SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-10473
PRIDE COMPANIES, L.P.
(Name of registrant)
Delaware 75-2313597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1209 North Fourth Street, Abilene, Texas 79601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(915) 674-8000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate the number of units outstanding of each of the
issuer's classes of units, as of the latest practicable date.
Class Outstanding at November 1, 1998
- - - ------------ -------------------------------
Common Units 4,950,000<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997
Statements of Operations (unaudited) -
for the three months ended September 30, 1998 and
for the three months ended September 30, 1997
Statements of Operations (unaudited) -
for the nine months ended September 30, 1998 and
for the nine months ended September 30, 1997
Statements of Cash Flows (unaudited) -
for the nine months ended September 30, 1998 and
for the nine months ended September 30, 1997
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIDE COMPANIES, L.P.
BALANCE SHEETS
(Amounts in thousands, except unit amounts)
<CAPTION>
September 30,
1998 December 31,
(unaudited) 1997
___________ ____________
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 830 $ 5,008
Accounts receivable, less allowance
for doubtful accounts 13,537 14,543
Inventories 8,427 13,036
Prepaid expenses 2,161 2,096
----------- -----------
Total current assets 24,955 34,683
Property, plant and equipment 68,420 67,253
Accumulated depreciation 22,051 19,665
----------- -----------
Property, plant and equipment - net 46,369 47,588
Assets no longer used in the business 7,401 7,353
Deferred financing cost 4,312 5,254
Other assets 365 403
----------- -----------
$ 83,402 $ 95,281
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Current liabilities:
Accounts payable $ 18,588 $ 26,670
Accrued payroll and related benefits 1,365 1,870
Accrued taxes 2,981 3,323
Other accrued liabilities 1,698 2,811
Current portion of long-term debt 4,433 2,084
----------- -----------
Total current liabilities 29,065 36,758
Long-term debt, excluding current portion 41,623 41,087
Deferred income taxes 2,315 2,405
Other long-term liabilities 11,312 10,935
Redeemable preferred equity 20,451 19,529
Partners' capital:
Common units (5,275,000 units
authorized, 4,950,000 units
outstanding) (20,468) (14,656)
General partners' interest (896) (777)
----------- -----------
$ 83,402 $ 95,281
=========== ===========
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
<CAPTION>
Three Months Ended
September 30,
1998 1997
------------ -----------
<S> <C> <C>
Revenues $ 92,167 $ 134,734
Cost of sales and operating expenses,
before depreciation 88,504 128,116
Marketing, general and administrative
expenses, before depreciation 1,991 2,297
Depreciation 856 1,717
------------ -----------
Operating income (loss) 816 2,604
Other income (expense):
Interest income 19 13
Interest expense (including interest
paid in kind of $347 and $0,
respectively) (1,289) (1,370)
Credit and loan fees (including
amortization of $331 and $0,
respectively) (541) (564)
Other - net 79 18
------------ -----------
Income (loss) before income taxes (916) 701
Income tax expense (benefit) (46) (70)
------------ -----------
Net income (loss) $ (870) $ 771
============ ===========
Basic and diluted net income (loss)
per Common Unit $ (0.26) $ (0.15)
============ ===========
Numerator:
Net income (loss) $ (870) $ 771
Preferred dividends accrued
and paid in kind (445) -
------------ -----------
Subtotal (1,315) 771
2% general partner interest (26) 15
------------ -----------
Numerator for basic and diluted
net inc(loss) per Common Unit $ (1,289) $ 756
============ ===========
Denominator:
Denominator for basic and diluted
net income (loss) per Common Unit 4,950 4,950
============ ===========
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ -----------
<S> <C> <C>
Revenues $ 301,372 $ 404,813
Cost of sales and operating expenses,
before depreciation 291,507 390,378
Marketing, general and administrative
expenses, before depreciation 6,265 7,148
Depreciation 2,569 5,151
------------ -----------
Operating income (loss) 1,031 2,136
Other income (expense):
Interest income 76 29
Interest expense (including interest
paid in kind of $991 and $0,
respectively) (3,785) (4,055)
Credit and loan fees (including
amortization of $992 and $0,
respectively, and credit and
loan fees paid in kind of
$150 and $0, respectively) (2,125) (1,452)
Other - net 139 474
------------ -----------
Income (loss) before income taxes (4,664) (2,868)
Income tax expense (benefit) (44) (124)
------------ -----------
Net income (loss) $ (4,620) $ (2,744)
============ ===========
Basic and diluted net loss
per Common Unit $ (1.17) $ (0.54)
============ ===========
Numerator:
Net loss $ (4,620) $ (2,744)
Preferred dividends accrued
and paid in kind (1,311) -
------------ -----------
Subtotal (5,931) (2,744)
2% general partner interest (119) (55)
------------ -----------
Numerator for basic and diluted
net loss per Common Unit $ (5,812) $ (2,689)
============ ===========
Denominator:
Denominator for basic and diluted
net loss per Common Unit 4,950 4,950
============ ===========
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
____________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,620) $ (2,744)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Noncash charges (credits) to earnings:
Depreciation 2,569 5,151
Amortization of loan costs 992 -
(Gain) loss on sale of
property, plant and equipment (114) (156)
Deferred tax benefit (90) (143)
Paid in kind interest and
credit and loan fees 1,141 -
Net effect of changes in:
Accounts receivable 1,006 3,869
Inventories 4,609 4,064
Prepaid expenses (65) (96)
Accounts payable and other
long-term liabilities (8,094) (3,881)
Accrued liabilities (1,960) (823)
------------ -----------
Total adjustments (6) 7,985
------------ -----------
Net cash provided by (used in)
operating activities (4,626) 5,241
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,433) (1,138)
Proceeds from disposal of property,
plant and equipment 167 408
Other (30) 1
------------ -----------
Net cash provided by (used in)
investing activities (1,296) (729)
Cash flows from financing activities:
Proceeds from debt and credit
facilities 58,930 103,866
Payments on debt and credit
facilities (57,186) (108,292)
------------ -----------
Net cash provided by (used in)
financing activities 1,744 (4,426)
Net increase (decrease) in cash and
cash equivalents (4,178) 86
Cash and cash equivalents at the
beginning of the period 5,008 472
------------ -----------
Cash and cash equivalents at the
end of the period $ 830 $ 558
============ ===========
See accompanying notes.
/TABLE
<PAGE>
PRIDE COMPANIES, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Pride Companies, L.P. (the "Partnership") was formed as a limited
partnership under the laws of the State of Delaware in January 1990.
The Partnership owns and operates (i) a crude oil gathering business
that gathers, transports, resells and redelivers crude oil in the
Texas and New Mexico markets (the "Crude Gathering System") and (ii) a
products marketing business which includes certain integrated products
pipelines and terminal operations in Abilene, Texas; San Angelo,
Texas; and Aledo, Texas (the "Products Marketing Business"). The
Partnership also owns a modern simplex petroleum refinery facility
(the "Refinery") which was mothballed on March 22, 1998. In April
1998, the Partnership began purchasing refined products from Equilon,
a refining and marketing joint venture between Royal Dutch/Shell Group
and Texaco, Inc. (formerly, Texaco Trading and Transportation, Inc.)
(the "Equilon Agreement") to market through its products pipelines and
terminal operations. Prior to mothballing the Refinery, the
Partnership's operations were considered a single industry segment,
the refining of crude oil and the sale of the resulting petroleum
products. The primary purpose of the Crude Gathering System was to
purchase and sell crude oil in order to provide a supply of the
appropriate grade of crude oil at strategic locations to be used as
feedstock for the Refinery. As a result of the Equilon Agreement and
the mothballing of the Refinery, the Crude Gathering System now
markets crude oil primarily to other refineries and the Partnership
now operates two separate and distinct industry segments, the Crude
Gathering System segment and the Products Marketing Business segment.
The Crude Gathering System consists of pipeline gathering systems and
a fleet of trucks which transport crude oil into third party pipelines
and into the system's primary asset, a common carrier pipeline. The
Products Marketing Business has two products pipelines that originate
at the Refinery and terminate at the Partnership's marketing
terminals. In connection with the mothballing of the Refinery, the
products pipeline that extends from the Refinery to the Aledo terminal
was idled, since Equilon's pipeline is connected to the Partnership's
Aledo terminal.
Pride Refining, Inc., a Texas corporation, owns a 1.9% general
partner interest in and serves as the managing general partner of the
Partnership (the "Managing General Partner"). The Partnership
succeeded in January 1990 to the businesses of Pride SGP, Inc.
("Special General Partner" or "Pride SGP") which owns a 0.1% general
partner interest in and serves as the special general partner of the
Partnership. The Managing General Partner and the Special General
Partner (collectively the "General Partners") collectively own a 2%
general partner interest. In addition to its general partner
interest, the Special General Partner owns a 4.9% interest in the
Partnership through ownership of common limited partner units (the
"Common Units"). Public ownership, represented by the remaining
Common Units, is 93.1%.
2. Accounting Policies
The financial statements of the Partnership include all of its
majority-owned subsidiaries including limited partnership interests
where the Partnership has significant control through related parties.
All intercompany transactions have been eliminated and minority
interest has been provided where applicable. The financial statements
included in this quarterly report on Form 10-Q are unaudited and
condensed and do not contain all information required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, the accompanying financial statements
contain all material adjustments necessary to present fairly the
financial position, results of operations, and cash flows for such
periods. Interim period results are not necessarily indicative of the
results to be achieved for the full year. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The financial statements of the Partnership presented in its
Annual Report on Form 10-K for the year ended December 31, 1997
include a summary of significant accounting policies that should be
read in conjunction with this quarterly report on Form 10-Q. The
Partnership has two subsidiaries that are corporations which are
separate taxable entities whose operations are subject to federal
income taxes.
3. Earnings Per Share
Earnings per share for all periods has been presented in
accordance with the recently issued Statement of Financial Accounting
Standards No. 128, Earnings per Share. Basic net income (loss) per
common unit is computed using the weighted average number of common
units outstanding. Diluted net income (loss) per common unit is
computed by adjusting the primary units outstanding and net income
(loss) for the potential effect of the conversion of the Subordinate
Note A, Series B Preferred Units, Series C Preferred Units and Series
E Preferred Units outstanding during the period and the elimination of
the related interest and dividends and the potential effect of the
exercise of officers' and employees' unit appreciation rights. When
the effect of including the conversion of the convertible preferred
equity and the exercise of unit appreciation rights on basic or
diluted net income (loss) per unit is antidilutive, as is the case for
the periods ended September 30, 1998 and September 30, 1997, they are
not included in the calculation of diluted net income (loss) per unit.
4. Related Party Transactions
In accordance with the Second Amended and Restated Agreement of
Limited Partnership of Pride Companies, L.P. ("Partnership
Agreement"), the Managing General Partner conducts, directs and
exercises control over substantially all of the activities of the
Partnership. The Managing General Partner has a 1.9% interest in the
income and cash distributions of the Partnership, subject to certain
adjustments. Certain members of the management of the Managing
General Partner are also members of the management of Pride SGP, which
has a 0.1% general partner interest and a 4.9% limited partner
interest in the Partnership.
The Partnership has no directors or officers; however, directors
and officers of the Managing General Partner are employed by the
Partnership to function in this capacity. Compensation of these
persons and any other expenses incurred on behalf of the Partnership
by the Managing General Partner and Pride SGP are paid by the
Partnership.
Certain conflicts of interest, including potential non-arm's
length transactions, could arise as a result of the relationships
described above. The Board of Directors and management of the
Managing General Partner have a duty to manage the Partnership in the
best interests of the unitholders and consequently must exercise good
faith and integrity in handling the assets and affairs of the
Partnership.
5. Inventories
<TABLE>
<CAPTION>
Inventories are valued at the At At
lower of cost or market and September 30, December 31,
consist of: 1998 1997
(in thousands)
----------------------------- ----------- -----------
<S> <C> <C>
Crude oil $ 6,581 $ 8,388
Refined products and blending
materials 567 6,473
----------- -----------
7,148 14,861
LIFO reserve 713 (2,837)
Market valuation (336) -
----------- -----------
Petroleum inventories 7,525 12,024
Spare parts and supplies 902 1,012
----------- -----------
$ 8,427 $ 13,036
=========== ===========
</TABLE>
The last-in/first-out (LIFO) inventory cost method is used for
crude oil and refined products and blending materials. The
weighted average inventory cost method is used for spare parts and
supplies.
The Partnership has recently amended its agreement with Equilon
whereby Equilon has assumed title of substantially all of the product
inventory on hand as of the close of business on September 30, 1998.
While this agreement is in place, the Partnership will purchase
product inventory daily from Equilon. As a result, the Partnership's
inventory will be minimal.
6. Long-term Debt
On December 31, 1997, Varde Partners, Inc. ("Varde") purchased
and assumed the then existing lenders' rights and obligations under
the Partnership's outstanding bank debt. In conjunction with Varde's
purchase and assumption of the lenders' rights and obligations under
such bank debt, BankBoston, N.A. ("BankBoston") refinanced the
Partnership's letter of credit and revolver facilities (the
"Revolver") on December 31, 1997 for a 5-year term.
Varde and BankBoston each amended their respective credit
agreements effective April 15, 1998. The credit agreement with Varde
was amended to provide a $2.0 million loan for working capital
purposes (the "Varde Revolver") through deferral of principal
amortization on the A Term Loan and additional cash advances (see
below). In addition, both credit agreements were amended to ease
certain financial covenants through December 31, 1998. It is not
certain whether the Partnership will be able to comply with these
covenants subsequent to December 31, 1998.
The Revolver from BankBoston provides for the issuance of letters
of credit to third parties to support the Partnership's purchase or
exchange of crude oil and petroleum products in an aggregate amount
not to exceed $65.0 million, with a sublimit of $10.0 million for
direct cash borrowings for general working capital purposes. Amounts
available under the Revolver are subject to a borrowing base
calculated as the sum of the Partnership's cash and cash equivalents,
certain receivables, deposits, inventory and other amounts, reduced by
a portion of crude oil royalties payable and certain other amounts
payable. The amount available under the borrowing base net of
outstanding letters of credit and advances under the Revolver was $1.1
million as of September 30, 1998.
Though no advances had been drawn under the letter of credit
facility as of September 30, 1998, the Partnership had approximately
$39.7 million in outstanding letters of credit. The Partnership had
$1.1 million in advances under the Revolver for direct cash borrowings
as of September 30, 1998. The entire $1.1 million has been classified
in the current portion of long-term debt. The fee on outstanding
letters of credit was 2.5% per annum as of September 30, 1998. There
is also an issuance fee of 0.125% per annum on the face amount of each
letter of credit. The fee for the unused portion of the Revolver is
0.5% per annum. At the Partnership's discretion, cash borrowings
under the Revolver at September 30, 1998 bore interest at either LIBOR
plus 3% or prime plus 1.75%. LIBOR and the prime rate were 5.375% and
8.25%, respectively, at September 30, 1998. The credit agreement
evidencing the Revolver also requires the Partnership to pay an agency
fee of up to $70,000 per annum depending on the number of participants
in the credit facility and restricts the payment of distributions to
unitholders throughout the term of the credit agreement. BankBoston
also charged a $75,000 amendment fee related to the amendment that
became effective April 15, 1998.
As a result of Varde's assumption of the outstanding bank debt,
additional loans to the Partnership and subsequent interest being paid
in like additional securities ("Paid in Kind"), Varde now holds a term
loan of $20.3 million ("A Term Loan"), a term loan of $10 million ("B
Term Loan"), a term loan of $4.9 million ("C Term Loan") and an
unsecured note of $2.7 million ("Subordinate Note A") as of September
30, 1998. The A Term Loan bears interest rates of 11% in the first
two years, 13% in the third year, 15% in the fourth year and 17% in
the fifth year. The Partnership has included $1.9 million of the A
Term Loan in the current portion of long-term debt as of September 30,
1998. The B Term Loan and C Term Loan bear interest rates of 11% in
the first three years, 13% in the fourth year and 15% in the fifth
year except for $3.4 million of the B Term Loan which is subject to
interest rates of 12% through maturity. If the A Term Loan is not
refinanced, the interest rates applicable to the A Term Loan, B Term
Loan and C Term Loan would be 11%, 13%, 15%, 17% and 19% for the
first, second, third, fourth and fifth years, respectively, during all
or any portion of the period after February 1998 that the A Term Loan
is held by Varde, except for $3.4 million of the B Term Loan which is
subject to interest rates of 18% through maturity. The Subordinate
Note A is convertible into 426,000 Common Units and bears interest at
prime plus one percent.
The cash interest and dividend payments on the B Term Loan, C
Term Loan, Subordinate Note A and the redeemable preferred equity held
by Varde are limited to $90,833 per month or $1.1 million annually.
To the extent the interest and dividends on the various Varde
securities exceed the cap on cash payments, such excess will be paid
in kind. The A Term Loan is due December 31, 2002. The B Term Loan, C
Term Loan and Subordinate Note A are also due December 31, 2002. The
Partnership is required to make quarterly principal payments on the A
Term Loan as set forth in the Varde credit agreement as well as make
payments of excess cash flow for the preceding year. Such principal
payments have been deferred for 1998 by agreement of Varde. The
Partnership will not have to make principal payments prior to the
scheduled maturity on the B Term Loan, C Term Loan and Subordinate
Note A, except in the case the Partnership receives proceeds related
to the Defense Energy Support Center ("DESC") Claim and certain other
transactions (see Note 9).
Any payments of principal on the securities held by Varde shall
be applied in the following order: A Term Loan (if then outstanding),
B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred
Units, Series C Preferred Units, and Series D Preferred Units (see
Note 7 for information on the preferred units).
The Partnership or its management has a three-year call on
Varde's position for an amount equal to a 40% annual rate of return to
Varde, subject to a minimum payment of $7.5 million over Varde's cost.
The securities held by Varde have certain antidilution provisions and
registration rights. Any litigation proceeds received by the
Partnership related to the DESC Claim will be used to retire up to
$6.0 million of either the A Term Loan if then outstanding, and up to
$5.0 million of either the B Term Loan or New Series A Preferred,
whichever is then outstanding, with any excess divided one-third to
Varde to be used to retire Varde's most senior securities and
two-thirds to the Partnership.
On December 31, 1997, certain members of management agreed to
invest an aggregate of $2.0 million in the form of a note payable to
Varde and will receive a one-third economic non-directive interest in
$6.0 million of the B Term Loan, C Term Loan, Subordinate Note A,
Series B Preferred Units, Series C Preferred Units and Series D
Preferred Units. The note payable to Varde will be secured by
management's interest in such securities. Any cash yield on
management's share of such securities will be paid to Varde as
interest, net of applicable federal income tax.
In addition, the Partnership maintains a revolving credit
facility with Varde ("Varde Revolver"). Advances under the Varde
Revolver bear interest at 11% per annum, payable monthly. The Varde
Revolver is subject to an administration fee of up to $100,000 and
calculated as 5.0% of any incremental advance under the Varde Revolver
and any deferral of principal on the A Term Loan. The fee is payable
in the form of an additional Series B Term Loan. Since the
Partnership deferred $750,000 in principal amortization on the A Term
Loan and drew an additional $1,250,000 under the Varde Revolver, the
entire $100,000 fee was payable in the second quarter of 1998. Also,
the Partnership paid a commitment fee in the amount of $50,000 in the
form of an additional Series B Term Loan in the second quarter of
1998. Cash advances under the Varde Revolver are due January 1, 1999.
Accordingly, the $1.3 million outstanding at September 30, 1998 has
been included in the current portion of long-term debt.
Other installment loans include a $6.0 million nonrecourse note,
due 2014, payable monthly with interest at 8% and a balance of $5.6
million at September 30, 1998. The note is supported by a minimum
throughput agreement. The assets of Pride Borger, Inc., a wholly-
owned subsidiary of the Partnership, are pledged as collateral.
Monthly principal payments are based on the number of throughput
barrels. The Partnership has classified $171,000 as current at
September 30, 1998.
7. Preferred Equity
In conjunction with Varde's assumption of the outstanding bank
debt, Varde received preferred equity securities. As a result of the
assumption and subsequent distributions being paid in kind, Varde now
holds preferred equity securities including $9.8 million of Series B
Cumulative Convertible Preferred Units ("Series B Preferred Units"),
$5.2 million of Series C Cumulative Convertible Preferred Units
("Series C Preferred Units") and $3.0 million of Series D Cumulative
Preferred Units ("Series D Preferred Units") which mature December 31,
2002. The Series B Preferred Units and Series C Preferred Units are
convertible into 1,552,000 and 833,000 Common Units, respectively, at
September 30, 1998. The preferential quarterly payments on the Series
B Preferred Units and Series C Preferred Units will be 6% per annum in
the first three years after issuance, 12% per annum in the fourth and
fifth years and 15% per annum thereafter or may be paid in kind at 8%
per annum in the first three years, 12% per annum in the fourth and
fifth years and 15% per annum thereafter. The preferential quarterly
payments on the Series D Preferred Units will be 11% per annum in the
first three years after issuance, 13% per annum in the fourth and
fifth years and 15% per annum thereafter or may be paid in kind
through maturity at 13% per annum in the first five years and 15% per
annum thereafter. Distributions are payable on the 5th day of the
second month in each quarter. Accordingly, the Partnership had paid,
in kind, distributions of $922,000 and accrued an additional
distribution of $243,000 at September 30, 1998 on these preferred
equity securities.
On December 31, 1997, Pride SGP agreed to convert (i) a $2.0
million note from the Partnership into Series E Cumulative Convertible
Preferred Units ("Series E Preferred Units") which is convertible into
317,000 Common Units at September 30, 1998 and (ii) a $450,000 note
from the Partnership into Series F Cumulative Preferred Units ("Series
F Preferred Units"). The Series E Preferred Units and Series F
Preferred Units mature December 31, 2002. The Series E Preferred
Units and Series F Preferred Units are subordinate to the Series B
Preferred Units, Series C Preferred Units and Series D Preferred
Units. The preferential quarterly payments on the Series E Preferred
Units and Series F Preferred Units will be 6% per annum in the first
three years after issuance, 12% per annum in the fourth and fifth
years and 15% per annum thereafter or may be paid in kind at 8% per
annum in the first three years, 12% per annum in the fourth and fifth
years and 15% per annum thereafter until mandatory redemption at
December 31, 2002. Distributions are payable on the 5th day of the
second month in each quarter; however, the Partnership may not make
any cash distributions or paid in kind distributions on the Series E
Preferred Units or Series F Preferred Units if the distributions with
respect to the Series B Preferred Units, Series C Preferred Units or
Series D Preferred Units are paid in kind. Accordingly, at September
30, 1998, the Partnership accrued distributions of $146,000 but had
not paid such distributions in cash or in kind.
8. Common Units
At September 30, 1998, 4,950,000 Common Units were outstanding,
representing a 98% limited partner interest in the Partnership. The
general partners are entitled to 2% of all distributions.
Under the terms of the Partnership's credit agreements, the
lenders restricted the payment of distributions to unitholders
throughout the term of the credit agreements. Future distributions
will be dependent on, among other things, payment in full of the debt,
expiration of all liabilities related to letters of credit, and the
termination of the credit agreements.
9. Contingencies
The Partnership has filed a substantial claim against the Defense
Energy Support Center ("DESC") relating to erroneous pricing of fuel
purchased over a period of several years from the Partnership and its
predecessors. The ultimate outcome of this matter cannot presently be
determined.
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Management believes that the outcome of all claims and litigation is
either adequately insured or will not have a material adverse effect
on the Partnership's financial position or results of operations.
10. Securities Exchange
The Partnership was delisted from trading on the New York Stock
Exchange effective August 17, 1998. The Partnership is now listed on
the NASDAQ OTC bulletin board under the symbol PRDE.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Overview
Pride Companies, L.P. is a Delaware limited partnership which
owns and operates a products marketing business ("Products
Marketing Business") and crude oil gathering business ("Crude
Gathering System"). Prior to the mothballing of the refinery on
March 22, 1998, the Partnership also operated a refining business
("Refinery") and products pipeline business ("Products System").
The following is a discussion of the results of operations of
the Partnership. This discussion should be read in conjunction
with the financial statements included in this report.
Forward Looking Statements
This Form 10-Q contains certain forward looking statements.
Such statements are typically punctuated by words or phrases such
as "anticipate," "estimate," "projects," "should," "may,"
"management believes," and words or phrases of similar import.
Such statements are subject to certain risks, uncertainties or
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated,
estimated or projected. Among the key factors that may have a
direct bearing on the Partnership's results of operations and
financial conditions are: (i) the margins between the prices of
the Partnership's refined petroleum products and the cost of such
products and the availability of such products, (ii) the volume
throughput on and margins from the transportation and resale of
crude oil from the Partnership's Crude Gathering System, (iii) the
impact of current and future laws and governmental regulations
affecting the petroleum industry in general and the Partnership's
operations in particular, (iv) the ability of the Partnership to
sustain cash flow from operations sufficient to realize its
investment in operating assets of the Partnership, (v) fluctuations
in crude oil and refined product prices and their impact on working
capital and the borrowing base under the Partnership's credit
agreements, and (vi) the receipt of certain consents and approvals
to modify the Partnership's capital structure.
General
As a result of mothballing the Refinery at the end of the first
quarter of 1998 and redirecting its business to focus on crude and
product marketing and distribution, the Partnership's operating
results now depend principally on (i) the margins between the cost at
which petroleum products are purchased from Equilon ("Equilon" is a
refining and marketing joint venture between Royal Dutch/Shell Group
and Texaco, Inc.) and the revenue realized by the Partnership on the
sale of such products, (ii) the volume throughput from the products
terminals, and (iii) the volume throughput on and margins from the
transportation and resale of crude oil from its Crude Gathering
System. The price the Partnership is able to realize on the resale of
its petroleum products is influenced by the level of competition in
the Partnership's markets. Due to the change in its core business, a
comparison of the Products Marketing Business to the Refinery and
Products System would not be meaningful and, therefore, will not be
included with this Form 10-Q.
Prior to mothballing the Refinery and entering into the Equilon
agreement ("Equilon Agreement"), the Partnership's operating results
depended principally on (i) the rate of utilization of the Refinery,
(ii) the margins between the prices of its refined petroleum products
and the cost of crude oil, (iii) the volume throughput on the Products
System, and (iv) the volume throughput on and margins from the
transportation and resale of crude oil from its Crude Gathering
System.
Margins from the Crude Gathering System are influenced by the
level of competition and the price of crude oil. When prices are
higher, crude oil can generally be resold at higher margins.
Additionally, transportation charges increase when higher crude oil
prices stimulate increased exploration and development. Conversely,
when crude oil prices decrease, margins on the resale of crude oil as
well as transportation charges tend to decrease.
In evaluating the financial performance of the Partnership,
management believes it is important to look at operating income,
excluding depreciation, in addition to operating income which is after
depreciation. Operating income, excluding depreciation, measures the
Partnership's ability to generate and sustain working capital and cash
flows from operations. However, such measure is before debt service,
so it does not indicate the amount available for distribution,
reinvestment or other discretionary uses. Gross revenues primarily
reflect the level of crude oil prices and are not necessarily an
accurate reflection of the Partnership's profitability. Also
important to the evaluation of the Refinery's performance were barrels
of crude oil refined, gross margin (revenue less cost of crude) per
barrel, and operating expense per barrel, excluding depreciation.
Third Quarter 1998 Compared to Third Quarter 1997
GENERAL -- Net loss for the third quarter of 1998 was $870,000
compared to net income of $771,000 for the third quarter of 1997. The
decline was a result of weaker results for the Products Marketing
Business for the third quarter of 1998 as compared to the Refinery and
Products System (see below) for the third quarter of 1997. This was
partially offset by improved results in the Crude Gathering segment.
Operating income was $816,000 for the third quarter of 1998
compared to $2.6 million for the third quarter of 1997. Operating
income, before depreciation, for the third quarter of 1998 was $1.7
million compared to operating income, before depreciation, of $4.3
million for the third quarter of 1997.
The following table details the operating income (loss);
depreciation; and the operating income (loss), before depreciation (in
thousands), for the third quarter of 1998 and 1997.
<TABLE>
<CAPTION>
Operating
Income
Operating (Loss)
Income Before
(Loss) Depreciation Depreciation
--------- ------------ ------------
<S> <C> <C> <C>
Third Quarter 1998
Products Marketing Business $ 38 $ 349 $ 387
Crude Gathering System 778 507 1,285
------- ------- --------
Total $ 816 $ 856 $ 1,672
======= ======= ========
Third Quarter 1997
Refinery and Products System $ 2,356 $ 1,242 $ 3,598
Crude Gathering System 248 475 723
------- ------- --------
Total $ 2,604 $ 1,717 $ 4,321
======= ======= ========
</TABLE>
PRODUCTS MARKETING BUSINESS -- Operating income for the Products
Marketing Business was $38,000 for the third quarter of 1998.
Depreciation expense for the Products Marketing Business was $349,000
for the third quarter of 1998. Operating income, before depreciation,
for the Products Marketing Business was $387,000 for the third quarter
of 1998. See "-Financial Condition - Financial Resources and
Liquidity." During the third quarter of 1998, the Partnership
marketed 14,248 barrels per day ("BPD") of refined products. The net
margin per barrel for this period was positive $0.03.
REFINERY AND PRODUCTS SYSTEM -- Operating income of the Refinery
and Products System was $2.4 million for the third quarter of 1997.
Depreciation expense for the Refinery and Products System was $1.2
million for the third quarter of 1997. Operating income, before
depreciation, for the Refinery and Products System was $3.6 million
for the third quarter of 1997.
Operating income of the Refinery was $2.2 million for the third
quarter of 1997. Depreciation expense for the Refinery was $1.0
million for the third quarter of 1997. Operating income, before
depreciation, for the Refinery was $3.2 million for the third quarter
of 1997.
Refinery gross margin per barrel was $2.55 for the third quarter
of 1997. Refinery throughput averaged 30,111 BPD for the third
quarter of 1997. Operating expenses per barrel, before depreciation,
were $0.99 for the third quarter of 1997.
Operating income for the Products System was $159,000 for the
third quarter of 1997. Depreciation expense for the Products System
was $217,000 for the third quarter of 1997. Operating income, before
depreciation, for the Products System was $376,000 for the third
quarter of 1997. Total transportation volumes were 11,468 BPD for the
third quarter of 1997.
CRUDE GATHERING SYSTEM -- Operating income for the Crude
Gathering System was $778,000 for the third quarter of 1998 compared
to operating income of $248,000 for the same period in 1997. The
third quarter of 1998 includes a favorable reserve reduction of
$708,000 for the market valuation of inventory. Depreciation expense
for the Crude Gathering System increased to $507,000 for the third
quarter of 1998 from $475,000 for the third quarter of 1997.
Operating income, before depreciation, for the Crude Gathering System
was $1.3 million for the third quarter of 1998 compared to operating
income, before depreciation, of $723,000 for the third quarter of
1997. The net margin was positive $0.21 per barrel for the third
quarter of 1998 versus positive $0.05 per barrel for the same period
in 1997. The volume of crude oil gathered by the Crude Gathering
System decreased to 39,906 BPD for the third quarter of 1998 from
53,457 BPD for the third quarter of 1997 primarily as a result of
lower overall crude oil production caused by a 34% decline in the
average posted price and the cancellation of certain marginal
contracts.
First Nine Months 1998 Compared to First Nine Months 1997
GENERAL -- Net loss for the first nine months of 1998 was $4.6
million compared to $2.7 million for the first nine months of 1997.
Net loss increased primarily as a result of weaker results for the
Crude Gathering System and an increase in credit and loan fees of
$673,000 during the first nine months of 1998. Credit and loan fees
increased due to the amortization of restructuring cost during the
first nine months of 1998.
Operating income was $1.0 million for the first nine months of
1998 compared to $2.1 million for the first nine months of 1997.
Operating income decreased as a result of weaker results for the Crude
Gathering System. Operating income, before depreciation, decreased
for the first nine months of 1998 to $3.6 million from $7.3 million
for the first nine months of 1997. Operating income, before
depreciation, decreased due to weaker results for both the Products
Marketing Business and Crude Gathering System.
The table below details the operating income (loss);
depreciation; and the operating income (loss), before depreciation by
division (in thousands) for the first nine months of 1998 and 1997.
<TABLE>
<CAPTION>
Operating
Income
Operating (Loss)
Income Before
(Loss) Depreciation Depreciation
--------- ------------ ------------
<S> <C> <C> <C>
First Nine Months 1998
Products Marketing
Business (1) $ 700 $ 1,063 $ 1,763
Crude Gathering System 331 1,506 1,837
------- ------- --------
Total $ 1,031 $ 2,569 $ 3,600
======= ======= ========
First Nine Months 1997
Refinery and Products System $ 631 $ 3,716 $ 4,347
Crude Gathering System 1,505 1,435 2,940
------- ------- --------
Total $ 2,136 $ 5,151 $ 7,287
======= ======= ========
(1) The Partnership began operating the Products Marketing
Business in the second quarter of 1998. Prior to this the
Partnership operated the Refinery and Products System.
</TABLE>
PRODUCTS MARKETING BUSINESS -- Operating income of the Products
Marketing Business was $700,000 for the first nine months of 1998
which includes operating income of $1.0 million from the Refinery and
Products System for the first three months of 1998. Depreciation
expense for the Products Marketing Business was approximately $1.1
million for the first nine months of 1998 which includes depreciation
expense of $368,000 from the Refinery and Products System for the
first three months of 1998. Operating income, before depreciation, of
the Products Marketing Business was $1.8 million for the first nine
months of 1998 which includes operating income, before depreciation,
of $1.4 million from the Refinery and Products System for the first
three months of 1998.
REFINERY AND PRODUCTS SYSTEM -- Operating income of the Refinery
and Products System was $631,000 for the first nine months of 1997.
Depreciation expense of the Refinery and Products System was
approximately $3.7 million for the first nine months of 1997.
Operating income, before depreciation, of the Refinery and Products
System was $4.3 million for the first nine months of 1997.
Operating income of the Refinery was $118,000 for the first nine
months of 1997. Depreciation expense for the Refinery was $3.1
million for the first nine months of 1997. Operating income, before
depreciation, of the Refinery was $3.2 million for the first nine
months of 1997.
Refinery gross margin per barrel was $1.83 for the first nine
months of 1997. Refinery throughput averaged 31,220 BPD for the first
nine months of 1997. Operating expenses per barrel, before
depreciation, were $1.03 for the first nine months of 1997.
Operating income for the Products System was $513,000 for the
first nine months of 1997. Depreciation expense for the Products
System was $653,000 for the first nine months of 1997. Operating
income, before depreciation, for the Products System was $1.2 million
for the first nine months of 1997. Total transportation volumes were
12,345 for the first nine months of 1997.
CRUDE GATHERING SYSTEM -- Operating income for the Crude
Gathering System was $331,000 for the first nine months of 1998
compared to operating income of $1.5 million for the same period in
1997 due to lower margins for the first nine months of 1998 and a
reserve of $294,000 for the market valuation of inventory for the
first nine months of 1998. Depreciation expense for the Crude
Gathering System was $1.5 million for the first nine months of 1998
and $1.4 million for the first nine months of 1997. Operating income,
before depreciation, for the Crude Gathering System was $1.8 million
for the first nine months of 1998 and $2.9 million for the first nine
months of 1997. The net margin was positive $0.03 per barrel for the
first nine months of 1998 compared to positive $0.11 per barrel for
the first nine months of 1997. The volume of crude oil gathered by
the Crude Gathering System was 46,185 BPD for the first nine months of
1998 compared to 50,610 BPD for the first nine months of 1997.
Factors and Trends Affecting Operating Results
A number of factors have affected the Partnership's operating
results, both indirectly and directly, such as environmental
compliance, other regulatory matters, industry trends and price of
crude oil, inventory prices, and seasonality and weather. The
Managing General Partner expects that such conditions will continue
to affect the Partnership's business to varying degrees in the
future. The order in which these factors are discussed is not
intended to represent their relative significance.
ENVIRONMENTAL COMPLIANCE -- Increasing public and governmental
concern about air quality is expected to result in continued
regulation of air emissions. Regulations relating to carbon monoxide
and regulations on oxygen content in gasoline and sulfur content in
diesel fuel are expected to be increasingly important as a means of
improving air quality in urban areas. The Partnership plans to spend
approximately $1.0 million in 1998 and 1999 on several projects to
maintain compliance with various environmental requirements including
approximately $600,000 related to mothballing the Refinery.
Effective January 1, 1995, the Clean Air Act Amendment of 1990
required that certain areas of the country use reformulated gasoline
("RFG"). The Abilene and San Angelo market areas do not require RFG.
Collin, Dallas, Denton, and Tarrant Counties, which comprise the
Dallas-Fort Worth ("DFW") metroplex area, do require RFG; however, the
Partnership's Aledo terminal lies outside this area and is allowed to
supply conventional gasoline that is not destined for sale in these
four counties. In addition to the requirement for RFG in certain
areas, new but much less restrictive regulations took effect that
impose new quality standards for conventional gasoline in the rest of
the country. Management does not anticipate that these have had or
will have a material adverse effect on the Partnership's operations.
OTHER REGULATORY REQUIREMENTS -- The Partnership is also subject
to the rules and regulations of, among others, the Occupational Safety
and Health Administration, Texas Air Control Board, Texas Railroad
Commission, and Texas Water Commission.
INDUSTRY TRENDS AND PRICE OF CRUDE OIL -- Industry trends and
the price of crude oil will continue to affect the Partnership's
business. As a result of purchasing product from Equilon, the
Partnership will be impacted by fluctuations in the cost of those
products versus fluctuations in the price realized by the Partnership
on the sale of such products and the amount of competition in its
markets. The general level of crude oil prices can also have a
significant effect on the margins in the crude gathering business.
Margins in the Crude Gathering System generally tend to be influenced
by competition and the general price level of crude oil. When prices
are higher, crude oil can generally be resold at higher margins.
Additionally, transportation charges are slightly less competitive
when higher crude oil prices result in increased exploration and
development. Conversely, when crude oil prices decrease, margins on
the resale of crude oil and transportation charges generally tend to
decrease.
INVENTORY PRICES -- The Partnership utilizes the last-in/first-
out (LIFO) method of determining inventory values. LIFO minimizes the
effect of fluctuations in inventory prices on earnings by matching
current costs with current revenue.
SEASONALITY AND WEATHER -- Gasoline consumption is typically
highest in the United States in the summer months and lowest in the
winter months. Diesel consumption in the southern United States is
generally higher just prior to and during the winter months when
commercial trucking is routed on southern highways to avoid severe
weather conditions further north.
<PAGE>
Financial Condition
Inflation
The Partnership's operations would be adversely impacted by
significant, sustained increases in crude oil and other energy
prices. Although the Partnership's operating costs are generally
impacted by inflation, the Managing General Partner does not expect
general inflationary trends to have a material adverse impact on
the Partnership's operations.
Financial Resources and Liquidity
The Partnership receives payments from the United States
Government, major oil companies, and other customers within
approximately 7 to 15 days from shipment in the case of product sales
and by the 20th of the following month in the case of third-party
crude oil sales and exchanges. The Partnership maintains crude
inventory of approximately 10 to 15 days of sales. Effective on the
close of business on September 30, 1998 and extending through December
31, 1999, Equilon has agreed to maintain substantially all of the
refined products inventory on hand at the Partnership's marketing
facilities. As a result, the Partnership purchases product inventory
daily from Equilon, thereby eliminating most of the carrying costs,
including interest costs. Further, this arrangement substantially
reduces the lag between the time the Partnership must pay Equilon for
the product, 10 days after the sale, and the time the Partnership
receives payment from its customers. The Crude Gathering System
generally pays for crude oil on the 20th of the month following the
month in which it is received and also can experience a minor lag
between the time it pays for and receives payment for crude oil
transactions. Letters of credit are an integral part of the
operations of the Crude Gathering System since the Partnership takes
title to both first purchased barrels and custom gathered barrels.
On December 31, 1997, Varde Partners, Inc. ("Varde") purchased
and assumed the then existing lenders' rights and obligations under
the Partnership's outstanding bank debt. In conjunction with Varde's
purchase and assumption of the lenders' rights and obligations under
such bank debt, BankBoston, N.A. ("BankBoston") refinanced the
Partnership's letter of credit and revolver facilities (the
"Revolver") on December 31, 1997 for a 5-year term.
Varde and BankBoston each amended their respective credit
agreements effective April 15, 1998. The credit agreement with Varde
was amended to provide a $2.0 million loan for working capital
purposes (the "Varde Revolver") through deferral of principal
amortization on the A Term Loan and additional cash advances (see
below). In addition, both credit agreements were amended to ease
certain financial covenants through December 31, 1998. It is not
certain whether the Partnership will be able to comply with these
covenants subsequent to December 31, 1998.
The Revolver from BankBoston provides for the issuance of letters
of credit to third parties to support the Partnership's purchase or
exchange of crude oil and petroleum products in an aggregate amount
not to exceed $65.0 million, with a sublimit of $10.0 million for
direct cash borrowings for general working capital purposes. Amounts
available under the Revolver are subject to a borrowing base
calculated as the sum of the Partnership's cash and cash equivalents,
certain receivables, deposits, inventory and other amounts, reduced by
a portion of crude oil royalties payable and certain other amounts
payable. The amount available under the borrowing base net of
outstanding letters of credit and advances under the Revolver was $1.1
million as of September 30, 1998.
Though no advances had been drawn under the letter of credit
facility at September 30, 1998, the Partnership did have approximately
$39.7 million in outstanding letters of credit. The Partnership had
$1.1 million outstanding under the Revolver for direct cash borrowings
as of September 30, 1998. The entire $1.1 million has been classified
in the current portion of long-term debt. The fee on outstanding
letters of credit was 2.5% per annum as of September 30, 1998. There
is also an issuance fee of 0.125% per annum on the face amount of each
letter of credit. The fee for the unused portion of the Revolver is
0.5% per annum. At the Partnership's discretion, cash borrowings
under the Revolver at September 30, 1998 bore interest at either LIBOR
plus 3% or prime plus 1.75%. LIBOR and the prime rate were 5.375% and
8.25%, respectively, at September 30, 1998. The credit agreement
evidencing the Revolver also requires the Partnership to pay an agency
fee of up to $70,000 per annum depending on the number of participants
in the credit facility and restricts the payment of distributions to
unitholders throughout the term of the credit agreement.
As a result of Varde's assumption of the outstanding bank debt,
additional loans to the Partnership and subsequent interest being paid
in kind, Varde now holds a term loan of $20.3 million ("A Term Loan"),
a term loan of $10 million ("B Term Loan"), a term loan of $4.9
million ("C Term Loan") and an unsecured note of $2.7 million
("Subordinate Note A") as of September 30, 1998. The A Term Loan
bears interest rates of 11% in the first two years, 13% in the third
year, 15% in the fourth and 17% in the fifth year. The Partnership
has included $1.9 million of the A Term Loan in the current portion of
long-term debt as of September 30, 1998. The B Term Loan and C Term
Loan bear interest rates of 11% in the first three years, 13% in the
fourth year and 15% in the fifth year except for $3.4 million of the B
Term Loan which is subject to interest rates of 12% through maturity.
If the A Term Loan is not refinanced, the interest rates applicable to
the A Term Loan, B Term Loan and C Term Loan would be 11%, 13%, 15%,
17% and 19% for the first, second, third, fourth and fifth years,
respectively, during all or any portion of the period after February
1998 that the A Term Loan is held by Varde, except for $3.4 million of
the B Term Loan which is subject to interest rates of 18% through
maturity. The Subordinate Note A is convertible into 426,000 Common
Units and bears interest at prime plus one percent.
The cash interest and dividend payments on the B Term Loan, C
Term Loan, Subordinate Note A and the redeemable preferred equity held
by Varde are limited to $90,833 per month or $1.1 million annually.
To the extent the interest and dividends on the various Varde
securities exceed the cap on cash payments, such excess will be paid
in kind. The A Term Loan is due December 31, 2002. The B Term Loan, C
Term Loan and Subordinate Note A are also due December 31, 2002. The
Partnership is required to make quarterly principal payments on the A
Term Loan as set forth in the Varde credit agreement as well as make
payments of excess cash flow for the preceding year. Such principal
payments have been deferred for 1998 by agreement of Varde. The
Partnership will not have to make principal payments prior to the
scheduled maturity on the B Term Loan, C Term Loan and Subordinate
Note A except in the case the Partnership receives proceeds related to
the DESC Claim and certain other transactions (See "Legal
Proceedings").
Any payments of principal on the securities held by Varde shall
be applied in the following order: A Term Loan (if then outstanding),
B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred
Units, Series C Preferred Units, and Series D Preferred Units (See "-
Cash Distributions and Paid In Kind Distributions" for information on
the preferred units).
The Partnership or management has a three-year call on Varde's
position for an amount equal to a 40% annual rate of return to Varde,
subject to a minimum payment of $7.5 million over Varde's cost. The
securities held by Varde will have certain antidilution provisions and
registration rights. Any litigation proceeds received by the
Partnership related to the DESC Claim will be used to retire up to
$6.0 million of either the A Term Loan if then outstanding, and up to
$5.0 million of either the B Term Loan or New Series A Preferred (see
below), whichever is then outstanding, with any excess divided
one-third to Varde to be used to retire Varde's most senior securities
and two-thirds to the Partnership.
On December 31, 1997, certain members of management agreed to
invest an aggregate of $2.0 million in the form of a note payable to
Varde and will receive a one-third economic non-directive interest in
$6.0 million of the B Term Loan, C Term Loan, Subordinate Note A,
Series B Preferred Units, Series C Preferred Units and Series D
Preferred Units. The note payable to Varde will be secured by
management's interest in such securities. Any cash yield on
management's share of such securities will be paid to Varde as
interest, net of applicable federal income tax.
In addition, the Partnership has a revolving credit facility with
Varde. Advances under the Varde Revolver bear interest at 11% per
annum, payable monthly. Under the credit agreement, the Varde
Revolver was subject to an administration fee of up to $100,000 equal
to 5.0% of any incremental advance and any principal deferral on the A
Term Loan. The fee was payable in the form of an additional Series B
Term Loan. Since the Partnership deferred $750,000 in principal
amortization on the A Term Loan and drew an additional $1,250,000
under the Varde Revolver, the entire $100,000 fee was payable in the
second quarter of 1998. Also, the Partnership paid a commitment fee
in the amount of $50,000 in the form of an additional Series B Term
Loan in the second quarter of 1998. Cash advances under the Varde
Revolver are due January 1, 1999. Accordingly, the $1.3 million
outstanding at September 30, 1998 has been included in the current
portion of long-term debt.
Other installment loans include a $6.0 million nonrecourse note,
due 2014, payable monthly with interest at 8% and a balance of $5.6
million at September 30, 1998. The note is supported by a minimum
throughput agreement. The assets of Pride Borger, Inc., a wholly-
owned subsidiary of the Partnership, are pledged as collateral.
Monthly principal payments are based on the number of throughput
barrels. The Partnership has classified $171,000 as current at
September 30, 1998.
Varde has proposed an additional restructuring of its investment
("Restructuring") that could further reduce the Partnership's bank
debt in connection with the authorization and issuance of new
preferred equity, which would in turn be convertible into Common
Units, if approved by the unitholders pursuant to a consent
solicitation on or before October 1, 1999 (the "Restructuring Consent
Solicitation"). Subject to unitholder authorization of additional
preferred equity in connection with the Restructuring Consent
Solicitation, Varde has agreed to exchange a total of $35.6 million of
debt and preferred equity securities as of September 30, 1998 composed
of $10.0 million of B Term Loan, $4.9 million of C Term Loan, $2.7
million of Subordinate Note A, $9.8 million of Series B Preferred
Units, $5.2 million of Series C Preferred Units and $3.0 million of
Series D Preferred Units (including any additional paid in kind
distributions on these instruments after September 30, 1998) for the
following series of newly authorized preferred equity:
(i) Nonconvertible redeemable preferred equity in the amount of
$9.5 million ("New Series A Preferred Units") which includes $500,000
that was Varde's transaction fee for bridging the A Term Loan,
(ii) Convertible redeemable preferred equity in the amount of
$2.5 million ("New Series B Preferred Units"), which would be
convertible into 10% of the Common Units outstanding,
(iii) Convertible redeemable preferred equity in the amount of
$2.5 million ("New Series C Preferred Units") which would be
convertible into an additional 42% of the Common Units outstanding,
plus an additional 8% of the Common Units for Varde's account if the A
Term Loan continues to be held by Varde, and
(iv) Nonconvertible nonredeemable preferred equity in the amount
of $6.0 million ("New Series D Preferred Units").
As part of the proposed Restructuring, Pride SGP will be asked,
subject to unitholder approval, to approve the Partnership
recapitalization and convert $2.4 million of claims and the Series E
Preferred Units and Series F Preferred Units into a total of 7.5% of
the outstanding Common Units.
If all requisite unitholder consents are received and all
proposed transactions are consummated, including the restructuring of
certain claims of Pride SGP and the authorization and issuance of
additional preferred equity, Varde will convert the $35.6 million of
debt and equity securities that it holds of the Partnership into $20.5
million of newly authorized equity securities.
Cash flows have been and will continue to be significantly
affected by fluctuations in the cost and volume of crude oil and
refined products held in inventory and the timing of accounts
receivable collections. Cash flows are also affected by refined
product margins and crude oil gathering margins.
Declines in crude oil and refined product prices in 1998 have had
a negative impact on the borrowing base under the Partnership's credit
agreement as well as working capital. Further declines could have a
material adverse effect on the Partnership.
The Partnership has incurred recurring operating losses and has
working capital and partners' deficiencies. In addition, the
Partnership has not historically complied with its financial and
performance covenants included in its various credit facilities.
Currently, the Partnership is not in compliance with certain financial
covenants contained in the various credit agreements. No demand
notice has yet been received from any creditor and Varde has agreed to
waive compliance with certain covenants through December 31, 1998.
However, management is not certain whether the Partnership will be
able to comply with the financial covenants contained in these credit
facilities through the remainder of 1998 or thereafter. Covenant
violations could enable the lenders to accelerate the Partnership's
loans. The ability of the Partnership to operate in future periods
may be adversely affected by these conditions.
The losses and capital expenditures incurred in the third quarter
of 1998 were funded by additional borrowing which became available
under the Partnership's Varde Revolver.
Product sales for April 1998 through June 1998 were below
management's budgeted sales due to startup problems experienced by
Equilon with its new products pipeline. As a result, delivery and
corresponding sales of gasoline, diesel and jet fuel were
substantially below expectations. Throughout the second quarter of
1998, the Partnership was unable to deliver contractual volumes,
particularly to the government. The failure by the Partnership to
deliver such contractual volumes to the government could result in a
termination of the contract and the Partnership being liable for any
additional costs associated with the government procuring such product
from an alternative source. The Partnership is currently delivering
to the government contractual volumes and gasoline and diesel sales
have also increased from the second quarter of 1998. Equilon
performed an extensive pipeline cleaning operation and the situation
has significantly improved. However, there can be no assurance that
further problems will not be encountered. As a result of the problems
associated with the startup of the pipeline, Equilon has agreed to
certain contract concessions.
The Partnership's ability to generate profits is principally
dependent upon increased volumes and/or improved profit margins, as
well as continued cost control initiatives. The ability to generate
profits could be affected if other Gulf Coast refiners bring refined
products into West Texas from the Gulf Coast via pipeline. Though
management has and will continue to pursue options regarding
increasing volumes and margins and reducing costs, including limiting
any significant capital expenditures, these improvements, if achieved,
will be gradual and, in many cases, will take sustained periods of
time to implement in order to achieve profitability. As a result,
management is also reviewing other strategic alternatives including
redeployment of its operating assets, possible asset sales and
alliances with other companies.
The Partnership was delisted from trading on the New York Stock
Exchange effective August 17, 1998. The Partnership is now listed on
the NASDAQ OTC bulletin board under the symbol PRDE.
Capital Expenditures
The Partnership incurred capital expenditures of $77,000 for the
third quarter of 1998 which includes $24,000 related to the conversion
of its computer system.
Cash Distributions and Paid in Kind Distributions
In conjunction with Varde's assumption of the outstanding bank
debt, Varde received preferred equity securities. As a result of the
assumption and subsequent distributions being paid in kind, Varde now
holds preferred equity securities including $9.8 million of Series B
Cumulative Convertible Preferred Units ("Series B Preferred Units"),
$5.2 million of Series C Cumulative Convertible Preferred Units
("Series C Preferred Units") and $3.0 million of Series D Cumulative
Preferred Units ("Series D Preferred Units") which mature December 31,
2002. The Series B Preferred Units and Series C Preferred Units are
convertible into 1,552,000 and 833,000 Common Units, respectively, at
September 30, 1998. The preferential quarterly payments on the Series
B Preferred Units and Series C Preferred Units will be 6% per annum in
the first three years after issuance, 12% per annum in the fourth and
fifth years and 15% per annum thereafter or may be paid in kind at 8%
per annum in the first three years, 12% per annum in the fourth and
fifth years and 15% per annum thereafter. The preferential quarterly
payments on the Series D Preferred Units will be 11% per annum in the
first three years after issuance, 13% per annum in the fourth and
fifth years and 15% per annum thereafter or may be paid in kind
through maturity at 13% per annum in the first five years and 15% per
annum thereafter. Distributions are payable on the 5th day of the
second month in each quarter. Accordingly, the Partnership had paid,
in kind, distributions of $922,000 and accrued an additional
distribution of $243,000 at September 30, 1998 on these preferred
equity securities.
On December 31, 1997, Pride SGP agreed to convert (i) a $2.0
million note from the Partnership into Series E Cumulative Convertible
Preferred Units ("Series E Preferred Units") which is convertible into
317,000 Common Units at September 30, 1998 and (ii) a $450,000 note
from the Partnership into Series F Cumulative Preferred Units ("Series
F Preferred Units"). The Series E Preferred Units and Series F
Preferred Units mature December 31, 2002. The Series E Preferred
Units and Series F Preferred Units are subordinate to the Series B
Preferred Units, Series C Preferred Units and Series D Preferred
Units. The preferential quarterly payments on the Series E Preferred
Units and Series F Preferred Units will be 6% per annum in the first
three years after issuance, 12% per annum in the fourth and fifth
years and 15% per annum thereafter or may be paid in kind at 8% per
annum in the first three years, 12% per annum in the fourth and fifth
years and 15% per annum thereafter until mandatory redemption at
December 31, 2002. Distributions are payable on the 5th day of the
second month in each quarter; however, the Partnership may not make
any cash distributions or paid in kind distributions on the Series E
Preferred Units or Series F Preferred Units if the distributions with
respect to the Series B Preferred Units, Series C Preferred Units or
Series D Preferred Units are paid in kind. Accordingly, at September
30, 1998, the Partnership accrued distributions of $146,000 but had
not paid such distributions in cash or in kind.
At September 30, 1998, 4,950,000 Common Units were outstanding,
representing a 98% limited partner interest in the Partnership. The
general partners are entitled to 2% of all distributions.
Under the terms of the Partnership's credit agreements, the
lenders restricted the payment of distributions to unitholders
throughout the term of the credit agreements. Future distributions
will be dependent on, among other things, payment in full of the debt,
expiration of all liabilities for letters of credit, and the
termination of the credit agreements.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive sofware or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Partnership determined that it
will be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly
utilize dates beyond December 31, 1999. The Partnership presently
believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However,
if such modifications and replacements are not made, or are not
completely timely, the Year 2000 Issue could have a material impact on
the operations of the Partnership.
The Partnership's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing and
implementation. To date, the Partnership has fully completed its
assessment of all systems that could be significantly affected by the
Year 2000. The completed assessment indicated that most of the
Partnership's significant information technology systems could be
affected, particularly the general ledger, billing, and inventory
systems. That assessment also indicated that software and hardware
(embedded chips) used in monitoring the Partnership's pipelines and
terminals are also at risk. The Partnership does not believe that the
Year 2000 presents a material exposure as it relates to the
Partnership's products. In addition, the Partnership has gathered
information about the Year 2000 compliance status of its significant
suppliers and subcontractors and continues to monitor their
compliance.
For its information technology exposures, to date the Partnership
is 80% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than June 30, 1999.
Once software is reprogrammed or replaced for a system, the
Partnership begins testing and implementation. These phases run
concurrently for different systems. To date, the Partnership has
completed 70% of its testing and has implemented 40% of its remediated
systems. Completion of the testing phase for all significant systems
is expected by September 30, 1999.
The Partnership has queried its significant suppliers and
subcontractors that do not share information systems with the
Partnership (external agents). To date, the Partnership is not aware
of any external agent with a Year 2000 issue that would materially
impact the Partnership's results of operations, liquidity, or capital
resources. However, the Partnership has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Partnership. The effect of non-
compliance by external agents is not determinable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership has filed a substantial claim against the Defense
Energy Support Center relating to erroneous pricing of fuel purchased
over a period of several years from the Partnership and its
predecessors. The ultimate outcome of this matter cannot presently be
determined.
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Management believes that the outcome of all claims and litigation is
either adequately insured or will not have a material adverse effect
on the Partnership's financial position or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Second Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1996
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L.P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).
27 Financial Data Schedule for the Third Quarter of 1998.
28.1 Waiver dated as of October 29, 1998 to the First Amendment
to Sixth Restated and Amended Credit Agreement among Pride
Companies, L.P. as borrower, Pride Refining, Inc., Pride
SGP, Inc., Desulfur Partnership, Pride Marketing of Texas
(Cedar Wind), Inc. and Pride Borger, Inc., as guarantors,
and Varde Partners, Inc., as lender.
28.2 Waiver dated as of August 1, 1998 to the Revolving Credit
and Term Loan Agreement dated December 30, 1997, as amended,
among Pride Companies, L.P., as borrower, Pride SGP, Inc.,
Pride Refining, Inc., Desulfur Partnership, Pride Borger,
Inc. and Pride Marketing of Texas (Cedar Wind), Inc.,
BankBoston, N.A., as Agent, Lehman Commercial Paper Inc., as
Documentation Agent, and BankBoston, N.A., Lehman Commercial
Paper Inc. and Union Bank of California, N.A.
b. Reports on Form 8-K:
None<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRIDE COMPANIES, L.P.
(Registrant)
By: Pride Refining, Inc.
as its Managing General Partner
Date: November 16, 1998 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: November 16, 1998 /s/ George Percival
Principal Financial Officer
(Signing as Principal Financial
Officer)
<PAGE>
PRIDE COMPANIES, L.P.
Exhibits to
Report to Form 10-Q
INDEX TO EXHIBITS
Exhibit Number
(Reference to
Item 601 of
Regulation S-K)
_________________
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Second Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1996
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L.P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).
27 Financial Data Schedule for the Third Quarter of 1998.
28.1 Waiver dated as of October 29, 1998 to the First Amendment
to Sixth Restated and Amended Credit Agreement among Pride
Companies, L.P. as borrower, Pride Refining, Inc., Pride
SGP, Inc., Desulfur Partnership, Pride Marketing of Texas
(Cedar Wind), Inc. and Pride Borger, Inc., as guarantors,
and Varde Partners, Inc., as lender.
28.2 Waiver dated as of August 1, 1998 to the Revolving Credit
and Term Loan Agreement dated December 30, 1997, as amended,
among Pride Companies, L.P., as borrower, Pride SGP, Inc.,
Pride Refining, Inc., Desulfur Partnership, Pride Borger,
Inc. and Pride Marketing of Texas (Cedar Wind), Inc.,
BankBoston, N.A., as Agent, Lehman Commercial Paper Inc., as
Documentation Agent, and BankBoston, N.A., Lehman Commercial
Paper Inc. and Union Bank of California, N.A.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 830
<SECURITIES> 0
<RECEIVABLES> 13,537
<ALLOWANCES> 0
<INVENTORY> 8,427
<CURRENT-ASSETS> 24,955
<PP&E> 68,420
<DEPRECIATION> 22,051
<TOTAL-ASSETS> 83,402
<CURRENT-LIABILITIES> 29,065
<BONDS> 41,623
20,451
0
<COMMON> (20,468)
<OTHER-SE> (896)
<TOTAL-LIABILITY-AND-EQUITY> 83,402
<SALES> 301,372
<TOTAL-REVENUES> 301,372
<CGS> 291,507
<TOTAL-COSTS> 291,507
<OTHER-EXPENSES> 2,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,785
<INCOME-PRETAX> (4,664)
<INCOME-TAX> (44)
<INCOME-CONTINUING> (4,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,620)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
<PAGE>
WAIVER (Exhibit 28.2)
October 29, 1998
Pride Companies, L.P.
1209 N. 4th
Abilene, Texas 79601
Gentlemen:
We refer to the Sixth Restated and Amended Credit Agreement
dated as of December 30, 1997 among Pride Companies, L.P., as borrower
(the "Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride
Borger, Inc., as guarantors (the "Guarantors") and Varde Partners,
Inc., as lender (the "Lender"), as amended by that certain First
Amendment to Sixth Restated and Amended Credit Agreement dated as of
April 15, 1998 (as so amended, the "Credit Agreement"). Capitalized
terms not otherwise defined in this Waiver have the meanings specified
in the Credit Agreement.
The Borrower has requested that the Lender waive compliance
with the provisions of Section 2.2 of the Credit Agreement to permit a
Borrowing in excess of the Borrowing Base. Accordingly, subject to
the provisions contained herein, the Lender hereby waives compliance
with Section 2.2 of the Credit Agreement to the extent necessary to
permit a Borrowing or Borrowings in excess of the Borrowing Base in an
amount not to exceed $850,000 in the aggregate; provided, however,
that under no circumstances may the aggregate amount of Revolving
Loans outstanding exceed the Revolving Credit Commitment. Please be
advised that this Waiver has been made in the sole discretion of the
Lender as an accommodation to the Borrower and the Guarantors and
should in no way be construed as a commitment to make Revolving Loans
in excess of the Borrowing Base at any time in the future. This
Waiver shall be effective only until the earlier of (i) the effective
date of any amendment to the Credit Agreement and (ii) November 15,
1998.
This Waiver shall become effective on the date on which the
Borrower, the Guarantors and the Lender shall each have executed and
delivered this instrument.
Except as specifically provided herein, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed. The execution, delivery and
effectiveness of this Waiver shall not operate as a waiver of any
right, power or remedy of the Lender under any of the Loan Documents,
nor constitute a waiver of any provision of the Loan Documents except
as set forth herein.
The Borrowers agree to pay the Lender on demand for all
costs, expenses and charges incurred in connection with the
preparation, reproduction, execution, delivery, filing, recording and
administration of this Waiver and any other instruments and documents
to be delivered hereunder, including, without limitation, the fees and
out-of-pocket expenses of counsel for the Lender with respect thereto
and with respect to advising the Lender as to its rights and
responsibilities under such documents, and all costs and expenses, if
any, in connection with the enforcement of any such documents.
This Waiver shall be governed by and construed in accordance
with the laws of the State of New York.
This Waiver may be executed in any number of counterparts,
all of which taken together shall constitute one and the same
instrument, and any party hereto may execute this Waiver by signing
any such counterpart.
Very truly yours,
VARDE PARTNERS, INC.
By: George G. Hicks
Title: Vice President
The Borrower and the Guarantors
hereby consent to the provisions
of this Waiver.
PRIDE COMPANIES, L.P.
By Pride Refining, Inc., its
Managing General Partner
By: Brad Stephens
Title: CEO
PRIDE REFINING, INC.
By: Brad Stephens
Title: CEO
PRIDE SGP, INC.
By: Brad Stephens
Title: CEO
PRIDE BORGER, INC.
By: Brad Stephens
Title: CEO
PRIDE MARKETING OF TEXAS (CEDAR WIND), INC.
By: Brad Stephens
Title: President
DESULFUR PARTNERSHIP
by Pride Companies, L.P., its
General Partner, by Pride Refining, Inc.,
its Managing General Partner
By: Brad Stephens
Title: CEO
and by Pride Marketing of Texas
(Cedar Wind), Inc., its General Partner
By: Brad Stephens
Title: President<PAGE>
WAIVER (Exhibit 28.2)
As of August 1, 1998
Pride Companies, L.P.
1209 North Fourth
Abilene, Texas 79601
Attention: Chief Executive Officer
Ladies and Gentlemen:
Each of the undersigned BankBoston, N.A., as Agent, as Bank
Lender and as Collateral Agent, Lehman Commercial Paper Inc., as
Documentation Agent and as Bank Lender, Union Bank of California,
N.A., as Bank Lender, and Varde Partners, Inc. hereby agrees with you
as follows:
1. References. Reference is made to each of the following
agreements:
(a) Revolving Credit and Term Loan Agreement dated
as of December 30, 1997, as amended (the "Bank Loan Agreement")
among Pride Companies, L.P., a Delaware limited partnership (the
"Borrower"), Pride SGP, Inc., a Texas corporation, Pride
Refining, Inc., a Texas corporation, Desulfur Partnership, a
Texas general partnership, Pride Borger, Inc., a Delaware
corporation, and Pride Marketing of Texas (Cedar Wind), Inc., a
Texas corporation (collectively, the "Pride Affiliates"),
BankBoston, N.A., as Agent (in such capacity, the "Agent"),
Lehman Commercial Paper Inc., as Documentation Agent, and
BankBoston, N.A., Lehman Commercial Paper Inc. and Union Bank of
California, N.A. (collectively, the "Bank Lenders").
(b) Sixth Restated and Amended Credit Agreement
dated as of December 30, 1997, as amended (the "Varde Loan
Agreement"), among the Borrower, the Pride Affiliates and Varde
Partners, Inc. ("Varde");
(c) Guarantee and Security Agreement dated as of
December 30, 1997 (the "Bank Security Agreement") among the
Borrower, the Pride Affiliates and the Agent; and
(d) Second Restated Security Agreement dated as of
December 30, 1997 (the "Varde Security Agreement") between the
Borrower and BankBoston, N.A., as Collateral Agent (in such
capacity, the "Collateral Agent").
2. Request for Waiver. The Borrower has reported to the Bank
Lenders, Varde, the Agent, the Documentation Agent and the Collateral
Agent (collectively, the "Lending Parties") that it is renegotiating
its arrangements with Texaco Trading and Transportation, Inc., a
Delaware corporation ("Texaco"). The Borrower proposes to modify its
arrangements with Texaco to provide that (a) Texaco product delivered
to the Borrower's terminals shall not pass to the Borrower until it is
pumped from the terminals to terminal truck racks or pipelines or, in
the case of JP-8 fuel, it is mixed with additives by the Borrower, (b)
Texaco shall lease from the Borrower certain storage facilities
holding such product and (c) Texaco shall repurchase from the Borrower
approximately 305,000 barrels of gasoline, diesel and jet fuel (the
"Repurchased Product"). These proposed transactions are to be
documented by agreements in the form of the draft Amendment and
Agreement and the draft Terminal and Pipeline Lease and Operating
Agreement attached hereto as Exhibit A and Exhibit B, respectively.
The Borrower has requested that the Lending Parties consent to the
arrangements contemplated by this Section 2.
3. Consent of Bank Lenders. Subject to the satisfaction of the
conditions set forth in Section 6 hereof, each of the Bank Lenders,
the Agent and the Documentation Agent hereby (a) consents for the
purposes of Section 6.2.4 of the Bank Loan Agreement to the amendments
of the Texaco Supply Contract (as defined in the Bank Loan Agreement)
set forth in Exhibit A hereto, (b) agrees that the resale of the
product inventory described in Section 2(c) hereto shall be treated as
a sale of inventory in the ordinary course of business for the
purposes of Section 6.11.1 of the Bank Loan Agreement and (c) waives
any default under Section 6.11 of the Bank Loan Agreement or any other
Credit Document (as defined in the Bank Loan Agreement) arising from
the lease of certain terminal and pipeline assets of the Borrower as
set forth in Exhibit B hereto. In addition, the Agent acknowledges
that the security interest in inventory granted under the Bank
Security Agreement extends to inventory of the Borrower and the Pride
Affiliates and shall not include inventory that is owned by Texaco
(including without limitation the inventory repurchased by Texaco as
contemplated in Section 2 hereof) and stored at the facilities leased
to Texaco as contemplated in Exhibit B hereto. Accordingly, with the
consent of the Bank Lenders and the Documentation Agent, the Agent
hereby releases its security interest in the Repurchased Product.
4. Consent of Varde. Subject to the satisfaction of the
conditions set forth in Section 6 hereof, Varde hereby (a) agrees for
the purposes of Section 7.7(a) of the Varde Loan Agreement that the
resale of the product inventory described in Section 2(c) hereto shall
be treated as a sale of inventory in the ordinary course of business
and (b) waives any default under Section 7.7 of the Varde Loan
Agreement or any other Loan Document (as defined in the Varde Loan
Agreement) arising from the lease of certain terminals and pipeline
assets of the Borrower as set forth in Exhibit B hereto. In addition,
the Collateral Agent acknowledges that the security interest in
inventory granted under the Varde Security Agreement extends to
inventory of the Borrower only and shall not include inventory that is
owned by Texaco (including without limitation the inventory
repurchased by Texaco as contemplated in Section 2 hereof) and stored
at the facilities leased to Texaco as contemplated in Exhibit B
hereto. Accordingly, with the consent of Varde, the Collateral Agent
hereby releases its security interest in the Repurchased Product.
5. Cross-Consents. Each of the Bank Lenders, the Agent, the
Documentation Agent, Varde and the Collateral Agent hereby consent to
the granting of each consent, waiver and acknowledgment granted by
each of such parties pursuant to the foregoing Sections 3 and 4.
6. Conditions. The waivers and consents granted herein are
subject to the following conditions.
(a) That the aggregate market value of the product
inventory resold to Texaco as permitted hereby shall not exceed
$5,500,000, that the price paid to the Borrower therefor shall
not be less than the price paid or agreed to be paid by the
Borrower to Texaco in consideration of the original delivery of
such product to the Borrower, that such price shall be paid in
cash and/or in cancellation of current liabilities owing from the
Borrower to Texaco and that such resale shall be effective by the
close of business on August 1, 1998.
(b) That the facilities leased to Texaco as
provided in the form of Terminal and Pipeline Lease and Operating
Agreement attached as Exhibit B hereto will consist solely of the
refined product terminal facilities of the Borrower at Abilene,
Aledo and San Angelo, Texas, the San Angelo pipeline and Tye
Station to Abilene terminal pipeline, excluding all crude oil
storage facilities.
(c) That the agreements with Texaco permitted
hereby shall be in the forms provided in Exhibits A and B hereto
with no changes except such modifications, if any, as shall have
been agreed to in writing by the Agent and Varde.
(d) Without regard to the Borrower's compliance
with any other terms of this agreement, upon payment from Texaco
to the Borrower the Lending Parties agree that they will make no
claims against Texaco for the Repurchased Product.
7. Representations and Warranties. In order to induce the
Lending Parties to enter into this Waiver, each of the Borrower and
the Pride Affiliates jointly and severally represents and warrants to
each of the Lending Parties that:
7.1. No Legal Obstacle to Agreements. Neither the execution and
delivery of this Waiver or the agreements with Texaco contemplated by
Section 2 of this Waiver, nor the consummation of any transaction
referred to in or contemplated by this Waiver or such agreements, nor
the fulfillment of the terms hereof or thereof or of any other
agreement, instrument, deed or lease contemplated by this Waiver or
such agreements, has constituted or resulted in or will constitute or
result in:
(a) any breach or termination of the provisions of
any agreement, instrument, deed or lease to which any of the
Borrower or the Pride Affiliates is a party or by which it is
bound, or of the charter or by-laws of any of the Borrower or the
Pride Affiliates;
(b) the violation of any law, statute, judgment,
decree or governmental order, rule or regulation applicable to
any of the Borrower or the Pride Affiliates;
(c) the creation under any agreement, instrument,
deed or lease of any lien upon any of the assets of any of the
borrower or the Pride Affiliates, except for the lease to Texaco
of the facilities of the Borrower described in Exhibit B hereto;
or
(d) any redemption, retirement or other repurchase
obligation of any of the Borrower or the Pride Affiliates under
any charter, by-law, agreement, instrument, deed or lease.
No approval, authorization or other action by, or declaration to or
filing with, any governmental or administrative authority or any other
person is required to be obtained or made by any of the Borrower or
the Pride Affiliates in connection with the execution and delivery of
this Waiver or such agreements or the transactions contemplated hereby
or thereby.
7.2. Defaults. Immediately after giving effect to the Waiver,
no Default (as defined either in the Bank Loan Agreement or in the
Varde Loan Agreement) shall exist.
7.3. Incorporation of Representations and Warranties.
Immediately after giving effect to the Amendment, the representations
and warranties set forth in Section 7 of the Bank Loan Agreement and
in Article V of the Varde Loan Agreement will be true and correct as
if originally made on and as of the date of this Waiver (except to the
extent of any representation or warranty which refers to a specific
earlier date).
8. Limitation. The waiver and consents set forth herein shall
apply only to the proposed agreements and transactions described in
Sections 2 and 6 hereof and shall not constitute or imply any waiver
or consent for any other agreement or transaction now or hereafter
contemplated, no matter how similar to those contemplated hereby.
Each of the Bank Loan Agreements, the Varde Loan Agreement, the Bank
Security Agreement and the Varde Security Agreement is confirmed as in
full force and effect.
9. General. This Waiver constitutes the entire understanding of
the parties with respect to the subject matter hereof and supersedes
all prior and current understandings and agreements, whether written
or oral, with respect to such subject matter. The invalidity or
unenforceability of any provision hereof shall not affect the validity
and enforceability of any other term or provision hereof. The
headings in this Waiver are for convenience of reference only and
shall not alter, limit or otherwise affect the meaning hereof. This
Waiver may be executed in any number of counterparts, which together
shall constitute one instrument, and shall bind and inure to the
benefit of the parties and their respective successors and assigns.
This Waiver shall be governed by and construed in accordance with the
laws (other than the conflict of law rules) of The Commonwealth of
Massachusetts.
Each of the undersigned has caused this Waiver to be executed and
delivered by its duly authorized officer as an agreement under seal as
of the date first above written. This Waiver shall take effect when
so executed by each of the Borrower, the Pride Affiliates and the
Lending Parties and delivered to the Borrower, the Agent and Varde.
BANKBOSTON, N.A., for Itself and as Agent
and as Collateral Agent
By: Peter Hailey
Authorized Officer
LEHMAN COMMERCIAL PAPER INC., for
Itself and as Documentation Agent
By: Michelle Swanson
Authorized Signatory
UNION BANK OF CALIFORNIA, N.A.
By: Walter M. Roth
Vice President
VARDE PARTNERS, INC.
By: George Hicks
Authorized Officer
Accepted and agreed to:
PRIDE COMPANIES, L.P.
by Pride Refining, Inc., its
Managing General Partner
By: Dave Caddell
Title: Vice President
Consented to:
PRIDE REFINING, INC.
By: Dave Caddell
Title: Vice President
PRIDE SGP, INC.
By: Dave Caddell
Title: Vice President
PRIDE BORGER, INC.
By: Dave Caddell
Title: Vice President
PRIDE MARKETING OF TEXAS (CEDAR
WIND), INC.
By: Dave Caddell
Title: Secretary
DESULFUR PARTNERSHIP
by Pride Companies, L.P., its General Partner,
by Pride Refining, Inc., its Managing General
Partner
By: Dave Caddell
Title: Vice President
and by Pride Marketing of Texas (Cedar Wind),
Inc., its General Partner
By: Dave Caddell
Title: Secretary
</TABLE>
