INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report.......................................... 2
Consolidated Balance Sheets - July 31, 2002 and 2001.................. 3
Notes to Consolidated Balance Sheets.................................. 4
1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ferrellgas, Inc. and Subsidiaries
Liberty, Missouri
We have audited the accompanying consolidated balance sheets of Ferrellgas, Inc.
and subsidiaries (the "Company") as of July 31, 2002 and 2001. These balance
sheets are the responsibility of the Company's management. Our responsibility is
to express an opinion on these balance sheets 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 balance
sheets are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheets. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated balance sheets present fairly, in all material
respects, the financial position of Ferrellgas, Inc. and subsidiaries as of July
31, 2002 and 2001, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Notes B(13) and E to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets with the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", in fiscal 2002.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 12, 2002
2
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31,
-----------------------
ASSETS 2002 2001
- ------------------------------------------------------ ----------- ----------
Current Assets:
Cash and cash equivalents $ 20,819 $ 27,017
Accounts and notes receivable (net of
allowance for doubtful accounts of $1,467 and
$3,159 in 2002 and 2001, respectively) 74,274 56,815
Inventories 48,034 65,284
Prepaid expenses and other current assets 10,771 10,504
----------- -----------
Total Current Assets 153,898 159,620
Property, plant and equipment, net 565,611 556,005
Goodwill 363,134 353,115
Intangible assets, net 98,170 116,747
Other assets 3,476 16,162
----------- -----------
Total Assets $1,184,289 $1,201,649
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
- ------------------------------------------------------
Current Liabilities:
Accounts payable $ 54,316 $ 58,274
Other current liabilities 89,005 77,324
----------- -----------
Total Current Liabilities 143,321 135,598
Long-term debt 703,858 704,782
Deferred income taxes 2,351 1,726
Other liabilities 14,861 15,472
Contingencies and commitments (Note J) - -
Minority interest 180,620 188,254
Parent investment in subsidiary 210,817 220,083
Stockholder's Equity (Deficiency):
Common stock, $1 par value;
10,000 shares authorized; 990 shares issued 1 1
Additional paid-in-capital 13,622 13,476
Note receivable from parent (147,484) (147,607)
Retained earnings 65,094 72,245
Accumulated other comprehensive loss (2,772) (2,381)
----------- -----------
Total Stockholder's Equity (Deficiency) (71,539) (64,266)
----------- -----------
Total Liabilities and Stockholder's
Equity (Deficiency) $1,184,289 $1,201,649
=========== ===========
See notes to consolidated balance sheets.
3
FERRELLGAS, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Ferrell Companies, Inc.)
NOTES TO CONSOLIDATED BALANCE SHEETS
A. Organization and Formation
The accompanying consolidated balance sheets and related notes present the
consolidated financial position of Ferrellgas, Inc. (the "Company"), its
subsidiaries and its partnership interest in Ferrellgas Partners, L.P and
subsidiaries. The Company is a wholly-owned subsidiary of Ferrell
Companies, Inc. ("Ferrell" or "Parent").
On July 5, 1994, Ferrellgas Partners, L.P. (the "Master Limited
Partnership" or "MLP") completed an initial public offering of common units
representing limited partner interests (the "common units"). The MLP was
formed April 19, 1994, and is a publicly traded limited partnership, owning
a 99% limited partner interest in Ferrellgas, L.P. (the "Operating
Partnership" or "OLP"). The MLP and the OLP (collectively referred to as
the "Partnership") are both Delaware limited partnerships. Both the MLP and
the OLP are governed by partnership agreements that were made effective at
the time of formation of the partnerships. Ferrellgas Partners, L.P. was
formed to acquire and hold a limited partner interest in the Operating
Partnership. The Operating Partnership was formed to acquire, own and
operate the propane business and assets of the Company. The Company owns an
effective 2% general partner interest in the Partnership and performs all
management functions required for the Partnership.
Concurrent with the closing of the offering, the Company contributed all of
its propane business and assets to the Partnership in exchange for
17,593,721 common units and Incentive Distribution Rights as well as a 2%
general partner interest in the MLP and the OLP on a combined basis.
In July 1998, the Company transferred its entire limited partnership
ownership of the MLP to Ferrell. Also during July 1998, 100% of the
outstanding common stock of Ferrell was purchased primarily from Mr. James
E. Ferrell and his family by a newly established leveraged employee stock
ownership trust ("ESOT") established pursuant to the Ferrell Companies,
Inc. Employee Stock Ownership Plan ("ESOP").
On December 17, 1999, the MLP's partnership agreement was amended to allow
for the issuance of a newly created senior unit, in connection with an
acquisition. Generally, these senior units were to be paid quarterly
distributions in additional senior units equal to 10% per annum. Also, the
senior units were structured to allow for redemption by the MLP at any
time, in whole or in part, upon payment in cash of the liquidating value of
the senior units, currently $40 per unit, plus the amount of any accrued
and unpaid distributions. The holder of the senior units also had the
right, at dates in the future and subject to certain events and conditions,
to convert any outstanding senior units into common units.
On June 5, 2000, the MLP and the OLP partnership agreements were amended to
allow the General Partner to have an option in maintaining its effective 2%
general partner interest concurrent with the issuance of other additional
equity. Prior to this amendment, the General Partner was required to make
capital contributions to maintain its 1% general partner interest
concurrent with the issuance of any additional equity. Also as part of this
amendment, the General Partner's interest in the MLP's Common Units was
converted from a General Partner interest to General Partner units.
4
On April 6, 2001, the MLP's partnership agreement was amended to reflect
modifications made to the senior units, previously issued on December 17,
1999, and the common units owned by Ferrell. The senior units are to be
paid quarterly distributions in cash equivalent to 10% per annum or $4 per
senior unit. The amendment also granted the holder of the senior units the
right, subject to certain events and conditions, to convert any outstanding
senior units into common units at the earlier of December 31, 2005 or upon
the occurrence of a material event as defined by the partnership agreement.
Also as part of the amendment, Ferrell granted the Partnership the ability,
until December 31, 2005, to defer future distributions on the common units
held by it, up to an aggregate outstanding amount of $36,000,000.
B. Summary of Significant Accounting Policies
(1) Nature of operations: The Company's operations are limited to those
activities associated with the Partnership. The Partnership is engaged
primarily in the retail distribution of propane and related equipment and
supplies in the United States. The retail market is seasonal because
propane is used primarily for heating in residential and commercial
buildings. The Partnership serves more than 1,000,000 residential,
industrial/commercial and agricultural customers.
(2) Accounting estimates: The preparation of balance sheets in conformity
with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the balance sheets. Actual
results could differ from these estimates. Significant estimates impacting
the consolidated balance sheets include reserves that have been established
for product liability and other claims.
(3) Principles of consolidation: The consolidated balance sheets include
the accounts of the Company, its subsidiaries and the Partnership. The
minority interest includes limited partner interests in the MLP's common
units held by the public and the MLP's senior units (See Note K). The
limited partner interest owned by Ferrell is reflected as "Parent
investment in subsidiary" in the consolidated balance sheets. All material
intercompany transactions and balances have been eliminated.
(4) Cash and cash equivalents: The Company considers cash equivalents to
include all highly liquid debt instruments purchased with an original
maturity of three months or less.
(5) Inventories: Inventories are stated at the lower of cost or market
using average cost and actual cost methods. The Company enters into
commodity derivative contracts involving propane and related products to
hedge, reduce risk and anticipate market movements. The fair value of these
derivative contracts is classified as inventory.
(6) Property, plant and equipment: Property, plant and equipment are stated
at cost less accumulated depreciation. Expenditures for maintenance and
routine repairs are expensed as incurred. Depreciation is calculated using
the straight-line method based on the estimated useful lives of the assets
ranging from two to 30 years. In the first quarter of fiscal 2001, the
Company increased the estimate of the residual values of its existing
customer and storage tanks. This change in accounting estimate resulted
from a review by management of its tank values established through an
independent tank valuation obtained in connection with a financing
completed in December 1999. The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of its assets might not be recoverable.
(7) Goodwill: Goodwill is not amortized and is tested annually for
impairment. Beginning in the first quarter of fiscal 2002, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142, which
modified the financial accounting and reporting for acquired goodwill and
other intangible assets, including the requirement that goodwill and some
intangible assets no longer be amortized. The Company tested goodwill for
impairment at the time the statement was adopted and during the third
quarter of fiscal 2002, and will continue to do so on an annual basis. The
results of these impairment tests did not have a material effect on the
Company's financial position. The Company did not recognize any impairment
losses as a result of these tests.
5
(8) Intangible assets: Intangible assets, consisting primarily of customer
lists and noncompete notes, are stated at cost, net of amortization
calculated using either straight-line or accelerated methods over periods
ranging from two to 15 years. The Company reviews identifiable intangibles
for impairment in a similar manner as with long-lived assets. The Company,
using its best estimates based on reasonable and supportable assumptions
and projections, reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable.
(9) Accounting for derivative commodity contracts: The Company enters into
commodity options involving propane and related products to specifically
hedge certain product cost risk. Any changes in the fair value of these
specific cash flow hedge positions are deferred and included in other
comprehensive income and recognized as an adjustment to the overall
purchase price of product in the month the purchase contract is settled.
The Company also enters into other commodity forward and futures
purchase/sale agreements and commodity swaps and options involving propane
and related products, which are not specific hedges to a certain product
cost risk, but are used for risk management purposes. To the extent such
contracts are entered into at fixed prices and thereby subject the Company
to market risk, the contracts are accounted for using the fair value
method. Under this valuation method, derivatives are carried on the
Consolidated Balance Sheets at fair value with changes in that value
recognized in earnings.
(10) Income taxes: The Company is treated as a Subchapter S corporation for
Federal income tax purposes and is liable for income tax in states that do
not recognize Subchapter S status. Income taxes were computed as though
each company filed its own income tax return in accordance with the
Company's tax sharing agreement. Deferred income taxes are provided as a
result of temporary differences between financial and tax reporting, as
described in Note I, using the asset/liability method.
(11) Unit and stock-based compensation: The Company accounts for its Unit
Option Plan and the Ferrell Companies Incentive Compensation Plan using the
intrinsic value method under the provisions of Accounting Principles Board
(APB) No. 25, "Accounting for Stock Issued to Employees."
(12) Segment information: The Company has a single reportable operating
segment engaging in the retail distribution of propane and related
equipment and supplies.
(13) Adoption of new accounting standards: The Financial Accounting
Standards Board (FASB) recently issued SFAS No. 141 "Business
Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets", SFAS
No. 143 "Accounting for Asset Retirement Obligations", SFAS No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets", SFAS No.
145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", and SFAS No. 146 "Accounting
for Costs Associated with Exit or Disposal Activities."
SFAS No. 141 requirements include, among other things, that all business
combinations are accounted for by a single method - the purchase method. It
applies to all business combinations initiated after June 30, 2001. The
Company has historically accounted for business combinations using the
purchase method; therefore, this new statement will not have a substantial
impact on how the Company accounts for future combinations.
6
SFAS No. 142 modified the financial accounting and reporting for acquired
goodwill and other intangible assets, including the requirement that
goodwill and some intangible assets no longer be amortized. The Company
adopted SFAS No. 142 beginning in the first quarter of fiscal 2002. This
adoption resulted in a reclassification to goodwill of both assembled
workforce and other intangible assets. This new standard also required us
to test goodwill for impairment at the time the standard was adopted and
also on an annual basis. The results of these impairment tests did not have
a material effect on the Company's financial position. The Company did not
recognize any impairment losses as a result of these tests.
SFAS No. 143 requires the recognition of a liability if a company has a
legal or contractual financial obligation in connection with the retirement
of a tangible long-lived asset. The Company will implement SFAS No. 143
beginning in the year ending July 31, 2003, and expects to record a
one-time reduction to earnings during the first quarter of fiscal 2003, as
a cumulative change in accounting principle, of approximately $2,800,000.
The Company believes the implementation will not have a material ongoing
effect on its financial position.
SFAS No. 144 modifies the financial accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions. The Company
will implement SFAS No. 144 beginning in the year ending July 31, 2003, and
believes the implementation will not have a material effect on its
financial position.
SFAS No. 145 eliminates the requirement that material gains and losses
resulting from the early extinguishment of debt be classified as an
extraordinary item in the results of operations. Instead, companies must
evaluate whether the transaction meets both the criteria of being unusual
in nature and infrequent in occurrence. Other aspects of SFAS No. 145
relating to accounting for intangibles assets of motor carriers and
accounting for certain lease modifications do not currently apply to the
Company. The Company will implement SFAS No. 145 beginning in the year
ending July 31, 2003, and believes the implementation will not have a
material effect on its financial position.
SFAS No. 146 modifies the financial accounting and reporting for costs
associated with exit or disposal activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Additionally, the statement
requires the liability to be recognized and measured initially at fair
value. Under previous rules, liabilities for exit costs were recognized at
the date of the entity's commitment to an exit plan. The Company will adopt
and implement SFAS No. 146 for any exit or disposal activities that are
initiated after July 31, 2002. The Company believes the implementation will
not have a material effect on its financial position.
(14) Reclassifications: Certain reclassifications have been made to the
prior years' Consolidated Balance Sheets to conform to the current year's
Consolidated Balance Sheets' presentation.
C. Supplemental Balance Sheet Information
Inventories consist of:
(in thousands) 2002 2001
-------- --------
Propane gas and related products $29,169 $45,966
Appliances, parts and supplies 18,865 19,318
-------- --------
$48,034 $65,284
======== ========
7
In addition to inventories on hand, the Company enters into contracts to
buy product for supply purposes. Nearly all of these contracts have terms
of less than one year and most call for payment based on market prices at
the date of delivery. All fixed price contracts have terms of less than one
year. As of July 31, 2002, in addition to the inventory on hand, the
Company had committed to make net delivery of approximately 7,061,000
gallons at a fixed price.
Property, plant and equipment consist of:
Estimated
(in thousands) useful lives 2002 2001
------------ ---------- ----------
Land and improvements 2-20 $40,781 $41,191
Buildings and improvements 20 54,453 54,384
Vehicles, including transport trailers 8-20 77,226 76,611
Furniture and fixtures 5 8,730 9,523
Bulk equipment and district facilities 5-30 93,816 90,930
Tanks and customer equipment 5-30 546,814 50,373
Computer equipment and software 2-5 29,530 25,515
Computer software development in progress n/a 29,904 100
Other 2,652 3,281
---------- ----------
883,906 851,908
Less: accumulated depreciation 318,295 295,903
---------- ----------
$565,611 $556,005
========== ==========
In a non-cash transaction, the Company has recognized payables as of July
31, 2002, totaling $6,956,000 related to the development of new computer
software. The Company capitalized $697,000 of interest expense related to
the development of computer software for the year ended July 31, 2002.
Other current liabilities consist of:
(in thousands) 2002 2001
-------- --------
Accrued interest $22,382 $22,816
Accrued payroll 24,068 20,236
Accrued insurance 9,409 8,056
Other 33,146 26,216
-------- --------
$89,005 $77,324
======== ========
D. Accounts Receivable Securitization
On September 26, 2000, the OLP entered into an account receivable
securitization facility with Bank One, NA. As part of this renewable
364-day facility, the OLP transfers an interest in a pool of its trade
accounts receivable to Ferrellgas Receivables, LLC, a wholly-owned, special
purpose entity, which sells its interest to a commercial paper conduit of
Banc One, NA. The OLP does not provide any guarantee or similar support to
the collectability of these receivables. The OLP structured the facility
using a wholly-owned, qualifying special purpose entity in order to
facilitate the transaction as required by Banc One, N.A. and to comply with
the Company's various debt covenants. The OLP remits daily to this special
purpose entity funds collected on the pool of trade receivables held by
Ferrellgas Receivables. The Company renewed the facility effective
September 25, 2001, for a 364-day commitment with Bank One, NA and intends
to renew the facility for an additional 364-day commitment on September 24,
2002.
8
The level of funding available from this facility is currently limited to
$60,000,000. In accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," this
transaction is reflected on the Company's Consolidated Balance Sheets as a
sale of accounts receivable and an investment in an unconsolidated
subsidiary. The OLP retained servicing rights and the right to collect
finance charges, however, the assets related to these retained interests at
July 31, 2002 and 2001, had no material effect on the Consolidated Balance
Sheets. The following table provides amounts recorded on the Company's
balance sheets.
Balance sheet information
(in thousands) 2002 2001
-------- --------
Investment in unconsolidated subsidiary,
included in "other assets" $ - $ 7,225
======== ========
E. Goodwill
SFAS No. 142 modified the financial accounting and reporting for acquired
goodwill and other intangible assets, including the requirement that
goodwill and some intangible assets no longer be amortized. The Company
adopted SFAS No. 142 beginning in the first quarter of fiscal 2002. This
adoption resulted in a reclassification to goodwill of both assembled
workforce and other intangible assets classified as other assets with
remaining book value of $10,019,000. The changes in the carrying amount of
goodwill for the year ended July 31, 2002, are as follows:
(in thousands) Intangible Other
Goodwill Assets Assets
---------- ---------- ----------
Balance as of July 31, 2001, net of accumulated
amortization $353,115 $116,747 $16,162
Reclassified to goodwill 10,019 (8,221) (1,798)
Additions during the period - 3,866 -
Amortization expense - (14,022) -
Reduction of investment in unconsolidated
subsidiary (see Note D) - - (7,225)
Other changes - (200) (3,663)
---------- ---------- ----------
Balance as of July 31, 2002 $363,134 $ 98,170 $ 3,476
========== ========== ==========
The remaining intangible assets are subject to amortization.
F. Intangible Assets, net
Intangible assets, net consist of:
July 31, 2002 July 31, 2001
---------------------------------------- ------------------------------------------
(in thousands) Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------ ------------ --------- ----------- ------------ ---------
Customer lists $208,662 $(124,860) $83,802 $207,667 $(114,679) $92,988
Non-compete agreements 62,893 (48,525) 14,368 60,222 (44,684) 15,538
Assembled workforce - - - 9,600 (1,379) 8,221
------------ ------------ --------- ----------- ------------ ---------
Total $271,555 $(173,385) $98,170 $277,489 $(160,742) $116,747
============ ============ ========= =========== ============ =========
9
Customer lists have estimated lives of 15 years, while non-compete
agreements have estimated lives ranging from two to 10 years.
(in thousands)
Aggregate Amortization Expense:
2002 2001
-------- --------
For the year ended July 31, $14,022 $16,883
(in thousands)
Estimated Amortization Expense:
For the year ended July 31, 2003 $11,656
For the year ended July 31, 2004 10,682
For the year ended July 31, 2005 10,150
For the year ended July 31, 2006 9,631
For the year ended July 31, 2007 8,991
G. Long-Term Debt
Long-term debt consists of:
(in thousands) 2002 2001
--------- ---------
Senior Notes
Fixed rate, 7.16% due 2005-2013 (1) $350,000 $350,000
Fixed rate, 9.375%, due 2006 (2) 160,000 160,000
Fixed rate, 8.8%, due 2006-2009 (3) 184,000 184,000
Notes payable, 7.6% and 7.9% weighted average
interest rates, respectively, due 2002 to 2011 12,177 12,566
--------- ---------
706,177 706,566
Less: current portion, included in other
current liabilities 2,319 1,784
--------- ---------
$703,858 $704,782
========= =========
<FN>
(1) The OLP fixed rate Senior Notes ("$350 million Senior Notes"), issued
in August 1998, are general unsecured obligations of the OLP and rank
on an equal basis in right of payment with all senior indebtedness of
the OLP and senior to all subordinated indebtedness of the OLP. The
outstanding principal amount of the Series A, B, C, D and E Notes
shall be due on August 1, 2005, 2006, 2008, 2010, and 2013,
respectively. In general, the OLP does not have the option to prepay
the Notes prior to maturity without incurring prepayment penalties.
(2) The Company has a commitment to redeem on September 24, 2002, the MLP
fixed rate Senior Secured Notes ("MLP Senior Secured Notes"), issued
in April 1996, with the proceeds expected from $170,000,000 of MLP
fixed rate Senior Notes. The Company anticipates that it will
recognize an approximate $7,100,000 charge to earnings related to the
premium and other costs incurred to redeem the notes plus the
write-off of financing costs related to the original issuance of the
MLP Senior Secured Notes. The MLP Senior Secured Notes are secured by
the MLP's partnership interest in the OLP. The MLP Senior Secured
Notes bear interest from the date of issuance, payable semi-annually
in arrears on June 15 and December 15 of each year.
10
(3) The OLP fixed rate Senior Notes ("$184 million Senior Notes"), issued
in February 2000, are general unsecured obligations of the OLP and
rank on an equal basis in right of payment with all senior
indebtedness of the OLP and senior to all subordinated indebtedness of
the OLP. The outstanding principal amount of the Series A, B and C
Notes are due on August 1, 2006, 2007 and 2009, respectively. In
general, the OLP does not have the option to prepay the Notes prior to
maturity without incurring prepayment penalties.
</FN>
At July 31, 2002, the unsecured $157,000,000 Credit Facility (the "Credit
Facility"), expiring June 2003, consisted of a $117,000,000 unsecured
working capital, general corporate and acquisition facility, including a
letter of credit facility, and a $40,000,000 revolving working capital
facility. This $40,000,000 facility is subject to an annual reduction in
outstanding balances to zero for thirty consecutive days. All borrowings
under the Credit Facility bear interest, at the borrower's option, at a
rate equal to either a) LIBOR plus an applicable margin varying from 1.25%
to 2.25% or, b) the bank's base rate plus an applicable margin varying from
0.25% to 1.25%. The bank's base rate at July 31, 2002 and 2001 was 4.75%
and 6.75%, respectively. In addition, a commitment fee is payable on the
daily unused portion of the credit facility (generally a per annum rate of
0.0375% at July 31, 2002).
The Company had no short-term borrowings outstanding under the credit
facility at July 31, 2002 and 2001. Letters of credit outstanding, used
primarily to secure obligations under certain insurance arrangements,
totaled $40,614,000 and $46,660,000, respectively. At July 31, 2002, the
Company had $116,386,000 of funding available. Effective July 16, 2001, the
credit facility was amended to increase the letter of credit sub-facility
availability from $60,000,000 to $80,000,000.
Effective April 27, 2000, the MLP entered into an interest rate swap
agreement with Bank of America, related to the semi-annual interest payment
due on the MLP Senior Secured notes. The swap agreement, which was
terminated at the option of the counterparty on June 15, 2001, required the
counterparty to pay the stated fixed interest rate every six months. In
exchange, the MLP was required to make quarterly floating interest rate
payments based on an annual interest rate equal to the three month LIBOR
interest rate plus 1.655% applied to the same notional amount of
$160,000,000. The Company resumed paying the stated fixed interest rate
effective after June 15, 2001.
On December 17, 1999, in connection with the purchase of Thermogas, LLC
("Thermogas acquisition") (see Note P), the OLP assumed a $183,000,000 loan
that was originally issued by Thermogas, LLC ("Thermogas") and had a
maturity date of June 30, 2000. On February 28, 2000, the OLP issued
$184,000,000 of Senior Notes at an average interest rate of 8.8% in order
to refinance the $183,000,000 loan. The additional $1,000,000 in borrowings
was used to fund debt issuance costs.
The MLP Senior Secured Notes, the $350 million and $184 million Senior
Notes and the Credit Facility agreement contain various restrictive
covenants applicable to the MLP and OLP and its subsidiaries, the most
restrictive relating to additional indebtedness. In addition, the
Partnership is prohibited from making cash distributions of the Minimum
Quarterly Distribution if a default or event of default exists or would
exist upon making such distribution, or if the Partnership fails to meet
certain coverage tests. The Company is in compliance with all requirements,
tests, limitations and covenants related to these debt agreements.
The scheduled annual principal payments on long-term debt are to be
$2,319,000 in 2003, $2,134,000 in 2004, $2,299,000 in 2005, $271,313,000 in
2006, $59,039,000 in 2007 and $369,073,000 thereafter.
11
H. Derivatives
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and SFAS No. 138, requires all
derivatives (with certain exceptions), whether designated in hedging
relationships or not, to be recorded on the Consolidated Balance Sheets at
fair value. As a result of implementing SFAS No. 133 at the beginning of
fiscal 2001, the Company recognized in its first quarter of fiscal 2001,
gains totaling $709,000 in accumulated other comprehensive income. In
addition, beginning in the first quarter of fiscal 2001, the Company
recorded subsequent changes in the fair value of positions qualifying as
cash flow hedges in accumulated other comprehensive income and changes in
the fair value of other positions in the consolidated statements of
earnings. The Company's overall objective for entering into derivative
contracts for the purchase of product is related to hedging, risk reduction
and to anticipate market movements. Other derivatives are entered into to
reduce interest rate risk associated with long term debt and lease
obligations. Fair value hedges are derivative financial instruments that
hedge the exposure to changes in the fair value of an asset or a liability
or an identified portion thereof attributable to a particular risk. Cash
flow hedges are derivative financial instruments that hedge the exposure to
variability in expected future cash flows attributable to a particular
risk. The Company uses cash flow hedges to manage exposures to product
purchase price risk and uses both fair value and cash flow hedges to manage
exposure to interest rate risks.
Fluctuations in the wholesale cost of propane expose the Company to
purchase price risk. The Company purchases propane at various prices that
are eventually sold to its customers, exposing the Company to future
product price fluctuations. Also, certain forecasted transactions expose
the Company to purchase price risk. The Company monitors its purchase price
exposures and utilizes product hedges to mitigate the risk of future price
fluctuations. Propane is the only product hedged with the use of product
hedge positions. The Company uses derivative contracts to hedge a portion
of its forecasted purchases for up to one year in the future. These
derivatives are designated as cash flow hedging instruments. Because these
derivatives are designated as cash flow hedges, the effective portions of
changes in the fair value of the derivatives are recorded in other
comprehensive income (OCI) and are recognized in the consolidated
statements of earnings when the forecasted transaction impacts earnings.
The $136,000 risk management fair value adjustment classified as other
comprehensive income on the consolidated statements of stockholder's equity
at July 31, 2002, will be recognized in the consolidated statements of
earnings during fiscal 2003. Changes in the fair value of cash flow hedges
due to hedge ineffectiveness, if any, are recognized in cost of product
sold. The fair value of the derivatives related to purchase price risk is
classified on the Consolidated Balance Sheets as inventories.
Through its risk management trading activities, the Company also purchases
and sells derivatives that are not designated as accounting hedges to
manage other risks associated with commodity prices. Emerging Issues Task
Force issue 98-10 "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities" applies to these activities. The types of
contracts utilized in these activities include energy commodity forward
contracts, options and swaps traded on the over-the-counter financial
markets, and futures and options traded on the New York Mercantile
Exchange. The Company utilizes published settlement prices for exchange
traded contracts, quotes provided by brokers and estimates of market prices
based on daily contract activity to estimate the fair value of these
contracts. The changes in fair value of these risk management trading
activities are recognized as they occur in cost of product sold in the
consolidated statements of earnings.
Estimates related to our risk management trading activities are sensitive
to uncertainty and volatility inherent in the energy commodities markets
and actual results could differ from these estimates. Assuming a
hypothetical 10% adverse change in prices for the delivery month of all
energy commodities, the potential loss in future earnings of such a change
is estimated at $1,100,000 for risk management trading activities as of
July 31, 2002. The preceding hypothetical analysis is limited because
changes in prices may or may not equal 10%.
12
The following table summarizes the change in the unrealized fair value of
contracts from risk management trading activities for the years ended July
31, 2002 and 2001. This table summarizes the contracts where settlement has
not yet occurred.
(in thousands) Year ended July 31,
--------------------
2002 2001
--------- ---------
Unrealized (losses) in fair value of contracts
outstanding at beginning of year $(12,587) $ (359)
Unrealized gains and (losses) recognized at
inception - -
Unrealized gains and (losses) recognized as a
result of changes in valuation techniques
or assumptions - -
Other unrealized gains and (losses) recognized (6,148) 23,320
Less: realized gains and (losses) recognized (14,166) 35,548
--------- ---------
Unrealized (losses) in fair value of contracts
outstanding at end of year $ (4,569) $(12,587)
========= =========
The following table summarizes the maturity of these contracts for the
valuation methodologies we utilize as of July 31, 2002 and 2001. This table
summarizes the contracts where settlement has not yet occurred.
(in thousands) Fair Value of Contracts
at Period-End
--------------------------
Maturity
greater than
Maturity 1 year
less than and less than
Source of Fair Value 1 year 18 months
--------------------------------------------------- ---------- -------------
Prices actively quoted $ (328) $ -
Prices provided by other external sources (4,225) (16)
Prices based on models and other valuation methods - -
---------- -------------
Unrealized (losses) in fair value of contracts
outstanding at July 31, 2002 $(4,553) $ (16)
========== =============
Prices actively quoted $(2,535) $ -
Prices provided by other external sources (4,061) (5,991)
Prices based on models and other valuation methods - -
---------- -------------
Unrealized (losses) in fair value of contracts
outstanding at July 31, 2001 $(6,596) $(5,991)
========== =============
The following table summarizes the gross transaction volumes in barrels
(one barrel equals 42 gallons) for risk management trading contracts that
were physically settled for the years ended July 31, 2002, 2001 and 2000:
(in thousands)
Year ended July 31, 2002 11,162
Year ended July 31, 2001 18,539
Year ended July 31, 2000 42,284
13
The Company also uses forward contracts, not designated as accounting
hedges under SFAS No. 133, to help reduce the price risk related to sales
made to its propane customers. These forward contracts meet the requirement
to qualify as normal purchases and sales as defined in SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, and thus are not adjusted to fair
market value.
As of July 31, 2002, the Company holds $706,177,000 in primarily fixed rate
debt and $156,000,000 in variable rate operating leases. Fluctuations in
interest rates subject the Company to interest rate risk. Decreases in
interest rates increase the fair value of the Company's fixed rate debt,
while increases in interest rates subject the Company to the risk of
increased interest expense related to its variable rate debt and operating
leases.
The Company enters into fair value and cash flow hedges to help reduce its
overall interest rate risk. Interest rate swaps were used to hedge the
exposure to changes in the fair value of fixed rate debt due to changes in
interest rates. The fair value of interest rate derivatives that are
considered fair value or cash flow hedges are classified either as other
current or long-term assets or as other current or long-term liabilities on
the Consolidated Balance Sheets. Changes in the fair value of the fixed
rate debt and any related fair value hedges are recognized as they occur in
interest expense in the consolidated statements of earnings. There were no
such fair value hedges outstanding at July 31, 2002. Interest rate caps are
used to hedge the risk associated with rising interest rates and their
effect on forecasted transactions related to variable rate debt and lease
obligations. These interest rate caps are designated as cash flow hedges
and are outstanding at July 31, 2002. Thus, the effective portions of
changes in the fair value of the hedges are recorded in OCI at interim
periods and are recognized as interest expense in the consolidated
statements of earnings when the forecasted transaction impacts earnings.
Cash flow hedges are assumed to hedge the risk of changes in cash flows of
the hedged risk.
I. Income Taxes
The significant components of the net deferred tax asset (liability)
included in the consolidated balance sheets are as follows:
(in thousands) 2002 2001
-------- --------
Deferred tax liabilities:
Partnership basis difference $(1,727) $(1,827)
Tax liability assumed in acquisition (725) -
-------- --------
Total deferred tax liabilities (2,452) (1,827)
Deferred tax assets:
Operating loss and credit carryforwards 101 101
-------- --------
Total deferred tax assets 101 101
-------- --------
Net deferred tax liability $(2,351) $(1,726)
======== ========
Partnership basis differences are primarily attributable to differences in
the tax and book basis of fixed assets and amortizable intangibles
resulting from the Company's contribution of assets and liabilities
concurrent with the MLP's public offering in 1994.
14
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $98,000,000 at July 31, 2002 available to
offset future taxable income. These net operating loss carryforwards expire
at various dates through 2011.
The Company is potentially subject to the built-in gains tax, which could
be incurred on the sale of assets owned as of August 1, 1998, the date of
the Subchapter S election, that have a fair market value in excess of their
tax basis as of that date. However, the Company anticipates that it can
avoid incurring any built-in gains tax liability through utilization of its
net operating loss carryovers and tax planning relating to the
retention/disposition of assets owned as of August 1, 1998. In the event
that the built-in gains tax is not incurred, the Company may not utilize
the net operating loss carryforwards.
J. Contingencies and Commitments
The Company is threatened with or named as a defendant in various lawsuits
that, among other items, claim damages for product liability. It is not
possible to determine the ultimate disposition of these matters; however,
management is of the opinion that there are no known claims or contingent
claims that will have a material adverse effect on the financial condition,
results of operations and cash flows of the Company. Currently, the Company
is not a party to any legal proceedings other than various claims and
lawsuits arising in the ordinary course of business.
On December 6, 1999, the OLP entered into, with Banc of America Leasing &
Capital LLC, a $25,000,000 operating lease involving the sale-leaseback of
a portion of the OLP's customer tanks. This operating lease has a term that
expires June 30, 2003 and may be extended for two additional one-year
periods at the option of the OLP, if such extension is approved by the
lessor. On December 17, 1999, immediately prior to the closing of the
Thermogas acquisition (See Note P), Thermogas entered into, with Banc of
America Leasing & Capital LLC, a $135,000,000 operating lease involving a
portion of its customer tanks. In connection with the Thermogas
acquisition, the OLP assumed all obligations under the $135,000,000
operating lease, which has terms and conditions similar to the December 6,
1999, $25,000,000 operating lease discussed above. Prior to the end of
these lease terms, the Company intends to secure additional financing in
order to purchase the related customer tanks. No assurances can be given
that such financing will be obtained or, if obtained, such financing will
be on terms equally favorable to the Company.
Effective June 2, 2000, the OLP entered into an interest rate cap agreement
("Cap Agreement") with Bank of America, related to variable quarterly rent
payments due pursuant to two operating tank lease agreements. The variable
quarterly rent payments are determined based upon a floating LIBOR based
interest rate. The Cap Agreement, which expires June 30, 2003, requires
Bank of America to pay the OLP at the end of each March, June, September
and December the excess, if any, of the applicable three month floating
LIBOR interest rate over 9.3%, the cap, applied to the total obligation due
each quarter under the two operating tank lease agreements. The total
obligation under these two operating tank lease agreements as of July 31,
2002 and 2001 was $156,000,000 and $157,600,000, respectively.
The MLP's senior units are redeemable by the MLP at any time, in whole or
in part, upon payment in cash of the liquidating value of the senior units,
currently $111,288,000, plus the amount of any accrued and unpaid
distributions. The holder of the senior units has the right, subject to
certain events and conditions, to convert any outstanding senior units into
MLP common units at the earlier of December 31, 2005 or upon the occurrence
of a material event as defined by the MLP partnership agreement. Such
conversion rights are contingent upon the Company not previously redeeming
such securities.
15
Certain property and equipment is leased under noncancelable operating
leases, which require fixed monthly rental payments and which expire at
various dates through 2020. Future minimum lease commitments for such
leases in the next five years, including the aforementioned operating tank
leases, are $26,986,000 in 2003, $13,478,000 in 2004, $10,223,000 in 2005,
$8,228,000 in 2006 and $5,020,000 in 2007.
In addition to the future minimum lease commitments, the Company plans to
purchase vehicles and computers at the end of their lease terms totaling
$158,577,000 in 2003, $4,738,000 in 2004, $4,105,000 in 2005, $2,076,000 in
2006 and $6,944,000 in 2007. The Company intends to renew other vehicle,
tank and computer leases that would have had buyouts of $5,039,000 in 2003
and $311,000 in 2004.
K. Minority Interest
The minority interest on the Consolidated Balance Sheets includes limited
partner interests in both the MLP's common units held by the public and the
MLP's senior units held by JEF Capital Management, Inc., an entity owned by
James E. Ferrell, Chairman, Chief Executive Officer and President of the
general partner. At July 31, 2002 and 2001, minority interest related to
the common units owned by the public was $69,332,000 and $76,189,000,
respectively. In fiscal 2000, the minority interest related to common units
owned by the public was zero, and accordingly, distributions in excess of
basis were recorded in minority interest on the consolidated statements of
earnings. Minority interest related to the senior units was $111,288,000
and $112,065,000 at July 31, 2002 and 2001, respectively. The amounts at
July 31, 2002 and 2001 represent the liquidation value of the senior units.
See Note L for additional information about the senior units.
L. Transactions with Related Parties
The Company has two notes receivable from Ferrell on an unsecured basis due
on demand. Because Ferrell no longer intends to repay the notes, the
Company did not accrue interest income in fiscal years 2002, 2001 and 2000.
The balances outstanding on these notes at July 31, 2002 and 2001, are
$147,484,000, and $147,607,000, respectively, and are reported as Note
Receivable from Parent in Stockholder's Equity on the Consolidated Balance
Sheets.
On December 12, 2001, the MLP issued 37,487 of its common units to Ferrell
Propane, Inc., a subsidiary of the General Partner in connection with the
acquisition of Blue Flame Bottle Gas (see Note P). The common unit issuance
compensated Ferrell Propane for its retention of $725,000 of certain tax
liabilities of Blue Flame.
During fiscal 2000, Williams became a related party to the Company due to
the MLP's issuance of 4,375,000 senior units to a subsidiary of Williams as
part of the Thermogas acquisition (See Note P). In a noncash transaction,
during fiscal 2001 and 2000, the MLP paid quarterly senior unit
distributions to Williams of $11,108,000 and $9,422,000, respectively,
using additional senior units. In April 2001, Williams sold all its senior
units to JEF Capital Management, Inc., an entity owned by James E. Ferrell,
Chairman, Chief Executive Officer and President of the Company, and
thereafter, ceased to be a related party of the Company.
On April 6, 2001, Williams approved amendments to the MLP partnership
agreement related to certain terms of the senior units. Williams then sold
all of the senior units for a purchase price of $195,529,000 plus accrued
and unpaid distributions to JEF Capital Management. The senior units
currently have all the same terms and preference rights in distributions
and liquidation as when the units were owned by Williams.
16
During fiscal 2001, the MLP paid to JEF Capital Management $83,464,000 to
redeem a total of 2,086,612 senior units and $5,750,000 in senior unit
distributions. During fiscal 2002, the MLP paid JEF Capital Management
$776,445 to redeem a total of 19,411 senior units and $11,192,000 in senior
unit distributions. In a noncash transaction, the MLP accrued a senior unit
distribution of $2,782,211 that will be paid to JEF Capital Management on
September 13, 2002.
Ferrell International Limited, FI Trading, Inc. and Ferrell Resources, LLC
are beneficially owned by James E. Ferrell and thus are affiliates of the
Company. The Company enters into transactions with Ferrell International
Limited and FI Trading in connection with its risk management activities
and does so at market prices in accordance with an affiliate trading policy
approved by the Company's Board of Directors. These transactions include
forward, option and swap contracts and are all reviewed for compliance with
the policy. Amounts due from Ferrell International Limited at July 31, 2002
and 2001 were $396,000 and $0, respectively. Amounts due to Ferrell
International Limited at July 31, 2002 and 2001 were $266,000 and $0,
respectively.
M. Employee Benefits
Ferrell makes contributions to the ESOT that causes a portion of the shares
of Ferrell owned by the ESOT to be allocated to employees' accounts over
time. The allocation of Ferrell shares to employee accounts causes a
non-cash compensation charge to be incurred by the Company, equivalent to
the fair value of such shares allocated. The Company is not obligated to
fund or make contributions to the ESOT.
The Company and its parent, Ferrell, have a defined contribution
profit-sharing plan which includes both profit sharing and matching
contributions. The plan covers substantially all employees with more than
one year of service. With the establishment of the ESOP in July 1998, the
Company suspended future profit sharing contributions to the plan beginning
with fiscal year 1998. The plan, which qualifies under section 401(k) of
the Internal Revenue Code, also provides for matching contributions under a
cash or deferred arrangement based upon participant salaries and employee
contributions to the plan.
The Company has a defined benefit plan that provides participants who were
covered under a previously terminated plan with a guaranteed retirement
benefit at least equal to the benefit they would have received under the
terminated plan. Until July 31, 1999, benefits under the terminated plan
were determined by years of credited service and salary levels. As of July
31, 1999, years of credited service and salary levels were frozen. The
Company's funding policy for this plan is to contribute amounts deductible
for Federal income tax purposes and invest the plan assets primarily in
corporate stocks and bonds, U.S. Treasury bonds and short-term cash
investments. As of July 31, 2002 and 2001, other comprehensive income was
reduced and other liabilities were increased $527,000 and $2,092,000,
respectively because the accumulated benefit obligation of this plan
exceeded the fair value of plan assets.
N. Ferrellgas Unit Option Plan and Stock Options of Ferrell Companies, Inc.
Prior to April 19, 2001, the Second Amended and Restated Ferrellgas Unit
Option Plan (the "unit option plan") authorized the issuance of options
(the "unit options") covering up to 850,000 of the MLP's common units to
employees of the Company or its affiliates. Effective April 19, 2001, the
unit option plan was amended to authorize the issuance of options covering
an additional 500,000 of the MLP's common units. The Company's Board of
17
Directors administers the unit option plan, authorizes grants of unit
options thereunder and sets the unit option price and vesting terms of unit
options in accordance with the terms of the unit option plan. No single
officer or director of the Company may acquire more than 314,895 of the
MLP's common units under the unit option plan. The unit options outstanding
as of July 31, 2002, are exercisable at exercise prices ranging from $16.80
to $21.67 per unit, which was an estimate of the fair market value of the
units at the time of the grant. In general, the options currently
outstanding under the unit option plan vest over a five-year period, and
expire on the tenth anniversary of the date of the grant.
Number Weighted Weighted
of Average Average
Units Exercise Price Fair Value
----------- -------------- ----------
Outstanding, August 1, 1999 782,025 $18.23
Granted - - $ -
Forfeited (60,500) 19.38
-----------
Outstanding, July 31, 2000 721,525 18.13
Granted 651,000 17.90 2.56
Exercised (101,250) 16.80
Forfeited (42,075) 19.27
-----------
Outstanding, July 31, 2001 1,229,200 18.08
Granted - - -
Exercised (55,350) 16.80
Forfeited (98,450) 18.04
-----------
Outstanding, July 31, 2002 1,075,400 18.15
-----------
Options exercisable, July 31, 2002 594,725 18.25
-----------
Options Outstanding at
July 31, 2002
----------------------
Range of option prices at end of year $16.80-$21.67
Weighted average remaining contractual life 6.2 Years
The Ferrell Companies Incentive Compensation Plan (the "ICP") was
established by Ferrell to allow upper middle and senior level managers of
the Company to participate in the equity growth of Ferrell. The shares
underlying the stock options are common shares of Ferrell, therefore, there
is no potential dilution of the Company. The Ferrell ICP stock options vest
ratably in 5% to 10% increments over 12 years or 100% upon a change of
control of Ferrell, or the death, disability or retirement at the age of 65
of the participant. Vested options are exercisable in increments based on
the timing of the payoff of Ferrell debt, but in no event later than 20
years from the date of issuance.
O. Disclosures About Fair Value of Financial Instruments
The carrying amount of short-term financial instruments approximates fair
value because of the short maturity of the instruments. The estimated fair
value of the Company's long-term financial instruments was $710,228,000 and
$681,060,000 as of July 31, 2002 and 2001, respectively. The fair value is
estimated based on quoted market prices.
Interest Rate Collar, Cap and Swap Agreements. The Company from time to
time has entered into various interest rate collar, cap and swap agreements
involving, among others, the exchange of fixed and floating interest
payment obligations without the exchange of the underlying principal
amounts. During fiscal 2001, an interest rate collar agreement expired and
a swap agreement was terminated by a counterparty. As of July 31, 2002, an
interest rate cap agreement with a counterparty that is a large financial
institution remained in place. The fair value of this interest rate cap
agreement at July 31, 2002 and 2001 was de minimis.
18
P. Business Combinations
During the year ended July 31, 2002, the Company acquired three retail
propane businesses with an aggregate value at $10,790,000.
o Blue Flame Bottle Gas, based in southern Arizona
o Alabama Butane Co., based in central and south Alabama
o Alma Farmers Union Co-op, based in western Wisconsin
These purchases were funded by $6,294,000 of cash payments and, in noncash
transactions, the issuance of 80,000 of the MLP's common units valued at an
aggregate of $1,600,000, and $2,171,000 of notes payable to the seller. The
aggregate value was allocated as follows: $7,064,000 for fixed assets such
as customer tanks, buildings and land, $2,671,000 for non-compete
agreements, $1,195,000 for customer lists, $32,000 for other assets,
$725,000 for deferred tax liabilities and $(172,000) for net working
capital. Net working capital was comprised of $556,000 of current assets
and $728,000 of current liabilities. The weighted average amortization
period for non-compete agreements and customer lists are five and 15 years,
respectively.
During the year ended July 31, 2001, the Company made acquisitions of three
businesses with an aggregate value at $418,000. These purchases were funded
by $200,000 of cash payments and, in a non-cash transaction, the issuance
of $218,000 of notes payable to the seller. Non-compete agreements and
customer lists were assigned values of $228,000 and $4,000, respectively.
On December 17, 1999, the Company purchased Thermogas from a subsidiary of
Williams. At closing the Company entered into the following noncash
transactions: a) issued $175,000,000 in senior units to the seller, b)
assumed a $183,000,000 loan, (see Note G) and c) assumed a $135,000,000
operating lease (see Note J). After the conclusion of these
acquisition-related transactions, including the merger of the OLP and
Thermogas, the Company acquired $61,842,000 of cash, which remained on the
Thermogas balance sheet at the acquisition date. The Company paid
$17,146,000 in additional costs and fees related to the acquisition. As
part of the Thermogas acquisition, the OLP agreed to reimburse Williams for
the value of working capital received by the Company in excess of
$9,147,500. On June 6, 2000, the OLP and Williams agreed upon the amount of
working capital that was acquired by the Company on December 17, 1999. The
OLP reimbursed Williams $5,652,500 as final settlement of this working
capital reimbursement obligation. In fiscal 2000, the Company had accrued
$7,033,000 in involuntary employee termination benefits and exit costs,
which it expected to incur within twelve months from the acquisition date
as it implemented the integration of the Thermogas operations. This accrual
included $5,870,000 of termination benefits and $1,163,000 of costs to exit
Thermogas activities. The Company paid $2,788,000 and $1,306,000 for
termination benefits and $491,000 and $890,000 for exit costs in fiscal
years 2001 and 2000, respectively. The remaining liability for termination
benefits and exit costs was reduced in fiscal 2001 by $1,558,000 as an
adjustment to goodwill.
19
Prior to the issuance of SFAS No. 141, "Business Combinations," the total
assets contributed to the OLP (at the Company's cost basis) were allocated
as follows: (a) working capital of $16,870,000, (b) property, plant and
equipment of $140,284,000, (c) $60,200,000 to customer list with an
estimated useful life of 15 years, (d) $9,600,000 to assembled workforce
with an estimated useful life of 15 years, (e) $3,071,000 to non-compete
agreements with an estimated useful life ranging from one to seven years,
and (f) $86,475,000 to goodwill at an estimated useful life of 15 years.
The transaction was accounted for as a purchase. Pursuant to the
implementation of SFAS No. 141, assembled workforce was considered an
acquired intangible asset that did not meet the criteria for recognition
apart from goodwill. Effective August 1, 2000, the $8,221,000 carrying
value of assembled workforce was reclassified to goodwill.
All transactions were accounted for using the purchase method of
accounting.
20