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 March 31, 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 May 1, 1998
Common Units 4,950,000<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIDE COMPANIES, L.P.
BALANCE SHEETS
(Amounts in thousands, except unit amounts)
<CAPTION>
March 31,
1998 December 31,
(unaudited) 1997
___________ ____________
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 792 $ 5,008
Accounts receivable, less allowance
for doubtful accounts 15,597 14,543
Inventories 13,050 13,036
Prepaid expenses 1,926 2,096
___________ ___________
Total current assets 31,365 34,683
Property, plant and equipment 68,084 67,253
Accumulated depreciation 20,501 19,665
___________ ___________
Property, plant and equipment - net 47,583 47,588
Assets no longer used in the business 7,353 7,353
Deferred financing cost 4,939 5,254
Other assets 405 403
___________ ___________
$ 91,645 $ 95,281
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Current liabilities:
Accounts payable $ 23,630 $ 26,670
Accrued payroll and related benefits 1,654 1,870
Accrued taxes 1,716 3,323
Other accrued liabilities 1,807 2,811
Current portion of long-term debt 3,434 2,084
___________ ___________
Total current liabilities 32,241 36,758
Long-term debt, excluding current portion 42,479 41,087
Deferred income taxes 2,375 2,405
Other long-term liabilities 11,265 10,935
Redeemable preferred equity 19,679 19,529
Partners' capital:
Common units (5,275,000 units
authorized, 4,950,000 units
outstanding) (15,598) (14,656)
General partners' interest (796) (777)
___________ ___________
$ 91,645 $ 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 March 31,
1998 1997
______________ ___________
<S> <C> <C>
Revenues $ 106,219 $ 142,455
Cost of sales and operating expenses,
excluding depreciation 101,899 139,371
Marketing, general and
administrative expenses 2,186 2,391
Depreciation 850 1,718
____________ ___________
Operating income (loss) 1,284 (1,025)
Other income (expense):
Interest income 41 9
Interest expense (including interest
paid in kind of $312 and $0,
respectively) (1,225) (1,334)
Credit and loan fees (including
amortization of $329 and $0,
respectively) (672) (589)
Other - net 33 (21)
____________ ___________
Loss before income taxes (539) (2,960)
Income tax expense (benefit) (6) (47)
____________ ___________
Net loss $ (533) $ (2,913)
============ ===========
Basic and diluted net loss
per Common Unit $ (.19) $ (.58)
============ ===========
Numerator:
Net loss $ (533) $ (2,913)
Preferred dividends accrued
and paid in kind (428) -
------------ -----------
Subtotal (961) (2,913)
2% general partner interest (19) (58)
------------ -----------
Numerator for basic and diluted
net loss per Common Unit $ (942) $ (2,855)
============ ===========
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>
Three Months Ended March 31,
1998 1997
____________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (533) $ (2,913)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Noncash charges (credits) to earnings:
Depreciation 850 1,718
Amortization of loan costs 329 -
(Gain) loss on sale of
property, plant and equipment (12) 24
Deferred tax benefit (30) (78)
Payment in kind 312 -
Net effect of changes in:
Accounts receivable (1,054) 5,019
Inventories (14) 2,116
Prepaid expenses 170 352
Accounts payable and other
long-term liabilities (2,987) (6,186)
Accrued liabilities (2,827) (1,466)
____________ ___________
Total adjustments (5,263) 1,499
____________ ___________
Net cash provided by (used in)
operating activities (5,796) (1,414)
Cash flows from investing activities:
Purchases of property, plant and
equipment (839) (369)
Proceeds from disposal of property,
plant and equipment 13 5
Other (14) 2
____________ ___________
Net cash provided by (used in)
investing activities (840) (362)
Cash flows from financing activities:
Proceeds from debt and credit
facilities 8,472 41,608
Payments on debt and credit
facilities (6,042) (39,846)
Other (10) -
____________ ___________
Net cash provided by (used in)
financing activities 2,420 1,762
____________ ___________
Net increase (decrease) in cash and
cash equivalents (4,216) (14)
Cash and cash equivalents at the
beginning of the period 5,008 472
____________ ___________
Cash and cash equivalents at the
end of the period $ 792 $ 458
============ ===========
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 and (ii) certain
integrated products pipelines and terminal operations in San
Angelo, Texas and Aledo, Texas (the "Products System"). 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, Inc., 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
the Products System and its other products terminal in Abilene,
Texas that had been included as part of the Refinery. 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 will now market crude oil
primarily to other refineries and the Partnership will now operate
two separate and distinct industry segments, the Crude Gathering
System segment and the marketing and products pipeline 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 System consisted of two products pipelines
that originated at the Refinery and terminated 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 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
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (FAS 128). FAS 128 supersedes APB Opinion No.
15, Earnings Per Share (APB 15) and requires the calculation and
dual presentation of basic and diluted earnings per share,
replacing the measures of primary and fully-diluted earnings per
share as reported under APB 15. FAS 128 is effective for general
statements issued for periods ending after December 15, 1997;
earlier application is not permitted. 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 quarter ended March 31,
1998, 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
lower of cost or market and March 31, December 31,
consist of: 1998 1997
(in thousands)
_____________________________ ___________ ___________
<S> <C> <C>
Crude oil $ 8,219 $ 8,388
Refined products and blending
materials 4,379 6,473
___________ ___________
12,598 14,861
LIFO reserve (449) (2,837)
___________ ___________
Petroleum inventories 12,149 12,024
Spare parts and supplies 901 1,012
___________ ___________
$ 13,050 $ 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.
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. BankBoston has
agreed that under certain circumstances it may provide $21.0
million of term financing to the Partnership at a future date (the
"Proposed Term Loan"), in each case for a 5-year term.
In commitment letters, Varde and BankBoston have each agreed
to amend their respective credit agreements. The credit agreement
with Varde is being amended to provide $2.0 million of additional
working capital through deferral of principal amortization and an
additional loan. In addition, both credit agreements are being
amended to ease certain financial covenants through 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 $1.7 million as of March 31, 1998.
Though no advances had been drawn under the letter of credit
facility as of March 31, 1998, the Partnership did have
approximately $39.2 million in outstanding letters of credit. The
Partnership had drawn $2.8 million for direct cash borrowings as of
March 31, 1998. The fee on outstanding letters of credit was 2.75%
per annum as of March 31, 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
March 31, 1998 bore interest at either LIBOR plus 3.25% or prime
plus 2%. LIBOR and the prime rate were 5.68% and 8.5%,
respectively, at March 31, 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.
If and when funded, the Proposed Term Loan would be expected
to be used to refinance a $20.0 million bridge loan held by Varde
and to provide an additional $1.0 million for general working
capital purposes.
As a result of Varde's assumption of the outstanding bank debt
and additional loans to the Partnership, Varde now holds a term
loan of $20.1 million ("A Term Loan"), a term loan of $9.6 million
("B Term Loan"), a term loan of $4.8 million ("C Term Loan") and an
unsecured note of $2.6 million ("Subordinate Note A") as of
March 31, 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 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 $3.0 million of the B Term Loan
which is subject to interest rates of 12% through maturity. If the
A Term Loan is not repaid with borrowings under the Proposed Term
Loan or otherwise, 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
$3.0 million of the B Term Loan which is subject to interest rates
of 18% through maturity. The Subordinate Note A is convertible
into 406,000 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 due December 31,
2002 if the A Term Loan has not been refinanced, otherwise 180 days
after the maturity of the Proposed Term Loan, but no later than
June 30, 2003 if the A Term Loan has been refinanced. 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 DFSC Claim and certain other transactions
(see Note 8).
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 6 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% 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 DFSC Claim will be used to retire up to
$6.0 million of either the A Term Loan or the Proposed Term Loan,
whichever is 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.
Other installment loans include a $6.0 million nonrecourse
note, due 2014, payable monthly with interest at 8% and a balance
of $5.7 million at March 31, 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 $159,000 as
current at March 31, 1998.
The Partnership converted certain non-interest bearing
accounts payable to the U. S. Government Defense Fuel Supply Center
related to pricing adjustments which had been accrued since 1993 to
a $2.4 million installment loan, payable in monthly installments of
$84,000, with a balance of $172,000 at March 31, 1998. The loan
bears interest based on the rate set semi-annually by the Secretary
of the Treasury. This rate was 6.25% as of March 31, 1998. The
Partnership has classified the entire balance as current.
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 $9.4 million
of Series B Cumulative Convertible Preferred Units ("Series B
Preferred Units"), $5.0 million of Series C Cumulative Convertible
Preferred Units ("Series C Preferred Units") and $2.8 million of
Series D Cumulative Preferred Units ("Series D Preferred Units")
which initially mature December 31, 2002. On funding of the
Proposed Term Loan, the maturity date of the preferred equity
securities would be extended 180 days past the maturity of the
Proposed Term Loan but no later than June 30, 2003. The Series B
Preferred Units and Series C Preferred Units are convertible into
1,491,000 and 800,000 Common Units, respectively, at March 31,
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 $115,000 on February 5, 1998 and accrued
distributions of $227,000 at March 31, 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 March 31, 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 initially mature
December 31, 2002. On any funding of the Proposed Term Loan, the
maturity will be extended 180 days past the maturity of the
Proposed Term Loan but no later than June 30, 2003. The Series E
Preferred Units and Series F Preferred Units will be subordinated
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 March 31, 1998,
the Partnership accrued distributions of $50,000 but had not paid
such distributions in cash or in kind.
8. Common Units
At March 31, 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 agreement, the
bank restricted the payment of distributions to unitholders
throughout the term of the credit agreement. Future distributions
will be dependent on, among other things, payment in full of the
bank debt, expiration of all liabilities related to letters of
credit, and the termination of the credit agreement.
9. Contingencies
The Partnership has filed a substantial claim against the
Defense Fuel Supply Center relating to erroneous pricing of fuel
purchased over a period of several years from the Partnership and
its predecessors (the "DFSC Claim"). 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.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
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) the
settlement of outstanding contract issues, and (vi) the receipt of
certain consents and approvals to modify the Partnership's capital
structure.
General
Prior to mothballing the Refinery and entering into the
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. Increased Refinery utilization allowed the Partnership to
spread its fixed costs across more barrels, thereby lowering the
fixed costs per barrel of crude oil processed. The refining
business is highly competitive, and the Partnership's margins were
significantly impacted by general industry margins. Industry
margins are determined by a variety of regional, national, and
global trends, including oil prices, weather, and economic
conditions, among other things. The Refinery's military aviation
fuel prices were influenced by these trends since the pricing for
military aviation fuel is based on Jet A, a kerosene-based product,
and the price of diesel and heating fuels affect the price of
kerosene.
As a result of mothballing the Refinery and redirecting its
business to focus on crude marketing and distribution, the
Partnership's future operating results now depend principally on
the margins between the cost at which petroleum products are
purchased under the Equilon Agreement and the profit realized by
the Partnership for such products, the volume throughput on the
Products System, and 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.
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.
The intrasystem pricing of crude oil between the Refinery and
the Crude Gathering System was based in part on an adjusted Midland
spot price for crude oil above the Partnership's posted price for
the purchase of such crude oil (the "Premium"), which represented
the approximate amount above posting that would be realized on the
sale of such crude oil to an unrelated third party. The total
intrasystem price for crude oil between the Refinery and the Crude
Gathering System included the Premium, the Partnership's posted
price and transportation costs. An increase in the Premium for
crude oil had a negative impact on the Refinery and a positive
impact on the Crude Gathering System. On the other hand, a
decrease in the Premium for crude oil had a positive impact on the
Refinery and a negative impact on the Crude Gathering System. For
the three months ended March 31, 1998 and 1997, the average Premium
for crude oil was $1.81 and $2.27 per barrel, respectively.
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 are barrels of crude oil refined, gross margin (revenue
less cost of crude) per barrel, and operating expense per barrel,
excluding depreciation.
First Quarter 1998 Compared to First Quarter 1997
GENERAL -- Net loss for the first quarter of 1998 was
$533,000 compared to $2.9 million for the first quarter of 1997.
The improvement was primarily a result of increased refining
margins prior to mothballing the Refinery.
Operating income was $1.3 million for the first quarter of
1998 compared to operating loss of $1.0 million for the first
quarter of 1997. Operating income, excluding depreciation and
amortization, for the first quarter of 1998 increased to $2.1
million from $693,000 for the first quarter of 1997.
The following table details the operating income (loss);
depreciation; and the operating income (loss), excluding
depreciation (in thousands), for the first quarter of 1998 and
1997.
<TABLE>
<CAPTION>
Operating
Income
Operating (Loss)
Income Excluding
(Loss) Depreciation Depreciation
_________ ____________ ____________
<S> <C> <C> <C>
First Quarter 1998
Refinery and Products System $ 1,006 $ 368 $ 1,374
Crude Gathering System 278 482 760
_______ _______ ________
Total $ 1,284 $ 850 $ 2,134
======= ======= ========
First Quarter 1997
Refinery and Products System $(2,188) $ 1,237 $ (951)
Crude Gathering System 1,163 481 1,644
_______ _______ ________
Total $(1,025) $ 1,718 $ 693
======= ======= ========
</TABLE>
REFINERY AND PRODUCTS SYSTEM -- Operating income of the
Refinery and Products System was $1.0 million for the first quarter
of 1998 compared to operating loss of $2.2 million for the first
quarter of 1997. Depreciation expense for the Refinery and
Products System was $368,000 for the first quarter of 1998 and $1.2
million for the first quarter of 1997. The decline in depreciation
is due to the impairment writedown of certain Refinery fixed assets
on December 31, 1997. Operating income, excluding depreciation, of
the Refinery and Products System was $1.4 million for the first
quarter of 1998 compared to operating loss, excluding depreciation,
of $951,000 for the first quarter of 1997.
Operating income of the Refinery was $937,000 for the first
quarter of 1998 compared to operating loss of approximately $2.2
million for the same period in 1997. Depreciation expense for the
Refinery alone was $210,000 for the first quarter of 1998 and $1.0
million for the first quarter of 1997. Operating income, excluding
depreciation, of the Refinery was approximately $1.1 million for
the first quarter of 1998 compared to operating loss, excluding
depreciation, of $1.2 million for the first quarter of 1997.
Refinery gross margin per barrel was $1.88 for the first
quarter of 1998 versus $1.08 for the same period in 1997. The
increase in the gross margin primarily reflects the decline in the
Premium for crude oil, and the lower residuum sales for the first
quarter of 1998. In the first quarter of 1997, the Partnership
sold off excess residuum causing the gross margin to decrease for
such period since residuum is sold at a negative margin. Refinery
throughput averaged 28,090 BPD for the first quarter of 1998 versus
30,746 BPD for the same period in 1997. Operating expenses per
barrel, excluding depreciation, were $0.98 for the first quarter of
1998 compared to $1.13 for the first quarter of 1997.
Operating income for the Products System was $69,000 for the
first quarter of 1998 compared to $55,000 for the first quarter of
1997. Depreciation expense for the Products System was $158,000
for the first quarter of 1998 compared to $218,000 for the first
quarter of 1997. Operating income, excluding depreciation, for the
Products System decreased to $228,000 for the first quarter of 1998
from $273,000 for the same period in 1997. Total transportation
volumes were 7,335 BPD for the first quarter of 1998 compared to
12,484 BPD for the same period in 1997. The decline was primarily
due to the idling of the pipeline between the Refinery and the
Aledo terminal in February 1998.
CRUDE GATHERING SYSTEM -- Operating income for the Crude
Gathering System was $278,000 for the first quarter of 1998
compared to $1.2 million for the same period in 1997 due to a
decline in crude gathering margins. The Premium for crude oil sold
to the Refinery was lower in the first quarter of 1998 than the
first quarter of 1997; however, the amount paid above posting for
such crude oil to third parties did not decrease accordingly.
Depreciation expense for the Crude Gathering System was $482,000
for the first quarter of 1998 compared to $481,000 for the first
quarter of 1997. Operating income, excluding depreciation, for the
Crude Gathering System was $760,000 for the first quarter of 1998
and $1.6 million for the first quarter of 1997. The net margin was
$0.06 per barrel for the first quarter of 1998 versus $0.27 per
barrel for the same period in 1997. The volume of crude oil
gathered by the Crude Gathering System increased to 52,177 BPD for
the first quarter of 1998 from 48,590 BPD for the first quarter 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 with respect to certain products,
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 in
urban areas. In addition, the Partnership plans to spend
approximately $1.5 million in 1998 and 1999 on several projects to
maintain compliance with various other environmental requirements
including approximately $1.2 million 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 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. While refined products are generally sold at a margin
above crude oil prices, fluctuations in the price of crude oil can
have a significant short-term effect on refining margins because
there is usually a lag in the movement of product prices, both up
and down, after a change in crude oil prices. 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 from the crude gathering business. Margins from 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. The LIFO
method is the predominant method used in the refining industry.
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
refined products inventory in the amount of approximately 5 to 10
days of sales and crude inventory of approximately 10 to 15 days of
sales. The Partnership will pay for the refined products 10 days
after receipt from Equilon and crude oil feedstock on the 20th of
the month following the month in which it is received. As a
result, the Partnership's operating cycle is such that there is a
lag on when it receives payment for the refined products versus
when it pays for such products. 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 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 and may provide $21.0 million of
term financing at a future date (the "Proposed Term Loan"), in each
case for a 5-year term.
In commitment letters, Varde and BankBoston have each agreed
to amend their respective credit agreements. The credit agreement
with Varde is being amended to provide $2.0 million of additional
working capital through deferral of principal amortization and an
additional loan. In addition, both credit agreements are being
amended to ease certain financial covenants through 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 $1.7 million as of March 31, 1998.
Though no advances had been drawn under the letter of credit
facility at March 31, 1998, the Partnership did have approximately
$39.2 million in outstanding letters of credit. The Partnership
had drawn $2.8 million for direct cash borrowings as of March 31,
1998. The fee on outstanding letters of credit was 2.75% per annum
as of March 31, 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
March 31, 1998 bore interest at either LIBOR plus 3.25% or prime
plus 2%. LIBOR and the prime rate were 5.68% and 8.5%,
respectively, at March 31, 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.
If and when funded, the Proposed Term Loan would be expected
to be used to refinance a $20.0 million bridge loan held by Varde
and to provide an additional $1.0 million for general working
capital purposes.
As a result of Varde's assumption of the outstanding bank debt
and additional loans to the Partnership, Varde now holds a term
loan of $20.1 million ("A Term Loan"), a term loan of $9.6 million
("B Term Loan"), a term loan of $4.8 million ("C Term Loan") and an
unsecured note of $2.6 million ("Subordinate Note A") as of
March 31, 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 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 $3.0 million of the B Term Loan
which is subject to interest rates of 12% through maturity. If the
A Term Loan is not repaid with borrowings under the Proposed Term
Loan or otherwise, 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
$3.0 million of the B Term Loan which is subject to interest rates
of 18% through maturity. The Subordinate Note A is convertible
into 406,000 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 due December 31,
2002 if the A Term Loan has not been refinanced, otherwise 180 days
after the maturity of the Proposed Term Loan, but no later than
June 30, 2003 if the A Term Loan has been refinanced. 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. 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
DFSC 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% 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 DFSC Claim will be used to retire up to
$6.0 million of either the A Term Loan or the Proposed Term Loan,
whichever is 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.
Other installment loans include a $6.0 million nonrecourse
note, due 2014, payable monthly with interest at 8% and a balance
of $5.7 million at March 31, 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 $159,000 as
current at March 31, 1998.
The Partnership converted certain non-interest bearing
accounts payable to the U. S. Government Defense Fuel Supply Center
related to pricing adjustments which had been accrued since 1993 to
a $2.4 million installment loan, payable in monthly installments of
$84,000, with a balance of $172,000 at March 31, 1998. The loan
bears interest based on the rate set semi-annually by the Secretary
of the Treasury. This rate was 6.25% as of March 31, 1998. The
Partnership has classified the entire balance as current.
The documentation under which Varde acquired the outstanding
bank debt contemplated two possible future transactions. First, if
and when the Proposed Term Loan is funded, such proceeds will be
used to retire Varde's A Term Loan for $20.0 million and an
additional $1.0 million in borrowings will be made available for
working capital purposes.
Second, 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 $33.8 million of debt and preferred equity securities
composed of $9.5 million of B Term Loan, $4.7 million of C Term
Loan, $2.5 million of Subordinate Note A, $9.3 million of Series B
Preferred Units, $5.0 million of Series C Preferred Units and $2.8
million of Series D Preferred Units (including any paid in kind
distributions on these instruments) for the following series of
newly authorized redeemable 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 $33.8
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.
The Partnership has incurred recurring operating losses and
has working capital and partners' deficiencies. In addition, the
Partnership has not historically complied with certain of the
financial and performance covenants included in its credit
facilities with lenders and management is not certain whether the
Partnership will be able to comply with various financial covenants
contained in these credit facilities throughout 1998. Any such
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 first
quarter of 1998 were funded by additional borrowing which became
available under the Partnership's revolving credit facility.
Product sales for April 1998 and May 1998 will be 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 will be
substantially below expectations. As a result of the reduced
volumes, the Partnership has been 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 such
termination. The Partnership has been informed by Equilon it has
recently assigned a team of experts to resolve these problems.
However, there can be no assurance as to when these problems will
be resolved. If these problems are not resolved satisfactorily and
in a timely manner, the Partnership's financial condition would be
materially and adversely affected.
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.
Capital Expenditures
The Partnership incurred capital expenditures of $839,000 for
the first quarter of 1998 compared to $369,000 for the first
quarter of 1997. Capital expenditures increased in the first
quarter of 1998 primarily as a result of $510,000 in expenditures
to reactivate a crude oil pipeline between Comyn and Ranger, Texas.
Cash Distributions and Paid in Kind Distributions
In conjunction with Varde's assumption of the outstanding bank
debt, Varde received preferred equity securities including $9.4
million of Series B Cumulative Convertible Preferred Units ("Series
B Preferred Units"), $5.0 million of Series C Cumulative
Convertible Preferred Units ("Series C Preferred Units") and $2.8
million of Series D Cumulative Preferred Units ("Series D Preferred
Units") which initially mature December 31, 2002. On funding of
the Proposed Term Loan, the maturity date of the preferred equity
securities would be extended 180 days past the maturity of the
Proposed Term Loan but no later than June 30, 2003. The Series B
Preferred Units and Series C Preferred Units are convertible into
1,491,000 and 800,000 Common Units, respectively, at March 31,
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 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
$115,000 on February 5, 1998 and accrued distributions of $227,000
at March 31, 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 March 31, 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 initially mature
December 31, 2002. On funding of the Proposed Term Loan, the
maturity will be extended 180 days past the maturity of the
Proposed Term Loan but no later than June 30, 2003. The Series E
Preferred Units and Series F Preferred Units will be subordinated
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 March 31, 1998,
the Partnership accrued distributions of $50,000 but had not paid
such distributions in cash or in kind.
At March 31, 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 agreement, the
bank restricted the payment of distributions to unitholders
throughout the term of the credit agreement. Future distributions
will be dependent on, among other things, payment in full of the
bank debt, expiration of all liabilities for letters of credit, and
the termination of the credit agreement.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership has filed a substantial claim against the
Defense Fuel Supply 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 contractually committed to supply Diamond
Shamrock with vacuum gas oil through December 31, 1998. The
Partnership has proposed supplying Diamond Shamrock with vacuum gas
oil that it would purchase from Equilon and ship to Diamond
Shamrock through the end of the contract. If this proposal is
acceptable to Diamond Shamrock and the Partnership can make the
appropriate arrangements to ship the vacuum gas oil to Diamond
Shamrock, the change to the contract is not expected to have a
material effect on the Partnership. If that proposal, or other
alternative proposals, are not acceptable, or the Partnership
cannot make the appropriate arrangements, there could be a
potentially material adverse effect on the Partnership.
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 First Quarter of 1998.
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: May 15, 1998 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: May 15, 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 First Quarter of 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 792
<SECURITIES> 0
<RECEIVABLES> 15,597
<ALLOWANCES> 0
<INVENTORY> 13,050
<CURRENT-ASSETS> 31,365
<PP&E> 68,084
<DEPRECIATION> 20,501
<TOTAL-ASSETS> 91,645
<CURRENT-LIABILITIES> 32,241
<BONDS> 42,479
0
19,679
<COMMON> (15,598)
<OTHER-SE> (796)
<TOTAL-LIABILITY-AND-EQUITY> 91,645
<SALES> 106,219
<TOTAL-REVENUES> 106,219
<CGS> 101,899
<TOTAL-COSTS> 101,899
<OTHER-EXPENSES> 850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,225
<INCOME-PRETAX> (539)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
