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, 2000
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) 677-5444
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, 2000
----- --------------------------
Common Units 4,950,000
<PAGE>
<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,
2000 December 31,
(unaudited) 1999
----------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,965 $ 16,183
Accounts receivable, less allowance
for doubtful accounts 9,367 6,513
Other current assets 175 338
----------- -----------
Total current assets 11,507 23,034
Property, plant and equipment 30,561 30,669
Accumulated depreciation (14,274) (14,048)
----------- -----------
Property, plant and equipment - net 16,287 16,621
Assets no longer used in the business 4,235 4,235
Deferred financing cost 3,051 3,546
Other assets 184 70
----------- -----------
$ 35,264 $ 47,506
=========== ===========
LIABILITIES AND PARTNERS'
CAPITAL (DEFICIENCY):
Current liabilities:
Accounts payable $ 6,234 $ 16,714
Accrued payroll and related benefits 226 552
Accrued taxes 2,558 2,659
Other accrued liabilities 456 724
Net current liabilities of
discontinued operations 2,205 2,837
Current portion of long-term debt 26,551 25,799
----------- -----------
Total current liabilities 38,230 49,285
Other long-term liabilities 1,216 1,345
Net long-term liabilities of
discontinued operations 8,333 8,311
Redeemable preferred equity 17,079 17,079
Partners' capital (deficiency):
Preferred units to the Special
General Partner (3,145 units
authorized, 3,144 units
outstanding) 3,144 3,144
Common units (5,275,000 units
authorized, 4,950,000 units
outstanding) (31,615) (30,557)
General partners' interest (1,123) (1,101)
----------- -----------
$ 35,264 $ 47,506
=========== ===========
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,
2000 1999
-------------- -----------
<S> <C> <C>
Revenues $ 50,293 $ 21,321
Cost of sales and operating expenses,
excluding depreciation 48,959 20,498
Marketing, general and
administrative expenses 811 924
Depreciation 371 359
----------- -----------
Operating income (loss) 152 (460)
Other income (expense):
Interest income 125 35
Interest expense (including interest
paid in kind of $768 and $641,
respectively, and increasing rate
accrued interest of ($129) and $85,
respectively) (839) (1,379)
Credit and loan fees (including
amortization of $495 and $332,
respectively) (561) (357)
Other - net 43 46
----------- -----------
(1,232) (1,655)
----------- -----------
Net loss from continuing operations (1,080) (2,115)
Discontinued operations:
Net income from operations
of the Crude Gathering
System prior to
August 1, 1999 - 1,415
----------- -----------
Net loss $ (1,080) $ (700)
=========== ===========
Basic and diluted loss
per Common Unit:
Net loss from continuing
operations $ (.30) $ (.51)
Net income from discontinued
operations - .28
----------- -----------
Net loss $ (.30) $ (.23)
=========== ===========
Numerator:
Net loss from continuing
operations $ (1,080) $ (2,115)
Preferred distributions (452) (458)
----------- -----------
Net loss from continuing
operations less preferred
distributions (1,532) (2,573)
Net loss from continuing
operations allocable to 2%
general partner interest (31) (51)
----------- -----------
Numerator for basic and diluted
earnings per unit from
continuing operations $ (1,501) $ (2,522)
=========== ===========
Net income from
discontinued operations $ - $ 1,415
Net income from
discontinued operations
allocable to 2% general
partner interest - 28
----------- -----------
Numerator for basic and
diluted earnings per
unit from discontinued
operations $ - $ 1,387
=========== ===========
Numerator for basic and
diluted earnings per
unit $ (1,501) $ (1,135)
=========== ===========
Denominator:
Denominator for basic and diluted
earnings per unit 4,950 4,950
=========== ===========
See accompanying notes.
</TABLE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<CAPTION>
Three Months Ended March 31,
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,080) $ (700)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation 371 868
Amortization of loan costs 495 332
Deferred tax benefit - (32)
Gain on sale of property,
plant and equipment (49) (14)
Paid in kind interest and credit
and loan fees 768 641
Increasing rate accrued interest (129) 85
Lower of cost or market adjustment - (1,197)
Net effect of changes in:
Accounts receivable (2,736) (6,575)
Other current assets 163 1,114
Accounts payable and other
long-term liabilities (11,029) 5,781
Accrued liabilities (874) 74
----------- -----------
Total adjustments (13,020) 1,077
----------- -----------
Net cash provided by (used in)
operating activities (14,100) 377
Cash flows from investing activities:
Purchases of property, plant and
equipment (91) (270)
Proceeds from asset disposals 103 109
Other (114) -
----------- -----------
Net cash used in investing activities (102) (161)
Cash flows from financing activities:
Proceeds from debt and credit
facilities - 8,875
Payments on debt and credit
facilities (16) (8,943)
----------- -----------
Net cash used in financing activities (16) (68)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (14,218) 148
Cash and cash equivalents at the
beginning of the period 16,183 2,592
----------- -----------
Cash and cash equivalents at the
end of the period $ 1,965 $ 2,740
=========== ===========
See accompanying notes.
</TABLE>
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 a common carrier products pipeline
system and three products terminals in Abilene, Texas (the "Abilene
Terminal"); San Angelo, Texas (the "San Angelo Terminal"); and Aledo,
Texas (the "Aledo Terminal") (collectively the "Products Terminals")
that are used to market conventional gasoline, low sulfur diesel fuel,
and military aviation fuel (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. (the "Equilon Agreement") to market through its
products pipeline and Products Terminals.
Prior to October 1, 1999, the Partnership also owned and operated
a crude oil gathering business that gathered, transported, resold and
redelivered crude oil in the Texas market (the "Crude Gathering
System"). On October 1, 1999, the Partnership sold the operating
assets utilized by the Crude Gathering System to Sun Pipe Line
Services, Inc. ("Sun") for $29,595,000 in cash proceeds and the
assumption by Sun of certain indebtedness in the amount of $5,334,000
(the "Crude Gathering Sale"). Accordingly, the Crude Gathering System
has been presented as discontinued operations for all periods.
The Products Marketing Business operates the Products Terminals
and one common carrier products pipeline, that originates at the
Abilene Terminal and terminates at the San Angelo Terminal (the "San
Angelo Pipeline"). The Partnership's operations are conducted
primarily in the State of Texas.
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in and serves as the
managing general partner of the Partnership. Pride SGP, Inc.
("Special General Partner" or "Pride SGP") owns a 0.1% general partner
interest in and serves as the special general partner of the
Partnership. The Managing General Partner and Pride SGP (collectively
the "General Partners") collectively own a 2% general partner
interest. In addition to its general partner interest, Pride SGP owns
the Series G Preferred Units (See Note 8) and a 4.9% interest in the
Partnership through ownership of common limited partner units ("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
wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated. 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, 1999
include a summary of significant accounting policies that should be
read in conjunction with this quarterly report on Form 10-Q. The
Partnership has one corporate subsidiary which is a taxable entity
whose operations are subject to federal income taxes.
3. Net Loss Per Common Unit
Basic net loss per Common Unit is computed using the weighted
average number of Common Units outstanding. Diluted net loss per
Common Unit is computed by adjusting the Common Units outstanding and
net loss for the potential dilutive effect of the convertible
securities and unit appreciation rights. However, the effect of these
securities was antidilutive for the first quarters of 2000 and 1999.
4. Related Party Transactions
In accordance with the Third 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, the Series G Preferred Units (See
Note 8) 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.
On December 31, 1997, certain members of management invested an
aggregate of $2.0 million in the form of a note payable to Varde
Partners, Inc. ("Varde") and received a one-third economic non-
directive interest in the following: (i) $6.0 million of the B Term
Loan, (ii) C Term Loan, (iii) Subordinate Note A, (iv) Series B
Preferred Units, (v) Series C Preferred Units and (vi) Series D
Preferred Units (See Notes 6 and 7). The note payable to Varde is
secured by management's interest in such securities. Any cash yield
on management's share of such securities is paid to Varde as interest,
net of applicable federal income tax.
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. Discontinued Operations
As previously discussed, on October 1, 1999, the Partnership sold
the operating assets utilized by the Crude Gathering System to Sun for
$29,595,000 in cash proceeds and the assumption by Sun of certain
indebtedness in the amount of $5,334,000. Accordingly, the assets,
liabilities and operating results of the Crude Gathering System have
been segregated from the continuing operations and are reported as
discontinued operations. Interest expense, except for interest on the
note assumed by Sun, and general corporate administrative expenses
were not allocated to the discontinued operations. However, interest
expense related to continuing operations has declined since
$15,000,000 of the proceeds were used to reduce debt.
After the sale, the Partnership continues to be responsible for
certain environment liabilities associated with the Crude Gathering
System including five on-going remediation sites, any refined product
contamination associated with the assets sold and certain inactive
crude gathering lines retained by the Partnership. Other than
$95,000 currently accrued for remediation of the sites, the
Partnership does not expect future expenditures related to these
retained environmental liabilities to be material.
Revenues for the Crude Gathering System were $61,845,000 for the
first quarter of 1999. Under the terms of the asset sale, the
Partnership retained receivables of $13,669,000, other payables
excluding suspense liability of $20,410,000, and crude suspense
liability of $10,935,000 as of the disposal date of October 1, 1999.
In connection with the Crude Gathering System operations, as
first purchaser of crude oil the Partnership was responsible for
distribution of payments to the various revenue and royalty interest
owners. Often, the legal rights of the interest owners were unclear
or the owners could not be located for long periods of time. When
such was the case, the Partnership retained the liability for the
payments until the ownership interest was clarified or the owners
located, at which time payment was made. When an owner could not be
located, state statutes generally required that the unpaid amounts be
escheated to the state after the passage of a specified number of
years. Because such liabilities take years to be resolved and paid,
an estimate has been made of the amounts expected to be paid during
the next year and included in net current liabilities of discontinued
operations with the remainder included in net long-term liabilities of
discontinued operations. At March 31, 2000 and December 31, 1999, net
long-term liabilities of discontinued operations included $8,414,000
and $8,392,000, respectively, related to crude suspense liabilities.
Net current liabilities of discontinued operations included the
following components (in thousands) as of:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
<S> <C> <C>
Accounts receivable $ (145) $ (263)
Accounts payable 790 1,109
Crude suspense liability 1,279 1,531
Accrued payroll and related benefits 315 398
Accrued taxes (30) -
Other accrued liabilities (4) 62
-------- --------
$ 2,205 $ 2,837
======== ========
Net long-term liabilities of discontinued operations included the
following components (in thousands) as of:
March 31, December 31,
2000 1999
-------- --------
<S> <C> <C>
Other assets $ (81) $ (81)
Crude suspense liability 8,414 8,392
-------- --------
$ 8,333 $ 8,311
======== ========
</TABLE>
<PAGE>
6. Long-term Debt
On December 31, 1997, 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 facility and provided a new revolver facility (the
"BankBoston Revolver") on December 31, 1997.
The BankBoston Revolver, as amended, is a $10,000,000 facility and
provides for the issuance of letters of credit to third parties to
support the Partnership's purchase or exchange of petroleum products
and direct cash borrowings for general working capital purposes.
Amounts available under the BankBoston 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 certain payables for refined products. The amount
available under the borrowing base net of outstanding letters of
credit and advances under the BankBoston Revolver was $3,976,000 as of
March 31, 2000.
The BankBoston facility matures January 2, 2001. Though no
advances had been drawn under the letter of credit facility at March
31, 2000, the Partnership did have approximately $1,742,000 in
outstanding letters of credit. The Partnership did not have any
advances outstanding under the BankBoston Revolver for direct cash
borrowings as of March 31, 2000. The fee on outstanding letters of
credit was 2.5% per annum as of March 31, 2000. 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 BankBoston Revolver is
0.5% per annum. Under the terms agreed to by the parties, cash
borrowings under the BankBoston Revolver will bear interest at prime
plus 1.75%. The prime rate was 9.0% at March 31, 2000. The credit
agreement evidencing the BankBoston Revolver also requires the
Partnership to pay an agency fee of $50,000 per annum 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, subsequent interest being paid in
kind and proceeds from the Crude Gathering Sale being applied to the A
Term Loan, Varde now holds a Series A Term Loan of $4,973,000 ("A Term
Loan"), Series B Term Loan of $12,305,000 ("B Term Loan"), Series C
Term Loan of $5,881,000 ("C Term Loan") and Series A Unsecured Loan of
$3,075,000 ("Subordinate Note A") as of March 31, 2000.
Under the amended terms, cash interest payments on the Varde
Revolver and cash interest and principal payments on the A Term Loan
are limited to $2,500,000 per annum. Any excess on the Varde Revolver
and A Term Loan along with interest on the B Term Loan, C Term Loan,
Subordinate Note A, and distributions on Varde's preferred securities
will be paid in kind or accumulate in arrears. The A Term Loan, B
Term Loan, and C Term Loan bear interest rates of 11%, 13%, 15%, 17%
and 18% for the first, second, third, fourth and fifth years,
respectively, except for $4,514,000 of the B Term Loan which is
subject to interest rates of 18% through maturity. In addition, if
the A Term Loan is repaid or refinanced, the B Term Loan and C Term
Loan bear interest at 11% the first three years, 13% in the fourth
year and 15% in the fifth year, except for $4,514,000 of the B Term
Loan which is subject to interest rates of 12% through maturity. The
Subordinate Note A is convertible into 488,000 Common Units and bears
interest at prime plus one percent.
Because a portion of the debt is subject to increasing rates of
interest, the Partnership is accruing interest at the effective rate
over the term of the debt. Interest expense in the first quarters of
2000 and 1999 reflects the reversal of $129,000 and an accrual of
$85,000, respectively, which is based on the difference between the
effective interest rates and the stated rates. As a result of the
cash interest and principal payment limitations, it is likely that all
interest on the B Term Loan, C Term Loan, and Subordinate Note A will
be paid in kind and all preferred distributions will accumulate in
arrears until such time as the Partnership can restructure its capital
structure.
Effective April 15, 1999, the Partnership has a $3,000,000
revolving credit facility with Varde ("Varde Revolver"). Advances
under the Varde Revolver bear interest at 11% per annum, payable
monthly. The Partnership did not have any outstanding borrowing under
the Varde Revolver as of March 31, 2000. Cash advances under the
Varde Revolver mature January 2, 2001.
Fees paid to Varde in the form of additional Series B Term Loans
were $100,000 in 1999.
The A Term Loan is due on December 31, 2002. The B Term Loan, C
Term Loan and Subordinate Note A are also due December 31, 2002 if the
A Term Loan has not been refinanced. If the A Term Loan is
refinanced, the B Term Loan, C Term Loan and Subordinate Note A mature
180 days after the maturity of the new term loan, but no later than
June 30, 2003. The Partnership is required to make quarterly
principal payments on the A Term Loan as set forth in the Varde
Agreement as well as make payments of excess cash flow for the
preceding year. Varde agreed to forego all regular principal payments
in 1998 and 1999. However, as previously mentioned in connection with
the Crude Gathering Sale, the Partnership applied $15,000,000 of the
cash proceeds to the A Term Loan on October 1, 1999. As a result of
applying $15,000,000 from the Crude Gathering Sale to the A Term Loan
and required scheduled principal amortization on the A Term Loan, the
A Term Loan could be paid off as early as December 31, 2000 even
though the loan matures on December 31, 2002. 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 litigation proceeds related to the DESC Claim
(See Note 10) and certain other transactions including asset sales.
The Partnership must maintain compliance with certain financial
and other covenants, as defined in the credit agreements with the
lenders. In addition, the agreements contain restrictive covenants
including, among other things, provisions concerning additional
indebtedness and commitments, restriction on payments, sale of assets,
and certain affiliate transactions. At March 31, 2000, the
Partnership was not in compliance with the consolidated operating cash
flow to consolidated debt service ("COSF/CDS Covenant"), earnings
before interest, taxes, depreciation and amortization covenant
("EBITDA Covenant") and the requirement that the financial statements
contain no material qualifications. Furthermore, as the covenants in
the current loan agreement for the year 2000 were based on the
combined results of the Products Marketing Business and the Crude
Gathering System, management believes it is unlikely the Partnership
can comply with its current debt covenants in the future. Accordingly,
at March 31, 2000, all debt has been classified as current and
BankBoston has requested their facility be refinanced by June 30,
2000. The Partnership will attempt to renegotiate such covenants or
refinance the debt. However, there can be no assurance that the
Partnership will be successful in renegotiating the covenants or
refinancing the debt. Substantially, all of the Partnership's assets
are pledged as collateral to Varde and BankBoston in connection with
the credit agreements.
7. Redeemable Preferred Equity
Effective April 15, 1999, the Partnership amended the terms of its
Partnership Agreement and preferred equity securities effective as of
January 1, 1998. As a result of the amendment, preferred equity
securities are treated as accumulated arrearages rather than being
considered paid in kind. This reduces the amount of preferred equity
on the balance sheet and also affects the tax treatment of the
distributions to the unitholders and holders of the preferred equity
securities.
In conjunction with Varde's assumption of the previous existing
bank debt, Varde received preferred equity securities. As a result of
the assumption, Varde now holds preferred equity securities including
$9,322,000 of Series B Cumulative Preferred Units ("Series B Preferred
Units"), $5,000,000 of Series C Cumulative Preferred Units ("Series C
Preferred Units") and $2,757,000 of Series D Cumulative Preferred
Units ("Series D Preferred Units') which are all redeemable on
December 31, 2002. The Series B Preferred Units and Series C
Preferred Units are convertible into 1,480,000 and 794,000 Common
Units, respectively. The preferential quarterly payments on the
Series B Preferred Units and Series C Preferred Units are 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 at the Partnership's
option may accumulate in arrears at 8% per annum in the first three
years. The preferential quarterly payments on the Series D Preferred
Units are 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 at the Partnership's option may accumulate in arrears at 13% per
annum in the first three years. During the first quarters of 2000 and
1999, the Partnership accumulated arrearages of $452,000 and $412,000,
respectively, on these preferred equity securities. Through March 31,
2000, these securities had total accumulated arrearages of $3,726,000.
Management believes the amount in arrears will continue to increase
until such time as the Partnership can restructure its capital
structure.
8. Partners' Capital (Deficiency)
At March 31, 2000, Pride SGP held the Series G Preferred Units in
the face amount of $3,144,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial
Condition - Cash Distributions and Preferred Arrearage." The Series G
Preferred Units are subordinate to the Series B Preferred Units,
Series C Preferred Units and Series D Preferred Units and at the
Partnership's option may be redeemed on the latter of the retirement
of the senior preferred units or October 1, 2004. The Series G
Preferred Units will not accrue any distributions prior to October 1,
2004. Beginning October 1, 2004, distributions will accrue on these
securities at a rate equal to the lesser of (i) the Partnership's net
income less any distributions accrued or paid on any preferred
securities issued to Varde or (ii) 10% per annum.
At March 31, 2000 and December 31, 1999, 4,950,000 Common Units
are outstanding, representing a 98% limited partner interest. Pride
SGP and the public own 250,000 and 4,700,000 Common Units,
respectively.
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, the termination of
the credit agreement and the payment of all preferred arrearages.
The Series B Preferred Units, Series C Preferred Units and
Subordinate Note A held by Varde are convertible into 2,762,000 Common
Units. If Varde converted all their securities into Common Units, the
number of Common Units outstanding would increase from 4,950,000
Common Units to 7,712,000 Common Units.
9. Contingencies
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.
The Partnership is currently involved in Phase II of an
investigative study by the Texas Natural Resource Conservation
Commission. Management estimates the remaining cost to comply with
this study approximates $209,000 and had accrued for this amount at
March 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim in
the United States Court of Federal Claims against the United States of
America (DESC) relating to erroneous pricing of fuel purchased over a
period of several years from the Partnership and its predecessors (the
"DESC Claim"). The Partnership had sued the DESC based on an illegal
economic price adjustment ("EPA") provision present in 12 jet fuel
contracts between the Partnership and the DESC. Although the DESC
acknowledged the illegality of the EPA provision, the parties
disagreed on whether the Partnership had incurred damages.
On May 10, 2000, the presiding judge in the Partnership's pending
DESC Claim against the DESC rendered a judgment in favor of the
Partnership in the amount of $45.7 million (comprised of an additional
long-term contract premium of $23.4 million and an additional
transportation premium of $22.3 million), with statutory interest
under the Contract Disputes Act estimated to be $15.1 million through
May 10, 2000. The total award is estimated to be approximately $60.8
million (assuming interest through May 10, 2000). If this amount is
ultimately recovered by the Partnership, the Partnership will, after
$6.2 million of legal and certain other expenses, receive net proceeds
of approximately $54.6 million as of May 10, 2000, which will result
in an allocation of a significant amount of taxable income to common
unitholders without a corresponding cash distribution to pay any
resulting income taxes.
It is anticipated that the DESC will appeal the judgment, and it
is unclear when the Partnership will receive any sums under the
DESC Claim or whether the Partnership will ultimately be successful
upon appeal. In addition, upon any final resolution of the DESC
Claim, a substantial portion of the DESC Claim proceeds must be
distributed to the Partnership's creditors and preferred unitholders,
and substantially all of the Partnership's debt and all of the
preferred equity must be retired prior to any distribution of proceeds
to the common unitholders. Accordingly, it is unlikely that any
proceeds could be distributed to the common unitholders. If the
Partnership prevails against any appeals by the DESC and the DESC
Claim is recovered the gain would be taxable to the common unitholders
without any cash distributions to pay the resulting tax.
The actual tax impact on a common unitholder depends upon his
overall personal tax situation and whether he has suspended losses
which can be used to offset the allocation of income. Even if a
common unitholder has sufficient suspended losses which can be used to
offset that income, it is not clear whether these losses can be used
to offset his share of the statutory interest income component of the
Lawsuit recovery. In particular, persons who purchased Common Units
recently will likely be allocated substantial income for tax purposes
without adequate losses to offset that income.
The Partnership estimates, based on the current covenants and
restrictions in the various debt and preferred equity instruments,
that if full recovery of the DESC Claim were obtained as of May 10,
2000, approximately $23.9 million would be required to be distributed
to the holders of debt and preferred equity, approximately $6.2
million would be paid in legal fees and certain other expenses,
approximately $6.8 million is estimated to be used to fund the
Partnership's existing executive bonus plan, the taxable income
allocable to common unitholders would be approximately $47.8 million
net of the legal fees and bonus expenses (or $9.46 per Common Unit).
Consequently, unitholders who own Common Units on the last day of the
month preceding the month when any recovery against the DESC Claim is
received may not have adequate suspended losses to offset the income
allocation and will not receive a distribution from the Partnership to
pay any resulting tax liability. Common unitholders should consult
with their own tax advisor to determine whether they have suspended
passive losses and whether such losses (or others) can be utilized to
offset any income allocated to them related to the DESC Claim
recovery.
Should a full recovery be made, the Partnership plans on retiring
an additional $26.6 million of debt and preferred equity assuming the
DESC Claim is collected on July 1, 2001 in order to keep interest and
preferred distributions at rates of 11% to 17% from accumulating. The
additional payment results in a total retirement of $50.5 million of
debt and preferred equity from the DESC Claim proceeds. After the
additional retirement of the debt, preferred equity and accumulated
arrearages there will still be an estimated $5.6 million of preferred
equity and accumulated arrearages senior to the Common Units, but by
retiring an additional $26.6 million of debt and equity, it improves
the likelihood that common unitholders will receive distributions in
the future. As previously mentioned, the debt and preferred equity
instruments restrict the payment of distributions to common
unitholders as long as the preferential instruments are outstanding.
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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"). Prior to the sale of the operating assets utilized by the
crude gathering business ("Crude Gathering System") to Sun Pipe Line
Services, Inc. ("Sun") on October 1, 1999 (the "Crude Gathering
Sale"), the Partnership also operated the crude gathering business.
The following is a discussion of the financial condition and
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-K 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 condition in the future are: (i)
the margins between the revenue realized by the Partnership on the
sale of refined products and the cost of those products purchased from
Equilon and the availability of such products, (ii) the sales volume
at the Products Terminals, (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 and meet its debt obligations, (v) fluctuations in
refined product prices and their impact on working capital and the
borrowing base under the Partnership's credit agreements, and (vi) the
final outcome of the claim filed against the United States Government.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition" and "Part II. Other
Information, Item 1. Legal Proceedings."
General
As a result of the Crude Gathering Sale on October 1, 1999, the
Partnership's operating results for the Products Marketing Business
now depend principally on (i) the margins between the revenue realized
by the Partnership on the sale of refined products and the cost of
those refined products purchased from Equilon and (ii) the sales
volume at the Products Terminals. 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.
The Crude Gathering System was sold on October 1, 1999 and
accordingly the Crude Gathering System is treated as a discontinued
operation in the financial statements of the Partnership. The Crude
Gathering System's operating results depended principally on (i) the
volume of throughput on and margins from the transportation and resale
of crude oil from the Partnership's Crude Gathering System and (ii)
the amount of crude oil produced in the areas the Partnership
gathered. Margins from the Crude Gathering System were influenced by
the level of competition and the price of crude oil. When prices were
higher, crude oil could generally be resold at higher margins.
Additionally, transportation charges trended upward when higher crude
oil prices resulted in increased exploration and development.
Conversely, when crude oil prices decreased, exploration and
development declined and margins on the resale of crude oil as well as
transportation charges tended 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
ultimately 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.
First Quarter 2000 Compared to First Quarter 1999
General. Net loss for the first quarter of 2000 was $1.1 million
compared to net loss of $700,000 for the first quarter of 1999. The
results for the first quarter of 1999 included $1.4 million of net
income from discontinued operations.
Continuing Operations (Products Marketing Business). Net loss
from continuing operations was $1.1 million for the first quarter of
2000 compared to net loss from continuing operations of $2.1 million
for the first quarter of 1999. The results for the first quarter of
2000 improved due to lower operating expenses and marketing, general
and administrative expenses and lower interest expense due to the
payment of $15.0 million on the A Term Loan (See "- Financial
Condition") from the proceeds on the sale of the Crude Gathering
System.
Operating income for the Products Marketing Business was $152,000
for the first quarter of 2000 compared to operating loss of $460,000
for the first quarter of 1999. Depreciation expense for the Products
Marketing Business was $371,000 for the first quarter of 2000 compared
to $359,000 for the first quarter of 1999. Operating income excluding
depreciation for the Products Marketing Business was $523,000 for the
first quarter of 2000 compared to operating loss excluding
depreciation of $101,000 for the first quarter of 1999. The
improvement in the first quarter of 2000 was primarily due to a
$365,000 reduction in operating expenses and a $113,000 reduction in
marketing, general and administrative expenses. During the first
quarter of 2000, the Partnership marketed 15,636 barrels per day
("BPD") of refined products compared to 13,786 BPD for the first
quarter of 1999. The net margin per barrel (after marketing, general
and administrative expenses) for the first quarter of 2000 was
positive $0.11 compared to negative $0.38 for the first quarter of
1999.
Discontinued Operations (Crude Gathering System). Net income from
discontinued operations was $1.4 million for the first quarter of 1999
and included the reversal of a $1.2 million lower of cost or market
inventory adjustment since the market value of the crude oil owned by
the Partnership was more than its LIFO carrying value at March 31,
1999. Operating income, depreciation expense and operating income
excluding depreciation from discontinued operations was $1.7 million,
$509,000 and $2.2 million, respectively, for the first quarter of
1999. The volume of crude oil gathered by the Crude Gathering System
was 40,267 BPD for the first quarter of 1999. For the first quarter
of 1999, net margin was $0.47 per barrel.
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 requirements, industry trends, price of
crude oil 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
both diesel fuel and gasoline are expected to be increasingly
important in urban areas. In addition, the Partnership plans to spend
approximately $451,000 in 2000 and 2001 on several projects to
maintain compliance with various other environmental requirements
including $209,000 related to an investigative study by the Texas
Natural Resource Conservation Commission and $95,000 related to the
cleanup of an existing crude oil leak. The remaining $147,000 is for
various normal operating expenses to be incurred in the ordinary
course of business.
The Partnership is currently involved in Phase II of an
investigative study by the Texas Natural Resource Conservation
Commission. Management estimates the remaining cost to comply with
this study approximates $209,000 and had accrued for this amount at
March 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than expenditures
incurred in the ordinary course of business.
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. Beginning January 1, 2002, the Aledo Terminal will
also be subject to the RFG requirement. 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 believe that
these have had or will have a material adverse effect on the
Partnership's operations.
After the Crude Gathering Sale, the Partnership continues to be
responsible for certain environmental liabilities associated with the
Crude Gathering System including five on-going remediation sites, any
refined product contamination associated with the assets sold and
certain inactive crude gathering lines retained by the Partnership.
Other than $95,000 currently accrued for remediation of the sites, the
Partnership does not expect future expenditures related to these
retained environmental liabilities to be material.
Other Regulatory Requirements. The Partnership is subject to the
rules and regulations of, among others, the Occupational Safety and
Health Administration, Texas Railroad Commission, Texas Natural
Resource Conservation Commission, and United States Environmental
Protection Agency.
Industry Trends and Price of Crude Oil. The Partnership is
impacted by fluctuations in the cost of products purchased from
Equilon versus fluctuations in the price realized by the Partnership
on the sale of such products and the amount of competition in its
markets.
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.
Other Factors. On May 10, 2000, the presiding judge in the
Partnership's pending DESC Claim against the DESC rendered a judgment
in favor of the Partnership in the amount of $45.7 million, with
statutory interest under the Contract Disputes Act estimated to be
$15.1 million through May 10, 2000. The total award is estimated to
be approximately $60.8 million (assuming interest through May 10,
2000). If this amount is ultimately recovered by the Partnership, the
Partnership will, after $6.2 million of legal and certain other
expenses, receive net proceeds of approximately $54.6 million as of
May 10, 2000, which will result in an allocation of a significant
amount of taxable income to common unitholders without a corresponding
cash distribution to pay any resulting income taxes. See "Part II.
Other Information, Item 1. Legal Proceedings".
<PAGE>
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Financial Condition
Inflation
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
With respect to the Products Marketing Business, 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. From September 30, 1998 to
December 31, 1999, Equilon maintained the refined products inventory
in tanks leased to Equilon by the Partnership at the Partnership's
marketing facilities. As a result, the Partnership purchased product
inventory daily from Equilon, thereby eliminating most of the carrying
costs, including interest costs. Further, this arrangement
substantially reduced the lag between the time the Partnership paid
Equilon for the product, 10 to 20 days after the sale, and the time
the Partnership received payment from its customers. Beginning
January 1, 2000, the Partnership is required to reimburse Equilon its
carrying costs of inventory, including interest costs. To offset the
interest costs associated with carrying the inventory and to reduce
the letters of credit fees, the Partnership deposited $11.0 million
with Equilon in February, 2000 which is included in accounts payable.
Equilon will pay the Partnership interest income on the difference
between the amount deposited and the value of the refined products
inventory maintained by Equilon at the Partnership's terminals.
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 facility and provided a new revolver
facility (the "BankBoston Revolver") on December 31, 1997.
The BankBoston Revolver, as amended, is a $10.0 million facility
and 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 and direct cash borrowings for general working
capital purposes. Amounts available under the BankBoston 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 certain payables for refined products.
The amount available under the borrowing base net of outstanding
letters of credit and advances under the BankBoston Revolver was $4.0
million as of March 31, 2000.
The BankBoston facility matures January 2, 2001. Though no
advances had been drawn under the letter of credit facility at
March 31, 2000, the Partnership did have approximately $1.7 million
in outstanding letters of credit. The Partnership did not have any
advances outstanding under the BankBoston Revolver for direct cash
borrowings as of March 31, 2000. The fee on outstanding letters of
credit was 2.5% per annum as of March 31, 2000. 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 BankBoston Revolver is
0.5% per annum. Under the terms agreed to by the parties, cash
borrowings under the BankBoston Revolver will bear interest at prime
plus 1.75%. The prime rate was 9.0% at March 31, 2000. The credit
agreement evidencing the BankBoston Revolver also requires the
Partnership to pay an agency fee of $50,000 per annum 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, subsequent interest being paid in
kind and proceeds from the Crude Gathering Sale being applied to the A
Term Loan, Varde now holds a Series A Term Loan of $5.0 million ("A
Term Loan"), Series B Term Loan of $12.3 million("B Term Loan"),
Series C Term Loan of $5.9 million("C Term Loan") and Series A
Unsecured Loan of $3.1 million ("Subordinate Note A") as of March 31,
2000.
Under the amended terms, cash interest payments on the Varde
Revolver and cash interest and principal payments on the A Term Loan
are limited to $2.5 million per annum. Any excess on the Varde
Revolver and A Term Loan along with interest on the B Term Loan, C
Term Loan, Subordinate Note A, and distributions on Varde's preferred
securities will be paid in kind or accumulate in arrears. The A Term
Loan, B Term Loan, and C Term Loan bear interest rates of 11%, 13%,
15%, 17% and 18% for the first, second, third, fourth and fifth years,
respectively, except for $4.5 million of the B Term Loan which is
subject to interest rates of 18% through maturity. In addition, if
the A Term Loan is repaid or refinanced, the B Term Loan and C Term
Loan bear interest at 11% the first three years, 13% in the fourth
year and 15% in the fifth year, except for $4.5 million of the B Term
Loan which is subject to interest rates of 12% through maturity. The
Subordinate Note A is convertible into 488,000 Common Units and bears
interest at prime plus one percent.
Because a portion of the debt is subject to increasing rates of
interest, the Partnership is accruing interest at the effective rate
over the term of the debt. Interest expense in the first quarters of
2000 and 1999 reflects the reversal of $129,000 and an accrual of
$85,000, respectively, which is based on the difference between the
effective interest rates and the stated rates. As a result of the
cash interest payment limitations, it is likely that all interest on
the B Term Loan, C Term Loan, and Subordinate Note A will be paid in
kind and all preferred distributions will accumulate in arrears until
such time as the Partnership can restructure its capital structure.
Effective April 15, 1999, the Partnership has a $3.0 million
revolving credit facility with Varde ("Varde Revolver"). Advances
under the Varde Revolver bear interest at 11% per annum, payable
monthly. The Partnership did not have any outstanding borrowing under
the Varde Revolver as of March 31, 2000. Cash advances under the
Varde Revolver mature January 2, 2001.
Fees paid to Varde in the form of additional Series B Term Loans
were $100,000 in 1999.
The A Term Loan is due on December 31, 2002. The B Term Loan, C
Term Loan and Subordinate Note A are also due December 31, 2002 if the
A Term Loan has not been refinanced. If the A Term Loan is
refinanced, the B Term Loan, C Term Loan and Subordinate Note A mature
180 days after the maturity of the new term loan, but no later than
June 30, 2003. The Partnership is required to make quarterly
principal payments on the A Term Loan as set forth in the Varde
Agreement as well as make payments of excess cash flow for the
preceding year. Varde agreed to forego all regular principal payments
in 1998 and 1999. However, as previously mentioned in connection with
the Crude Gathering Sale, the Partnership applied $15.0 million of the
cash proceeds to the A Term Loan on October 1, 1999. As a result of
applying $15.0 million from the Crude Gathering Sale to the A Term
Loan and required scheduled principal amortization on the A Term Loan,
the A Term Loan could be paid off as early as December 31, 2000 even
though the loan matures on December 31, 2002. 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 litigation proceeds related to the DESC Claim
and certain other transactions including asset sales. See "Part II.
Other Information, Item 1. Legal Proceedings."
The Partnership or management has a three-year call on Varde's
position for an amount equal to a 40% annual 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 the A Term Loan, if then outstanding, and up to $5.0
million of the B Term Loan 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 invested an
aggregate of $2.0 million in the form of a note payable to Varde and
received a one-third economic non-directive interest in the following:
(i) $6.0 million of the B Term Loan, (ii) C Term Loan, (iii)
Subordinate Note A, (iv) Series B Cumulative Convertible Preferred
Units ("Series B Preferred Units"), (v) Series C Cumulative
Convertible Preferred Units ("Series C Preferred Units") and (vi)
Series D Cumulative Convertible Preferred Units ("Series D Preferred
Units"). The note payable to Varde is secured by management's
interest in such securities. Any cash yield on management's share of
such securities is paid to Varde as interest, net of applicable
federal income tax.
Any payments of principal on the securities held by Varde shall
be applied in the following order: Varde Revolver, A Term Loan, B Term
Loan, C Term Loan, Subordinate Note A, Series B Preferred Units,
Series C Preferred Units, and Series D Preferred Units.
Cash flows will be significantly affected by fluctuations in the
cost and volume of refined products and the timing of accounts
receivable collections. For the first quarter of 2000, cash was
utilized as a result of an increase in accounts receivable (as a
result of the higher refined product prices) and a decrease in
accounts payable (resulting from the $11.0 million cash deposited with
Equilon). For the first quarter of 1999, cash was utilized as a
result of an increase in accounts receivable (resulting from higher
crude oil prices and refined product prices). This was partially
offset by an increase in accounts payable (resulting from the higher
crude oil prices and refined product prices).
The Partnership must maintain compliance with certain financial
and other covenants, as defined in the credit agreements with the
lenders. In addition, the agreements contain restrictive covenants
including, among other things, provisions concerning additional
indebtedness and commitments, restriction on payments, sale of assets,
and certain affiliate transactions. At March 31, 2000, the
Partnership was not in compliance with the consolidated operating cash
flow to consolidated debt service ("COSF/CDS Covenant"), earnings
before interest, taxes, depreciation and amortization covenant
("EBITDA Covenant") and the requirement that the financial statements
contain no material qualification. Furthermore, as the covenants in
the current loan agreement for the year 2000 were based on the
combined results of the Products Marketing Business and the Crude
Gathering System, management believes it is unlikely the Partnership
can comply with its current debt covenants. Accordingly, at March 31,
2000, all debt has been classified as current and BankBoston has
requested their facility be refinanced by June 30, 2000. The
Partnership will attempt to renegotiate such covenants in the future
or refinance the debt. However, there can be no assurance that the
Partnership will be successful in renegotiating the covenants or
refinancing the debt. Substantially, all of the Partnership's assets
are pledged as collateral to Varde and BankBoston in connection with
the credit agreements.
The Partnership continues to incur net losses and it has a
working capital deficiency. Operating results have suffered as a
result of increasing competition, depressed operating margins and
higher financing costs. The loss from continuing operations for the
first quarter of 2000 was $1.1 million compared to $2.1 million for
the first quarter of 1999. Based upon its present capital structure,
management expects that the Partnership will continue to incur net
losses. Furthermore, at March 31, 2000, the Partnership was not in
compliance with certain financial covenants contained in the various
credit agreements resulting in the Partnership's debt being classified
as current.
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. Under a new military
aviation fuel contract with the U.S. Government which begins April 1,
2000 and ends March 31, 2001, the Partnership will supply
approximately 52.3 million gallons which is a 107% increase over the
volumes that it supplied under the contract which began April 1, 1999
and ends March 31, 2000; however, margins under the new contract will
be below last year's contract.
As a result of problems associated with the startup of the new
products pipeline by Equilon in 1998, Equilon agreed to certain
contract concessions. On October 1, 1998 the Partnership sold to
Equilon the refined products held by it at the Products Terminals and
in the San Angelo Pipeline. In addition, Equilon leased certain
tankage from the Partnership and sells refined products to the
Partnership daily from such facilities, thus eliminating the need for
the Partnership to maintain its own refined products inventory. On
April 15, 1999, Equilon further agreed to extend the lease and
maintain the inventory provided the Partnership reimburses Equilon for
its carrying costs beginning January 1, 2000, which primarily includes
interest costs. To offset such carrying costs the Partnership
deposited cash of $11.0 million in February 2000 with Equilon which is
included in accounts payable. As a result, Equilon will not include
interest charges in their carrying costs of inventory. In addition,
Equilon will pay the Partnership interest on the excess of the $11.0
million cash deposit over the value of the inventory, which was
approximately $6.0 million at March 31, 2000.
The Partnership has been able to achieve certain reductions in
operating expenses and marketing, general and administrative expenses
over the years. The expenses of the Products Marketing Business have
recently been reduced through staff reductions and computer
automation. The ability to generate profits could be adversely
affected if other Gulf Coast refiners bring refined products into West
Texas from the Gulf Coast via pipeline.
Regardless of any changes made to the Partnership operations, the
Partnership's financing arrangements will have to be significantly
restructured or refinanced before the BankBoston facility and Varde
Revolver expire January 2, 2001 and the Varde securities mature on
December 31, 2002. At this time it is uncertain what impact the
pending DESC Claim could have on the Partnership's ability to
restructure its obligations, and there can be no assurances that the
Partnership will be successful in restructuring its obligations.
Further, management is attempting to sell the idle refining equipment
to further reduce the outstanding indebtedness. Given the debt
covenant violations, the lenders have the right to refuse additional
advances as well as the right to accelerate the maturities of the
Partnership's obligations. Accordingly, the Partnership's ability to
continue operations, regain profitability, meets its obligations or
restore distributions is uncertain.
Capital Expenditures
Capital expenditures totaled $91,000 for the first quarter of
2000 compared to $270,000 for the first quarter of 1999. The first
quarter of 1999 included $107,000 in capital expenditures for the
Crude Gathering System.
Management anticipates spending $342,000 in the last nine months
of 2000 for environmental expenditures of which $254,000 was accrued
at March 31, 2000 and capital expenditures for 2000 are budgeted at
$200,000.
Cash Distributions and Preferred Arrearages
Effective April 15, 1999, the Partnership amended the terms of
its Partnership Agreement and preferred equity securities effective as
of January 1, 1998. As a result of the amendment, preferred equity
securities are treated as accumulated arrearages rather than being
considered paid in kind. This reduces the amount of preferred equity
on the balance sheet and also affects the tax treatment of the
distributions to the unitholders and holders of the preferred equity
securities.
In conjunction with Varde's assumption of the previous existing
bank debt, Varde received preferred equity securities. As a result of
the assumption, Varde now holds preferred equity securities including
$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 which are
all redeemable on December 31, 2002. The Series B Preferred Units and
Series C Preferred Units are convertible into 1,480,000 and 794,000
Common Units, respectively. The preferential quarterly payments on
the Series B Preferred Units and Series C Preferred Units are 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 at the
Partnership's option may accumulate in arrears at 8% per annum in the
first three years. The preferential quarterly payments on the Series
D Preferred Units are 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 at the Partnership's option may accumulate in
arrears at 13% per annum in the first three years. During the first
quarters of 2000 and 1999, the Partnership accumulated arrearages of
$452,000 and $412,000, respectively, on these preferred equity
securities. Through March 31, 2000, these securities had total
accumulated arrearages of $3.7 million. Management believes the
amount in arrears will continue to increase until such time as the
Partnership can restructure its capital structure.
In connection with the Crude Gathering Sale, Pride SGP exchanged
(a) certain trunklines and related pumping facilities owned by Pride
SGP, (b) interest payable to Pride SGP from the Partnership of
$548,000, (c) rentals payable to Pride SGP from the Partnership of
$2.1 million, (d) the Series E Preferred Units ("Series E Preferred
Units") in the face amount of $2.0 million held by Pride SGP, and (e)
the Series F Preferred Units ("Series F Preferred Units") in the face
amount of $450,000 held by Pride SGP for (y) $2.0 million in cash and
(z) newly issued Series G Preferred Units ("Series G Preferred Units")
in the face amount of $3.1 million. The Series G Preferred Units are
subordinate to the Series B Preferred Units, Series C Preferred Units
and Series D Preferred Units and at the Partnership's option may be
redeemed on the latter of the retirement of the senior preferred units
or October 1, 2004. The Series G Preferred Units will not accrue any
distributions prior to October 1, 2004. Beginning October 1, 2004,
distributions will accrue on these securities at a rate equal to the
lesser of (i) the Partnership's net income less any distributions
accrued or paid on any preferred securities issued to Varde or (ii)
10% per annum.
At March 31, 2000, Pride SGP held the Series G Preferred Units in
the face amount of $3.1 million.
At March 31, 2000 and December 31, 1999, 4,950,000 Common Units
were outstanding, representing a 98% limited partner interest in.
Pride SGP and the public own 250,000 and 4,700,000 Common Units,
respectively.
The Common Units rank behind the Partnership's bank indebtedness,
its indebtedness with Varde, the Series B Preferred Units, Series C
Preferred Units, Series D Preferred Units and Series G Preferred
Units (collectively "Preferred Equity"). As a result of the layers of
debt and the Preferred Equity ahead of the Common Units and taking
into consideration the various preferential calls on available cash
contained in the debt instruments and Preferred Equity instruments
(including accumulated arrearages on the Preferred Equity), it is
possible that a common unitholder could be allocated income under
the Partnership Agreement without a corresponding distribution of cash
to offset the tax liability that arises upon such allocation of income
at such time as operations, assets sales or the DESC Claim generate
cash which can be used to repay indebtedness under the Varde credit
agreement or retire the Preferred Equity. The actual impact on a
common unitholder of repayment of debt and retirement of the Preferred
Equity is dependent upon each common unitholder's personal tax basis
in his or her Common Units and his/her overall personal tax situation.
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 debt, expiration of all
liabilities related to letters of credit, and the termination of the
credit agreement and the payment of all preferred arrearages.
The Series B Preferred Units, Series C Preferred Units and
Subordinate Note A held by Varde are convertible into 2,762,000 Common
Units. If Varde converted all of their securities into Common Units,
the number of Common Units outstanding would increase from 4,950,000
Common Units to 7,712,000 Common Units.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is currently involved in Phase II of an
investigative study by the Texas Natural Resource Conservation
Commission. Management estimates the remaining cost to comply with
this study approximates $209,000 and had accrued for this amount at
March 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim
in the United States Court of Federal Claims against the United States
of America (DESC) relating to erroneous pricing of fuel purchased over
a period of several years from the Partnership and its predecessors
(the "DESC Claim"). The Partnership had sued the DESC based on an
illegal economic price adjustment ("EPA") provision present in 12 jet
fuel contracts between the Partnership and the DESC. Although the
DESC acknowledged the illegality of the EPA provision, the parties
disagreed on whether the Partnership had incurred damages.
On May 10, 2000, the presiding judge in the Partnership's pending
DESC Claim against the DESC rendered a judgment in favor of the
Partnership in the amount of $45.7 million (comprised of an additional
long-term contract premium of $23.4 million and an additional
transportation premium of $22.3 million), with statutory interest
under the Contract Disputes Act estimated to be $15.1 million through
May 10, 2000. The total award is estimated to be approximately $60.8
million (assuming interest through May 10, 2000). If this amount is
ultimately recovered by the Partnership, the Partnership will, after
$6.2 million of legal and certain other expenses, receive net proceeds
of approximately $54.6 million as of May 10, 2000, which will result
in an allocation of a significant amount of taxable income to common
unitholders without a corresponding cash distribution to pay any
resulting income taxes.
It is anticipated that the DESC will appeal the judgment, and it
is unclear when the Partnership will receive any sums under the
DESC Claim or whether the Partnership will ultimately be successful
upon appeal. In addition, upon any final resolution of the DESC
Claim, a substantial portion of the DESC Claim proceeds must be
distributed to the Partnership's creditors and preferred unitholders,
and substantially all of the Partnership's debt and all of the
preferred equity must be retired prior to any distribution of proceeds
to the common unitholders. Accordingly, it is unlikely that any
proceeds could be distributed to the common unitholders. If the
Partnership prevails against any appeals by the DESC and the DESC
Claim is recovered the gain would be taxable to the common unitholders
without any cash distributions to pay the resulting tax.
The actual tax impact on a common unitholder depends upon his
overall personal tax situation and whether he has suspended losses
which can be used to offset the allocation of income. Even if a
common unitholder has sufficient suspended losses which can be used to
offset that income, it is not clear whether these losses can be used
to offset his share of the statutory interest income component of the
Lawsuit recovery. In particular, persons who purchased Common Units
recently will likely be allocated substantial income for tax purposes
without adequate losses to offset that income.
The Partnership estimates, based on the current covenants and
restrictions in the various debt and preferred equity instruments,
that if full recovery of the DESC Claim were obtained as of May 10,
2000, approximately $23.9 million would be required to be distributed
to the holders of debt and preferred equity, approximately $6.2
million would be paid in legal fees and certain other expenses,
approximately $6.8 million is estimated to be used to fund the
Partnership's existing executive bonus plan, the taxable income
allocable to common unitholders would be approximately $47.8 million
net of the legal fees and bonus expenses (or $9.46 per Common Unit).
Consequently, unitholders who own Common Units on the last day of the
month preceding the month when any recovery against the DESC Claim is
received may not have adequate suspended losses to offset the income
allocation and will not receive a distribution from the Partnership to
pay any resulting tax liability. Common unitholders should consult
with their own tax advisor to determine whether they have suspended
passive losses and whether such losses (or others) can be utilized to
offset any income allocated to them related to the DESC Claim
recovery.
Should a full recovery be made, the Partnership plans on retiring
an additional $26.6 million of debt and preferred equity assuming the
DESC Claim is collected on July 1, 2001 in order to keep interest and
distributions at rates of 11% to 17% from accumulating. The
additional payment results in a total retirement of $50.5 million of
debt and preferred equity from the DESC Claim proceeds. After the
additional retirement of the debt and preferred equity there will
still be an estimated $5.6 million of preferred equity senior to the
Common Units, but by retiring an additional $26.6 million of debt and
equity, it improves the likelihood that common unitholders will
receive distributions in the future. As previously mentioned, the
debt and preferred equity instruments restrict the payment of
distributions to common unitholders as long as the preferential
instruments are outstanding.
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
Under the terms agreed to on April 15, 1999, payments to Varde
are capped at $2.5 million per annum. To the extent the interest and
distributions on the various Varde securities exceed the cap on cash
payments, the excess will be paid in kind or increase accumulated
arrearages, respectively. As a result of the cash cap, it is likely
that all interest on the B Term Loan, C Term Loan and Subordinate Note
A will be paid in kind and all preferred distributions will accumulate
in arrears until such time as the Partnership can restructure its
capital structure.
Distributions on the Series B Preferred Units, the Series C
Preferred Units and the Series D Preferred Units are payable on the
5th day of the second month in each quarter. Distributions are
subject to the cap on payments to Varde. Accordingly, for the first
quarters of 2000 and 1999, the Partnership accumulated arrearages of
$452,000 and $412,000, respectively, on these preferred equity
securities. Through March 31, 2000, these securities had total
accumulated arrearages of $3.7 million. Management believes the
amount in arrears will continue to increase until such time as the
Partnership can restructure its capital structure.
The Partnership must maintain compliance with certain financial
and other covenants, as defined in the credit agreements with the
lenders. In addition, the agreements contain restrictive covenants
including, among other things, provisions concerning additional
indebtedness and commitments, restriction on payments, sale of assets,
and certain affiliate transactions. At March 31, 2000, the
Partnership was not in compliance with the consolidated operating cash
flow to consolidated debt service ("COSF/CDS Covenant"), earnings
before interest, taxes, depreciation and amortization covenant
("EBITDA Covenant") and the requirement that the financial statements
contain no material qualification. Furthermore, as the covenants in
the current loan agreement for the year 2000 were based on the
combined results of the Products Marketing Business and the Crude
Gathering System, management believes it is unlikely the Partnership
can comply with its current debt covenants in the future.
Accordingly, at March 31, 2000, all debt has been classified as
current and BankBoston has requested their facility be refinanced by
June 30, 2000. The Partnership will attempt to renegotiate such
covenants or refinance the debt. However, there can be no assurance
that the Partnership will be successful in renegotiating the covenants
or refinancing the debt. Substantially, all of the Partnership's
assets are pledged as collateral to Varde and BankBoston in connection
with the credit agreements.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
No material changes have occurred related to market risks as
disclosed in the Form 10-K.
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 Third 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, 1999
(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 2000.
b. Reports on Form 8-K:
Notice to common unitholders concerning $45.7 million
judgment in favor of the Partnership, plus estimated
statutory interest through May 10, 2000 of $15.1
million, dated May 10, 2000.
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, 2000 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: May 15, 2000 /s/ George Percival
Principal Financial Officer
(Signing as Principal Financial
Officer)
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 Third 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, 1999
(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 2000.
<PAGE>
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