
cause exists or withdrawal of a general partner where that withdrawal violates
the partnership agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general partner
withdraws or is removed by the limited partners, the departing general partner
will have the option to require the successor general partner to purchase the
general partner interest of the departing general partner and its incentive
distribution rights for the fair market value. In each case, this fair market
value will be determined by agreement between the departing general partner and
the successor general partner. If no agreement is reached, an independent
investment banking firm or other independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. If the departing general partner and the successor general partner cannot
agree upon an expert, then an expert chosen by agreement of the experts selected
by each of them will determine the fair market value.
If the option described above is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner
for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
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TRANSFER OF GENERAL PARTNER INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for transfer by our general partner of all, but not less than all,
of its general partner interest in us or its incentive distribution rights to:
- an affiliate of our general partner (other than an individual); or
- another entity as part of the merger or consolidation of our general
partner with or into another entity or the transfer by our general
partner of all or substantially all of its assets to another entity,
our general partner may not transfer all or any part of its general partner
interest in us or its incentive distribution rights to another person prior to
September 30, 2012 without the approval of the holders of at least a majority of
the outstanding common units, excluding common units held by our general partner
and its affiliates. In the case of a transfer by our general partner of its
general partner interest in us, as a condition of this transfer, the transferee
must, among other things, assume the rights and duties of our general partner,
agree to be bound by the provisions of the partnership agreement, furnish an
opinion of counsel regarding limited liability and tax matters, and agree to be
bound by the provisions of the partnership agreement and the partnership
agreement of our operating partnership.
The general partner and its affiliates may at any time transfer units to
one or more persons, without unitholder approval, except that they may not
transfer subordinated units to us.
TRANSFER OF OWNERSHIP INTERESTS IN GENERAL PARTNER
At any time, the members of our general partner may sell or transfer all or
part of their membership interests in our general partner to an affiliate
without the approval of the unitholders.
CHANGE OF MANAGEMENT PROVISIONS
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove Martin Midstream GP LLC
as our general partner or otherwise change management. If any person or group
other than our general partner and its affiliates acquires beneficial ownership
of 20% or more of any class of units, that person or group loses voting rights
on all of its units. The general partner has the discretion to increase, but not
subsequently decrease, the ownership percentage at which voting rights are
forfeited. This loss of voting rights does not apply to any person or group that
acquires the units from our general partner or its affiliates and any
transferees of that person or group approved by our general partner or to any
person or group who acquires the units with the prior approval of the directors
of our general partner.
The partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own more than 80% of
the then-issued and outstanding partnership securities of any class, our general
partner will have the right, which it may assign in whole or in part to any of
its affiliates or to us, to acquire all, but not less than all, of the remaining
partnership securities of the class held by unaffiliated persons as of a record
date to be selected by our
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general partner, on at least ten but not more than 60 days notice. Our general
partner may exercise this right in its sole discretion. The purchase price in
the event of this purchase will be the greater of:
- the highest cash price paid by either of our general partner or any of
its affiliates for any partnership securities of the class purchased
within the 90 days preceding the date on which our general partner first
mails notice of its election to purchase those partnership securities;
and
- the current market price as of the date three days before the date the
notice is mailed.
As a result of our general partner's right to purchase outstanding partnership
securities, a holder of partnership securities may have his partnership
securities purchased at an undesirable time or price. The tax consequences to a
unitholder of the exercise of this call right are the same as a sale by that
unitholder of his common units in the market. Please read "Material Tax
Consequences -- Disposition of Common Units."
MEETINGS AND VOTING
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of our limited partners and to act upon matters for which approvals
may be solicited. Common units that are owned by an assignee who is a record
holder, but who has not yet been admitted as a limited partner, will be voted by
our general partner at the written direction of the record holder. Absent
direction of this kind, the common units will not be voted, except that, in the
case of common units held by our general partner on behalf of non-citizen
assignees, our general partner will distribute the votes on those common units
in the same ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action so
taken are signed by holders of the number of units necessary to authorize or
take that action at a meeting. Meetings of the unitholders may be called by our
general partner or, subject to the provision described in the next paragraph, by
unitholders owning at least 20% of the outstanding units of the class for which
a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of the class or
classes for which a meeting has been called, represented in person or by proxy,
will constitute a quorum unless any action by the unitholders requires approval
by holders of a greater percentage of the units, in which case the quorum will
be the greater percentage.
Each record holder of a unit has a vote according to his percentage
interest in us, although additional limited partner interests having special
voting rights could be issued. Please read "-- Issuance of Additional
Securities." However, if at any time any person or group, other than our general
partner and its affiliates, or a direct or subsequently approved transferee of
our general partner or its affiliates, acquires, in the aggregate, beneficial
ownership of 20% or more of any class of units then outstanding, that person or
group will lose voting rights on all of its units and the units may not be voted
on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the
presence of a quorum or for other similar purposes. Common units held in nominee
or street name account will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as the
partnership agreement otherwise provides, subordinated units will vote together
with common units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under the partnership
agreement will be delivered to the record holder by us or by the transfer agent.
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STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the common units
will be fully paid and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right to
share in allocations and distributions from us, including liquidating
distributions. Our general partner will vote and exercise other powers
attributable to common units owned by an assignee that has not become a
substitute limited partner at the written direction of the assignee. Please read
"-- Meetings and Voting." Transferees that do not execute and deliver a transfer
application will not be treated as assignees or as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to holders of common units. Please read "Description of the
Common Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of our general partner, create either (i)
a substantial risk of cancellation or forfeiture of any property in which we
have an interest because of the nationality, citizenship or other related status
of any limited partner or assignee, or (ii) a substantial risk that we or one or
more of our subsidiaries or other entities in which we have at least a 25%
equity interest will not be permitted to conduct business as a United States
maritime company under the Jones Act and other United States federal statutes
based on the status of any limited partner or assignee as a non-United States
citizen, we may redeem the units held by any of these limited partners or
assignees at the units' current market price. In order to avoid any cancellation
or forfeiture, our general partner may require each limited partner or assignee
to furnish information about his nationality, citizenship or related status. If
a limited partner or assignee fails to furnish information about his
nationality, citizenship or other related status within 30 days after a request
for the information or if our general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee that 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
our liquidation.
INDEMNIFICATION
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
- our general partner;
- any departing general partner;
- any person who is or was an affiliate of a general partner or any
departing general partner;
- any person who is or was a member, partner, officer, director, employee,
agent or trustee of our general partner, any departing general partner,
or any affiliate of a general partner or any departing general partner;
or
- any person who is or was serving at the request of a general partner or
any departing general partner or any affiliate of a general partner or
any departing general partner, as an officer, director, manager,
employee, member, partner, agent or trustee of another person.
Any indemnification under these provisions will only be out of our assets.
Our general partner will not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to effectuate,
indemnification. We may purchase insurance against liabilities asserted against
and expenses incurred by persons for our activities, regardless of whether we
would have the power to indemnify the person against liabilities under the
partnership agreement.
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BOOKS AND REPORTS
Our general partner is required to keep appropriate books of our business
at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and fiscal reporting
purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT OUR BOOKS AND RECORDS
The partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
- a current list of the name and last known address of each partner;
- a copy of our tax returns;
- 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;
- copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of attorney
under which they have been executed;
- information regarding the status of our business and financial condition;
and
- any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which our general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Under the partnership agreement, we have agreed to register for resale
under the Securities Act and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to be sold by our
general partner or any of its affiliates or their assignees if an exemption from
the registration requirements is not otherwise available. These registration
rights continue for two years following any withdrawal or removal of Martin
Midstream GP LLC as our general partner. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts and
commissions. Please read "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered by this prospectus, affiliates
of our general partner will hold 4,253,362 subordinated units and no common
units. All of the subordinated units will convert into common units at the end
of the subordination period and some may convert earlier. The sale of these
subordinated units could have an adverse impact on the price of the common units
or on any trading market that may develop.
The common units sold in this offering will generally be freely
transferable without restriction or further registration under the Securities
Act, except that any common units held by an "affiliate" of ours may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or otherwise. Rule 144
permits securities acquired by an affiliate of the issuer to be sold into the
market in an amount that does not exceed, during any three month period, the
greater of:
- 1% of the total number of the securities outstanding; or
- the average weekly reported trading volume of the common units for the
four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale
provisions, notice requirements, volume limitations and the availability of
current public information about us. A person who is not deemed to have been an
affiliate of ours at any time during the three months preceding a sale, and who
has beneficially owned his common units for at least two years, would be
entitled to sell common units under Rule 144 without regard to the manner of
sale provisions, notice requirements, volume limitations, and public information
requirements of Rule 144.
Prior to the end of the subordination period, we may not issue equity
securities of the partnership ranking prior or senior to the common units or an
aggregate of more than 1,500,000 common units or an equivalent amount of
securities ranking on a parity with the common units, plus an amount, if any,
equal to one half of the number of common units issued pursuant to the
underwriters' over-allotment option, without the approval of the holders of the
outstanding common units and subordinated units, voting as separate classes,
subject to certain exceptions described under "The Partnership
Agreement -- Issuance of Additional Securities."
The partnership agreement provides that, after the subordination period, we
may issue an unlimited number of limited partner interests of any type without a
vote of the unitholders. The partnership agreement does not restrict our ability
to issue equity securities ranking junior to the common units at any time. Any
issuance of additional common units or other equity securities would result in a
corresponding decrease in the proportionate ownership interest in us represented
by, and could adversely affect the cash distributions to and market price of,
common units then outstanding. Please read "The Partnership
Agreement -- Issuance of Additional Securities."
Under the partnership agreement, the general partner and its affiliates
have the right to cause us to register under the Securities Act and applicable
state securities laws the offer and sale of any units that they hold. Subject to
the terms and conditions of the partnership agreement, these registration rights
allow the general partner and its affiliates or their assignees holding any
units to require registration of any of these units and to include any of these
units in a registration by us of other units, including units offered by us or
by any unitholder. The general partner will continue to have these registration
rights for two years following its withdrawal or removal as a general partner.
In connection with any registration of this kind, we will indemnify each
unitholder participating in the registration and its officers, directors, and
controlling persons from and against any liabilities under the Securities Act or
any applicable state securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to any registration,
excluding any underwriting discounts and commissions. Except as described below,
the general partner and its affiliates may sell their units in private
transactions at any time, subject to compliance with applicable laws.
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We, Martin Resource Management, our operating partnership, our general
partner and the directors and executive officers of the general partner have
agreed not to sell any common units they beneficially own for a period of 180
days from the date of this prospectus. Please read "Underwriting" for a
description of these lock-up provisions.
MATERIAL TAX CONSEQUENCES
This section addresses all of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, except as otherwise indicated, is the opinion of Baker
Botts L.L.P., counsel to our general partner and us, with respect to matters of
United States federal income tax law that are addressed in this section. This
section is based upon current provisions of the Internal Revenue Code, existing
regulations, proposed regulations to the extent noted and current administrative
rulings and court decisions, all of which are subject to change. Changes in
these authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to "us" or "we" are references to Martin Midstream Partners L.P.
and our operating partnership.
While we have addressed all of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States, no attempt has been made in this section to comment on all
federal income tax matters affecting us or the unitholders. Moreover, this
section focuses on unitholders who are individual citizens or residents of the
United States and has only limited application to corporations, estates, trusts,
nonresident aliens or other unitholders subject to specialized tax treatment,
such as tax-exempt institutions, foreign persons, individual retirement accounts
(IRAs), real estate investment trusts (REITs) or mutual funds. Accordingly, we
urge each prospective unitholder to consult, and depend on, his own tax advisor
in analyzing the federal, state, local and foreign tax consequences particular
to him of the ownership or disposition of common units.
All statements of law and legal conclusions, but not statements of facts,
contained in this section, except as otherwise indicated, are the opinions of
Baker Botts L.L.P. Such opinions are based on the accuracy and completeness of
facts described in this prospectus and representations made by us to Baker Botts
L.L.P. Baker Botts L.L.P. has not undertaken any obligation to update its
opinions discussed in this section after the date of this prospectus.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions expressed in this section may not be sustained by a
court if challenged by the IRS. Any such challenge by the IRS may materially and
adversely impact the market for the common units and the prices at which common
units trade. In addition, the costs of any dispute with the IRS will be borne
directly or indirectly by the unitholders and our general partner. Furthermore,
the tax treatment of us, or of an investment in us, may be significantly
modified by future legislative or administrative changes or court decisions. Any
modifications may or may not be retroactively applied.
For the reasons described below, Baker Botts L.L.P. has not rendered an
opinion with respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees");
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit Ownership -- Section
754 Election"); and
(4) whether assignees of common units who fail to execute and deliver
transfer applications will be treated as partners for federal income tax
purposes (please read "-- Limited Partner Status").
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PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his 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 to him by the partnership. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
Section 7704 of the Internal Revenue Code provides that publicly traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the marketing (including sales of propane to
retail customers or end users), transportation, storage and processing of crude
oil, natural gas and products thereof, and certain other "natural resources" and
products, including sulfur, sulfur products and fertilizer. Other types of
qualifying income include interest other than from a financial business,
dividends, gains from the sale of real property and gains from the sale or other
disposition of assets held for the production of income that otherwise
constitutes qualifying income. We estimate that, as of the date of this
prospectus, less than 6.4% of our gross income is not qualifying income. In
reliance upon facts provided by Martin Resource Management, us and our general
partner concerning the sources and amounts of gross income attributable to our
businesses for the current calendar year through the month-end prior to the date
of this prospectus, together with the representation that the composition of
such gross income remained materially unchanged through the date of this
prospectus, and based on applicable legal authority, Baker Botts L.L.P. is of
the opinion that at least 90% of our gross income as of the date of this
prospectus constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS has made no
determination of our status as a partnership for federal income tax purposes or
whether our operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code. Instead, we will rely on the opinion of Baker Botts
L.L.P., based upon the Internal Revenue Code, Treasury regulations, published
revenue rulings and court decisions and the representations and assumptions
described below, that as of the date of this prospectus Martin Midstream
Partners L.P. will be classified as a partnership and our operating partnership
will be disregarded as an entity separate from Martin Midstream Partners L.P.
for federal income tax purposes.
In rendering its opinion, Baker Botts L.L.P. has relied on certain
assumptions, and on factual representations made by us and our general partner.
Such assumptions and representations are:
- Neither we nor our operating partnership will elect to be treated as a
corporation; and
- For our first taxable year, extending from the date of this prospectus
through December 31, 2002, there will be no material change in the
sources and composition of our income, and that, therefore, more than 90%
of our gross income for such year will be income that Baker Botts L.L.P.
has opined or would opine is "qualifying income" within the meaning of
Section 7704(d) of the Internal Revenue Code.
We intend to monitor our income on a continuing basis and to manage our
operations in subsequent taxable years with the objective to assure, although we
cannot completely assure, that the ratio of our qualifying income to our total
gross income will remain at 90% or above for each such taxable year.
If we fail to meet the Qualifying Income Exception, other than a failure
that is determined by the IRS to be inadvertent and that is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
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If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our 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 common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation 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 remainder of this section is based on Baker Botts L.L.P.'s opinion that
Martin Midstream Partners L.P. will be classified as a partnership and our
operating partnership will be disregarded as an entity separate from Martin
Midstream Partners L.P. for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of Martin Midstream Partners
L.P. will be treated as partners of Martin Midstream Partners L.P. for federal
income tax purposes. Also:
- assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners; and
- unitholders whose common 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 common units,
will be treated as partners of Martin Midstream Partners L.P. for federal income
tax purposes. Because there is no direct authority dealing with the status of
assignees of common units who are entitled to execute and deliver transfer
applications and become entitled to direct the exercise of attendant rights, but
who fail to execute and deliver transfer applications, counsel is unable to
opine that such persons are partners for federal income tax purposes. If not
partners, such persons will not be eligible for the federal income tax treatment
described in this discussion. Furthermore, a purchaser or other transferee of
common units who does not execute and deliver a transfer application may not
receive some federal income tax information or reports furnished to record
holders of common units unless the common units are held in a nominee or street
name account and the nominee or broker has executed and delivered a transfer
application for those common units.
A beneficial owner of common units whose 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 those units for federal income tax purposes. Please read
"-- Tax Consequences of Unit Ownership -- Treatment of Short Sales."
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 a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
are urged to consult their own tax advisors with respect to their status as
partners in Martin Midstream Partners L.P. for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether cash
distributions are received by him. Consequently, we may allocate income to a
unitholder even if he has not received a cash distribution from us. Each
unitholder will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending with or within
his taxable year.
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Treatment of Distributions. Our distributions 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 common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units." To
the extent our 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. Please read "-- Limitations on Deductibility of Losses."
Any reduction in a unitholder's share of our liabilities for which no
partner, including our general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. A decrease in a unitholder's percentage interest in us because of
our issuance of additional common units will decrease his share of our
nonrecourse liabilities, 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
common units, if the distribution reduces the unitholder's share of our
"unrealized receivables," including depreciation recapture and/or substantially
appreciated "inventory items," both as defined in the Internal Revenue Code, and
collectively, "Section 751 Assets." To that extent, he will be treated as having
been distributed his proportionate share of the Section 751 Assets and having
exchanged those assets with us 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, which will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the
unitholder's tax basis for the share of Section 751 Assets deemed relinquished
in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in this offering who owns those common units from the date of
closing of this offering through December 31, 2006, will be allocated an amount
of federal taxable income for that period that will be approximately 20% of the
cash distributed with respect to that period. We anticipate that after the
taxable year ending December 31, 2006, the ratio of allocable taxable income to
cash distributions to the unitholders will increase. These estimates are based
upon the assumption that gross income from operations will approximate the
amount required to make the minimum quarterly distribution on 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 our control. Further, the estimates are based on
current tax law and tax reporting positions that we will adopt and with which
the IRS could disagree. Accordingly, we cannot assure you that these estimates
will prove to be correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower, and any differences could be
material and could materially affect the value of the common units.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
limited partner will have no share of our debt that is recourse to our general
partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read "-- Disposition of Common Units --
Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our 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 the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his 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
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these limitations will carry forward and will be allowable to the extent that
his 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 that 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 our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the 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 our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are 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 losses we generate will only be available to offset our
passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly traded partnerships, or salary or active
business income. Similarly, a unitholder's share of our net income may be offset
by our passive losses, 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. Passive losses that are not deductible
because they exceed a unitholder's share of income we generate may be deducted
in full when he disposes of his entire investment in us in a fully taxable
transaction with an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions, including the at risk rules
and the basis limitation.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- 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 under 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. The IRS has
indicated that net passive income from a publicly traded partnership constitutes
investment income for purposes of the limitations on the deductibility of
investment interest. In addition, the unitholder's share of our portfolio income
will be treated as investment income.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state, local or foreign income tax on behalf of any
unitholder or our general partner or any former unitholder, we are authorized to
pay those taxes from our funds. That 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, we
are authorized to treat the payment as a distribution to all current
unitholders. We are authorized to amend the partnership agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of units and
to adjust later distributions, so that after
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giving effect to these distributions, the priority and characterization of
distributions otherwise applicable under the partnership agreement is maintained
as nearly as is practicable. Payments by us as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner would be required to file a claim in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated units, or incentive
distributions are made to our general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss for
the entire year, that loss will be allocated first to our general partner and
the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to our general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by our general partner and its affiliates, referred
to in this discussion as "Contributed Property." The effect of these allocations
to a unitholder purchasing common units in this offering essentially will be the
same as if the tax basis of our assets were equal to their fair market value at
the time of this offering. In addition, items of recapture income will be
allocated to the extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner to
eliminate the negative balance as quickly as possible.
Baker Botts L.L.P. is of the opinion that, with the exception of the issues
described in "-- Tax Consequences of Unit Ownership -- Section 754 Election" and
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction.
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
those units. If so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units would
be fully taxable; and
- all of these distributions would appear to be ordinary income.
Baker Botts L.L.P. has not rendered an opinion regarding the treatment of a
unitholder where common units are loaned to a short seller to cover a short sale
of common units; therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a short seller
should modify any applicable brokerage account agreements to prohibit their
brokers from borrowing their units. The IRS has announced that it is studying
issues relating to the tax treatment of short sales of partnership interests.
Please also read "-- Disposition of Common Units -- Recognition of Gain or
Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current 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 are urged
to consult with their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
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Tax Rates. In general, the highest effective United States federal income
tax rate for individuals for 2002 is 38.6% and the maximum United States federal
income tax rate for net capital gains of an individual for 2002 is 20% if the
asset disposed of was held for more than 12 months at the time of disposition.
Section 754 Election. We will make the election permitted by Section 754
of the Internal Revenue Code. That election is irrevocable without the consent
of the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. 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 our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted (which we will adopt), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under Section
167 of the Internal Revenue 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. It would not be
possible to maintain uniformity of units if this requirement were literally
followed; therefore under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of units even if that
position is not consistent with these Treasury Regulations. Please read "-- Tax
Treatment of Operations" and "--Uniformity of Units."
Although Baker Botts L.L.P. is unable to opine as to the validity of this
approach because there is no clear authority on this issue, we intend 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 the property, or treat that portion as non-amortizable to
the extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations under Section 743 of
the Internal Revenue Code but is arguably inconsistent with Treasury Regulation
Section 1.167(c)-l(a)(6). Although Treasury Regulation 1.167(c)-1(a)(6) is not
expected to directly apply to a material portion of our assets, if we determine
that our position cannot reasonably be taken, we may take a depreciation or
amortization position under which all purchasers acquiring units in the same
month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if
they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to some unitholders. This position will not be
adopted if we determine that the loss of depreciation and amortization
deductions will have a material adverse effect on the unitholders. If we choose
not to utilize this aggregate method, we may use any other reasonable
depreciation and amortization method 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 this 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. Please read
"-- Disposition of Common Units -- Recognition of Gain or Loss." Please read
"-- Tax Treatment of Operations" and "-- Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have a higher tax basis in his share of our assets for
purposes of computing, among other items, his depreciation and depletion
deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in
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his units is lower than those units' share of the aggregate tax basis of our
assets immediately prior to the transfer. Thus, the fair market value of the
units may be affected either favorably or unfavorably by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make 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 our opinion, the
expense of compliance exceed the benefit of the election, we may seek permission
from the IRS to revoke our Section 754 election. If 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.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close
of our taxable year but before the close of his taxable year must include his
share of our income, gain, loss and deduction in income for his taxable year,
with the result that he will be required to include in income for his taxable
year his share of more than one year of our income, gain, loss and deduction.
Please read "-- Disposition of Common Units -- Allocations Between Transferors
and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to this offering will
be borne by our general partner and its affiliates. Please read "-- Tax
Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose 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 we own will likely be required to recapture some or all, of
those deductions as ordinary income upon a sale of his interest in us. Please
read "-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss
and Deduction" and "-- Disposition of Common Units -- Recognition of Gain or
Loss."
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication expenses.
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Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates 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 basis are later 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 and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received by him
plus his share of our nonrecourse liabilities. Because the amount realized
includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of any
cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price received
is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. However, a portion of this gain or loss, which
will likely be substantial, will be separately computed and taxed as ordinary
income or loss under Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. 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 a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Capital losses may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains 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 for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Treasury
Regulations under Section 1223 of the Internal Revenue Code allow a selling
unitholder who can identify common units transferred with an ascertainable
holding period to elect to use the actual holding period of the common units
transferred. Thus, according to the ruling, a common unitholder will be unable
to select high or low basis common units to sell as would be the case with
corporate stock, but, according to the regulations, may designate specific
common units sold for purposes of determining the holding period of units
transferred. A unitholder electing to use the actual holding period of common
units transferred must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder considering the
purchase of additional units or a sale of common units purchased in separate
transactions is urged to consult his tax advisor as to the possible consequences
of this ruling and application of the regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated"
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partnership interest (one in which gain would be recognized if it were sold,
assigned or terminated at its fair market value) if the taxpayer or related
persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
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, our 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 applicable
exchange on the first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or loss realized on a sale or
other disposition of our 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 may be allocated income, gain, loss and deduction realized after the date
of transfer.
It is uncertain, due to the absence of interpretative authority, whether
this method conforms to the requirements of applicable Treasury Regulations.
Accordingly, Baker Botts L.L.P. is unable to opine on the validity of this
method of allocating income and deductions between unitholders. If this method
is disallowed or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
unitholders 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 them prior to the record date set for a cash distribution for that quarter
will be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A person who purchases units from a unitholder
is required to notify us in writing of that purchase within 30 days after
purchase. We are required to notify the IRS of that transaction and to furnish
specified information to the transferor and transferee. However, these reporting
requirements do not apply to a sale by an individual who is a citizen of the
United States and who effects the sale or exchange through a broker.
Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity,
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we may be unable to completely comply with a number of federal income tax
requirements, both statutory and regulatory. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6). Any
non-uniformity could have a negative impact on the value of the units. Please
read "-- Tax Consequences of Unit Ownership -- Section 754 Election."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder that is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence, they will be required to file
federal tax returns to report their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on their share of our net income or
gain. Moreover, under rules applicable to publicly traded partnerships, we will
withhold at the highest effective tax rate applicable to individuals from cash
distributions made quarterly to foreign unitholders. Each foreign unitholder
must obtain a taxpayer identification number from the IRS and submit that number
to our transfer agent on a Form W-8 or applicable substitute form in order to
obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be subject
to the United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its share of our 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
in which the foreign corporate unitholder is a "qualified resident." In
addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue 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
sale or disposition of that unit to the extent that this 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 or subject to
withholding upon the sale or disposition of a unit if he has owned 5% or less 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 sale or disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by Baker Botts L.L.P., we will take
various accounting and reporting positions, some of which have been mentioned
earlier, to determine each unitholder's share of income, gain, loss and
deduction. We cannot assure you that those positions will yield a result that
conforms to the requirements of the Internal Revenue Code, regulations or
administrative interpretations of
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the IRS. Neither we nor Baker Botts L.L.P. can assure prospective unitholders
that the IRS will not successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect the value of the
units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his return. Any audit of a
unitholder's return could result in adjustments not related to our returns as
well as those related to our returns.
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 Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names Martin Midstream GP LLC as our Tax Matters
Partner.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
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, judicial review may be sought by any unitholder having at least a 1%
interest in profits or by any group of unitholders having in the aggregate at
least a 5% interest in profits. 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 our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is:
(1) a person that is not a United States person;
(2) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing; or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific 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 specific
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 Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue 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
Internal Revenue Code are extremely broad. It is arguable that we are not
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subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, we will register as a tax shelter with the Secretary of
Treasury in the absence of assurance that we will not be subject to tax shelter
registration and in light of the substantial penalties that might be imposed if
registration is required and not undertaken.
ISSUANCE OF A TAX SHELTER REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT
IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY
THE IRS.
We will supply our tax shelter registration number to you when one has been
assigned to us. A unitholder who sells or otherwise transfers a unit in a later
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 failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit we generate is claimed or on which
any of our income 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 are not deductible for federal income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for 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 regarding 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:
(1) for which there is, or was, "substantial authority;" or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we 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 the 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, FOREIGN AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state, local and foreign income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder is urged to consider their potential impact on his
investment in us. We will initially own property or do business in Alabama,
Arizona, Arkansas, Georgia, Florida, Illinois, Louisiana, Mississippi, Texas and
Utah. We may also own property or do business in other state or foreign
jurisdictions in the future. Although you may not be required to file a return
and pay taxes in some jurisdictions because your income from that jurisdiction
falls below the filing and payment requirement, you will be required to file
income tax returns
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and to pay income taxes in many of these jurisdictions in which we do business
or own property and may be subject to penalties for failure to comply with those
requirements.
In some jurisdictions, tax losses may not produce a tax benefit in the year
incurred and may not be available to offset income in subsequent taxable years.
Some of the jurisdictions may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a unitholder who is not a
resident of the jurisdiction. Withholding, the amount of which may be greater or
less than a particular unitholder's income tax liability to the jurisdiction,
generally does not relieve a 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 us. Please
read "-- Tax Consequences of Unit Ownership -- Entity-Level Collections." Based
on current law and our estimate of our future operations, our 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 jurisdictions, of his investment
in us. Accordingly, each prospective unitholder is urged to consult, and depend
upon, his tax counsel or other advisor with regard to those matters. Further, it
is the responsibility of each unitholder to file all state, local and foreign,
as well as United States federal tax returns, that may be required of him. Baker
Botts L.L.P. has not rendered an opinion on the state, local or foreign tax
consequences of an investment in us.
INVESTMENT IN MARTIN MIDSTREAM PARTNERS L.P. BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of Employee
Retirement Income Security Act of 1974, as amended (referred to as "ERISA"), and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes 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 the investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential after-tax
investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and/or Section 4975 of the Internal Revenue Code
prohibits employee benefit plans, and IRAs that are not considered part of an
employee benefit plan, from engaging in specified transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that our general partner also would be a
fiduciary of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue 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 some
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circumstances. Under these regulations, an entity's assets would not be
considered to be "plan assets" if, among other things,
(a) the equity interests 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 under some 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 some interests held by our general partner,
its affiliates, and some other persons, is held by the employee benefit
plans referred to above, IRAs and other employee benefit plans not subject
to ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (a)
above.
Plan fiduciaries contemplating a purchase of common units are urged to
consult with their own counsel regarding the consequences under ERISA and the
Internal Revenue Code in light of the serious penalties imposed on persons who
engage in prohibited transactions or other violations.
144
UNDERWRITING
Under the terms of an underwriting agreement, which will be filed as an
exhibit to the registration statement relating to this prospectus, each of the
underwriters named below, for whom Raymond James & Associates, Inc. is acting as
representative, have severally agreed to purchase from us the respective number
of common units opposite their names below.
NUMBER OF
UNDERWRITERS COMMON UNITS
------------ ------------
Raymond James & Associates, Inc.............................
A.G. Edwards & Sons, Inc....................................
RBC Dain Rauscher Inc. .....................................
Total.............................................
The underwriting agreement provides that the underwriters' obligations to
purchase the common units depend upon the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the common units are
purchased by the underwriters, all of the common units must be purchased. The
conditions contained in the underwriting agreement include the condition that
all the representations and warranties made by us to the underwriters are true,
that there has been no material adverse change in our condition or in the
financial markets and that we deliver to the underwriters customary closing
documents.
We have been advised by the underwriters that the underwriters propose to
offer the common units directly to the public at the initial price to the public
set forth on the cover page of this prospectus and to dealers (who may include
the underwriters) at this price to the public less a concession not in excess of
$ per unit. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per unit to certain brokers and dealers.
After this offering, the underwriters may change the offering price and other
selling terms.
We, Martin Resource Management, our general partner, our operating
partnership and the general partner of our operating partnership have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement, or to
contribute to payments that may be required to be made in respect of these
liabilities.
We have granted to the underwriters an option to purchase up to an
aggregate of 450,000 additional common units at the initial price to the public
less the underwriting discount set forth on the cover page of this prospectus
exercisable solely to cover over-allotments, if any. This option may be
exercised at any time and from time to time until 30 days after the date of this
prospectus. If this option is exercised, each underwriter will be committed,
subject to satisfaction of the conditions specified in the underwriting
agreement, to purchase a number of additional common units proportionate to the
underwriter's initial commitment as indicated in the preceding table, and we
will be obligated, pursuant to the option, to sell these common units to the
underwriters.
We, Martin Resource Management, our operating partnership, our general
partner and the directors and executive officers of our general partner, have
agreed that they will not, directly or indirectly, sell, offer or otherwise
dispose of any common units or enter into any derivative transaction with
similar effect as a sale of common units for a period of 180 days after the date
of this prospectus without the prior written consent of Raymond James &
Associates, Inc. The restrictions described in this paragraph do not apply to:
- the sale of common units to the underwriters;
- common units issued by us under employee incentive plans or upon the
exercise of options issued under employee incentive plans; or
- common units issued in connection with accretive acquisitions, provided
that the recipients of those common units agree to be bound by the
restrictions described above.
145
Raymond James & Associates, Inc., in its sole discretion, may release the
units subject to lock-up agreements in whole or in part at any time with or
without notice. When determining whether or not to release units from lock-up
agreements, Raymond James & Associates, Inc. will consider, among other factors,
the unitholders' reasons for requesting the release, the number of units for
which the release is being requested and market conditions at the time.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment transactions involve sales by the underwriters of a number
of common units in excess of the number of units the underwriters are
obligated to purchase, which creates a syndicate short position. The
short position may be either a covered short position or a naked short
position. In a covered short position, the number of units over-allotted
by the underwriters is not greater than the number of units they may
purchase in the over-allotment option. In a naked short position, the
number of units involved is greater than the number of units in the
over-allotment option. The underwriters may close out any short position
by either exercising their over-allotment option and/or purchasing common
units in the open market.
- Syndicate covering transactions involve purchases of the common units in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of the common
units to close out the short position, the underwriters will consider,
among other things, the price of common units available for purchase in
the open market as compared to the price at which they may purchase
common units through the over-allotment option. If the underwriters sell
more common units than could be covered by the over-allotment option,
which we refer to in this prospectus as a naked short position, the
position can only be closed out by buying common units in the open
market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the common units in the open market after pricing that could
adversely affect investors who purchase in this offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common units originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common units or preventing or retarding a decline in the market price of the
common units. As a result, the price of the common units may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
At our request, the underwriters are reserving up to 150,000 common units
for sale at the initial public offering price to director, officers, employees
and other persons associated with us through a directed unit program. The number
of common units available for sale to the general public in the public offering
will be reduced by the extent these persons purchase these reserved units. Any
common units not so purchased will be offered by the underwriters to the general
public on the same basis as the other common units offered by this prospectus.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common units. In addition, neither
we nor any of the underwriters make any representation that the underwriters
will engage in stabilizing transactions or that any transaction, once commenced,
will not be discontinued without notice.
146
We have applied to list the common units on the Nasdaq National Market,
under the symbol "MMLP."
Prior to this offering, there has been no public market for the common
units. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included the following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
units of generally comparable entities.
The following table summarizes the discounts that we will pay to the
underwriters in this offering. These amounts assume both no exercise and full
exercise of the underwriters' option to purchase additional common units.
NO FULL
EXERCISE EXERCISE
-------- --------
Per Unit.................................................... $ $
Total....................................................... $ $
We expect to incur expenses of approximately $2.8 million in connection
with this offering.
In addition, as compensation for certain advisory services rendered to us,
including services related to our structuring, we have agreed to pay $350,000 to
Raymond James & Associates, Inc. upon the consummation of this offering.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us and our affiliates. RBC Capital Markets, an
affiliate of RBC Dain Rauscher Inc., will be a lender to us under our new credit
facility.
Because the National Association for Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, this
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
Investor suitability with respect to the common units should be judged similarly
to the suitability with respect to other securities that are listed for trading
on a national securities exchange.
The underwriters have informed us that they do not intend to confirm sales
to accounts over which they exercise discretionary authority without the prior
written approval of the customer.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for us by Baker Botts
L.L.P., Dallas, Texas. Certain legal matters in connection with the common units
offered hereby will be passed upon for the underwriters by Vinson & Elkins
L.L.P., Dallas, Texas.
147
EXPERTS
The combined financial statements of Martin Midstream Partners Predecessor
as of December 31, 2000 and 2001 and for each of the years in the three-year
period ended December 31, 2001 have been included in this prospectus and
elsewhere in the registration statement in reliance upon the report of KPMG LLP,
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 regarding the common units. This prospectus does not
contain all of the information found in the registration statement. For further
information regarding Martin Midstream Partners L.P. and the common units
offered by this prospectus, you may review the full registration statement,
including its exhibits and schedules, filed under the Securities Act of 1933.
The registration statement of which this prospectus forms a part, including its
exhibits and schedules, may be inspected and copied at the public reference room
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of the materials may also be obtained from the SEC at prescribed
rates by writing to the public reference room maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of this public reference room by calling the
SEC at 1-800-SEC-0330.
The SEC maintains a World Wide Web site on the Internet at
http://www.sec.gov. Our registration statement, of which this prospectus
constitutes a part, can be downloaded from the SEC's web site.
We intend to furnish or make available to our unitholders annual reports
containing our audited financial statements prepared in accordance with
generally accepted accounting principles and furnish or make available quarterly
reports containing our unaudited interim financial information including the
information required by Form 10-Q for the first three fiscal quarters of each of
our fiscal years.
148
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Martin Midstream Partners L.P. Pro Forma Combined Financial
Statements (unaudited):
Introduction.............................................. F-2
Pro Forma Combined Balance Sheet as of June 30, 2002...... F-3
Pro Forma Combined Statement of Income for the year ended
December 31, 2001...................................... F-4
Pro Forma Combined Statement of Income for the six months
ended June 30, 2002.................................... F-5
Notes to Pro Forma Combined Financial Statements.......... F-6
Martin Midstream Partners Predecessor Combined Financial
Statements:
Report of Independent Auditors............................ F-8
Combined Balance Sheets as of December 31, 2000 and 2001
and June 30, 2002 (unaudited).......................... F-9
Combined Statements of Operations and Owner's Equity for
the years ended December 31, 1999, 2000, and 2001 and
the six months ended June 30, 2001 and 2002
(unaudited)............................................ F-10
Combined Statements of Cash Flows for the years ended
December 31, 1999, 2000, and 2001 and the six months
ended June 30, 2001 and 2002 (unaudited)............... F-11
Notes to Combined Financial Statements.................... F-12
Martin Midstream Partners L.P.:
Report of Independent Auditors............................ F-26
Balance Sheet as of June 26, 2002......................... F-27
Note to Balance Sheet..................................... F-28
Martin Midstream GP LLC:
Report of Independent Auditors............................ F-29
Balance Sheet as of June 26, 2002......................... F-30
Note to Balance Sheet..................................... F-31
F-1
MARTIN MIDSTREAM PARTNERS L.P.
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma financial statements are based upon the historical
combined financial statements of the Martin Midstream Partners Predecessor,
which includes businesses of indirect wholly-owned affiliates of Martin Resource
Management Corporation. Effective with the closing of this offering, Martin
Midstream Partners L.P. will own and operate substantially all of these
businesses. The transfer is considered to be a reorganization of entities under
common control and will be recorded at historical cost. The pro forma financial
statements have been derived from the audited historical combined financial
statements of the Martin Midstream Partners Predecessor set forth elsewhere
herein. The pro forma financial statements have been prepared on the basis that
Martin Midstream Partners L.P. will be treated as a partnership for federal
income tax purposes. The pro forma financial statements should be read in
conjunction with the accompanying notes to pro forma financial statements and
with the historical combined financial statements and related notes set forth
elsewhere herein.
The pro forma adjustments are based upon currently available information
and certain estimates and assumptions, and therefore the actual adjustments will
differ from the pro forma adjustments. However, management believes that the
assumptions used provide a reasonable basis for presenting the significant
effects of the offering and related transactions as contemplated and that the
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma financial statements. The pro forma financial
statements may not be indicative of the results that actually would have
occurred if we had assumed the operations of the Martin Midstream Partners
Predecessor on the dates indicated. In addition, the pro forma financial
statements are not necessarily indicative of the results of our future
operations.
The following pro forma financial statements give pro forma effect to:
- the transfer of substantially all of the assets, liabilities and
operations of the Martin Midstream Partners Predecessor to our operating
partnership in connection with the closing of this offering;
- the assumption of $66.1 million of indebtedness of Martin Resource
Management Corporation which was not part of the operations of Martin
Midstream Partners Predecessor (this debt has historically been on the
books of Martin Resource Management Corporation and/or its affiliates,
not on the books of the entities that comprise the assets, liabilities
and operations of the combined financial statements. Therefore such debt
has not been reflected in the historical combined financial statements of
Martin Midstream Partners Predecessor). Since the primary use of proceeds
is to pay off this assumed debt, the assumption of the debt was included
as a pro forma adjustment in the pro forma financial statements);
- the completion of this offering;
- initial borrowings of 1) $25 million under our new term loan and 2) $4.0
million under our new $35.0 million revolving credit facility in
connection with the closing of this offering;
- the execution of an omnibus agreement with Martin Resource Management
Corporation and some of its affiliates in connection with the closing of
this offering; and
- the payment of $74.5 million of indebtedness immediately after the
closing of this offering.
The following pro forma financial statements have been prepared as if the
offering and related transactions had taken place on June 30, 2002, in the case
of the Pro Forma Combined Balance Sheet and as of January 1, 2001, in the case
of the Pro Forma Combined Statements of Operations.
F-2
MARTIN MIDSTREAM PARTNERS L.P.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2002
HISTORICAL PRO FORMA PRO FORMA PRO FORMA
PREDECESSOR ADJUSTMENTS(A) PRO FORMA(1) ADJUSTMENTS PRO FORMA(2) ADJUSTMENTS PRO FORMA
----------- -------------- ------------ ----------- ------------ ----------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash.................... $ 242 $ $ 242(c) $ 60,000 $ 53,242(i) $ 29,000 $ 2,937
(d) (7,000) (j) (500)
(k) (78,805)
Accounts receivable..... 12,221 (1) 12,220 12,220 12,220
Product exchange
receivables........... 1,109 1,109 1,109 1,109
Inventories............. 10,769 10,769 10,769 10,769
Receivable from
affiliates............ -- --
Other current assets.... 302 (8) 294 294 294
------- ------- ------- -------- -------- -------- -------
Total current
assets.............. 24,643 (9) 24,634 53,000 77,634 (50,305) 27,329
Property, plant &
equipment............. 87,303 (5,652) 81,651 81,651 81,651
Less: accumulated
depreciation........ 30,385 (3,725) 26,660 26,660 26,660
------- ------- ------- -------- -------- -------- -------
Net property, plant
and equipment....... 56,918 (1,927) 54,991 54,991 54,991
Goodwill................ 2,922 2,922 2,922 2,922
Other assets, net....... 207 192 399 399(j) 500 899
------- ------- ------- -------- -------- -------- -------
Total assets.......... $84,690 $(1,744) $82,946 $ 53,000 $135,946 $(49,805) $86,141
======= ======= ======= ======== ======== ======== =======
LIABILITIES AND CAPITAL
Current Liabilities:
Current installments of
long term debt........ $ 995 $ 995 $ 995(k) $ (995) $ --
Accounts payable........ 9,012 $ (107) 8,905 8,905 8,905
Product exchange
payables.............. 2,077 2,077 2,077 2,077
Accrued expenses........ 660 (10) 650(e) 4,259 4,909(k) (4,259) 650
------- ------- ------- -------- -------- -------- -------
Total current
liabilities......... 12,744 (117) 12,627 4,259 16,886 (5,254) 11,632
Long term debt.......... 7,422 7,422(e) 66,129 73,551(i) 29,000 29,000
(k) (73,551)
Payable to affiliates... 32,820 (4,628) 28,192(b) (28,192) -- --
Deferred income taxes... 10,576 555 11,131(f) (11,131) -- --
------- ------- ------- -------- -------- -------- -------
Total liabilities....... 63,562 (4,190) 59,372 31,065 90,437 (49,805) 40,632
Combined equity......... 21,128 2,446 23,574(b) 28,192 -- --
(e) (70,388)
(f) 11,131
(h) 7,491
Partners' equity
Common units.......... (c) 60,000 53,000 53,000
(d) (7,000)
Subordinated units.... (h) (7,341) (7,341) (7,341)
General partner......... (h) (150) (150) (150)
------- ------- ------- -------- -------- -------- -------
Total partners'
capital............. 21,128 2,446 23,574 21,935 45,509 -- 45,509
------- ------- ------- -------- -------- -------- -------
$84,690 $(1,744) $82,946 $ 53,000 $135,946 $(49,805) $86,141
======= ======= ======= ======== ======== ======== =======
---------------
(1) Reflects amounts related to assets, liabilities and operations which will be
transferred to our operating partnership.
(2) Reflects amounts after assumption of debt and offering but prior to new
borrowings and use of proceeds.
F-3
MARTIN MIDSTREAM PARTNERS LP
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL PRO FORMA PRO FORMA
PREDECESSOR ADJUSTMENTS(A) PRO FORMA(1) ADJUSTMENTS PRO FORMA
----------- -------------- ------------ ----------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
Revenues................... $163,118 $ (330) $162,788 $ $162,788
Cost of products sold...... 119,767 307 120,074 120,074
Operating expenses......... 20,472 (706) 19,766 19,766
General & administrative... 7,513 7,513 (759) 7,754
(m) 1,000
Depreciation and
amortization............. 4,122 (145) 3,977 3,977
-------- ------- -------- ------- --------
Total costs and expenses... 151,874 (544) 151,330 241 151,571
-------- ------- -------- ------- --------
Operating income........... 11,244 214 11,458 (241) 11,217
Equity in earnings of
unconsolidated
entities................. 1,477 164 1,641 1,641
Interest expense........... (5,390) 350 (5,040)(b) 4,213 (1,399)
(i) (1,232)
(j) (167)
(k) 827
Other net.................. 82 (1) 81 81
-------- ------- -------- ------- --------
Income before taxes........ 7,413 727 8,140 3,400 11,540
Income taxes............... 2,735 245 2,980(g) (2,980) --
-------- ------- -------- ------- --------
Net income................. $ 4,678 $ 482 $ 5,160 $ 6,380 $ 11,540
======== ======= ======== ======= ========
General partner's interest
in net income............ (n) $ 231
========
Limited partners' interest
in net income............ $ 11,309
========
Net income per limited
partner unit............. (n) $ 1.56
========
Weighted average number of
limited partner units
outstanding.............. 7,253
========
---------------
(1) Reflects amounts related to assets, liabilities and operations which will be
transferred to our operating partnership.
F-4
MARTIN MIDSTREAM PARTNERS LP
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002
HISTORICAL PRO FORMA PRO FORMA
PREDECESSOR ADJUSTMENTS(A) PRO FORMA(1) ADJUSTMENTS PRO FORMA
----------- -------------- ------------ ----------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
Revenues.................... $68,340(a) $ (97) $68,243 $ $68,243
Cost of products sold....... 48,475(a) 196 48,671 48,671
Operating expenses.......... 10,018(a) (267) 9,751 9,751
General & administrative.... 3,374 3,374(l) (364) 3,510
(m) 500
Depreciation and
amortization.............. 2,216(a) (80) 2,136 2,136
------- ------- ------- ------- -------
Total costs and expenses.... 64,083 (151) 63,932 136 64,068
------- ------- ------- ------- -------
Operating income............ 4,257 54 4,311 (136) 4,175
Equity in earnings of
unconsolidated entities... 1,470(a) 184 1,654 1,654
Interest expense............ (2,039)(a) 142 (1,897)(b) 1,590 (699)
(i) (616)
(j) (83)
(k) 307
Other net................... 15 15 15
------- ------- ------- ------- -------
Income before taxes......... 3,703 380 4,083 1,062 5,145
Income taxes................ 1,333 126 1,459(g) (1,459) --
------- ------- ------- ------- -------
Net income.................. $ 2,370 $ 254 $ 2,624 $ 2,521 $ 5,145
======= ======= ======= ======= =======
General partner's interest
in net income............. (n) $ 103
=======
Limited partners' interest
in net income............. $ 5,042
=======
Net income per limited
partner unit.............. (n) $ 0.70
=======
Weighted average number of
limited partner units
outstanding............... 7,253
=======
---------------
(1) Reflects amounts related to assets, liabilities and operations which will be
transferred to our operating partnership.
F-5
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Reflects the retention by MRMC of certain assets, liabilities and
operations which will not be transferred to the operating partnership.
(b) Reflects the capital contribution of $28.2 million representing the
conversion to equity of Martin Midstream Partners L.P.'s net payable to
affiliates of its general partner and elimination of related affiliate
interest expense of $4.2 million and $1.6 million, respectively.
(c) Reflects the proceeds to Martin Midstream Partners L.P. of $60.0 million
from the issuance and sale of 3,000,000 units at an assumed initial public
offering price of $20.00 per unit.
(d) Reflects the payment of the underwriting discount of $4.2 million and legal
and other professional fees and expenses of approximately $2.8 million
associated with the offering. These expenses will be allocated to the
common units.
(e) Reflects the assumption of borrowings of $66.1 million, related accrued
interest of $2.7 million, and related prepayment penalties of $1.5 million
from affiliates of Martin Midstream Partners L.P.'s general partner.
(f) Reflects the elimination of deferred income taxes as income taxes will be
the responsibility of the unitholders and not Martin Midstream Partners
L.P.
(g) Reflects the elimination of federal and state income taxes as income taxes
will be the responsibility of unitholders and not Martin Midstream Partners
L.P.
(h) Reflects the conversion of the adjusted net liabilities contributed by
Martin Resource Management and affiliates of $7.5 million to the
subordinated units of Martin Midstream Partners L.P. and its general
partner's interest in Martin Midstream Partners L.P. The conversion is as
follows:
- $7.3 million for 4,253,362 subordinated units; and
- $0.2 million for Martin Midstream Partners L.P.'s general partner's
interest
Such adjusted net liabilities (consideration) were composed of the
following:
(IN THOUSANDS)
Book value of net assets contributed before assumption of
Martin Resource Management debt........................... $ 23,574
Conversion to equity of amount due to Martin Resource
Management and affiliates................................. 28,192
Assumption of Martin Resource Management debt and accrued
interest and prepayment fees.............................. (70,388)
Elimination of deferred income taxes........................ 11,131
--------
Total consideration......................................... $ (7,491)
========
(i) Reflects borrowings under the term debt credit facility of $25.0 million
and borrowings under the revolving credit facility of $5.2 million, and
related interest expense of $1.2 million and $0.6 million, respectively.
The weighted average interest rate for the outstanding borrowings was
4.25%. If interest rates were to change by 0.25%, Martin Midstream Partners
L.P.'s annual debt interest service would change by approximately $0.1
million.
(j) Reflects payment of debt financing fees of $0.5 million related to the
credit facility. The debt financing fees will be capitalized and amortized
over the life of the associated debt.
(k) Reflects payment of (1) existing predecessor debt of $8.4 million and
related elimination of interest expense and (2) assumed debt from Martin
Midstream Partners L.P.'s general partner of $66.1 million, related accrued
interest of $2.7 million and prepayment fees of $1.5 million.
(l) Reflects the elimination of historical allocated general and administrative
expense of $0.8 million and $0.4 million, respectively.
(m) Reflects the general and administrative charges by Martin Midstream
Partners L.P.'s general partner of $1.0 million and $0.5 million
respectively. After the offering, we will receive an allocation of
F-6
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
indirect general and administrative expenses from Martin Resource
Management that will not exceed $1.0 million in the first year. In each of
the following four years, this amount may be increased by no more than the
percentage increase in the consumer price index for the applicable year.
(n) Martin Midstream Partners L.P.'s general partner's allocation of net income
is based on its combined 2% interest in Martin Midstream Partners L.P. Its
general partners' 2% allocation of net income has been deducted before
calculating net income per limited partners' unit. The computation of net
income per limited partner unit assumes that 3,000,000 common units and
4,253,362 subordinated units were outstanding at all time periods
presented.
(NOTE) Shortly after the offering, Martin Midstream Partners L.P. plans to
purchase for approximately $2.9 million two barges that it has been
leasing from an unaffiliated third party. The purchase price will be paid
from the residual cash balance reflected in the combined pro forma
balance sheet. Martin Midstream Partners L.P. expects that this purchase
will reduce its operating expenses by $0.6 million and increase its
depreciation expense by $0.1 million annually. This expected transaction
and related expected impact has not been reflected in the combined pro
forma financial statements above.
In addition, following the completion of this offering, Martin Midstream
Partners L.P., will begin to incur the additional administrative
expenses resulting from its status as a publicly traded company,
including the expenses connected with complying with the periodic
reporting requirements of the Securities and Exchange Commission under
applicable federal securities laws. Such expenses are estimated to be
approximately $700,000 per year.
Additionally, Martin Resource Management Corporation will agree for a
period of three years to use our four vessels that are currently not
subject to term agreements in a manner such that we will receive at
least $5.6 million annually for the use of these vessels by Martin
Resource Management and third parties.
F-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Martin Resource Management Corporation
We have audited the accompanying combined balance sheets of Martin
Midstream Partners Predecessor (as defined in Note 1) as of December 31, 2000
and 2001, and the related combined statements of operations and owner's equity,
and cash flows for each of the years in the three-year period ended December 31,
2001. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Martin Midstream
Partners Predecessor at December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Shreveport, Louisiana
September 27, 2002
F-8
MARTIN MIDSTREAM PARTNERS PREDECESSOR
COMBINED BALANCE SHEETS
DECEMBER 31,
------------------- JUNE 30,
2000 2001 2002
-------- -------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
Cash........................................................ $ 127 $ 62 $ 242
Accounts and other receivables, less allowance for doubtful
accounts of $393 and $355 in 2000 and 2001................ 24,345 14,669 12,221
Product exchange receivables................................ 206 356 1,109
Inventories................................................. 17,532 13,601 10,769
Other current assets........................................ 2,106 137 302
-------- -------- --------
Total current assets.............................. 44,316 28,825 24,643
-------- -------- --------
Property, plant, and equipment, at cost..................... 79,735 85,409 87,303
Accumulated depreciation.................................... (25,074) (28,335) (30,385)
-------- -------- --------
Property, plant, and equipment, net............... 54,661 57,074 56,918
-------- -------- --------
Goodwill, less accumulated amortization..................... 3,177 2,922 2,922
Other assets, net........................................... 230 132 207
-------- -------- --------
$102,384 $ 88,953 $ 84,690
======== ======== ========
LIABILITIES AND OWNER'S EQUITY
Current installments of long-term debt...................... $ 925 $ 970 $ 995
Trade and other accounts payable............................ 20,523 8,853 9,012
Product exchange payables................................... 6,761 4,109 2,077
Other accrued liabilities................................... 957 862 660
-------- -------- --------
Total current liabilities......................... 29,166 14,794 12,744
-------- -------- --------
Long-term debt, net of current installments................. 10,691 7,845 7,422
Due to affiliates........................................... 39,096 36,796 32,820
Deferred income taxes....................................... 6,663 9,319 10,576
Other liabilities........................................... 2,688 1,441 --
-------- -------- --------
Total liabilities................................. 88,304 70,195 63,562
-------- -------- --------
Owner's equity.............................................. 14,080 18,758 21,128
Commitments and contingencies...............................
-------- -------- --------
$102,384 $ 88,953 $ 84,690
======== ======== ========
See accompanying notes to combined financial statements.
F-9
MARTIN MIDSTREAM PARTNERS PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1999 2000 2001 2001 2002
-------- -------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Revenues:
Marine transportation................... $ 19,004 $ 26,060 $ 28,637 $16,339 $11,651
Terminalling............................ 2,988 3,978 4,368 2,317 2,392
Product sales:
LPG distribution..................... 123,683 143,799 98,615 61,062 38,379
Fertilizer........................... 27,220 25,976 31,498 18,822 15,918
-------- -------- -------- ------- -------
150,903 169,775 130,113 79,884 54,297
-------- -------- -------- ------- -------
Total revenues.................. 172,895 199,813 163,118 98,540 68,340
-------- -------- -------- ------- -------
Costs and expenses:
Cost of products sold:
LPG distribution..................... 107,417 128,834 93,664 57,709 35,751
Fertilizer........................... 22,517 21,229 26,103 15,809 12,724
-------- -------- -------- ------- -------
129,934 150,063 119,767 73,518 48,475
Expenses:
Operating expenses................... 22,557 25,993 20,472 11,455 10,018
Selling, general, and
administrative..................... 8,747 7,880 7,513 3,974 3,374
Depreciation and amortization........ 6,914 6,413 4,122 2,008 2,216
-------- -------- -------- ------- -------
Total costs and expenses........ 168,152 190,349 151,874 90,955 64,083
-------- -------- -------- ------- -------
Operating income................ 4,743 9,464 11,244 7,585 4,257
-------- -------- -------- ------- -------
Other income (expense):
Equity in earnings (losses) of
unconsolidated entities.............. (110) 192 1,477 698 1,470
Interest expense........................ (7,049) (7,949) (5,390) (2,895) (2,039)
Other, net.............................. 296 70 82 41 15
-------- -------- -------- ------- -------
Total other income (expense).... (6,863) (7,687) (3,831) (2,156) (554)
-------- -------- -------- ------- -------
Income (loss) before income
taxes......................... (2,120) 1,777 7,413 5,429 3,703
Income taxes.............................. (501) 847 2,735 1,990 1,333
-------- -------- -------- ------- -------
Net income (loss)............... (1,619) 930 4,678 3,439 2,370
Owner's equity at beginning of year....... 14,769 13,150 14,080 14,080 18,758
-------- -------- -------- ------- -------
Owner's equity at end of year............. $ 13,150 $ 14,080 $ 18,758 $17,519 $21,128
======== ======== ======== ======= =======
See accompanying notes to combined financial statements.
F-10
MARTIN MIDSTREAM PARTNERS PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------
1999 2000 2001 2001 2002
-------- -------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)................................ $ (1,619) $ 930 $ 4,678 $ 3,439 $ 2,370
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 6,914 6,413 4,122 2,008 2,216
Deferred income taxes.......................... (637) 656 2,656 1,850 1,257
(Gain) loss on sale of property, plant, and
equipment.................................... (144) (1) (4) (1) 1
Equity in (earnings) losses of unconsolidated
entities..................................... 110 (192) (1,477) (698) (1,470)
Change in current assets and liabilities,
excluding effects of acquisitions and
dispositions:
Accounts and other receivables............... (6,323) (10,061) 9,696 7,248 2,448
Product exchange receivables................. (1,041) 605 (150) (36) (753)
Inventories.................................. 2,296 (7,547) 3,931 3,344 2,832
Other current assets......................... 487 (2,107) 1,968 1,708 (165)
Trade and other accounts payable............. 6,819 8,998 (11,670) (9,142) 159
Product exchange payables.................... (205) 3,509 (2,651) (2,399) (2,032)
Other accrued liabilities.................... 162 478 (96) (187) (203)
Change in other noncurrent assets, net......... (282) (72) 141 146 6
Other.......................................... -- 12 -- -- --
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities.............................. 6,537 1,621 11,144 7,280 6,666
-------- -------- -------- ------- -------
Cash flows from investing activities:
Payments for property, plant, and equipment...... (15,131) (3,944) (6,229) (1,163) (2,016)
Proceeds from sale of property, plant, and
equipment...................................... 589 2 109 -- 7
Payment of costs associated with formation of
unconsolidated partnership..................... -- -- (701) (701) --
Capital investment in unconsolidated joint
venture........................................ (50) (62) (280) (280) --
Payment received from unconsolidated partnership
partner........................................ -- 920 -- -- --
Distributions from unconsolidated partnership.... -- -- 394 394 --
Cash paid for acquisition........................ -- -- (102) -- (103)
-------- -------- -------- ------- -------
Net cash used in investing activities..... (14,592) (3,084) (6,809) (1,750) (2,112)
-------- -------- -------- ------- -------
Cash flows from financing activities:
Payments of long-term debt....................... (1,790) (2,107) (2,801) (2,497) (398)
Borrowings from affiliates....................... 48,520 55,774 57,865 32,591 24,906
Payments to affiliates........................... (38,783) (52,246) (59,464) (35,723) (28,882)
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities.............................. 7,947 1,421 (4,400) (5,629) (4,374)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................. (108) (42) (65) (99) 180
Cash at beginning of year.......................... 277 169 127 127 62
-------- -------- -------- ------- -------
Cash at end of year................................ $ 169 $ 127 $ 62 $ 28 $ 242
======== ======== ======== ======= =======
See accompanying notes to combined financial statements.
F-11
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying combined financial statements and notes thereto present
the combined financial position, results of operations, changes in combined
equity and cash flows of certain assets, liabilities, and operations currently
owned by Martin Resource Management Corporation (MRMC). Such operations relate
to four primary lines of business: 1) marine transportation of hydrocarbon and
hydrocarbon by-products; 2) terminalling of hydrocarbon and hydrocarbon
by-products; 3) liquefied petroleum gas (LPG) distribution; and 4) fertilizer
manufacturing. These operations are collectively referred to as the Martin
Midstream Partners Predecessor (MMPP). These combined financial statements are
prepared in connection with the formation and proposed public offering of
limited partner units in Martin Midstream Partners L.P. (the Partnership) which
will own substantially all of the businesses previously within MMPP.
Hydrocarbon products and by-products are produced primarily by major and
independent oil and gas companies who often turn to independent third parties,
such as MMPP, for the transportation and disposition of these products. In
addition to these major and independent oil and gas companies, MMPP's primary
customers include independent refiners, large chemical companies, fertilizer
manufacturers and other wholesale purchasers of hydrocarbon products and
by-products.
(b) PRINCIPLES OF COMBINATION
MRMC will retain its assets, liabilities, and operations not related to the
four lines of business noted above. In addition, MRMC will retain certain
assets, liabilities and operations within the LPG distribution and fertilizer
manufacturing lines of business. These retained assets and operations have been
excluded from the accompanying combined financial statements of MMPP. These
combined financial statements present all of the assets, liabilities and
operations related to the four lines of business as if such operations had
existed as a single entity separate from MRMC during the periods presented. All
intercompany transactions within MMPP have been eliminated.
(c) INTERIM FINANCIAL DATA
The interim financial data are unaudited; however, in the opinion of
management, the interim financial data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results for the six-month periods ended June 30, 2001 and 2002. The unaudited
combined financial statements should be read in conjunction with the audited
combined financial statements presented for each of the years ended December 31,
1999, 2000 and 2001.
(d) PRODUCT EXCHANGES
Product exchange balances due to other companies under negotiated
agreements are recorded at quoted market product prices while balances due from
other companies are recorded at the lower of cost (determined using the
first-in, first-out [FIFO] method) or market.
(e) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by using the FIFO method for all inventories.
F-12
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(f) REVENUE RECOGNITION
Revenue for our four operating segments are recognized as follows:
Marine transportation -- Revenue is recognized for contracted trips
upon completion of the particular trip. For time charters, revenue is
recognized based on a per day rate.
Terminalling -- Revenue is recognized for storage contracts based on
the contracted monthly tank fixed fee. For throughput contracts, revenue is
recognized based on the volume moved through our terminals at the
contracted rate.
LPG distribution -- When product is sold by truck, revenue is
recognized upon delivering product to our customers as title to the product
transfers when the customer physically receives the product. When product
is sold in storage, or by pipeline, revenue is recognized when the customer
receives product from either the storage facility or pipeline.
Fertilizer -- Revenue is recognized when the customer takes title to
the product, either at our plant or the customer facility.
Freight related to LPG distribution and fertilizer sales is recognized
as revenue in accordance with EITF 00-10, "Accounting for Shipping and
Handling Fees and Costs."
(g) EQUITY METHOD INVESTMENTS
MMPP has a 49.5% non-controlling limited partner interest in CF Martin
Sulphur, L.P. which is accounted for by the equity method. The partnership
collects and aggregates, transports, stores and markets molten sulfur supplied
by oil refiners and natural gas processors.
There is a difference in MMPP's basis in the partnership and MMPP's
underlying equity on the partnership's books. Such difference is being amortized
over 20 years as additional equity in earnings (losses) of unconsolidated
entities.
Additionally, MMPP has a 50% interest in a joint venture which manufactures
and sells a sulfur fungicide product.
(h) PROPERTY, PLANT, AND EQUIPMENT
Owned property, plant, and equipment is stated at cost, less accumulated
depreciation. Owned buildings and equipment are depreciated using straight-line
method over the estimated lives of the respective assets.
Routine maintenance and repairs are charged to operating expense while
costs of betterments and renewals are capitalized. When an asset is retired or
sold, its cost and related accumulated depreciation are removed from the
accounts and the difference between net book value of the asset and proceeds
from disposition is recognized as gain or loss.
(i) GOODWILL
Goodwill represents the excess of purchase price over fair value of net
assets acquired and through December 31, 2001, has been amortized on a
straight-line basis over the expected periods to be benefited, generally 15
years.
Through December 31, 2001, MMPP would assess the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill
F-13
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
impairment, if any, would be measured based on projected discounted future
operating cash flows using a discount rate commensurate with the risk involved.
The assessment of the recoverability of goodwill would be impacted if estimated
future operating cash flows were not achieved.
Amortization of goodwill totaled $291, $291, and $300 for the years ended
December 31, 1999, 2000, and 2001, respectively, and accumulated amortization
amounted to $667 and $967 at December 31, 2000 and 2001, respectively.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Through December 31, 2001, MMPP accounted for long-lived assets in
accordance with the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
required that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used was measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
were considered to be impaired, the impairment to be recognized was measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are to be reported at the lower of the
carrying amount or fair value less costs to sell.
(k) INDIRECT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Indirect selling, general and administrative expenses are incurred by MRMC
and allocated to MMPP to cover costs of centralized corporate functions such as
accounting, treasury, engineering, information technology, risk management and
other corporate services. Such expenses are based on the percentage of time
spent by MRMC's personnel that provide such centralized services.
(l) INCOME TAXES
MMPP's operations have historically been included in the consolidated MRMC
federal tax return. Income taxes have been calculated based on the combined tax
attributes of MMPP's operations. Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(m) ENVIRONMENTAL LIABILITIES
MMPP's policy is to accrue for losses associated with environmental
remediation obligations when such losses are probable and reasonably
estimatable. Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
F-14
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(n) USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these combined financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.
(o) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS No.
141), and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121 and subsequently, SFAS No. 144 after its adoption (see discussion
below).
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002.
Upon adoption of SFAS No. 142, MMPP was required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. MMPP was required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments by the end of the first interim period after adoption. This
resulted in no changes to previously recorded amounts.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the statement requires MMPP to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, MMPP must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. MMPP will then have up to six months from January 1, 2002
to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and MMPP must perform
the second step of the transitional impairment test. The second step is required
to be completed as soon as possible, but no later than the end of the year of
adoption. If the second step is required, MMPP must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in MMPP's statement of income.
In addition to the transitional goodwill impairment test, SFAS No. 142
requires MMPP to test for goodwill impairment annually and on an interim basis
if an event or circumstance indicates it is more likely than not that an
impairment loss has been incurred.
F-15
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires MMPP to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. MMPP would also record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. MMPP is required to adopt SFAS No. 143 on
January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. MMPP adopted SFAS No. 144 on January 1, 2002 and its adoption had no
significant impact on financial position or results of operations.
(2) INVENTORIES
Components of inventories at December 31, 2000 and 2001 were as follows:
2000 2001
------- -------
Liquefied petroleum gas..................................... $ 8,995 $ 7,101
Fertilizer -- raw materials and packaging................... 2,665 2,693
Fertilizer -- finished goods................................ 5,349 3,343
Other....................................................... 523 464
------- -------
$17,532 $13,601
======= =======
F-16
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(3) PROPERTY, PLANT, AND EQUIPMENT
At December 31, 2000 and 2001, property, plant, and equipment consisted of
the following:
DEPRECIABLE
LIVES 2000 2001
----------- ------- -------
Land................................................. -- $ 1,118 $ 1,118
Improvements to land and buildings................... 10-25 years 3,255 3,770
Transportation equipment............................. 3-7 years 421 470
LPG storage equipment................................ 5-20 years 4,558 4,594
Marine vessels....................................... 4-25 years 47,244 48,964
Operating equipment.................................. 3-20 years 22,169 22,349
Furniture, fixtures, and other equipment............. 3-10 years 565 569
Construction in progress............................. 405 3,575
------- -------
$79,735 $85,409
======= =======
Depreciation expense was $6,560, $6,050, and $3,750 for the years ended
December 31, 1999, 2000 and 2001, respectively.
During 2000, MMPP transferred property, plant, and equipment with a net
book value of $2,902 to affiliates of MRMC recording an offsetting amount to
reduce due to affiliates.
(4) GOODWILL
The following information relates to goodwill balances as of the periods
presented:
DECEMBER 31,
-------------- JUNE 30,
2000 2001 2002
------ ----- --------
Carrying amount of goodwill:
Marine transportation segment............................. $2,195 2,026 2,026
LPG distribution segment.................................. 96 80 80
Fertilizer segment........................................ 886 816 816
------ ----- -----
$3,177 2,922 2,922
====== ===== =====
The following is a reconciliation of reported net income (loss) to the
amounts that would have been reported had the Company been subject to SFAS 142
during all periods presented:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1999 2000 2001 2001 2002
------- ------- ------ ------- -------
Net income (loss), as reported.................... $(1,619) 930 4,678 3,439 2,370
Goodwill amortization, net of taxes............... 192 192 198 96 --
------- ------- ------ ------ ------
Net income (loss), as adjusted.................... $(1,427) 1,122 4,876 3,535 2,370
======= ======= ====== ====== ======
(5) LEASES
MMPP has numerous noncancelable operating leases primarily for
transportation and other equipment. The leases generally provide that all
expenses related to the equipment are to be paid by the
F-17
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
lessee. Management expects to renew or enter into similar leasing arrangements
for similar equipment upon the expiration of the current lease agreements.
The future minimum lease payments under noncancelable operating leases for
years subsequent to December 31, 2001 are as follows: 2002 -- $861;
2003 -- $801; 2004 -- $644; 2005 -- $581; and 2006 -- $10.
Total rent expense for operating leases for the years ended December 31,
1999, 2000 and 2001 was $2,778, $2,390, and $1,377, respectively.
(6) INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
On November 22, 2000, MMPP contributed certain assets and liabilities to
acquire a 49.5% non-controlling limited partnership interest in a partnership,
C.F. Martin Sulphur, L.P. (CF Martin), which is an independent provider of
transportation, terminalling, marketing and logistics management services for
molten sulfur. The carrying amount of assets and liabilities contributed by MMPP
were as follows:
Accounts and other receivables.............................. $ 8,314
Inventories................................................. 3,176
Other current assets........................................ 97
Net property, plant, and equipment.......................... 22,967
Other assets................................................ 29
Accounts payable and accrued expenses....................... (7,575)
Long-term debt, including current installments.............. (30,014)
--------
$ (3,006)
========
In connection with the contribution, MMPP received $920 in 2000 from the
other partner which represented a working capital adjustment under the
Partnership Agreement. Additionally, MMPP paid $721 in 2001 related to costs of
forming the partnership, primarily professional fees.
The long-term debt contributed included $18 million of non-MMPP debt which
was contributed to MMPP by MRMC and then contributed by MMPP to the partnership.
The gain of $3,006 was not recognized in connection with the exchange due
to MMPP having an actual and implied commitment to support the operations of the
partnership due to its continued involvement as a supplier of services to CF
Martin and MRMC's guaranty of CF Martin's debt. The difference in the original
carrying value (deferred credit of $3,006) of MMPP's investment in the
partnership and its share of the original net assets of $7,474 is being
amortized over 20 years as additional equity in earnings in the partnership.
F-18
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Certain financial information related to 1) MMPP's investment in, equity in
earnings in and cash distributions from the partnership and 2) the partnership
is as follows:
DECEMBER 31,
-------------------------
1999 2000 2001
----- ------- -------
MMPP
Investment................................................. $ -- $(2,688) $(1,441)
===== ======= =======
Equity in earnings:
Allocation of actual earnings............................ -- 274 1,117
Amortization of basis difference......................... -- 44 524
----- ------- -------
$ -- $ 318 $ 1,641
===== ======= =======
Cash distributions received................................ -- -- 394
===== ======= =======
PARTNERSHIP
Total assets............................................... $ -- $47,129 $42,973
Long-term debt............................................. -- 11,432 10,850
Total partners' capital.................................... -- 27,081 28,548
MMPP equity balance........................................ -- 7,748 8,474
Revenues................................................... -- 5,907 27,888
Net income................................................. -- 554 2,257
(7) LONG-TERM DEBT
At December 31, 2000 and 2001, long-term debt consisted of the following:
2000 2001
------- ------
$12,000 Term Loan at variable interest rate (8.74%* at
December 31, 2001), due in monthly installments with a
balloon payment due September 2007, secured by various
marine vessels............................................ $ 9,411 $8,815
Note payable................................................ 2,205 --
------- ------
Total long-term debt...................................... 11,616 8,815
Less current installments................................. 925 970
------- ------
Long-term debt, net of current installments............... $10,691 $7,845
======= ======
---------------
* Interest rate fluctuates based on the one-year United States Treasury Bill
rate plus 250 basis points and is reset every 18 months. Such interest rate
was reset in March 2002 at 5.16%.
The aggregate maturities of long-term debt for the next five years are as
follows: 2002 -- $970; 2003 -- $1,345; 2004 -- $1,416; 2005 -- $1,491; and 2006
- $1,570.
F-19
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(8) INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1999, 2000 and 2001, are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 2000 2001
------ ----- -------
Current:
Federal................................................... $ -- $ -- $ --
State..................................................... 136 191 79
----- ---- ------
136 191 79
Deferred -- federal......................................... (637) 656 2,656
----- ---- ------
$(501) $847 $2,735
===== ==== ======
The income tax expense (benefit) for 1999, 2000 and 2001 differs from the
"expected" tax expense (benefit) (computed by applying the federal corporate
rate of 34% to income before income taxes) as follows:
1999 2000 2001
----- ---- ------
"Expected" tax expense (benefit)............................ $(721) $604 $2,520
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax benefit..... 90 126 52
Tax effect of nondeductible goodwill amortization......... 81 81 81
Other nondeductible items................................. 49 36 82
----- ---- ------
$(501) $847 $2,735
===== ==== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities include:
AS OF DECEMBER 31,
-------------------
2000 2001
-------- --------
Deferred tax assets:
Difference in basis -- unconsolidated partnership......... $ 2,039 $ 1,762
Net operating loss carry forward.......................... 3,755 2,047
Difference in basis of property, plant, and equipment..... 223 223
Other..................................................... 337 890
------- -------
Total deferred tax assets.............................. 6,354 4,922
Less valuation allowance............................... -- --
------- -------
Net deferred tax assets................................ 6,354 4,922
------- -------
Deferred tax liabilities:
Excess of tax over book depreciation...................... 12,994 14,241
Other..................................................... 23 --
------- -------
Total deferred tax liabilities......................... 13,017 14,241
------- -------
Net deferred tax liability............................. $ 6,663 $ 9,319
======= =======
F-20
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
At December 31, 2000 and 2001, current state income taxes payable of $191
and $79, respectively, was included in other accrued liabilities in the balance
sheet.
At December 31, 2001, the Company has total net operating loss
carryforwards for federal income tax purposes of $6,021 available to offset
future federal taxable income, if any, through 2014.
(9) RELATED PARTY TRANSACTIONS
Included in the combined financial statements for the years ended December
31, 1999, 2000 and 2001, are various related party transactions and balances
primarily with 1) MRMC and affiliates and 2) CF Martin Sulphur, L.P.
For MRMC and affiliates, such transactions consist primarily of (1) LPG
product sales; (2) marine transportation revenues; (3) terminalling revenue and
wharfage fees; (4) fertilizer product sales; (5) LPG product purchases; (6) land
transportation hauling costs; (7) sulfuric acid product purchases; (8) marine
fuel purchases; (9) LPG truck loading costs; (10) overhead allocation expenses;
and (11) interest expense on affiliate balances. For CF Martin Sulphur, L.P.,
such transactions consist primarily of (1) marine transportation revenues, (2)
fertilizer handling fees, (3) product purchase settlements, (4) overhead
allocation reimbursement, and (5) marine crew charge reimbursement.
Significant transactions with these related parties are reflected in the
combined financial statements as follows:
MRMC AND AFFILIATES
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
------ ------ ------
LPG product sales (LPG revenues)........................... $ 3 $1,223 $ 237
Marine transportation revenues (Marine transportation
revenues)................................................ 3,614 3,686 3,999
Terminalling revenue and wharfage fees (Terminalling
revenues)................................................ 709 637 428
Fertilizer product sales (Fertilizer revenues)............. 1,700 1,757 1,531
LPG product purchases (LPG cost of products sold).......... 849 1,079 741
Land transportation hauling costs (LPG cost of products
sold).................................................... 9,178 8,466 5,471
Sulfuric acid product purchases (Fertilizer cost of
products sold)........................................... 1,330 1,375 1,453
Marine fuel purchases (Operating expenses)................. 897 1,710 738
LPG truck loading costs (Operating expenses)............... 318 357 432
Overhead allocation expenses (Selling, general and
administrative expenses)................................. 731 853 759
Interest expense (Interest expense)........................ 5,053 6,111 4,570
F-21
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
CF MARTIN SULPHUR, L.P.
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
------ ------ ------
Marine transportation revenues (Marine transportation
revenues)................................................ -- -- 586
Fertilizer handling fees (Fertilizer revenues)............. -- 15 167
Product purchase settlements (Fertilizer cost of products
sold).................................................... -- 61 (501)
Overhead allocation reimbursement (Selling, general and
administrative expenses)................................. -- 22 202
Marine crew charge reimbursement (Operating expenses)...... -- 134 1,220
(10) FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that MMPP disclose estimated fair
values for its financial instruments. Fair value estimates are set forth below
for the Company's financial instruments. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument:
- Accounts and other receivables, trade and other accounts payable, other
accrued liabilities and due to affiliates -- The carrying amounts
approximate fair value because of the short maturity of these
instruments.
- Long-term debt including current maturities -- The carrying amount
approximates fair value due to the debt having a variable interest rate.
(11) COMMITMENTS AND CONTINGENCIES
Under our marine transportation agreement with CF Martin Sulphur, L.P., we
could be obligated to reimburse CF Martin Sulphur, L.P. for a portion of the
expenditures CF Martin Sulphur, L.P. incurred in connection with reconfiguring a
tug/barge tanker unit to carry molten sulfur. We believe that the risk is remote
that we will ever need to pay any amounts to CF Martin Sulphur, L.P. under this
reimbursement obligation. As of February 25, 2002, our aggregate reimbursement
liability would have been approximately $2.6 million. This amount decreases by
approximately $300,000 annually based on an amortization rate.
From time to time, MMPP is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
MMPP.
F-22
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(12) BUSINESS SEGMENTS
MMPP has four reportable segments: transportation, terminalling, LPG
distribution, and fertilizer. The Company's reportable segments are strategic
business units that offer different products and services. The operating income
of these segments is reviewed by the chief operating decision maker to assess
performance and make business decisions.
OPERATING
REVENUES DEPRECIATION OPERATING
OPERATING INTERSEGMENT AFTER AND INCOME CAPITAL
REVENUES ELIMINATIONS ELIMINATIONS AMORTIZATION (LOSS) EXPENDITURES
--------- ------------ ------------ ------------- --------- ------------
Year ended December 31, 1999:
Marine transportation............. $ 26,118 $ (7,114) $ 19,004 $ 3,044 $ 2,036 $ 7,387
Terminalling...................... 3,908 (920) 2,988 603 (439) 1,642
LPG distribution.................. 125,714 (2,031) 123,683 2,129 4,437 4,843
Fertilizer........................ 27,549 (329) 27,220 1,138 (560) 1,259
Indirect selling, general, and
administrative.................. -- -- -- -- (731) --
-------- -------- -------- ------- ------- -------
Total........................... $183,289 $(10,394) $172,895 $ 6,914 $ 4,743 $15,131
======== ======== ======== ======= ======= =======
Year ended December 31, 2000:
Marine transportation............. $ 32,256 $ (6,196) $ 26,060 $ 3,003 $ 5,395 $ 1,809
Terminalling...................... 4,741 (763) 3,978 457 418 943
LPG distribution.................. 145,851 (2,052) 143,799 1,926 3,880 15
Fertilizer........................ 26,214 (238) 25,976 1,027 624 1,177
Indirect selling, general, and
administrative.................. -- -- -- -- (853) --
-------- -------- -------- ------- ------- -------
Total........................... $209,062 $ (9,249) $199,813 $ 6,413 $ 9,464 $ 3,944
======== ======== ======== ======= ======= =======
Year ended December 31, 2001:
Marine transportation............. $ 28,783 $ (146) $ 28,637 $ 2,500 $ 7,787 $ 3,743
Terminalling...................... 4,368 -- 4,368 266 1,750 1,462
LPG distribution.................. 100,179 (1,564) 98,615 386 1,064 103
Fertilizer........................ 32,513 (1,015) 31,498 970 1,402 921
Indirect selling, general, and
administrative.................. -- -- -- -- (759) --
-------- -------- -------- ------- ------- -------
Total........................... $165,843 $ (2,725) $163,118 $ 4,122 $11,244 $ 6,229
======== ======== ======== ======= ======= =======
Six months ended June 30, 2001:
Marine transportation............. $ 16,412 $ (73) $ 16,339 $ 1,229 $ 4,876 $ 585
Terminalling...................... 2,317 -- 2,317 177 733 --
LPG distribution.................. 62,077 (1,015) 61,062 126 1,416 39
Fertilizer........................ 19,585 (763) 18,822 476 916 539
Indirect selling, general, and
administrative.................. -- -- -- -- (356) --
-------- -------- -------- ------- ------- -------
Total........................... $100,391 $ (1,851) $ 98,540 $ 2,008 $ 7,585 $ 1,163
======== ======== ======== ======= ======= =======
F-23
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
OPERATING
REVENUES DEPRECIATION OPERATING
OPERATING INTERSEGMENT AFTER AND INCOME CAPITAL
REVENUES ELIMINATIONS ELIMINATIONS AMORTIZATION (LOSS) EXPENDITURES
--------- ------------ ------------ ------------- --------- ------------
Six months ended June 30, 2002:
Marine transportation............. $ 11,711 $ (60) $ 11,651 $ 1,418 $ 1,408 $ 75
Terminalling...................... 2,392 -- 2,392 146 918 1,897
LPG distribution.................. 39,007 (628) 38,379 183 943 15
Fertilizer........................ 16,149 (231) 15,918 469 1,352 29
Indirect selling, general, and
administrative.................. -- -- -- -- (364) --
-------- -------- -------- ------- ------- -------
Total........................... $ 69,259 $ (919) $ 68,340 $ 2,216 $ 4,257 $ 2,016
======== ======== ======== ======= ======= =======
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1999 2000 2001 2001 2002
------- ------- ------- ------- -------
Operating income............................. $ 4,743 $ 9,464 $11,244 $ 7,585 $ 4,257
Equity in earnings (losses) of unconsolidated
entities................................... (110) 192 1,477 698 1,470
Interest expense............................. (7,049) (7,949) (5,390) (2,895) (2,039)
Other, net................................... 296 70 82 41 15
------- ------- ------- ------- -------
Income (loss) before income taxes.......... $(2,120) $ 1,777 $ 7,413 $ 5,429 $ 3,703
======= ======= ======= ======= =======
DECEMBER 31, JUNE 30,
------------------ --------
2000 2001 2002
-------- ------- --------
Total assets:
Marine transportation..................................... $ 42,675 $42,962 $41,258
LPG distribution.......................................... 33,874 21,387 15,156
Fertilizer................................................ 20,649 19,703 19,386
Terminalling.............................................. 5,186 4,901 8,890
-------- ------- -------
Total assets........................................... $102,384 $88,953 $84,690
======== ======= =======
Revenues from one customer in the LPG distribution segment were $14,344,
$23,302 and $16,246 for the years ended December 31, 1999, 2000 and 2001,
respectively.
F-24
MARTIN MIDSTREAM PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(13) NON-CASH TRANSACTIONS
During 2000 MMPP transferred property, plant and equipment with a net book
value of $2,902 to affiliates of MRMC recording an offsetting amount to reduce
due to affiliates. In November 2000, MMPP contributed the following assets and
liabilities to acquire a 49.5% non-controlling limited partnership interest in
CF Martin Sulphur, L.P.:
Accounts and other receivables.............................. $ 8,314
Inventories................................................. 3,176
Other current assets........................................ 97
Net property, plant, and equipment.......................... 22,967
Other assets................................................ 29
Accounts payable and accrued expenses....................... (7,575)
Long-term debt, including current installments.............. (30,014)
--------
$ (3,006)
========
F-25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Martin Midstream GP LLC:
We have audited the accompanying balance sheet of Martin Midstream Partners
L.P. as of June 26, 2002. This balance sheet is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Martin Midstream Partners L.P. at
June 26, 2002, in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
Shreveport, Louisiana
June 26, 2002
F-26
MARTIN MIDSTREAM PARTNERS L.P.
BALANCE SHEET
JUNE 26, 2002
ASSETS
Cash........................................................ $1,000
------
PARTNERS' EQUITY
Limited partner's equity.................................... $ 980
General partner's equity.................................... 20
------
Total partners' equity............................ $1,000
======
See accompanying note to the balance sheet.
F-27
MARTIN MIDSTREAM PARTNERS L.P.
NOTE TO BALANCE SHEET
JUNE 26, 2002
(1) NATURE OF OPERATIONS
Martin Midstream Partners L.P. (the Partnership) is a Delaware limited
partnership formed on June 21, 2002, to acquire certain assets, liabilities, and
operations of Martin Resource Management Corporation (MRMC) and its
subsidiaries. The Partnership's general partner is Martin Midstream GP LLC.
The Partnership intends to offer common units, representing limited partner
interests, pursuant to a public offering and to concurrently issue common units
and subordinated units, representing additional limited partner interests, to
affiliates of MRMC.
Martin Midstream GP LLC, as general partner, contributed $20, and an
affiliate of MRMC contributed $980, to the Partnership on June 26, 2002. There
have been no other transactions involving the Partnership as of June 26, 2002.
F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Martin Midstream GP LLC:
We have audited the accompanying balance sheet of Martin Midstream GP LLC
as of June 26, 2002. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Martin Midstream GP LLC at June 26,
2002, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Shreveport, Louisiana
June 26, 2002
F-29
MARTIN MIDSTREAM GP LLC
BALANCE SHEET
JUNE 26, 2002
ASSETS
Cash........................................................ $ 980
Investment in Martin Midstream Partners L.P. ............... 20
------
Total assets...................................... $1,000
======
OWNER'S EQUITY
Owner's equity.............................................. $1,000
======
See accompanying note to the balance sheet.
F-30
MARTIN MIDSTREAM GP LLC
NOTE TO BALANCE SHEET
JUNE 26, 2002
(1) NATURE OF OPERATIONS
Martin Midstream GP LLC (the General Partner) is a Delaware limited
liability company formed on June 21, 2002 to become the general partner of
Martin Midstream Partners L.P. (the Partnership). The General Partner owns a 2%
general partner interest in the Partnership.
On June 26, 2002, affiliates of Martin Resource Management Corporation
contributed $1,000 to the General Partner in exchange for a 100% ownership
interest.
The General Partner has invested $20 in the Partnership. There have been no
other transactions involving the General Partner as of June 26, 2002.
F-31
APPENDIX A
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
MARTIN MIDSTREAM PARTNERS L.P.
TABLE OF CONTENTS
ARTICLE I -- DEFINITIONS
SECTION 1.1 Definitions................................................. A-1
SECTION 1.2 Construction................................................ A-15
ARTICLE II -- ORGANIZATION
SECTION 2.1 Formation................................................... A-16
SECTION 2.2 Name........................................................ A-16
SECTION 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices..................................................... A-16
SECTION 2.4 Purpose and Business........................................ A-16
SECTION 2.5 Powers...................................................... A-17
SECTION 2.6 Power of Attorney........................................... A-17
SECTION 2.7 Term........................................................ A-18
SECTION 2.8 Title to Partnership Assets................................. A-18
ARTICLE III -- RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability..................................... A-18
SECTION 3.2 Management of Business...................................... A-18
SECTION 3.3 Outside Activities of the Limited Partners.................. A-18
SECTION 3.4 Rights of Limited Partners.................................. A-19
ARTICLE IV -- CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
SECTION 4.1 Certificates................................................ A-19
SECTION 4.2 Mutilated, Destroyed, Lost or Stolen Certificates........... A-20
SECTION 4.3 Record Holders.............................................. A-20
SECTION 4.4 Transfer Generally.......................................... A-21
SECTION 4.5 Registration and Transfer of Limited Partner Interests...... A-21
SECTION 4.6 Transfer of the General Partner's General Partner
Interest.................................................... A-22
SECTION 4.7 Transfer of Incentive Distribution Rights................... A-22
SECTION 4.8 Restrictions on Transfers................................... A-22
SECTION 4.9 Citizenship Certificates; Non-citizen Assignees............. A-23
SECTION 4.10 Redemption of Partnership Interests of Non-citizen
Assignees................................................... A-24
ARTICLE V -- CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions................................ A-25
SECTION 5.2 Contributions by the General Partner and its Affiliates..... A-25
SECTION 5.3 Contributions by Initial Limited Partners and Distributions
to the General Partner...................................... A-25
SECTION 5.4 Interest and Withdrawal..................................... A-26
SECTION 5.5 Capital Accounts............................................ A-26
SECTION 5.6 Issuances of Additional Partnership Securities.............. A-28
SECTION 5.7 Limitations on Issuance of Additional Partnership
Securities.................................................. A-29
SECTION 5.8 Conversion of Subordinated Units............................ A-31
SECTION 5.9 Limited Preemptive Right.................................... A-33
SECTION 5.10 Splits and Combinations..................................... A-33
SECTION 5.11 Fully Paid and Non-Assessable Nature of Limited Partner
Interests................................................... A-34
A-i
ARTICLE VI -- ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes.................... A-34
SECTION 6.2 Allocations for Tax Purposes................................ A-40
SECTION 6.3 Requirement and Characterization of Distributions;
Distributions to Record Holders............................. A-41
SECTION 6.4 Distributions of Available Cash from Operating Surplus...... A-42
SECTION 6.5 Distributions of Available Cash from Capital Surplus........ A-43
SECTION 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels......................................... A-43
SECTION 6.7 Special Provisions Relating to the Holders of Subordinated
Units....................................................... A-44
SECTION 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights......................................... A-44
SECTION 6.9 Entity-Level Taxation....................................... A-44
ARTICLE VII -- MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management.................................................. A-45
SECTION 7.2 Certificate of Limited Partnership.......................... A-46
SECTION 7.3 Restrictions on the General Partner's Authority............. A-47
SECTION 7.4 Reimbursement of the General Partner........................ A-47
SECTION 7.5 Outside Activities.......................................... A-48
SECTION 7.6 Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain
Restrictions on the General Partner......................... A-49
SECTION 7.7 Indemnification............................................. A-50
SECTION 7.8 Liability of Indemnitees.................................... A-51
SECTION 7.9 Resolution of Conflicts of Interest......................... A-52
SECTION 7.10 Other Matters Concerning the General Partner................ A-53
SECTION 7.11 Purchase or Sale of Partnership Securities.................. A-53
SECTION 7.12 Registration Rights of the General Partner and its
Affiliates.................................................. A-54
SECTION 7.13 Reliance by Third Parties................................... A-55
ARTICLE VIII -- BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting...................................... A-56
SECTION 8.2 Fiscal Year................................................. A-56
SECTION 8.3 Reports..................................................... A-56
ARTICLE IX -- TAX MATTERS
SECTION 9.1 Tax Returns and Information................................. A-56
SECTION 9.2 Tax Elections............................................... A-56
SECTION 9.3 Tax Controversies........................................... A-57
SECTION 9.4 Withholding................................................. A-57
ARTICLE X -- ADMISSION OF PARTNERS
SECTION 10.1 Admission of Initial Limited Partners....................... A-57
SECTION 10.2 Admission of Substituted Limited Partner.................... A-57
SECTION 10.3 Admission of Successor General Partner...................... A-58
SECTION 10.4 Admission of Additional Limited Partners.................... A-58
SECTION 10.5 Amendment of Agreement and Certificate of Limited
Partnership................................................. A-58
A-ii
ARTICLE XI -- WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1 Withdrawal of the General Partner........................... A-58
SECTION 11.2 Removal of the General Partner.............................. A-60
SECTION 11.3 Interest of Departing Partner and Successor General
Partner..................................................... A-60
SECTION 11.4 Termination of Subordination Period, Conversion of
Subordinated Units and Extinguishment of Cumulative Common
Unit Arrearages............................................. A-61
SECTION 11.5 Withdrawal of Limited Partners.............................. A-61
ARTICLE XII -- DISSOLUTION AND LIQUIDATION
SECTION 12.1 Dissolution................................................. A-62
SECTION 12.2 Continuation of the Business of the Partnership After
Dissolution................................................. A-62
SECTION 12.3 Liquidator.................................................. A-62
SECTION 12.4 Liquidation................................................. A-63
SECTION 12.5 Cancellation of Certificate of Limited Partnership.......... A-63
SECTION 12.6 Return of Contributions..................................... A-64
SECTION 12.7 Waiver of Partition......................................... A-64
SECTION 12.8 Capital Account Restoration................................. A-64
ARTICLE XIII -- AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1 Amendment to be Adopted Solely by the General Partner....... A-64
SECTION 13.2 Amendment Procedures........................................ A-65
SECTION 13.3 Amendment Requirements...................................... A-66
SECTION 13.4 Special Meetings............................................ A-66
SECTION 13.5 Notice of a Meeting......................................... A-66
SECTION 13.6 Record Date................................................. A-67
SECTION 13.7 Adjournment................................................. A-67
SECTION 13.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes..................................................... A-67
SECTION 13.9 Quorum...................................................... A-67
SECTION 13.10 Conduct of a Meeting........................................ A-67
SECTION 13.11 Action Without a Meeting.................................... A-68
SECTION 13.12 Voting and Other Rights..................................... A-68
ARTICLE XIV -- MERGER
SECTION 14.1 Authority................................................... A-69
SECTION 14.2 Procedure for Merger or Consolidation....................... A-69
SECTION 14.3 Approval by Limited Partners of Merger or Consolidation..... A-69
SECTION 14.4 Certificate of Merger....................................... A-70
SECTION 14.5 Effect of Merger............................................ A-70
ARTICLE XV -- RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 Right to Acquire Limited Partner Interests.................. A-71
ARTICLE XVI -- GENERAL PROVISIONS
SECTION 16.1 Addresses and Notices....................................... A-72
SECTION 16.2 Further Action.............................................. A-73
SECTION 16.3 Binding Effect.............................................. A-73
SECTION 16.4 Integration................................................. A-73
SECTION 16.5 Creditors................................................... A-73
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SECTION 16.6 Waiver...................................................... A-73
SECTION 16.7 Counterparts................................................ A-73
SECTION 16.8 Applicable Law.............................................. A-73
SECTION 16.9 Invalidity of Provisions.................................... A-73
SECTION 16.10 Consent of Partners......................................... A-73
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FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
MARTIN MIDSTREAM PARTNERS L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP OF MARTIN MIDSTREAM PARTNERS L.P.,
dated as of is entered into by and among Martin Midstream GP LLC, a
Delaware limited liability company, as the General Partner, and Martin Resource
LLC, a Delaware limited liability company, as the Organizational Limited
Partner, together with any other Persons who become Partners in the Partnership
or parties hereto as provided herein. In consideration of the covenants,
conditions and agreements contained herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following definitions shall be for all
purposes, unless otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value
of an Adjusted Property that is attributable to positive adjustments made to
such Carrying Value as a result of Book-Up Events. For purposes of determining
the extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments after
such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the
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amount of all losses and deductions that, as of the end of such fiscal year, are
reasonably expected to be allocated to such Partner in subsequent years under
Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section
1.751-1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end
of such fiscal year, are reasonably expected to be made to such Partner in
subsequent years in accordance with the terms of this Agreement or otherwise to
the extent they exceed offsetting increases to such Partner's Capital Account
that are reasonably expected to occur during (or prior to) the year in which
such distributions are reasonably expected to be made (other than increases as a
result of a minimum gain chargeback pursuant to Section 6.1(d)(i) or
6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to
comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The "Adjusted Capital Account"
of a Partner in respect of a General Partner Interest, a Common Unit, a
Subordinated Unit or an Incentive Distribution Right or any other specified
interest in the Partnership shall be the amount which such Adjusted Capital
Account would be if such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest in the Partnership were the
only interest in the Partnership held by such Partner from and after the date on
which such General Partner Interest, Common Unit, Subordinated Unit, Incentive
Distribution Right or other interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings with respect to such period and (ii) any net reduction in
cash reserves for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made during such period, and (b) plus (i)
any net decrease in Working Capital Borrowings with respect to such period, and
(ii) any net increase in cash reserves for Operating Expenditures with respect
to such period required by any debt instrument for the repayment of principal,
interest or premium. Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of Operating
Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to the fair market value of
each Contributed Property.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership of Martin Midstream Partners L.P., as it may be amended,
supplemented or restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
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"Associate" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that are necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such Quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such Quarter
if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to
the Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Business" has the meaning assigned to such term in the Omnibus Agreement.
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States of
America or the State of Texas shall not be regarded as a Business Day.
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"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by such Partner from and after
the date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution Agreement, or any payment made by
the General Partner to the Partnership described in Section 5.2(c).
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, marine
transportation, storage facilities and logistics assets, and related assets), in
each case if such addition, improvement, acquisition or construction is made to
increase the operating capacity or revenues of the Partnership Group from the
operating capacity or revenues of the Partnership Group existing immediately
prior to such addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
"Certificate" means a certificate (i) substantially in the form of Exhibit
A to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as such Certificate of Limited Partnership may be amended, supplemented
or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which a Limited Partner or an
Assignee certifies that he (and if he is a nominee holding for the account of
another Person, that to the best of his knowledge such other Person) is an
Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
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"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
any successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees and of the
General Partner, and having the rights and obligations specified with respect to
Common Units in this Agreement. The term "Common Unit" does not refer to a
Subordinated Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Conflicts Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are not (a)
security holders, officers or employees of the General Partner, (b) officers,
directors or employees of any Affiliate of the General Partner or (c) holders of
any ownership interest in the Partnership Group other than Common Units and who
also meet the independence standards required to serve on an audit committee of
a board of directors by the National Securities Exchange on which the Common
Units are listed for trading.
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Contribution Agreement" means that certain Contribution, Conveyance and
Assumption Agreement, dated as of the Closing Date, among the General Partner,
the Partnership, the Operating Partnership, Martin Resource Management
Corporation and certain other Affiliates of Martin Resource Management
Corporation, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
"Controlled Person" means any corporation or partnership of which the
Partnership or any Subsidiary owns or controls an interest in excess of 25%.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means 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" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Depositary" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
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"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person who is (i) qualified to own interests in
real property in jurisdictions in which any Group Member does business or
proposes to do business from time to time, and whose status as a Limited Partner
or Assignee does not or would not subject such Group Member to a significant
risk of cancellation or forfeiture of any of its properties or any interest
therein and (ii) is not a Non-citizen.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.55 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on December 31,
2002, it means the product of $0.55 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
91), subject to adjustment in accordance with Sections 6.6 and 6.9.
"Fully Diluted Basis" means, when calculating the number of Outstanding
Units for any period, a basis that includes, in addition to the Outstanding
Units, all Partnership Securities and options, rights, warrants and appreciation
rights relating to an equity interest in the Partnership (a) that are
convertible into or exercisable or exchangeable for Units that are senior to or
pari passu with the Subordinated Units, (b) whose conversion, exercise or
exchange price is less than the Current Market Price on the date of such
calculation, (c) that may be converted into or exercised or exchanged for such
Units prior to or during the Quarter following the end of the last Quarter
contained in the period for which the calculation is being made without the
satisfaction of any contingency beyond the control of the holder other than the
payment of consideration and the compliance with administrative mechanics
applicable to such conversion, exercise or exchange, and (d) were not converted
into or exercised or exchanged for such Units prior to the end of the last
quarter referred to in clause (c) above; provided that for purposes of
determining the number of Outstanding Units on a Fully Diluted Basis when
calculating whether the Subordination Period has ended or Subordinated Units are
entitled to convert into Common Units pursuant to Section 5.8, such Partnership
Securities, options, rights, warrants and appreciation rights shall be deemed to
have been Outstanding Units only for the four Quarters that comprise the last
four Quarters of the measurement period; provided, further, that if
consideration will be paid to any Group Member in connection with such
conversion, exercise or exchange, the number of Units to be included in such
calculation shall be that number equal to the difference between (i) the number
of Units issuable upon such conversion, exercise or exchange and (ii) the number
of Units which such consideration would purchase at the Current Market Price.
"General Partner" means Martin GP LLC and its successors and permitted
assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
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"Incentive Distribution Right" means a non-voting Limited Partner Interest
issued to the General Partner in connection with the transfer of all of its
interest in the Operating Partnership and Martin Operating GP LLC pursuant to
Section 5.2, which Partnership Interest will confer upon the holder thereof only
the rights and obligations specifically provided in this Agreement with respect
to Incentive Distribution Rights (and no other rights otherwise available to or
other obligations of a holder of a Partnership Interest). Notwithstanding
anything in this Agreement to the contrary, the holder of an Incentive
Distribution Right shall not be entitled to vote such Incentive Distribution
Right on any Partnership matter except as may otherwise be required by law.
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner and the Underwriters,
in each case upon being admitted to the Partnership in accordance with Section
10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, and (ii) sales or other dispositions of
assets as part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Departing Partner upon the change of its status from
General Partner to Limited Partner pursuant to Section 11.3 or (b) solely for
purposes of Articles V, VI, VII and IX, each Assignee; provided, however, that
when the term "Limited Partner" is used herein in the context of any vote or
other approval, including without limitation Articles XIII and XIV, such
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term shall not, solely for such purpose, include any holder of an Incentive
Distribution Right except as may otherwise be required by law.
"Limited Partner Interest" means the ownership interest of a Limited
Partner or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.50 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on December 31,
2002, it means the product of $0.50 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
91), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
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determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Non-citizen" means (1) any person (including any individual, a
partnership, a corporation or an association) who is not a United States
citizen, within the meaning of Section 2 of the Shipping Act, 1916, as amended
or as it may hereafter be amended; (2) any foreign government or representative
thereof; (3) any corporation, the president, chief executive officer or chairman
of the board of directors of which is a Non-citizen, or of which more than a
minority or the number of its directors necessary to constitute a quorum are
Non-citizens; (4) any corporation organized under the laws of any foreign
government; (5) any corporation of which 25% or greater interest is owned
beneficially or of record, or may be voted by, a Non-citizen or Non-citizens, or
which by any other means whatsoever is controlled by or in which control is
permitted to be exercised by a Non-citizen or Non-citizens (the General Partner
being authorized to determine reasonably the meaning of "control" for this
purpose); (6) any partnership or association which is controlled by a
Non-citizen or Non-citizens; or (7) any person (including an individual,
partnership, corporation or association) who acts as representative of or
fiduciary for any person described in clauses (1) through (6) above.
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its 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 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditure (including, without limitation, any expenditure described in Section
705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury
Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b).
"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing
Date, among Martin Resource Management Corporation, the General Partner, the
Partnership and the Operating Partnership.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
repayment of Working Capital Borrowings, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness other than Working Capital Borrowings shall not constitute
Operating Expenditures; and
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(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"Operating Partnership" means Martin Operating Partnership, L.P., a
Delaware limited partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated
Partnership Agreement of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $8.5 million plus (ii) all cash and cash
equivalents of the Partnership Group on hand as of the close of business on
the Closing Date, (iii) all cash receipts of the Partnership Group for the
period beginning on the Closing Date and ending with the last day of such
period, other than cash receipts from Interim Capital Transactions (except
to the extent specified in Section 6.5) and (iv) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" means the date or dates on which any Common Units are
sold by the Partnership to the Underwriters upon exercise of the Over-Allotment
Option.
"Organizational Limited Partner" means Martin Resource LLC in its capacity
as the organizational limited partner of the Partnership pursuant to this
Agreement.
"Outstanding" means, with respect to Partnership Securities, all
Partnership Securities that are issued by the Partnership and reflected as
outstanding on the Partnership's books and records as of the date of
determination; provided, however, that if at any time any Person or Group (other
than the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates, (ii) to any Person or Group
who acquired 20% or more of any
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Outstanding Partnership Securities of any class then Outstanding directly or
indirectly from a Person or Group described in clause (i) provided that the
General Partner shall have notified such Person or Group in writing that such
limitation shall not apply, or (iii) to any Person or Group who acquired 20% or
more of any Partnership Securities issued by the Partnership with the prior
approval of the Board of Directors of the General Partner; provided further,
that the provisions contained herein may be amended by the General Partner as
provided in Section 13.1 hereof.
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units of any other class or
series that have the right (i) to receive distributions of Available Cash from
Operating Surplus pursuant to each of subclauses (a)(i) and (a)(ii) of Section
6.4 in the same order of priority with respect to the participation of Common
Units in such distributions or (ii) to participate in allocations of Net
Termination Gain pursuant to Section 6.1(c)(i)(B) in the same order of priority
with the Common Units, in each case regardless of whether the amounts or value
so distributed or allocated on each Parity Unit equals the amount or value so
distributed or allocated on each Common Unit. Units whose participation in such
(i) distributions of Available Cash from Operating Surplus and (ii) allocations
of Net Termination Gain are subordinate in order of priority to such
distributions and allocations on Common Units shall not constitute Parity Units
even if such Units are convertible under certain circumstances into Common Units
or Parity Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Martin Midstream Partners L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and
any Subsidiary of any such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of any date of determination (a) as to the
General Partner (in its capacity as General Partner without reference to any
Limited Partner Interests held by it), 2.0%, (b) as to any Unitholder or
Assignee holding Units, the product obtained by multiplying (i) 98% less the
percentage applicable to paragraph (c) by (ii) the quotient obtained by dividing
(A) the number of Units held by such Unitholder or Assignee by (B) the total
number of all Outstanding Units, and (c) as to the holders of additional
Partnership Securities issued by the Partnership in accordance with Section 5.6,
the percentage established as a part of such issuance. The Percentage Interest
with respect to an Incentive Distribution Right shall at all times be zero.
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"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the
date for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter,
or, with respect to the first fiscal quarter after the Closing Date, the portion
of such fiscal quarter after the Closing Date, of the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-91706) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over (b) the sum of the General
Partner's Share of Additional Book Basis Derivative Items with respect to the
General Partner Interest for each prior taxable period, and (iii) with respect
to the holders of Incentive Distribution Rights, the excess of (a) the Net
Positive Adjustments of the holders of Incentive
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Distribution Rights as of the end of such period over (b) the sum of the Share
of Additional Book Basis Derivative Items of the holders of the Incentive
Distribution Rights for each prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation
of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.625 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on December 31,
2002, it means the product of $0.625 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments
of the Partners holding the Incentive Distribution Rights as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement. The term "Subordinated Unit" as used herein does not include a Common
Unit or Parity Unit. A Subordinated Unit that is convertible into a Common Unit
or a Parity Unit shall not constitute a Common Unit or Parity Unit until such
conversion occurs.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after September 30, 2009 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units and
any other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
(or portion thereof for the first fiscal quarter after the Closing Date) on
all Outstanding Common Units and Subordinated Units and any other
Outstanding Units that are senior or equal in right of distribution to the
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Common Units
and Subordinated Units and any other Units that are senior
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or equal in right of distribution to the Subordinated Units that were
Outstanding during such periods on a Fully Diluted Basis, plus the related
distribution on the General Partner Interest, during such periods and (ii)
there are no Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of
such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2(b).
"Third Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(F).
"Third Target Distribution" means $0.75 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on December 31,
2002, it means the product of $0.75 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated
among the Underwriters, the Partnership, the General Partner, the Operating
Partnership and Martin Resource Management Corporation, providing for the
purchase of Common Units by such Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and
shall include Common Units and Subordinated Units but shall not include (i) a
General Partner Interest or (ii) Incentive Distribution Rights.
"Unitholders" means the holders of Units.
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"Unit Majority" means, (x) during the Subordination Period, at least a
majority of the Outstanding Common Units (excluding Common Units owned by the
General Partner and its Affiliates) voting as a class and at least a majority of
the Outstanding Subordinated Units voting as a class, and thereafter, (y) at
least a majority of the Outstanding Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 5.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the
Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit 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 an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"U.S. Maritime Company" means any corporation or other entity which,
directly or indirectly (1) owns or operates vessels in the United States
coastwise trade, intercoastal trade or noncontiguous domestic trade; (2) owns or
operates any vessel built with construction differential subsidies from the
United States Government (or any agency thereof); (3) is a party to an operating
differential subsidy agreement with the United States Government (or any agency
thereof) on account of ships owned, chartered or operated by it; (4) owns any
vessel on which there is a preferred mortgage issued in connection with Title XI
of the Merchant Marine Act, 1936, as amended; (5) operates vessels under
agreement with the United States Government (or any agency thereof); (6)
conducts any activity, takes any action or receives any benefit which would be
adversely affected under any provision of the U.S. maritime, shipping or vessel
documentation laws by virtue of Non-citizen ownership of its stock; or (7)
maintains a Capital Construction Fund under the provisions of Section 607 of the
Merchant Marine Act of 1936, as amended.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Borrowings" means borrowings used solely for working
capital purposes or to pay distributions to Partners made pursuant to a credit
facility or other arrangement to the extent such borrowings are required to be
reduced to a relatively small amount each year (or for the year in which the
Initial Offering is consummated, the 12-month period beginning on the Closing
Date) for an economically meaningful period of time.
SECTION 1.2 Construction. Unless the context requires otherwise: (a) any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa; (b) references to Articles and Sections
refer to Articles and Sections of this Agreement; and (c) the term "include" or
"includes" means includes, without limitation, and "including" means including,
without limitation.
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ARTICLE II
ORGANIZATION
SECTION 2.1 Formation. The General Partner and the Organizational Limited
Partner have previously formed the Partnership as a limited partnership pursuant
to the provisions of the Delaware Act and hereby amend and restate the original
Agreement of Limited Partnership of Martin Midstream Partners L.P. in its
entirety. This amendment and restatement shall become effective on the date of
this Agreement. Except as expressly provided to the contrary in this Agreement,
the rights, duties (including fiduciary duties), liabilities and obligations of
the Partners and the administration, dissolution and termination of the
Partnership shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all purposes and a
Partner has no interest in specific Partnership property.
SECTION 2.2 Name. The name of the Partnership shall be "Martin Midstream
Partners L.P." The Partnership's business may be conducted under any other name
or names deemed necessary or appropriate by the General Partner in its sole
discretion, including the name of the General Partner. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purpose of complying with the
laws of any jurisdiction that so requires. The General Partner in its discretion
may change the name of the Partnership at any time and from time to time and
shall notify the Limited Partners of such change in the next regular
communication to the Limited Partners.
SECTION 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices. Unless and until changed by the General Partner, the registered office
of the Partnership in the State of Delaware shall be located at 1209 Orange
Street, Wilmington, Delaware 19801, and the registered agent for service of
process on the Partnership in the State of Delaware at such registered office
shall be The Corporation Trust Company. The principal office of the Partnership
shall be located at 4200 Stone Road, Kilgore, Texas 75662 or such other place as
the General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate. The address of the General Partner shall be 4200 Stone Road,
Kilgore, Texas 75662 or such other place as the General Partner may from time to
time designate by notice to the Limited Partners.
SECTION 2.4 Purpose and Business. The purpose and nature of the business
to be conducted by the Partnership shall be to (a) own the equity of the general
partner of the Operating Partnership and to serve as a limited partner of the
Operating Partnership and, in connection therewith, to exercise all the rights
and powers conferred upon the Partnership as a partner of the Operating
Partnership pursuant to the Operating Partnership Agreement or otherwise, (b)
engage directly in, or enter into or form any corporation, partnership, joint
venture, limited liability company or other arrangement to engage indirectly in,
any business activity that the Operating Partnership is permitted to engage in
by the Operating Partnership Agreement or that its subsidiaries are permitted to
engage in by their limited liability company or partnership agreements and, in
connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity,
(c) engage directly in, or enter into or form any corporation, partnership,
joint venture, limited liability company or other arrangement to engage
indirectly in, any business activity that is approved by the General Partner and
which lawfully may be conducted by a limited partnership organized pursuant to
the Delaware Act and, in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements relating to
such business activity; provided, however, that the General Partner reasonably
determines, as of the date of the acquisition or commencement of such activity,
that such activity (i) generates "qualifying income" (as such term is defined
pursuant to Section 7704 of the Code) or a Subsidiary or a Partnership activity
that generates qualifying income or (ii) enhances the operations of an activity
of the Operating Partnership, and (d) do anything necessary or appropriate to
the foregoing, including the making of capital contributions or loans to a Group
Member. The General Partner has no
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obligation or duty to the Partnership, the Limited Partners or the Assignees to
propose or approve, and in its discretion may decline to propose or approve, the
conduct by the Partnership of any business.
SECTION 2.5 Powers. The Partnership shall be empowered to do any and all
acts and things necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the purposes and business
described in Section 2.4 and for the protection and benefit of the Partnership.
SECTION 2.6 Power of Attorney. Each Limited Partner and each Assignee
hereby constitutes and appoints the General Partner and, if a Liquidator shall
have been selected pursuant to Section 12.3, the Liquidator (and any successor
to the Liquidator by merger, transfer, assignment, election or otherwise) and
each of their authorized officers and attorneys-in-fact, as the case may be,
with full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and stead,
to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XIII
or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each Limited Partner or Assignee hereby agrees to be bound by any
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representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and each Limited Partner or Assignee
hereby waives, to the maximum extent permitted by law, any and all defenses that
may be available to contest, negate or disaffirm the action of the General
Partner or the Liquidator taken in good faith under such power of attorney. Each
Limited Partner or Assignee shall execute and deliver to the General Partner or
the Liquidator, within 15 days after receipt of the request therefor, such
further designation, powers of attorney and other instruments as the General
Partner or the Liquidator deems necessary to effectuate this Agreement and the
purposes of the Partnership.
SECTION 2.7 Term. The term of the Partnership commenced upon the filing
of the Certificate of Limited Partnership in accordance with the Delaware Act
and shall continue in existence until the dissolution of the Partnership in
accordance with the provisions of Article XII. The existence of the Partnership
as a separate legal entity shall continue until the cancellation of the
Certificate of Limited Partnership as provided in the Delaware Act.
SECTION 2.8 Title to Partnership Assets. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner, one or more of its Affiliates or one or more nominees, as the General
Partner may determine. The General Partner hereby declares and warrants that any
Partnership assets for which record title is held in the name of the General
Partner or one or more of its Affiliates or one or more nominees shall be held
by the General Partner or such Affiliate or nominee for the use and benefit of
the Partnership in accordance with the provisions of this Agreement; provided,
however, that the General Partner shall use reasonable efforts to cause record
title to such assets (other than those assets in respect of which the General
Partner determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be vested in the
Partnership as soon as reasonably practicable; provided, further, that, prior to
the withdrawal or removal of the General Partner or as soon thereafter as
practicable, the General Partner shall use reasonable efforts to effect the
transfer of record title to the Partnership and, prior to any such transfer,
will provide for the use of such assets in a manner satisfactory to the General
Partner. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which record
title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability. The Limited Partners and the
Assignees shall have no liability under this Agreement except as expressly
provided in this Agreement or the Delaware Act.
SECTION 3.2 Management of Business. No Limited Partner or Assignee, in
its capacity as such, shall participate in the operation, management or control
(within the meaning of the Delaware Act) of the Partnership's business, transact
any business in the Partnership's name or have the power to sign documents for
or otherwise bind the Partnership. Any action taken by any Affiliate of the
General Partner or any officer, director, employee, manager, member, general
partner, agent or trustee of the General Partner or any of its Affiliates, or
any officer, director, employee, manager, member, general partner, agent or
trustee of a Group Member, in its capacity as such, shall not be deemed to be
participation in the control of the business of the Partnership by a limited
partner of the Partnership (within the meaning of Section 17-303(a) of the
Delaware Act) and shall not affect, impair or eliminate the limitations on the
liability of the Limited Partners or Assignees under this Agreement.
SECTION 3.3 Outside Activities of the Limited Partners. Subject to the
provisions of Section 7.5 and the Omnibus Agreement, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
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Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
SECTION 3.4 Rights of Limited Partners. In addition to other rights
provided by this Agreement or by applicable law, and except as limited by
Section 3.4(b), each Limited Partner shall have the right, for a purpose
reasonably related to such Limited Partner's interest as a limited partner in
the Partnership, upon reasonable written demand and at such Limited Partner's
own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
SECTION 4.1 Certificates. Upon the Partnership's issuance of Common Units
or Subordinated Units to any Person, the Partnership shall issue one or more
Certificates in the name of such Person evidencing the number of such Units
being so issued. In addition, (a) upon the General Partner's request, the
Partnership shall issue to it one or more Certificates in the name of the
General Partner evidencing its interests in the Partnership and (b) upon the
request of any Person owning Incentive Distribution Rights or any other
Partnership Securities other than Common Units or Subordinated Units, the
Partnership shall issue to such Person one or more certificates evidencing such
Incentive Distribution Rights or other Partnership Securities other than Common
Units or Subordinated Units. Certificates shall be executed on behalf of the
Partnership by the Chairman of the Board, President or any Vice President and
the Secretary or any Assistant Secretary of the General Partner. No Common Unit
Certificate shall be valid for any purpose until it has been countersigned by
the Transfer Agent; provided, however, that if the General Partner elects to
issue Common Units in global form, the Common Unit Certificates shall be valid
upon
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receipt of a certificate from the Transfer Agent certifying that the Common
Units have been duly registered in accordance with the directions of the
Partnership and the Underwriters. Subject to the requirements of Section 6.7(b),
the Partners holding Certificates evidencing Subordinated Units may exchange
such Certificates for Certificates evidencing Common Units on or after the date
on which such Subordinated Units are converted into Common Units pursuant to the
terms of Section 5.8.
SECTION 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall countersign
a new Certificate in place of any Certificate previously issued if the Record
Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the General
Partner has notice that the Certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the General
Partner a bond, in form and substance satisfactory to the General Partner,
with surety or sureties and with fixed or open penalty as the General
Partner may reasonably direct, in its sole discretion, to indemnify the
Partnership, the Partners, the General Partner and the Transfer Agent
against any claim that may be made on account of the alleged loss,
destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
General Partner.
If a Limited Partner or Assignee fails to notify the General Partner within
a reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the General Partner may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) reasonably connected therewith.
SECTION 4.3 Record Holders. The Partnership shall be entitled to
recognize the Record Holder as the Partner or Assignee with respect to any
Partnership Interest and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such Partnership Interest on the part
of any other Person, regardless of whether the Partnership shall have actual or
other notice thereof, except as otherwise provided by law or any applicable
rule, regulation, guideline or requirement of any National Securities Exchange
on which such Partnership Interests are listed for trading. Without limiting the
foregoing, when a Person (such as a broker, dealer, bank, trust company or
clearing corporation or an agent of any of the foregoing) is acting as nominee,
agent or in some other representative capacity for another Person in acquiring
and/or holding Partnership Interests, as between the Partnership on the one
hand, and such other Persons on the other, such representative Person (a) shall
be the Partner or Assignee (as the case may be) of record and beneficially, (b)
must execute and deliver a Transfer Application and (c) shall be bound by this
Agreement and shall have the rights and obligations of a Partner or Assignee (as
the case may be) hereunder and as, and to the extent, provided for herein.
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SECTION 4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the general partner of the Partnership, by which the holder of a Limited
Partner Interest assigns such Limited Partner Interest to another Person who is
or becomes a Limited Partner or an Assignee, and includes a sale, assignment,
gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the membership
interests of the General Partner.
SECTION 4.5 Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests. The
Transfer Agent is hereby appointed registrar and transfer agent for the purpose
of registering Common Units and transfers of such Common Units as herein
provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent shall countersign
and deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more new
Certificates evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly authorized
in writing). No charge shall be imposed by the Partnership for such transfer;
provided, that as a condition to the issuance of any new Certificate under this
Section 4.5, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed with respect
thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests and
the admission of any new Limited Partner shall not constitute an amendment to
this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested admission
as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and
to have executed this Agreement, (iii) represented and warranted that such
transferee has the right, power and authority and, if an individual, the
capacity to enter into this Agreement, (iv) granted the powers of attorney set
forth in this Agreement and (v) given the consents and approvals and made the
waivers contained in this Agreement.
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(f) The General Partner and its Affiliates shall have the right at any time
to transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
SECTION 4.6 Transfer of the General Partner's General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to September 30, 2012, the
General Partner shall not transfer all or any part of its General Partner
Interest to a Person unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of the Outstanding
Common Units (excluding Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of its General Partner
Interest to (A) an Affiliate of the General Partner (other than an individual)
or (B) another Person (other than an individual) in connection with the merger
or consolidation of the General Partner with or into another Person (other than
an individual) or the transfer by the General Partner of all or substantially
all of its assets to another Person (other than an individual).
(b) Subject to Section 4.6(c) below, on or after September 30, 2012, the
General Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and to be bound by the
provisions of this Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the loss of limited liability of
any Limited Partner or of any limited partner of the Operating Partnership or
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not already so treated or taxed) and
(iii) such transferee also agrees to purchase all (or the appropriate portion
thereof, if applicable) of the partnership or membership interest of the General
Partner as the general partner or managing member, if any, of each other Group
Member. In the case of a transfer pursuant to and in compliance with this
Section 4.6, the transferee or successor (as the case may be) shall, subject to
compliance with the terms of Section 10.3, be admitted to the Partnership as the
General Partner immediately prior to the transfer of the Partnership Interest,
and the business of the Partnership shall continue without dissolution.
SECTION 4.7 Transfer of Incentive Distribution Rights. Prior to September
30, 2012, a holder of Incentive Distribution Rights may transfer any or all of
the Incentive Distribution Rights held by such holder without any consent of the
Unitholders (a) to an Affiliate of such holder (other than an individual) or (b)
to another Person (other than an individual) in connection with (i) the merger
or consolidation of such holder of Incentive Distribution Rights with or into
such other Person or (ii) the transfer by such holder of all or substantially
all of its assets to such other Person or (iii) the sale of all or substantially
all of the equity interests of such holder to such other Person. Any other
transfer of the Incentive Distribution Rights prior to September 30, 2012, shall
require the prior approval of holders of at least a majority of the Outstanding
Common Units (excluding Common Units held by the General Partner and its
Affiliates). On or after September 30, 2012, any holder of Incentive
Distribution Rights may transfer any or all of its Incentive Distribution Rights
without Unitholder approval. Notwithstanding anything herein to the contrary, no
transfer of Incentive Distribution Rights to another Person shall be permitted
unless the transferee agrees to be bound by the provisions of this Agreement.
SECTION 4.8 Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction over
such transfer, (ii) terminate the existence or qualification of the Partnership
or the Operating Partnership under the laws of the jurisdiction of its
formation, or (iii) cause the Partnership or the Operating Partnership to be
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treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not already so treated
or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or the
Operating Partnership becoming an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes. The
restrictions may be imposed by making such amendments to this Agreement as the
General Partner may determine to be necessary or appropriate to impose such
restrictions; provided, however, that any amendment that the General Partner
believes, in the exercise of its reasonable discretion, could result in the
delisting or suspension of trading of any class of Limited Partner Interests on
the principal National Securities Exchange on which such class of Limited
Partner Interests is then traded must be approved, prior to such amendment being
effected, by the holders of at least a majority of the Outstanding Limited
Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
SECTION 4.9 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates (i) a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee or (ii) a
substantial risk that one or more Group Member or any Controlled Person of a
Group Member will not be permitted to conduct business as a U.S. Maritime
Company based on the status of a Limited Partner or Assignee as a Non-citizen,
the General Partner may request any Limited Partner or Assignee to furnish to
the General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or Assignee is a
nominee holding for the account of another Person, the nationality, citizenship
or other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be subject
to redemption in accordance with the provisions of Section 4.10. In addition,
the General Partner may require that the status of any such Partner or Assignee
be changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited
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Partner with respect to any Limited Partner Interests of such Non-citizen
Assignee not redeemed pursuant to Section 4.10, and upon his admission pursuant
to Section 10.2, the General Partner shall cease to be deemed to be the Limited
Partner in respect of the Non-citizen Assignee's Limited Partner Interests.
SECTION 4.10 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the General Partner that such Limited Partner or Assignee
is an Eligible Citizen or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship Certification to the
General Partner prior to the date fixed for redemption as provided below, redeem
the Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner Interests
of the class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank or
accompanied by an assignment duly executed in blank, the Limited Partner or
Assignee or his duly authorized representative shall be entitled to receive
the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Limited Partner Interest certifies
to the satisfaction of the General Partner in a Citizenship Certification
delivered in connection with the Transfer Application that he is an Eligible
Citizen. If the transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption date.
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ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions. In connection with the
formation of the Partnership under the Delaware Act, the General Partner made an
initial Capital Contribution to the Partnership in the amount of $20.00, for a
2% General Partner Interest in the Partnership and has been admitted as a
General Partner of the Partnership, and the Organizational Limited Partner made
an initial Capital Contribution to the Partnership in the amount of $980.00 for
a 98% Limited Partner Interest in the Partnership and has been admitted as a
Limited Partner of the Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in the Contribution
Agreement; the initial Capital Contributions of each Partner shall thereupon be
refunded; and the Organizational Limited Partner shall cease to be a Limited
Partner of the Partnership. Ninety-eight percent of any interest or other profit
that may have resulted from the investment or other use of such initial Capital
Contributions shall be allocated and distributed to the Organizational Limited
Partner, and the balance thereof shall be allocated and distributed to the
General Partner.
SECTION 5.2 Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution Agreement, and in
consideration of the assumption of the debt as set forth in Section 3.1(b) of
the Contribution Agreement, (i) the General Partner shall contribute to the
Partnership, as a Capital Contribution, all of its interest in the Operating
Partnership in exchange for (A) the continuation of its General Partner
Interest, subject to all of the rights, privileges and duties of the General
Partner under this Agreement, and (B) the Incentive Distribution Rights, (ii)
the Organizational Limited Partner shall contribute to the Partnership its
limited partner interest in the Operating Partnership and all of its interest in
Martin Operating GP LLC, as a Capital Contribution, in exchange for 3,728,224
Subordinated Units, (iii) Midstream Fuel Service LLC shall contribute its
limited partner interest in the Operating Partnership, as a Capital
Contribution, in exchange for 243,482 Subordinated Units, and (iv) Martin Gas
Sales LLC will contribute its limited partner interest in the Operating
Partnership, as a Capital Contribution, in exchange for 281,656 Subordinated
Units.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the Initial
Offering and other than the issuance of the Common Units issued pursuant to the
Over-Allotment Option and other than Common Units purchased by the General
Partner to the extent the Over-Allotment Option is not exercised), the General
Partner shall be required to make additional Capital Contributions equal to
2/98ths of any amount contributed to the Partnership by the Limited Partners in
exchange for such additional Limited Partner Interests. Except as set forth in
the immediately preceding sentence and Article XII, the General Partner shall
not be obligated to make any additional Capital Contributions to the
Partnership.
SECTION 5.3 Contributions by Initial Limited Partners and Distributions to
the General Partner.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by or
on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option and pursuant to the
Underwriting Agreement, each Underwriter shall contribute to the Partnership
cash in an amount equal to the Issue Price per Initial Common Unit, multiplied
by the number of Common Units specified in the Underwriting Agreement to be
purchased by such Underwriter at the Option Closing Date. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall issue Common
Units to each Underwriter on whose behalf such Capital Contribution is made in
an amount equal to the quotient obtained by dividing (i) the cash
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contributions to the Partnership by or on behalf of such Underwriter by (ii) the
Issue Price per Initial Common Unit.
(c) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to subparagraph
(a) hereof in aggregate number equal to 3,000,000, (ii) the "Additional Units"
as such term is used in the Underwriting Agreement in an aggregate number up to
450,000 issuable upon exercise of the Over-Allotment Option pursuant to
subparagraph (b) hereof, (iii) the 4,253,362 Subordinated Units issuable to the
Martin Resource Management Corporation and its Affiliates pursuant to Section
5.2 hereof, and (iv) the Incentive Distribution Rights.
SECTION 5.4 Interest and Withdrawal. No interest shall be paid by the
Partnership on Capital Contributions. No Partner or Assignee shall be entitled
to the withdrawal or return of its Capital Contribution, except to the extent,
if any, that distributions made pursuant to this Agreement or upon termination
of the Partnership may be considered as such by law and then only to the extent
provided for in this Agreement. Except to the extent expressly provided in this
Agreement, no Partner or Assignee shall have priority over any other Partner or
Assignee either as to the return of Capital Contributions or as to profits,
losses or distributions. Any such return shall be a compromise to which all
Partners and Assignees agree within the meaning of Section 17-502(b) of the
Delaware Act.
SECTION 5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance with the rules
of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made to the Partnership
with respect to such Partnership Interest pursuant to this Agreement and (ii)
all items of Partnership income and gain (including, without limitation, income
and gain exempt from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such Partnership Interest
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership or any other
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those items
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described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section
5.8 by a holder thereof (other than a transfer to an Affiliate unless the
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the
Capital Account maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be allocated to the
Subordinated Units or converted Subordinated Units to be transferred in an
amount equal to the product of (x) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (y) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units or converted Subordinated Units.
Following any such allocation, the transferor's Capital Account, if any,
maintained with respect to the retained Subordinated Units or converted
Subordinated Units, if any, will have a balance equal to the amount
allocated under clause (B) hereinabove, and the transferee's Capital
Account established with respect to the transferred Subordinated Units or
converted Subordinated Units will have a balance equal to the amount
allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partner's Combined
Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all
Partners and the Carrying Value of each Partnership property immediately prior
to such issuance shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership
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property, as if such Unrealized Gain or Unrealized Loss had been recognized on
an actual sale of each such property immediately prior to such issuance and had
been allocated to the Partners at such time pursuant to Section 6.1 in the same
manner as any item of gain or loss actually recognized during such period would
have been allocated. In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
the issuance of additional Partnership Interests shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation, must
take fully into account the fair market value of the Partnership Interests of
all Partners at such time. The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such manner as it determines in
its discretion to be reasonable) to arrive at a fair market value for individual
properties.
(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as if such Unrealized Gain or Unrealized Loss
had been recognized in a sale of such property immediately prior to such
distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 6.1 in the
same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss, the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of
an actual distribution which is not made pursuant to Section 12.4 or in the
case of a deemed distribution, be determined and allocated in the same
manner as that provided in Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as it
may adopt.
SECTION 5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any time
and from time to time to such Persons for such consideration and on such terms
and conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) rights upon dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon which, the Partnership may
redeem the Partnership Security; (v) whether such Partnership Security is issued
with the privilege of conversion or exchange and, if so, the terms and
conditions of such conversion or exchange; (vi) the terms and conditions upon
which each Partnership Security will be issued, evidenced by certificates and
assigned or transferred; and (vii) the right, if any, of each such Partnership
Security to vote on Partnership matters, including matters relating to the
relative rights, preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this Section
5.6, (ii) the conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of
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Partnership Securities. The General Partner is further authorized and directed
to specify the relative rights, powers and duties of the holders of the Units or
other Partnership Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is authorized and directed
to do all things it deems to be necessary or advisable in connection with any
future issuance of Partnership Securities or in connection with the conversion
of the General Partner Interest or any Incentive Distribution Rights into Units
pursuant to the terms of this Agreement, including compliance with any statute,
rule, regulation or guideline of any federal, state or other governmental agency
or any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
SECTION 5.7 Limitations on Issuance of Additional Partnership
Securities. Except as otherwise specified in this Section 5.7, the issuance of
Partnership Securities pursuant to Section 5.6 shall be subject to the following
restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) an aggregate of more than 1,500,000 (plus an amount, if any, equal to one
half of the number of Units issued pursuant to the Over-Allotment Option, if and
to the extent exercised) additional Parity Units without the prior approval of
the holders of a Unit Majority. In applying this limitation, there shall be
excluded Common Units and other Parity Units issued (A) in connection with the
Underwriting Agreement, (B) in accordance with Sections 5.7(b) and 5.7(c), (C)
upon conversion of Subordinated Units pursuant to Section 5.8, (D) upon
conversion of the General Partner Interest or any Incentive Distribution Rights
pursuant to Section 11.3(b), (D) pursuant to the employee benefit plans of the
General Partner, the Partnership or any other Group Member, (E) upon a
conversion or exchange of Parity Units issued after the date hereof into Common
Units or other Parity Units; provided that the total amount of Available Cash
required to pay the aggregate Minimum Quarterly Distribution on all Common Units
and all Parity Units does not increase as a result of this conversion or
exchange and (F) in the event of a combination or subdivision of Common Units.
(b) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the prior approval of the Unitholders,
if such issuance occurs (i) in connection with an Acquisition or a Capital
Improvement or (ii) within 365 days of, and the net proceeds from such issuance
are used to repay debt incurred in connection with, an Acquisition or a Capital
Improvement, in each case where such Acquisition or Capital Improvement involves
assets that, if acquired by the Partnership as of the date that is one year
prior to the first day of the Quarter in which such Acquisition is to be
consummated or such Capital Improvement is to be completed, would have resulted,
on a pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect to
each of the four most recently completed Quarters (on a pro forma basis as
described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
The General Partner's good faith determination that such an increase would have
resulted shall be conclusive. If the issuance of Parity Units with respect to an
Acquisition or Capital Improvement occurs within the first four full Quarters
after the Closing Date, then Adjusted Operating Surplus as used in clauses (A)
(subject to the succeeding sentence) and (B) above shall be calculated (i) for
each Quarter, if any, that commenced after the Closing Date for which actual
results of operations are available, based on the actual Adjusted Operating
Surplus of the Partnership generated with respect to such Quarter, and (ii) for
each other Quarter, on a pro forma basis consistent with the procedures, as
applicable, set forth in Appendix D to the Registration Statement. Furthermore,
the amount in clause (A) shall be determined on a pro forma basis assuming that
(1) all of the Parity Units to be issued in connection with or within 365 days
of such Acquisition or Capital Improvement had been issued and outstanding, (2)
all indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or
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Capital Improvement (other than any such indebtedness that is to be repaid with
the proceeds of such issuance of Parity Units) had been incurred or assumed, in
each case as of the commencement of such four-Quarter period, (3) the personnel
expenses that would have been incurred by the Partnership in the operation of
the acquired assets are the personnel expenses for employees to be retained by
the Partnership in the operation of the acquired assets, and (4) the
non-personnel costs and expenses are computed on the same basis as those
incurred by the Partnership in the operation of the Partnership's business at
similarly situated Partnership facilities. For the purposes of this Section
5.7(b), the term "debt" shall be deemed to include indebtedness used to extend,
refinance, renew, replace or defease any debt-originally incurred in connection
with an Acquisition or Capital Improvement.
(c) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership shall not issue any additional
Partnership Securities (or options, rights, warrants or appreciation rights
related thereto) (i) that are entitled in any Quarter to receive in respect of
the Subordination Period any distribution of Available Cash from Operating
Surplus before the Common Units and any Parity Units have received (or amounts
have been set aside for payment of) the Minimum Quarterly Distribution and any
Cumulative Common Unit Arrearage for such Quarter or (ii) that are entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and any Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B).
(d) During the Subordination Period, without the prior approval of the
Unitholders, the Partnership may issue additional Partnership Securities (or
options, rights, warrants or appreciation rights related thereto) (i) that are
not entitled in any Quarter during the Subordination Period to receive any
distributions of Available Cash from Operating Surplus until after the Common
Units and any Parity Units have received (or amounts have been set aside for
payment of) the Minimum Quarterly Distribution and any Cumulative Common Unit
Arrearage for such Quarter and (ii) that are not entitled to allocations in
respect of the Subordination Period of Net Termination Gain before the Common
Units and Parity Units have been allocated Net Termination Gain pursuant to
Section 6.1(c)(i)(B), even if (A) the amount of Available Cash from Operating
Surplus to which each such Partnership Security is entitled to receive after the
Minimum Quarterly Distribution and any Cumulative Common Unit Arrearage have
been paid or set aside for payment on the Common Units exceeds the Minimum
Quarterly Distribution, (B) the amount of Net Termination Gain to be allocated
to such Partnership Security after Net Termination Gain has been allocated to
any Common Units and Parity Units pursuant to Section 6.1(c)(i)(B) exceeds the
amount of such Net Termination Gain to be allocated to each Common Unit or
Parity Unit or (C) the holders of such additional Partnership Securities have
the right to require the Partnership or its Affiliates to repurchase such
Partnership Securities at a discount, par or a premium.
(e) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the approval of the Unitholders, if the
proceeds from such issuance are used exclusively to repay up to $15,000,000 of
indebtedness of a Group Member where the aggregate amount of distributions that
would have been paid with respect to such newly issued Units or Partnership
Securities, plus the related distributions on the General Partner Interest in
respect of the four-Quarter period ending prior to the first day of the Quarter
in which the issuance is to be consummated (assuming such additional Units or
Partnership Securities had been Outstanding throughout such period and that
distributions equal to the distributions that were actually paid on the
Outstanding Units during the period were paid on such additional Units or
Partnership Securities) did not exceed the interest costs actually incurred
during such period on the indebtedness that is to be repaid (or, if such
indebtedness was not outstanding throughout the entire period, would have been
incurred had such indebtedness been outstanding for the entire period). In the
event that the Partnership is required to pay a prepayment penalty in connection
with the repayment of such indebtedness, for purposes of the foregoing test the
number of Parity Units issued to repay such indebtedness shall be deemed
increased by the number of Parity Units that would need to be issued to pay such
penalty.
(f) No fractional Units shall be issued by the Partnership.
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SECTION 5.8 Conversion of Subordinated Units. A total of 850,672 of the
Outstanding Subordinated Units will convert into Common Units on a one-for-one
basis immediately after the distribution of Available Cash to Partners pursuant
to Section 6.3(a) in respect of any Quarter ending on or after September 30,
2005 in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest in the Partnership,
during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional 850,672 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after September 30, 2006, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) An additional 850,672 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after September 30, 2007, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
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(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(c) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(b).
(d) An additional 850,672 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after September 30, 2008, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(d) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(c).
(e) An additional 850,672 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after September 30, 2005, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the two consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Second Target Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Second Target Distribution on
all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
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(f) An additional 850,672 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect
of any Quarter ending on or after September 30, 2005, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units with
respect to each of the two consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Third Target Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Third Target Distribution on
all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that
were Outstanding during such periods on a Fully Diluted Basis, plus the
related distribution on the General Partner Interest during such periods;
and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(g) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a)-(f) at a time when
there shall be more than one holder of Subordinated Units, then, unless all of
the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(h) Any Subordinated Units that are not converted into Common Units
pursuant to Section 5.8(a)-(f) shall convert into Common Units on a one-for-one
basis immediately after the distribution of Available Cash to Partners pursuant
to Section 6.3(a) in respect of the final Quarter of the Subordination Period.
(i) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.
(j) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
SECTION 5.9 Limited Preemptive Right. Except as provided in this Section
5.9 and in Section 5.2, no Person shall have any preemptive, preferential or
other similar right with respect to the issuance of any Partnership Security,
whether unissued, held in the treasury or hereafter created. The General Partner
shall have the right, which it may from time to time assign in whole or in part
to any of its Affiliates, to purchase Partnership Securities from the
Partnership whenever, and on the same terms that, the Partnership issues
Partnership Securities to Persons other than the General Partner and its
Affiliates, to the extent necessary to maintain the Percentage Interests of the
General Partner and its Affiliates equal to that which existed immediately prior
to the issuance of such Partnership Securities.
SECTION 5.10 Splits and Combinations.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued
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pursuant to Section 5.7 without a Unitholder vote) are proportionately adjusted
retroactive to the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of a date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants selected
by it to calculate the number of Partnership Securities to be held by each
Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the accuracy of such
calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
SECTION 5.11 Fully Paid and Non-Assessable Nature of Limited Partner
Interests. All Limited Partner Interests issued pursuant to, and in accordance
with the requirements of, this Article V shall be fully paid and non-assessable
Limited Partner Interests in the Partnership, except as such non-accessibility
may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes. For purposes of
maintaining the Capital Accounts and in determining the rights of the Partners
among themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 5.5(b)) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided herein below.
(a) Net Income. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 2% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 98% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata.
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(b) Net Losses. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata, until the aggregate Net Losses allocated pursuant to this Section
6.1(b)(i) for the current taxable year and all previous taxable years is
equal to the aggregate Net Income allocated to such Partners pursuant to
Section 6.1(a)(iii) for all previous taxable years, provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(ii) Second, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata; provided, that Net Losses shall not be allocated pursuant to this
Section 6.1(b)(ii) to the extent that such allocation would cause any
Unitholder to have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
6.1 and after all distributions of Available Cash provided under Sections 6.4
and 6.5 have been made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD") plus (3) any
then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
98% to all Unitholders holding Subordinated Units, Pro Rata, and 2% to
the General Partner, until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, determined for the taxable year (or portion thereof) to which
this allocation of gain relates, plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with respect
to such Subordinated Unit for such Quarter;
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(D) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital, plus (2)
the Unpaid MQD, plus (3) any then existing Cumulative Common Unit
Arrearage, plus (4) the excess of (aa) the First Target Distribution
less the Minimum Quarterly Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of any
distributions of Available Cash that is deemed to be Operating Surplus
made pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus
(2) plus (3) plus (4) is hereinafter defined as the "First Liquidation
Target Amount");
(E) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of (1) plus (2) is
hereinafter defined as the "Second Liquidation Target Amount");
(F) 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 the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(vi)and 6.4(b)(iv) (the sum of (1) plus (2) is
hereinafter defined as the "Third Liquidation Target Amount"); and
(G) Finally, any remaining amount 50% to all Unitholders, Pro Rata,
48% to the holders of the Incentive Distribution Rights, Pro Rata, and
2% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 98% to the Unitholders holding Subordinated Units,
Pro Rata, and 2% to the General Partner, until the Capital Account in
respect of each Subordinated Unit then Outstanding has been reduced to
zero;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(iii) If, immediately prior to the allocation of any Net Termination
Gain or Net Termination Loss pursuant to Section 6.1(c)(i) and (ii), the
cumulative amount of Capital Contributions by the General Partner to the
Partnership described in Section 5.2(c) exceeds the cumulative amount of
items allocated to the General Partner pursuant to Section 6.1(d)(xiii),
items of loss and deduction shall be allocated to the General Partner,
immediately prior to any allocation pursuant to Section 6.1(c)(i) and (ii),
in an amount equal to such excess. In the event the amount of Partnership
losses and deductions available to make the allocation described in the
previous sentence is less than the amount required to satisfy such
allocation, Net Termination Gain that would otherwise be allocated to the
General Partner pursuant to Sections 6.1(c)(i)(B), (D), (E), (F) or (G), in
an amount equal to such shortfall, shall be allocated to the Unitholders
holding Common Units instead.
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(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to
such taxable period. This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury Regulation
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/98th of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent
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required by the Treasury Regulations promulgated under Section 704(b) of
the Code, the deficit balance, if any, in its Adjusted Capital Account
created by such adjustments, allocations or distributions as quickly as
possible unless such deficit balance is otherwise eliminated pursuant to
Section 6.1(d)(i) or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 6.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Capital Account as adjusted
after all other allocations provided for in this Section 6.1 have been
tentatively made as if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner bears
the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Section 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the
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Capital Accounts underlying Final Subordinated Units and the Capital
Accounts underlying Common Units held by Persons other than the General
Partner and its Affiliates immediately prior to the conversion of such
Final Subordinated Units into Common Units. This allocation method for
establishing such economic uniformity will only be available to the General
Partner if the method for allocating the Capital Account maintained with
respect to the Subordinated Units between the transferred and retained
Subordinated Units pursuant to Section 5.5(c)(ii) does not otherwise
provide such economic uniformity to the Final Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations to
the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner shall
allocate additional items of gross income and gain away from the holders
of Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, to the extent that the Additional Book Basis
Derivative Items allocated to the Unitholders or the General Partner
exceed their Share of Additional Book Basis Derivative Items. For this
purpose, the Unitholders and the General Partner shall be treated as
being allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the Unitholders or
the General Partner under the Partnership Agreement (e.g., Additional
Book Basis Derivative Items taken into account in computing cost of
goods sold would reduce the amount of book income otherwise available
for allocation among the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A) shall be made after all of the other Agreed
Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the
reallocation of items that have been allocated pursuant to such other
Agreed Allocations.
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(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c)
hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
SECTION 6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury
Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise
to preserve or achieve uniformity of the Limited Partner Interests (or any class
or classes thereof). The General Partner may adopt such conventions, make such
allocations and make such amendments to this Agreement as provided in this
Section 6.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Limited Partner Interests issued and Outstanding or the Partnership,
and if such allocations are consistent with the principles of Section 704 of the
Code.
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(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Treasury Regulation Section 1.167(c)-l(a)(6) or any successor
regulations thereto. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt depreciation
and amortization conventions under which all purchasers acquiring Limited
Partner Interests in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any Limited Partner Interests that would
not have a material adverse effect on the Limited Partners or the Record Holders
of any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction shall for
federal income tax purposes, be determined on an annual basis and prorated on a
monthly basis and shall be allocated to the Partners as of the opening of the
Nasdaq National Market on the first Business Day of each month; provided,
however, that (i) such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Option Closing Date or the
expiration of the Over-allotment Option occurs shall be allocated to the
Partners as of the opening of the Nasdaq National Market on the first Business
Day of the next succeeding month; and provided, further, that gain or loss on a
sale or other disposition of any assets of the Partnership or any other
extraordinary item of income or loss realized and recognized other than in the
ordinary course of business, as determined by the General Partner in its sole
discretion, shall be allocated to the Partners as of the opening of the Nasdaq
National Market on the first Business Day of the month in which such gain or
loss is recognized for federal income tax purposes. The General Partner may
revise, alter or otherwise modify such methods of allocation as it determines
necessary or appropriate in its sole discretion, to the extent permitted or
required by Section 706 of the Code and the regulations or rulings promulgated
thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
SECTION 6.3 Requirement and Characterization of Distributions;
Distributions to Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on December 31, 2002, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to the
Partners as of the Record Date selected by the General Partner in its reasonable
discretion. All amounts of Available Cash distributed by the Partnership on any
date from any source shall
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be deemed to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to Section
6.4 equals the Operating Surplus from the Closing Date through the close of the
immediately preceding Quarter. Any remaining amounts of Available Cash
distributed by the Partnership on such date shall, except as otherwise provided
in Section 6.5, be deemed to be "Capital Surplus." All distributions required to
be made under this Agreement shall be made subject to Section 17-607 of the
Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
SECTION 6.4 Distributions of Available Cash from Operating Surplus.
(a) During the Subordination Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be Operating Surplus
pursuant to the provisions of Section 6.3 or 6.5 shall, subject to Section
17-607 of the Delaware Act, be distributed as follows, except as otherwise
required by Section 5.6(b) in respect of additional Partnership Securities
issued pursuant thereto:
(i) First, 98% to the Unitholders holding Common Units, Pro Rata, and
2% to the General Partner, until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 98% to the Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 98% to the Unitholders holding Subordinated Units, Pro
Rata, and 2% to the General Partner, until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) 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 distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution for such Quarter;
(vi) 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 distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
(vii) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
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provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After the Subordination Period. Available Cash with respect to any
Quarter after the Subordination Period that is deemed to be Operating Surplus
pursuant to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of
the Delaware Act, shall be distributed as follows, except as otherwise required
by Section 5.6(b) in respect of additional Partnership Securities issued
pursuant thereto:
(i) First, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 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 distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution for such Quarter;
(iv) Fourth, 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 distributed in respect of each Unit then Outstanding
an amount equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
(v) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
SECTION 6.5 Distributions of Available Cash from Capital
Surplus. Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 98%
to all Unitholders, Pro Rata, and 2% to the General Partner, until a
hypothetical holder of an Initial Common Unit has received with respect to such
Common Unit, during the period since the Closing Date through such date,
distributions of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash that is deemed
to be Capital Surplus shall then be distributed 98% to all Unitholders holding
Common Units, Pro Rata, and 2% to the General Partner, until there has been
distributed in respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
SECTION 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the event
of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second
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Target Distribution and Third Target Distribution, as the case may be, by a
fraction of which the numerator is the Unrecovered Capital of the Common Units
immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Capital of the Common Units immediately prior to
giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution, shall also be subject to
adjustment pursuant to Section 6.9.
SECTION 6.7 Special Provisions Relating to the Holders of Subordinated
Units.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain, loss
and deduction and distributions made with respect to Common Units, the holder of
a Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to Common
Units; provided, however, that such converted Subordinated Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the holder
until such time as the General Partner determines, based on advice of counsel,
that a converted Subordinated Unit should have, 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 an
Initial Common Unit. In connection with the condition imposed by this Section
6.7(b), the General Partner may take whatever reasonable steps are required to
provide economic uniformity to the converted Subordinated Units in preparation
for a transfer of such converted Subordinated Units, including the application
of Sections 5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may
be taken that would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
SECTION 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights. Notwithstanding anything to the contrary set forth in this
Agreement, the holders of the Incentive Distribution Rights (a) shall (i)
possess the rights and obligations provided in this Agreement with respect to a
Limited Partner pursuant to Articles III and VII and (ii) have a Capital Account
as a Partner pursuant to Section 5.5 and all other provisions related thereto
and (b) shall not (i) be entitled to vote on any matters requiring the approval
or vote of the holders of Outstanding Units, (ii) be entitled to any
distributions other than as provided in Sections 6.4(a)(v), (vi) and (vii),
6.4(b)(iii), (iv) and (v), and 12.4 or (iii) be allocated items of income, gain,
loss or deduction other than as specified in this Article VI.
SECTION 6.9 Entity-Level Taxation. If legislation is enacted or the
interpretation of existing language is modified by the relevant governmental
authority which causes a Group Member to be treated as an association taxable as
a corporation or otherwise subjects a Group Member to entity-level taxation for
federal, state or local income tax purposes, the then applicable Minimum
Quarterly Distribution, First Target Distribution, Second Target Distribution
and Third Target Distribution, shall be adjusted to equal the product obtained
by multiplying (a) the amount thereof by (b) one minus the sum of (i) the
highest marginal federal corporate (or other entity, as applicable) income tax
rate of the Group Member for the taxable year of the Group Member in which such
Quarter occurs (expressed as a percentage) plus (ii) the effective overall state
and local income tax rate (expressed as a percentage) applicable to the Group
Member for the calendar year next preceding the calendar year in which such
Quarter occurs (after taking into account the benefit of any deduction allowable
for federal income tax purposes with respect to the payment of state and local
income taxes), but only to the extent of the increase in such rates resulting
from such legislation or interpretation. Such effective overall state and local
income tax rate shall be
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determined for the taxable year next preceding the first taxable year during
which the Group Member is taxable for federal income tax purposes as an
association taxable as a corporation or is otherwise subject to entity-level
taxation by determining such rate as if the Group Member had been subject to
such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group;
subject to Section 7.6(a), the lending of funds to other Persons (including
other Group Members), the repayment or guarantee of obligations of the
Partnership Group and the making of capital contributions to any member of
the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
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(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any other limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, any Group Member from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership or any other
subsidiary of the Partnership as a member or partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and the Assignees and each other Person who may
acquire an interest in Partnership Securities hereby (i) approves, ratifies and
confirms the execution, delivery and performance by the parties thereto of the
Operating Partnership Agreement, the Underwriting Agreement, the Omnibus
Agreement, the Contribution Agreement and the other agreements described in or
filed as exhibits to the Registration Statement that are related to the
transactions contemplated by the Registration Statement; (ii) agrees that the
General Partner (on its own or through any officer of the Partnership) is
authorized to execute, deliver and perform the agreements referred to in clause
(i) of this sentence and the other agreements, acts, transactions and matters
described in or contemplated by the Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Partnership
Securities; and (iii) agrees that the execution, delivery or performance by the
General Partner, any Group Member or any Affiliate of any of them, of this
Agreement or any agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate of the General
Partner of the rights accorded pursuant to Article XV), shall not constitute a
breach by the General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
SECTION 7.2 Certificate of Limited Partnership. The General Partner has
caused the Certificate of Limited Partnership to be filed with the Secretary of
State of the State of Delaware as required by the Delaware Act. The General
Partner shall use all reasonable efforts to cause to be filed such other
certificates or documents as may be determined by the General Partner in its
sole discretion to be reasonable and necessary or appropriate for the formation,
continuation, qualification and operation of a limited partnership (or a
partnership in which the limited partners have limited liability) in the State
of Delaware or any other state in which the Partnership may elect to do business
or own property. To the extent that such action is determined by the General
Partner in its sole discretion to be reasonable and necessary or appropriate,
the General Partner shall file amendments to and restatements of the Certificate
of Limited Partnership and do all things to maintain the Partnership as a
limited partnership (or a partnership or other entity in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do business or own
property. Subject to the terms of Section 3.4(a), the General Partner shall not
be required, before or after filing, to
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deliver or mail a copy of the Certificate of Limited Partnership, any
qualification document or any amendment thereto to any Limited Partner.
SECTION 7.3 Restrictions on the General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it impossible
to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
a general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approve on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership without the
approval of holders of a Unit Majority; provided however that this provision
shall not preclude or limit the General Partner's ability to mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of the
assets of the Partnership or the Operating Partnership and shall not apply to
any forced sale of any or all of the assets of the Partnership or the Operating
Partnership pursuant to the foreclosure of, or other realization upon, any such
encumbrance. Without the approval of holders of a Unit Majority, the General
Partner shall not, on behalf of the Partnership, (i) consent to any amendment to
the Operating Partnership Agreement or (ii) except as expressly permitted by
Section 7.9(d), take any action permitted to be taken by a partner of the
Operating Partnership, in either case, that would adversely affect the Limited
Partners (including any particular class of Partnership Interests as compared to
any other class of Partnership Interests) in any material respect, except, in
either case, as permitted under Sections 4.6, 11.1 and 11.2 with respect to the
election of a successor general partner or managing member of any Group Member.
SECTION 7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement,
the General Partner shall not be compensated for its services as a general
partner or managing member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote in
respect thereof), may propose and adopt on behalf of the Partnership employee
benefit plans, employee programs and employee practices (including plans,
programs and practices involving the issuance of Partnership Securities or
options to purchase Partnership Securities), or cause the Partnership to issue
Partnership Securities in connection with, or pursuant to, any employee benefit
plan, employee program or employee practice maintained or sponsored by the
General Partner or any of its Affiliates, in each case for the benefit of
employees of the General Partner, any Group Member or any Affiliate, or any of
them, in respect of services performed, directly or indirectly, for
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the benefit of the Partnership Group. The Partnership agrees to issue and sell
to the General Partner or any of its Affiliates any Partnership Securities that
the General Partner or such Affiliates are obligated to provide to any employees
pursuant to any such employee benefit plans, employee programs or employee
practices. Expenses incurred by the General Partner in connection with any such
plans, programs and practices (including the net cost to the General Partner or
such Affiliates of Partnership Securities purchased by the General Partner or
such Affiliates from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted by the General
Partner as permitted by this Section 7.4(c) shall constitute obligations of the
General Partner hereunder and shall be assumed by any successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's General Partner Interest pursuant to Section 4.6.
SECTION 7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership agrees that its sole business will be to act
as a general partner or managing member, as the case may be, of the Partnership
and any other partnership or limited liability company of which the Partnership
or the Operating Partnership is, directly or indirectly, a partner or member and
to undertake activities that are ancillary or related thereto (including being a
limited partner in the Partnership).
(b) Martin Resource Management Corporation has entered into the Omnibus
Agreement with the General Partner, and the Partnership, which agreement sets
forth certain restrictions on the ability of Martin Resource Management
Corporation and its Affiliates to engage in the Business.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the right
to engage in businesses of every type and description and other activities for
profit and to engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement, the limited liability company or
partnership agreement of any other Group Member or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b), Section 7.5(c)
and the Omnibus Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii)
it shall be deemed not to be a breach of the General Partner's fiduciary duty or
any other obligation of any type whatsoever of the General Partner for the
Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the Partnership
and (iii) except as set forth in the Omnibus Agreement, Martin Resource
Management Corporation, the General Partner and the Indemnitees shall have no
obligation to present business opportunities to the Partnership.
(e) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing Date
and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of the General Partner or Limited Partner, as applicable,
relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and Section 7.5(e)
with respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the
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effect of restricting the fiduciary duties that might otherwise, as a result of
Delaware or other applicable law, be owed by the General Partner to the
Partnership and its Limited Partners, or to constitute a waiver or consent by
the Limited Partners to any such restriction, such provisions shall be
inapplicable and have no effect in determining whether the General Partner has
complied with its fiduciary duties in connection with determinations made by it
under this Section 7.5.
SECTION 7.6 Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain Restrictions on the General
Partner.
(a) The General Partner or any of its Affiliates may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of time
and in such amounts as the General Partner may determine; provided, however,
that in any such case the lending party may not charge the borrowing party
interest at a rate greater than the rate that would be charged the borrowing
party or impose terms less favorable to the borrowing party than would be
charged or imposed on the borrowing party by unrelated lenders on comparable
loans made on an arm's-length basis (without reference to the lending party's
financial abilities or guarantees). The borrowing party shall reimburse the
lending party for any costs (other than any additional interest costs) incurred
by the lending party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and Section 7.6(b), the term "Group Member"
shall include any Affiliate of a Group Member that is controlled by the Group
Member. No Group Member may lend funds to the General Partner or any of its
Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as General Partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third parties
or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply to
the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 7.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 5.2 and 5.3, the Contribution
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval, (iii)
any transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties, or (iv) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. With respect to any contribution of assets to the
Partnership
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in exchange for Partnership Securities, the Conflicts Committee, in determining
whether the appropriate number of Partnership Securities are being issued, may
take into account, among other things, the fair market value of the assets, the
liquidated and contingent liabilities assumed, the tax basis in the assets, the
extent to which tax-only allocations to the transferor will protect the existing
partners of the Partnership against a low tax basis, and such other factors as
the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partner
and its Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
SECTION 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or 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 an Indemnitee; provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee 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 proceeding,
had no reasonable cause to believe its conduct was unlawful; provided, further,
no indemnification pursuant to this Section 7.7 shall be available to the
General Partner with respect to its obligations incurred pursuant to the
Underwriting Agreement, the Omnibus Agreement or the Contribution Agreement
(other than obligations incurred by the General Partner on behalf of the
Partnership). The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that the Indemnitee acted in a manner
contrary to that specified above. Any indemnification pursuant to this Section
7.7 shall be made only out of the assets of the Partnership, it being agreed
that the General Partner shall not be personally liable for such indemnification
and shall have no obligation to contribute or loan any monies or property to the
Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests, as
a matter of law or otherwise, both as to actions in the Indemnitee's capacity as
an Indemnitee and as to actions in any other capacity (including any capacity
under the Underwriting Agreement), and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf
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of the Partnership, regardless of whether the Partnership would have the power
to indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
SECTION 7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement,
no Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired interests
in the Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the Partnership
or to the Partners, the General Partner and any other Indemnitee acting in
connection with the Partnership's business or affairs shall not be liable to the
Partnership or to any Partner for its good faith reliance on the provisions of
this Agreement. The provisions of this Agreement, to the extent that they
restrict or otherwise modify the duties and liabilities of an Indemnitee
otherwise existing at law or in equity, are agreed by the Partners to replace
such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors, officers
and employees under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
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SECTION 7.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement, the Operating
Partnership Agreement or the limited liability company agreement or partnership
agreement of any other Group Member, whenever a potential conflict of interest
exists or arises between the General Partner or any of its Affiliates, on the
one hand, and the Partnership, the Operating Partnership, any other Group
Member, any Partner or any Assignee, on the other, any resolution or course of
action by the General Partner or its Affiliates in respect of such conflict of
interest shall be permitted and deemed approved by all Partners, and shall not
constitute a breach of this Agreement, of the Operating Partnership Agreement,
of any agreement contemplated herein or therein, or of any duty stated or
implied by law or equity, if the resolution or course of action is, or by
operation of this Agreement is deemed to be, fair and reasonable to the
Partnership. The General Partner shall be authorized but not required in
connection with its resolution of such conflict of interest to seek Special
Approval of such resolution, and the General Partner may also adopt a resolution
or course of action that has not received Special Approval. Any such approval by
the Conflicts Committee shall be subject to the presumption that, in making its
decision, the Conflicts Committee acted on an informed basis, in good faith, and
in the honest belief that the action taken was in the best interests of the
Partnership, and in any proceeding brought by any Unitholder or by or on behalf
of such Unitholder or any other Unitholders or the Partnership challenging such
approval, the Person bringing or prosecuting such proceeding shall have the
burden of overcoming such presumption. Any conflict of interest and any
resolution of such conflict of interest shall be conclusively deemed fair and
reasonable to the Partnership if such conflict of interest or resolution is (i)
approved by Special Approval, (ii) on terms no less favorable to the Partnership
than those generally being provided to or available from unrelated third parties
or (iii) fair to the Partnership, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership). The General
Partner (including the Conflicts Committee in connection with Special Approval)
shall be authorized in connection with its determination of what is "fair and
reasonable" to the Partnership and in connection with its resolution of any
conflict of interest to consider (A) the relative interests of any party to such
conflict, agreement, transaction or situation and the benefits and burdens
relating to such interest; (B) any customary or accepted industry practices and
any customary or historical dealings with a particular Person; (C) any
applicable generally accepted accounting practices or principles; and (D) such
additional factors as the General Partner (including the Conflicts Committee)
determines in its sole discretion to be relevant, reasonable or appropriate
under the circumstances. In any proceeding brought by any Unitholder by or on
behalf of such Unitholder or any other Unitholders or the Partnership alleging
that such a resolution by the General Partner (and not by the Conflicts
Committee, whose resolution shall be conclusive as provided above) is not fair
to the Partnership, such Unitholder shall have the burden of proof of overcoming
such conclusion. Nothing contained in this Agreement, however, is intended to
nor shall it be construed to require the General Partner (including the
Conflicts Committee) to consider the interests of any Person other than the
Partnership. In the absence of bad faith by the General Partner, the resolution,
action or terms so made, taken or provided by the General Partner with respect
to such matter shall not constitute a breach of this Agreement or any other
agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise provided herein, the
General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, the
Operating Partnership, any Group Member, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the General Partner or such Affiliate shall act under such
express standard and shall not be subject to any other or different standards
imposed by this Agreement, the Operating Partnership Agreement, the limited
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liability company agreement or partnership agreement of any Group Member any
other agreement contemplated hereby or under the Delaware Act or any other law,
rule or regulation. In addition, any actions taken by the General Partner or
such Affiliate consistent with the standards of "reasonable discretion" set
forth in the definitions of Available Cash or Operating Surplus shall not
constitute a breach of any duty of the General Partner to the Partnership or the
Limited Partners. The General Partner shall have no duty, express or implied, to
sell or otherwise dispose of any asset of the Partnership Group other than in
the ordinary course of business. No borrowing by any Group Member or the
approval thereof by the General Partner shall be deemed to constitute a breach
of any duty of the General Partner to the Partnership or the Limited Partners by
reason of the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable distributions to the General Partner or its Affiliates
(including in their capacities as Limited Partners) to exceed 2% of the total
amount distributed to all partners or (B) hasten the expiration of the
Subordination Period or the conversion of any Subordinated Units into Common
Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
SECTION 7.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including an Opinion of Counsel) of such Persons as to matters
that the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other agreement contemplated by this
Agreement and to make any decision pursuant to the authority prescribed in this
Agreement, so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, the best interests of the Partnership.
SECTION 7.11 Purchase or Sale of Partnership Securities. The General
Partner may cause the Partnership to purchase or otherwise acquire Partnership
Securities; provided that, except as permitted pursuant to Section 4.10, the
General Partner may not cause any Group Member to purchase Subordinated Units
during the Subordination Period. As long as Partnership Securities are held by
any Group Member, such Partnership Securities shall not be considered
Outstanding for any purpose, except as otherwise provided herein. The General
Partner or any Affiliate of the General Partner may also purchase or otherwise
acquire and sell or otherwise dispose of Partnership Securities for its own
account, subject to the provisions of Articles IV and X.
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SECTION 7.12 Registration Rights of the General Partner and its
Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate of
the General Partner at the date of this Agreement notwithstanding that it may
later cease to be an Affiliate of the General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or
any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of any such Holder, the Partnership shall file with
the Commission as promptly as practicable after receiving such request, and use
all reasonable efforts to cause to become effective and remain effective for a
period of not less than six months following its effective date or such shorter
period as shall terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement under the
Securities Act registering the offering and sale of the number of Partnership
Securities specified by the Holder; provided, however, that the Partnership
shall not be required to effect more than three registrations pursuant to this
Section 7.12(a); and provided further, however, that if the Conflicts Committee
determines in its good faith judgment that a postponement of the requested
registration for up to six months would be in the best interests of the
Partnership and its Partners due to a pending transaction, investigation or
other event, the filing of such registration statement or the effectiveness
thereof may be deferred for up to six months, but not thereafter. In connection
with any registration pursuant to the immediately preceding sentence, the
Partnership shall promptly prepare and file (x) such documents as may be
necessary to register or qualify the securities subject to such registration
under the securities laws of such states as the Holder shall reasonably request;
provided, however, that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Partnership would become subject to
general service of process or to taxation or qualification to do business as a
foreign corporation or partnership doing business in such jurisdiction solely as
a result of such registration, and (y) such documents as may be necessary to
apply for listing or to list the Partnership Securities subject to such
registration on such National Securities Exchange as the Holder shall reasonably
request, and do any and all other acts and things that may reasonably be
necessary or advisable to enable the Holder to consummate a public sale of such
Partnership Securities in such states. Except as set forth in Section 7.12(c),
all costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.12(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's Partnership Securities would adversely and materially affect the
success of the offering, the Partnership shall include in such offering only
that number or amount, if any, of securities held by the Holder which, in the
opinion of the managing underwriter or managing underwriters, will not so
adversely and materially affect the offering. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments,
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damages, liabilities (joint or several), costs and expenses (including interest,
penalties and reasonable attorneys' fees and disbursements), resulting to,
imposed upon, or incurred by the Indemnified Persons, directly or indirectly,
under the Securities Act or otherwise (hereinafter referred to in this Section
7.12(c) as a "claim" and in the plural as "claims") based upon, arising out of
or resulting from any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which any
Partnership Securities were registered under the Securities Act or any state
securities or Blue Sky laws, in any preliminary prospectus (if used prior to the
effective date of such registration statement), or in any summary or final
prospectus or in any amendment or supplement thereto (if used during the period
the Partnership is required to keep the registration statement current), or
arising out of, based upon or resulting from the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements made therein not misleading; provided, however, that the
Partnership shall not be liable to any Indemnified Person to the extent that any
such claim arises out of, is based upon or results from an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, such preliminary, summary or final prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Partnership by or on behalf of such Indemnified
Person specifically for use in the preparation thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General Partner's
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Partnership
Securities with respect to which, during such two-year period, it has requested
inclusion in a registration statement pursuant to Section 7.12(b) or requested
that a registration statement be filed pursuant to Section 7.12(a); provided,
however, that the Partnership shall not be required to file successive
registration statements covering the same Partnership Securities for which
registration was demanded during such two-year period. The provisions of Section
7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such Partnership Securities for distribution, (iii) describe the nature
or method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
SECTION 7.13 Reliance by Third Parties. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the General Partner and any officer of the General
Partner authorized by the General Partner to act on behalf of and in the name of
the Partnership has full power and authority to encumber, sell or otherwise use
in any manner any and all assets of the Partnership and to enter into any
authorized contracts on behalf of the Partnership, and such Person shall be
entitled to deal with the General Partner or any such officer as if it were the
Partnership's sole party in interest, both legally and beneficially. Each
Limited Partner hereby waives any and all defenses or other remedies that may be
available against such Person to contest, negate or disaffirm any action of the
General Partner or any such officer in connection with any such dealing. In no
event shall any Person dealing with the General Partner or any such officer or
its representatives be obligated to ascertain that the terms of the Agreement
have been complied with or to inquire into the necessity or expedience of any
act or action of the General Partner or any such officer or its representatives.
Each and every certificate, document or other instrument executed on behalf of
the Partnership by the General Partner or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly
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executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting. The General Partner shall keep or
cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's business, including all books and
records necessary to provide to the Limited Partners any information required to
be provided pursuant to Section 3.4(a). Any books and records maintained by or
on behalf of the Partnership in the regular course of its business, including
the record of the Record Holders and Assignees of Units or other Partnership
Securities, books of account and records of Partnership proceedings, may be kept
on, or be in the form of, computer disks, hard drives, punch cards, magnetic
tape, photographs, micrographics or any other information storage device;
provided, that the books and records so maintained are convertible into clearly
legible written form within a reasonable period of time. The books of the
Partnership shall be maintained, for financial reporting purposes, on an accrual
basis in accordance with U.S. GAAP.
SECTION 8.2 Fiscal Year. The fiscal year of the Partnership shall be a
fiscal year ending December 31.
SECTION 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause to
be mailed or made available to each Record Holder of a Unit as of a date
selected by the General Partner in its discretion, an annual report containing
financial statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with U.S. GAAP, including a balance sheet and statements
of operations, Partnership equity and cash flows, such statements to be audited
by a firm of independent public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or made available to each Record Holder of a
Unit, as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
SECTION 9.1 Tax Returns and Information. The Partnership shall timely
file all returns of the Partnership that are required for federal, state and
local income tax purposes on the basis of the accrual method and a taxable year
ending on December 31. The tax information reasonably required by Record Holders
for federal and state income tax reporting purposes with respect to a taxable
year shall be furnished to them within 90 days of the close of the calendar year
in which the Partnership's taxable year ends. The classification, realization
and recognition of income, gain, losses and deductions and other items shall be
on the accrual method of accounting for federal income tax purposes.
SECTION 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code
in accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the purposes
of computing the
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