SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 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>
September 30,
2000 December 31,
(unaudited) 1999
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 9,604 $ 16,183
Restricted cash (including the
Deposits) 17,273 -
Accounts receivable, less allowance
for doubtful accounts 12,000 6,513
Other current assets 670 338
----------- -----------
Total current assets 39,547 23,034
Property, plant and equipment 30,582 30,669
Accumulated depreciation (14,999) (14,048)
----------- -----------
Property, plant and equipment - net 15,583 16,621
Assets no longer used in the business 4,235 4,235
Deferred financing cost - 3,546
Other assets 181 70
----------- -----------
$ 59,546 $ 47,506
=========== ===========
LIABILITIES AND PARTNERS'
CAPITAL (DEFICIENCY):
Current liabilities:
Accounts payable $ 5,838 $ 16,714
Accrued payroll and related benefits 200 552
Accrued taxes 980 2,659
Other accrued liabilities 676 724
Net current liabilities of
discontinued operations 1,045 2,837
Current portion of long-term debt 9,359 25,799
Current portion of preferred equity
and accumulated arrearages 7,001 -
----------- -----------
Total current liabilities 25,099 49,285
Other long-term liabilities - 1,345
Net long-term liabilities of
discontinued operations 8,584 8,311
Redeemable preferred equity 12,290 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) 10,688 (30,557)
General partners' interest (259) (1,101)
----------- -----------
$ 59,546 $ 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 September 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 61,229 $ 39,582
Net DESC proceeds-First DESC Receipt 39,798 -
Cost of sales and operating expenses,
excluding depreciation 60,362 38,805
Marketing, general and
administrative expenses 7,927 953
Depreciation 367 399
----------- -----------
Operating income (loss) 32,371 (575)
Other income (expense):
Interest income 174 85
Interest income from DESC-Second
DESC Receipt 15,815 -
Interest expense (including interest
paid in kind of $102 and $690,
respectively, and increasing rate
accrued interest of ($1,087) and
$137, respectively) 797 (1,468)
Credit and loan fees (including
amortization and write off of
$2,556 and $495, respectively) (2,731) (508)
Other - net 3 (30)
----------- -----------
14,058 (1,921)
----------- -----------
Net income (loss) from continuing
operations 46,429 (2,496)
Discontinued operations:
Net loss from operations of the
Crude Gathering System prior
to August 1, 1999 - (514)
----------- -----------
Net income (loss) $ 46,429 $ (3,010)
=========== ===========
Basic income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 9.11 $ (.59)
Net loss from discontinued
operations - (.10)
----------- -----------
Basic net income (loss) $ 9.11 $ (.69)
=========== ===========
Diluted income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 6.33 $ (.59)
Net loss from discontinued
operations - (.10)
----------- -----------
Diluted net income (loss) $ 6.33 $ (.69)
=========== ===========
Numerator for basic net earnings
per unit:
Net income (loss) from continuing
operations $ 46,429 $ (2,496)
Preferred distributions (426) (481)
----------- -----------
Net income (loss) from continuing
operations less preferred
distributions 46,003 (2,977)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 920 (60)
----------- -----------
Numerator for basic earnings per
unit from continuing operations $ 45,083 $ (2,917)
=========== ===========
Net loss from discontinued
operations $ - $ (514)
Net loss from discontinued
operations allocable to 2%
general partner interest - (10)
----------- -----------
Numerator for basic earnings per
unit from discontinued
operations $ - $ (504)
=========== ===========
Numerator for basic
earnings per unit $ 45,083 $ (3,421)
=========== ===========
Numerator for diluted net earnings
per unit:
Net income (loss) from continuing
operations $ 46,429 $ (2,496)
Preferred distributions (426) (481)
Adjustments to compute diluted
net income (loss):
Subordinate Note A interest
expense 34 -
Series B Preferred Units
distribution expense 214 -
Series C Preferred Units
distribution expense 114 -
----------- -----------
Net income (loss) from continuing
operations less preferred
distributions 46,365 (2,977)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 927 (60)
----------- -----------
Numerator for diluted earnings per
unit from continuing operations $ 45,438 $ (2,917)
=========== ===========
Net loss from discontinued
operations $ - $ (514)
Net loss from discontinued
operations allocable to 2%
general partner interest - (10)
----------- -----------
Numerator for diluted earnings
per unit from discontinued
operations $ - $ (504)
=========== ===========
Numerator for diluted
earnings per unit $ 45,438 $ (3,421)
=========== ===========
Denominator:
Denominator for basic
earnings per unit 4,950 4,950
=========== ===========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A 202 -
Series B Preferred Units 1,318 -
Series C Preferred Units 707 -
----------- -----------
Total adjustments 2,227 -
----------- -----------
Denominator for diluted
earnings per unit 7,177 4,950
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
<CAPTION>
Nine Months Ended September 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 175,243 $ 88,293
Net DESC proceeds-First DESC Receipt 39,798 -
Cost of sales and operating expenses,
excluding depreciation 171,784 85,248
Marketing, general and
administrative expenses 9,508 2,761
Depreciation 1,102 1,122
----------- -----------
Operating income (loss) 32,647 (838)
Other income (expense):
Interest income 478 185
Interest income from DESC-Second
DESC Receipt 15,815 -
Interest expense (including interest
paid in kind of $1,673 and $2,008,
respectively, and increasing rate
accrued interest of ($1,345) and $386,
respectively) (862) (4,310)
Credit and loan fees (including
amortization and write off of
$3,546 and $1,267 respectively,
and credit and loan fees paid in
kind of $0 and $100, respectively) (3,821) (1,524)
Other - net 42 21
----------- -----------
11,652 (5,628)
----------- -----------
Net income (loss) from continuing
operations 44,299 (6,466)
Discontinued operations:
Net income from operations of the
Crude Gathering System prior
to August 1, 1999 - 269
----------- -----------
Net income (loss) $ 44,299 $ (6,197)
=========== ===========
Basic income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 8.51 $ (1.56)
Net income from discontinued
operations - .05
----------- -----------
Basic net income (loss) $ 8.51 $ (1.51)
=========== ===========
Diluted income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 5.75 $ (1.56)
Net income from discontinued
operations - .05
----------- -----------
Diluted net income (loss) $ 5.75 $ (1.51)
=========== ===========
Numerator for basic net earnings
per unit:
Net income (loss) from continuing
operations $ 44,299 $ (6,466)
Preferred distributions (1,340) (1,413)
----------- -----------
Net income (loss) from continuing
operations less preferred
distributions 42,959 (7,879)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 859 (158)
----------- -----------
Numerator for basic earnings per
unit from continuing operations $ 42,100 $ (7,721)
=========== ===========
Net income from discontinued
operations $ - $ 269
Net income from discontinued
operations allocable to 2%
general partner interest - 5
----------- -----------
Numerator for basic earnings
per unit from discontinued
operations $ - $ 264
=========== ===========
Numerator for basic
earnings per unit $ 42,100 $ (7,457)
=========== ===========
Numerator for diluted net earnings
per unit:
Net income (loss) from continuing
operations $ 44,299 $ (6,466)
Preferred distributions (1,340) (1,413)
Adjustments to compute diluted net
income (loss):
Subordinate Note A interest
expense 186 -
Series B Preferred Units
distribution expense 655 -
Series C Preferred Units
distribution expense 351 -
----------- -----------
Net income (loss) from continuing
operations less preferred
distributions 44,151 (7,879)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 883 (158)
----------- -----------
Numerator for diluted earnings per
unit from continuing operations $ 43,268 $ (7,721)
=========== ===========
Net income from discontinued
operations $ - $ 269
Net income from discontinued
operations allocable to 2%
general partner interest - 5
----------- -----------
Numerator for diluted earnings
per unit from discontinued
operations $ - $ 264
=========== ===========
Numerator for diluted
earnings per unit $ 43,268 $ (7,457)
=========== ===========
Denominator:
Denominator for basic
earnings per unit 4,950 4,950
=========== ===========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note 391 -
Series B Preferred Units 1,425 -
Series C Preferred Units 765 -
----------- -----------
Total adjustments 2,581 -
----------- -----------
Denominator for diluted
earnings per unit 7,531 4,950
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<CAPTION>
Nine Months Ended September 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 44,299 $ (6,197)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation 1,102 2,613
Amortization and write off
of loan costs 3,546 1,267
Deferred tax benefit - (98)
(Gain) loss on sale of property,
plant and equipment (49) 12
Deferred loss on sale of Crude
Gathering Segment - (1,476)
Paid in kind interest and credit
and loan fees 1,673 2,108
Increasing rate accrued interest (1,345) 386
Lower of cost or market adjustment - (1,197)
Net effect of changes in:
Restricted cash (17,273) -
Accounts receivable (5,368) (11,963)
Other current assets (332) 2,087
Accounts payable and other
long-term liabilities (12,218) 20,029
Accrued liabilities (2,418) 223
----------- -----------
Total adjustments (32,682) 13,991
----------- -----------
Net cash provided by operating
activities 11,617 7,794
Cash flows from investing activities:
Purchases of property, plant and
equipment (119) (1,121)
Proceeds from asset disposals 104 241
Other (68) 3
----------- -----------
Net cash used in investing activities (83) (877)
Cash flows from financing activities:
Proceeds from debt and credit
facilities 24 17,007
Payments on debt and credit
facilities (18,137) (18,564)
----------- -----------
Net cash used in financing activities (18,113) (1,557)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (6,579) 5,360
Cash and cash equivalents at the
beginning of the period 16,183 2,592
----------- -----------
Cash and cash equivalents at the
end of the period $ 9,604 $ 7,952
=========== ===========
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 (See
Note 5).
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 Income (Loss) Per Common Unit
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 Common
Units outstanding and net income (loss) for the potential dilutive
effect of the convertible securities and unit appreciation rights.
The adjustment to net income for the potential dilution is $362,000
and $1,192,000 for the third quarter of 2000 and the first nine months
of 2000, respectively. For the third quarter of 2000 and the first
nine months of 2000, the weighted average number of Common Units
associated with convertible securities was 2,227,000 and 2,581,000,
respectively. The unit appreciation rights are considered
antidilutive since the exercise price was greater than the average
market price of the Common Unit for the third quarter of 2000 and the
first nine months of 2000. The effect of both the convertible
securities and unit appreciation rights was antidilutive for the third
quarter of 1999 and the first nine months of 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 $2,000,000 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) $6,000,000 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 was
secured by management's interest in such securities. Any current cash
yield on management's share of such securities was payable to Varde as
interest, net of applicable federal income tax. As a result of the
Payments (See Note 6), management believes the note payable to Varde
of $2,000,000 has been retired and the above securities should be
issued directly to management. Varde apparently does not agree as it
refuses to request the Partnership to issue the securities.
On July 25, 2000, the Managing General Partner of the Partnership
purchased a call option from J-Hawk Corporation for $150,000 giving
the Managing General Partner the right to purchase 930,000 Common
Units of the Partnership. The call option is exercisable at any time
from July 25, 2000 until December 31, 2000. Prior to December 2,
2000, the exercise price per unit is $0.27, and from December 2, 2000
to December 31, 2000, the exercise price per unit is $0.30.
The units underlying the call option were acquired by J-Hawk
Corporation in a separate transaction that also closed on July 25,
2000. The Managing General Partner was paid a $50,000 finder's fee by
the Seller.
Due to the constraints imposed during the period the temporary
restraining order issued by the New York Court on September 10, 2000
was outstanding (See Note 9), management agreed to extend a revolving
loan to the Partnership of $4,200,000 from the bonus management
received as a result of the successful litigation of the DESC Claim.
The note was executed September 18, 2000 and accrues interest at prime
plus 1.75%. The Partnership had drawn up to $1,990,000 during the
quarter; however, the loan balance was zero at September 30, 2000.
Such note is secured by the assets of 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. 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. Since August 1, 2000 was the measurement
date for computing gain (loss) on disposal, discontinued operations
for the third quarter of 1999 and for the first nine months of 1999
are based on operations through July 31, 2000. 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 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.
Revenues for the Crude Gathering System were $97,480,000 and
$238,941,000 for the third quarter of 1999 and the first nine months
of 1999, respectively. Under the terms of the asset sale, the
Partnership retained receivables of $13,669,000, other payables
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 September 30, 2000 and December 31, 1999,
net long-term liabilities of discontinued operations included
$8,622,000 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>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Accounts receivable $ (144) $ (263)
Accounts payable 430 1,109
Crude suspense liability 638 1,531
Accrued payroll and related benefits 170 398
Accrued taxes (49) -
Other accrued liabilities - 62
-------- --------
$ 1,045 $ 2,837
======== ========
Net long-term liabilities of discontinued operations included the
following components (in thousands) as of:
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Other assets $ (38) $ (81)
Crude suspense liability 8,622 8,392
-------- --------
$ 8,584 $ 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.
At the request of BankBoston, the BankBoston Revolver was reduced
to zero during the third quarter of 2000. The Partnership still
maintains certain bank accounts with BankBoston, but BankBoston has
requested that those accounts be closed by December 31, 2000.
During the third quarter of 2000, the Partnership invested a
portion of its cash balances with Wells Fargo Bank, N.A. ("Wells
Fargo") and also had Wells Fargo issue a letter of credit for
$721,000.
Under the Varde loan documents, the Partnership is required to
make quarterly principal payments on the Series A Term Loan. In
addition, the Varde loan documents provide for the following
prepayments: (a) prepayments at the Partnership's option, (b)
prepayments of excess cash flow, (c) prepayments of proceeds from the
issuance of new securities, (d) prepayments from asset sales and (e)
prepayments from proceeds of legal claims which includes DESC proceeds
(See Note 9) (the "Prepayments"). On receipt of proceeds from legal
claims, the loan documents require that the Partnership must first
retire the Series A Term Loan of $3,657,000 ("A Term Loan") and pay
$5,000,000 towards the Series B Term Loan of $12,949,000 ("B Term
Loan"). The amounts outstanding on the A Term Loan and B Term Loan
shown above were before the three payments from the DESC proceeds on
July 25, 2000 and July 26, 2000 to Varde totaling $16,606,000 (the
"Payments"). In addition, Varde also receives one-third of the
remaining DESC proceeds after reduction for the $8,657,000 mentioned
above ("Varde One-Third"). The Partnership is allowed to retain any
remaining DESC proceeds after the payments to Varde. Under the Varde
credit agreement, the Varde One-Third reduces the debt and preferred
equity securities. Therefore, the Partnership believes that the
Payments retired the A Term Loan and B Term Loan. See Note 9 for
discussion of dispute with Varde and Varde's interpretation of the
loan documents.
As a result of Varde's assumption of the outstanding bank debt,
additional loans to the Partnership, subsequent interest being paid in
kind, proceeds from the Crude Gathering Sale being applied to the A
Term Loan, scheduled principal payments and payments out of the DESC
proceeds, Varde now holds a Series C Term Loan of $6,171,000 ("C Term
Loan") and Series A Unsecured Loan of $3,188,000 ("Subordinate Note
A") as of September 30, 2000. The Partnership ceased accruing
interest on the C Term Loan and $2,000,000 of the Subordinate Note A
on July 27, 2000 as a result of the conditional tender by the
Partnership to Varde of $8,171,000 (the "Tender"). The condition of
the Tender was that Varde had to apply it in accordance with the
credit agreement. Varde refused the Tender. When the Partnership
deposited $9,360,000 on August 23, 2000 in the District Court of
Taylor County, Texas (the "First Deposit"), the Partnership ceased
accruing interest on an additional $1,188,000 of the Subordinate Note
A which is what would have been the remaining balance of the
Subordinate Note A had Varde accepted the Tender. The Partnership
believes the First Deposit will eventually be used to retire the C
Term Loan and Subordinate Note A. The outstanding balance on the C
Term Loan and Subordinate Note A are included in current liabilities
at September 30, 2000. See Note 9 for discussion of dispute with
Varde and Varde's interpretation of the Varde loan documents.
On August 31, 2000, the Partnership deposited another $7,000,000
in the District Court of Taylor County, Texas (the "Second Deposit").
The Partnership believes the Second Deposit will eventually be used to
redeem a portion of the preferred equity securities along with paying
accumulated arrearages on those securities. The First Deposit and
Second Deposit are collectively referred to as the deposits (the
"Deposits").
Under the amended terms, cash interest payments on the Varde
Revolver and cash interest and principal payments on the A Term Loan
were 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 and Subordinate Note A were paid in kind. Distributions on
Varde's preferred equity securities accumulate in arrears. Prior to
the Payments and the Tender, the A Term Loan, B Term Loan, and C Term
Loan bore interest rates of 11%, 13%, 15%, 17% and 18% for the first,
second, third, fourth and fifth years, respectively, except for
$4,779,000 of the B Term Loan which was subject to interest rates of
18% through maturity. Prior to the Tender and the First Deposit which
is expected to retire the Subordinate Note A, such note was
convertible into 502,000 Common Units and bore interest at prime plus
one percent. The prime rate was 9.5% at September 30, 2000. See Note
9 for discussion of dispute with Varde and Varde's interpretation of
the Varde loan documents.
Because a portion of the debt was subject to increasing rates of
interest, the Partnership was accruing interest at the effective rate
over the term of the debt. Interest expense in the third quarters of
2000 and 1999 reflects the reversal of $1,087,000 and an accrual of
$137,000, 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, interest on the B
Term Loan, C Term Loan, and Subordinate Note A had been paid in kind
prior to the Payments, the Tender and the First Deposit which are
expected to be used to retire such debt. The preferred distributions
will continue to accumulate in arrears on the remaining preferred
equity securities after application of the Second Deposit until the
Partnership redeems such preferred equity securities with the
remaining DESC proceeds and the Partnership obtains a replacement
working capital facility (See Note 9).
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 September 30, 2000. Cash advances under the
Varde Revolver mature January 2, 2001. However, due to the current
dispute with Varde, it is unlikely that further advances will occur
under this facility (See Note 9).
Fees paid to Varde in the form of additional Series B Term Loans
were $100,000 in 1999.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
were originally due December 31, 2002. As previously mentioned, the
Partnership was required to make quarterly principal payments on the A
Term Loan as well as Prepayments under certain circumstances. Varde
agreed to forego all regular principal payments in 1998 and 1999.
However, the Partnership applied $15,000,000 of the cash proceeds from
the Crude Gathering Sale to the A Term Loan on October 1, 1999, made a
quarterly principal payment of $1,353,000 on the A Term Loan in the
second quarter of 2000, and used $3,657,000 and $12,949,000 of the
Payments to retire the A Term Loan and B Term Loan, respectively. See
Note 9 for discussion of dispute with Varde and Varde's interpretation
of the Varde loan documents.
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. Prior to the receipt of the DESC
proceeds, the Partnership was not in compliance with the consolidated
operating cash flow to consolidated debt service ("COCF/CDS Covenant")
and earnings before interest, taxes, depreciation and amortization
covenant ("EBITDA Covenant"); however, it came in compliance beginning
on July 25, 2000. The financial covenants in the Varde credit
agreement for the year 2000 were based on the combined results of the
Products Marketing Business and the Crude Gathering System and due to
the sale of the Crude Gathering System it was unlikely the Partnership
could have complied with the current financial covenants without
receipt of the DESC proceeds (See Note 9). The Partnership is still
not in compliance with the requirement that the auditors' opinion on
the financial statements contain no material qualifications or going
concern uncertainties. The Partnership plans on retaining a portion
of the DESC proceeds to provide the necessary working capital to the
extent permitted under the temporary injunctions issued by both the
Texas Court and New York Court while the Partnership seeks a
replacement working capital facility. Due to the current dispute with
Varde, it is unlikely a lender will provide a replacement working
capital facility until such dispute is resolved. Also, there can be
no assurance that the Partnership will be successful in obtaining a
replacement working capital facility even after such dispute is
resolved. Substantially all of the Partnership's assets are pledged
as collateral to Varde in connection with the credit agreement. See
Note 9 for information on the dispute with Varde and the potentially
material adverse effects such dispute could have on the Partnership's
financial condition.
Varde has sent the Partnership notices of defaults and
accelerations under the credit agreement and the preferred equity
instruments for not paying the Varde One-Third within two days of
receipt of the DESC Proceeds and for not providing certain financial
information. The Partnership believes it has complied with the Varde
One-Third requirement with the Tender and the Deposits. Further, the
Partnership is taking the position that because Varde breached the
contract that the reporting requirements are no longer enforceable
(See Note 9).
Due to the constraints imposed during the period the temporary
restraining order issued by the New York Court on September 10, 2000
was outstanding (See Note 9), management agreed to extend a revolving
loan to the Partnership of $4,200,000 from the bonus management
received as a result of the successful litigation of the DESC Claim.
The note was executed September 18, 2000 and accrues interest at prime
plus 1.75%. The Partnership had drawn up to $1,990,000 during the
quarter; however, the loan balance was zero at September 30, 2000.
Such note is secured by the assets of the Partnership.
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, there are now 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 Partnership expects that once the dispute with
Varde is resolved that part of the Second Deposit of $7,000,000 and
$1,000 from the First Deposit (See Note 6) will be used to redeem
$3,117,000 of the Series B Preferred Units and $1,672,000 of the
Series C Preferred Units (See Note 9) or a total of $4,789,000. The
$4,789,000 of Series B Preferred Units and Series C Preferred Units
along with the accumulated arrearages on such preferred equity
securities of $2,212,000 (See below), or a total of $7,001,000 is
included in current liabilities at September 30, 2000. At September
30, 2000 and after adjusting for the expected redemption with the
Second Deposit, the Series B Preferred Units and Series C Preferred
Units are convertible into 985,000 and 528,000 Common Units,
respectively, or a total of 1,513,000 Common Units. 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. On August 31, 2000,
the Partnership ceased accumulating arrearages on the Series B
Preferred Units and Series C Preferred Units to the extent that the
Second Deposit is expected to be applied to such securities. 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 third quarters of 2000 and 1999, the
Partnership accumulated arrearages of $426,000 and $432,000,
respectively, on these preferred equity securities. Through September
30, 2000, these securities had total accumulated arrearages of
$4,615,000. The Partnership expects that once the dispute with Varde
is resolved, that part of the Second Deposit will be used to pay
$1,440,000 of the accumulated arrearages on the Series B Preferred
Units and $772,000 of the accumulated arrearages on the Series C
Preferred Units or a total of $2,212,000. In addition, the
Partnership expects to redeem additional preferred equity securities
and pay additional accumulated arrearages once a replacement working
capital facility is in place (See Note 9).
The Partnership also accumulated arrearages of $49,000 on
preferred equity securities owned by Pride SGP in the third quarter of
1999. These accumulated arrearages were canceled on October 1, 1999
as part of an exchange between Pride SGP and the Partnership. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Cash Distributions and
Preferred Arrearages."
8. Partners' Capital (Deficiency)
At September 30, 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 equity securities issued to Varde or (ii) 10% per annum.
At September 30, 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 loan agreement with Varde,
Varde 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 Varde
debt, the termination of the credit agreement and the redemption of
all preferred equity securities.
At September 30, 2000 and after the expected redemption with the
Second Deposit (See Note 7), the Series B Preferred Units and Series C
Preferred Units held by Varde are convertible into 1,513,000 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 6,463,000 Common Units.
9. Contingencies
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Other than the dispute with Varde discussed below, 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 $150,000 and had accrued for this amount at
September 30, 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 $45,706,000 (comprised of an additional
long-term contract premium of $23.4 million and an additional
transportation premium of $22.3 million), along with statutory
interest of $15,815,000 under the Contract Disputes Act. The total
award was $61,521,000. The DESC did not appeal the decision and the
Partnership received $45,706,000 of the judgment on July 25, 2000 and
paid legal fees of $5,908,000 leaving the Partnership with DESC
proceeds of $39,798,000 ("First DESC Receipt"). On August 24, 2000,
the Partnership received an additional $15,815,000 which was for the
statutory interest on the judgement ("Second DESC Receipt"). The
First DESC Receipt and Second DESC Receipt totaled $55,613,000 ("DESC
Proceeds").
The Partnership used the DESC Proceeds for the Payments of
$16,606,000 (See Note 6), the Deposits of $16,360,000 (See Note 6) and
for management bonuses of $6,967,000 under the Partnership's bonus
plan ("Management Bonuses"). The total of the Payments, the Deposits
and the Management Bonuses is $39,933,000 (the "Disbursements"). The
balance of the DESC Proceeds after the Disbursements is $15,680,000
and has been used by the Partnership for working capital to the extent
permitted under temporary injunctions issued by both the Texas Court
and New York Court (See below).
Due to various layers of debt and the Partnership's preferred
equity securities, and taking into consideration preferential calls on
available cash contained in the Partnership's debt instruments and
preferred equity security instruments (including distributions paid in
kind on debt and accumulated arrearages owed on preferred equity
securities) and payments under the Partnership's bonus plan, a common
unitholder will be allocated income from the DESC proceeds without a
corresponding distribution of cash to offset the tax liability that
arises from such income. The Partnership had originally estimated
that the net taxable income from the judgment that would be allocable
to common unitholders would be approximately $41.0 million (or $8.28
per Common Unit). However, due to the dispute with Varde (see below),
the timing and amount of certain deductions related to the DESC Claim
is uncertain. As a result of the dispute with Varde, the net taxable
income may be as much as $45,168,000 (or $9.12 per Common Unit) unless
the dispute is resolved by December 31, 2000. As a result of the DESC
Claim being paid in two installments, such net income will be reported
to common unitholders in two different months (See below).
As a result of the expected retirement of the debt with the
Payments and the Deposits, the Partnership deducted $2,556,000 of
deferred financing costs.
In accordance with the Partnership's partnership agreement, the
Managing General Partner has determined that for tax purposes it is
necessary to establish a convention under which the income and certain
expenses attributable to the judgment will be allocated to the holders
of Common Units. Under that convention, common unitholders as of July
31, 2000 and August 31, 2000 will be allocated the income attributable
to the portion of the proceeds from the judgment actually received by
the Partnership during those months. The Partnership intends to take
the position that suspended losses will be available to unitholders to
offset net income attributable to the judgment; however, it is not
certain the Internal Revenue Service would agree with this position.
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. Each common unitholder
should consult with his own tax advisor regarding his use of suspended
losses.
The Partnership had planned on eventually retiring all of Varde's
debt and preferred equity securities with the DESC Proceeds and after
a replacement working capital facility was in place.
After the Partnership made the Payments of $16,606,000 to Varde,
Varde claimed for the first time that it was entitled to the Varde
One-Third as a transaction fee (See Note 6). This position conflicts
with the credit agreement between Varde and the Partnership in that it
requires that the Varde One-Third must be applied to the debt and
preferred equity securities it holds. However, Varde's position is
that since another loan document executed at the same time as the
credit agreement doesn't specifically require application of the DESC
Proceeds to the debt and preferred equity securities that the Varde
One-Third should be treated as a transaction fee. The Partnership
believes the two agreements can be read together and are not
inconsistent; therefore, Varde must apply the Varde One-Third to their
debt and preferred equity securities.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before any legal fees associated with the
DESC Claim and, therefore, the amount of proceeds used to calculate
the Varde One-Third should be $61,521,000 rather than the $55,613,000
that the Partnership believes is correct.
If Varde's interpretations of the loan documents are correct, the
Varde One-Third would equal $17,621,000 and Varde would receive it as
a transaction fee ("Transaction Fee") and not have to apply it to any
of the debt and preferred equity securities. Further, if the Varde
One-Third is considered a Transaction Fee, net income would decline by
$17,621,000 for both the third quarter of 2000 and the first nine
months of 2000 to $28,808,000 and $26,678,000, respectively. In
addition, interest expense and distribution expense would increase
$358,000 and $46,000, respectively, for both the third quarter of 2000
and the first nine months of 2000.
The following table compares how the Partnership believes the
Payments of $16,606,000 should be applied according to its
interpretation of the loan documents and how Varde believes the
Payment should be applied according to their interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
A Term Loan $ 3,657,000 $ 3,657,000
B Term Loan 12,949,000 5,000,000
Transaction Fee (1) - 7,949,000
----------- -----------
The Payments $16,606,000 $16,606,000
=========== ===========
(1) Based on Varde's interpretation, the Partnership would owe
Varde a Transaction Fee of $17,621,000; therefore, after the
Payments, Varde would still be owed an additional $9,672,000
as a transaction fee.
Under the Partnership's interpretation and after the above
Payments, Varde was due an additional $7,797,000 to be applied to the
debt and preferred equity securities as opposed to the $9,672,000
Varde believes is owed them as a transaction fee.
Due to the dispute with Varde and rather than making additional
payments to Varde which Varde indicated they would not apply in
accordance with the credit agreement, the Partnership deposited
$16,360,000 of the DESC Proceeds with the District Court of Taylor
County, Texas which the Partnership believes will eventually be used
to retire the remaining debt and redeem a portion of the preferred
equity securites. Under Varde's interpretation of the loan documents,
the Deposits would go to Varde as a Transaction Fee and retire a
portion of the B Term Loan. The following table compares how the
Partnership believes the Deposits will eventually be applied and how
Varde believes the Deposits will eventually be applied:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
C Term Loan $ 6,171,000 $ -
Subordinate Note A 3,188,000 -
Series B Preferred Units 3,117,000 -
Series C Preferred Units 1,672,000 -
Accumulated Arrearages Series
B Preferred Units 1,440,000 -
Accumulated Arrearages Series
C Preferred Units 772,000 -
Transaction Fee - 9,672,000
B Term Loan - 6,688,000
----------- -----------
The Deposits $16,360,000 $16,360,000
=========== ===========
The following table compares the outstanding balances of the debt
and preferred equity securities owed by the Partnership to Varde as of
September 30, 2000 after application of the Payments and the Deposits
based on the Partnership's interpretation of the Varde loan documents
and Varde's interpretation of the Varde loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
B Term Loan $ - $ 1,405,000
C Term Loan - 6,335,000
Subordinate Note A - 3,238,000
Series B Preferred Units 6,205,000 9,322,000
Series C Preferred Units 3,328,000 5,000,000
Series D Preferred Units 2,757,000 2,757,000
Accumulated Arrearages Series
B Preferred Units 805,000 2,275,000
Accumulated Arrearages Series
C Preferred Units 432,000 1,220,000
Accumulated Arrearages Series
D Preferred Units 1,166,000 1,166,000
----------- -----------
Outstanding Varde Debt and
Preferred Securities $14,693,000 $32,718,000
=========== ===========
The Partnership has advised Varde that it does not intend to make
any further payments until the above issues are resolved. The
Partnership filed suit against Varde in the District Court of Taylor
County, Texas ("Texas Court"), on August 3, 2000, demanding among
other things that Varde apply the proceeds from the DESC Claim in
accordance with the credit agreement. The Partnership also deposited
$16,360,000 with the Texas Court. The case is currently set for trial
on January 29, 2001.
On August 14, 2000, the Partnership requested an injunction from
the Texas Court to prevent Varde from accelerating the loans and
foreclosing on the collateral. On August 28, 2000, a hearing was held
and the Texas Court signed an order on September 15, 2000 that among
other things restrained Varde from seizing or foreclosing on any
collateral while the case was pending.
On August 8, 2000, Varde filed a notice of motion for summary
judgment in lieu of complaint in the amount of $18,592,000 plus
interest from August 8, 2000 on the ground that the action is based
upon an instrument for the payment of money only and the claim that
there is no defense to their action. The $18,592,000 is what Varde
claims is still outstanding on the B Term Loan, C Term Loan and the
remaining balance of a transaction fee based on the First DESC Receipt
before reduction for legal fees. The motion was filed in the Supreme
Court of New York County, New York ("New York Court").
On August 31, 2000, Varde filed a second lawsuit claiming
$48,749,000, which is the amount Varde claims is still outstanding on
the B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred
Units, Series C Preferred Units, Series D Preferred Units and the
remaining balance of the transaction fee associated with the receipt
of the DESC Proceeds. Varde claims that due to the defaults, all of
the aforementioned debt and preferred equity securities are due. The
second lawsuit was filed in the New York Court. A trial date has not
been set by the New York Court, however, the court has set a January
10, 2001 deadline to complete discovery. At that time, there will be
a hearing to determine how to proceed.
On September 7, 2000, Varde requested and received a temporary
restraining order from the New York Court which among other things
enjoined the Partnership from transferring or otherwise disposing of
any personal or real property (including cash) to the extent of
$48,749,000 received as a result of the DESC Claim.
On October 10, 2000, the New York Court issued a preliminary
injunction, replacing the temporary restraining order, enjoining the
Partnership from transferring or disposing of any property to the
extent of the amount claimed of $48,749,000.
Due to the constraints imposed during the period the temporary
restraining order issued by the New York Court on September 10, 2000
was outstanding, management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the bonus management received as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000 and accrues interest at prime plus 1.75%.
The Partnership had drawn up to $1,990,000 during the quarter;
however, the loan balance was zero at September 30, 2000. Such note
is secured by the assets of the Partnership.
During the third quarter of 2000, the Partnership incurred legal
fees of $141,000 in connection with the dispute with Varde.
While the Partnership believes it is unlikely, if either court
ruled that Varde was entitled to a Transaction Fee of $17,621,000,
such ruling would have a material adverse effect on the Partnership's
financial condition. In addition, if the New York Court order has the
effect of materially restricting the use by the Partnership of its
assets, such restriction could have a material adverse effect on the
Partnership's financial condition. Finally, if the Partnership is
forced to redeem the remaining preferred equity securities after
application of the Second Deposit but before the Partnership has a
replacement credit facility, such forced redemption could have a
material adverse effect on the Partnership's financial condition. As
a result, the Partnership may be forced to seek bankruptcy protection
should any of the above events occur. Due to the uncertainties
involved with the dispute, there may be other circumstances under
which the Partnership seeks bankruptcy protection.
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Overview
Pride Companies, L.P. (the "Partnership") 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)
resolution of the dispute with Varde Partners, Inc. ("Varde")
concerning the application of proceeds from the DESC claim. 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.
Third Quarter 2000 Compared to Third Quarter 1999
General. Net income for the third quarter of 2000 was $46.4
million compared to net loss of $3.0 million for the third quarter of
1999. The results for the third quarter of 1999 included $514,000 of
net loss from discontinued operations.
Continuing Operations (Products Marketing Business). Net income
from continuing operations was $46.4 million for the third quarter of
2000 compared to net loss from continuing operations of $2.5 million
for the third quarter of 1999. The results for the third quarter of
2000 included $55.6 million of proceeds from the DESC Claim. See "-
Financial Condition - Financial Resources and Liquidity." The $15.8
million of interest income related to the DESC Claim is reported
separately from the $39.8 million included in operating income which
represents underpayments in prior years for jet fuel sold to the U.S.
Government. As a result of receiving the DESC proceeds and applying
it to the debt, the Partnership deducted $2.6 million of deferred
financing costs and recognized income of $1.1 million associated with
the reversal of increasing rate accrued interest in the third quarter
of 2000. In addition, marketing, general and administrative expense
for the third quarter of 2000 included $7.0 million paid to management
under the Partnership's bonus plan. (See "Part II. Other Information,
Item 1. Legal Proceedings").
Operating income for the Products Marketing Business was $32.4
million for the third quarter of 2000 compared to operating loss of
$575,000 for the third quarter of 1999. Excluding the $39.8 million
of DESC proceeds included in operating income and the $7.0 million
paid to management under the Partnership's bonus plan, the third
quarter of 2000 would have shown an operating loss of $427,000.
Depreciation expense for the Products Marketing Business was $367,000
for the third quarter of 2000 and $399,000 for the third quarter of
1999. Operating income excluding depreciation for the Products
Marketing Business was $32.7 million for the third quarter of 2000
compared to operating loss excluding depreciation of $176,000 for the
third quarter of 1999. Excluding the $39.8 million of DESC proceeds
included in operating income and the $7.0 million paid to management
under the Partnership's bonus plan, the third quarter of 2000 would
have shown an operating loss excluding depreciation of $60,000. The
improvement in the third quarter of 2000 was due to a $222,000
reduction in operating expenses. During the third quarter of 2000,
the Partnership marketed 16,847 barrels per day ("BPD") of refined
products compared to 15,908 BPD for the third quarter of 1999. The
net margin per barrel (after marketing, general and administrative
expenses) but excluding the $39.8 million of DESC proceeds included in
operating income and the $7.0 million paid to management under the
Partnership's bonus plan for the third quarter of 2000 was negative
$0.22 compared to negative $0.38 for the third quarter of 1999.
Discontinued Operations (Crude Gathering System). Net loss from
discontinued operations was $514,000 for the month of July 1999.
Operating loss, depreciation expense and operating loss excluding
depreciation from discontinued operations was $387,000, $152,000 and
$235,000, respectively, for the third quarter of 1999. The volume of
crude oil gathered by the Crude Gathering System was 34,201 BPD for
the month of July 1999. For the month of July 1999, net margin was
negative $0.37 per barrel.
First Nine Months of 2000 Compared to First Nine Months of 1999
General. Net income for the first nine months of 2000 was $44.3
million compared to net loss of $6.2 million for the first nine months
of 1999. The results for the first nine months of 1999 included
$269,000 of net income from discontinued operations.
Continuing Operations (Products Marketing Business). Net income
from continuing operations was $44.3 million for the first nine months
of 2000 compared to net loss from continuing operations of $6.5
million for the first nine months of 1999. The results for the first
nine months of 2000 included $55.6 million of proceeds from the DESC
Claim. (See "- Financial Condition - Financial Resources and
Liquidity"). The $15.8 million of interest income related to the DESC
Claim is reported separately from the $39.8 million included in
operating income which represents underpayments in prior years for jet
fuel sold to the U.S. Government. As a result of receiving the DESC
proceeds and applying it to the debt, the Partnership deducted $2.6
million of deferred financing costs and recognized income of $1.1
million associated with the reversal of increasing rate accrued
interest in the first nine months of 2000. In addition, marketing,
general and administrative expense for the first nine months of 2000
included $7.0 million paid to management under the Partnership's bonus
plan. (See "Part II. Other Information, Item 1. Legal Proceedings").
Operating income for the Products Marketing Business was $32.6
million for the first nine months of 2000 compared to operating loss
of $838,000 for the first nine months of 1999. Excluding the $39.8
million of DESC proceeds included in operating income and the $7.0
million paid to management under the Partnership's bonus plan, the
first nine months of 2000 would have shown an operating loss of
$151,000. Depreciation expense for the Products Marketing Business
was $1.1 million for both the first nine months of 2000 and 1999.
Operating income excluding depreciation for the Products Marketing
Business was $33.7 million for the first nine months of 2000 compared
to operating income excluding depreciation of $284,000 for the first
nine months of 1999. Excluding the $39.8 million in DESC proceeds
included in operating income and the $7.0 million paid to Management
under the Partnership's bonus plan, the first nine months of 2000
would have shown operating income excluding depreciation of $951,000.
The improvement in the first nine months of 2000 was due to a $903,000
reduction in operating expenses. During the first nine months of
2000, the Partnership marketed 17,269 BPD of refined products compared
to 14,489 BPD for the first nine months of 1999. The net margin per
barrel (after marketing, general and administrative expenses) for the
first nine months of 2000 was negative $0.02 compared to negative
$0.21 for the first nine months of 1999.
Discontinued Operations (Crude Gathering System). Net income from
discontinued operations was $269,000 for the first seven months 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 July
31, 1999. Operating income, depreciation expense and operating income
excluding depreciation from discontinued operations was $966,000, $1.2
million and $2.2 million, respectively, for the first seven months of
1999. The volume of crude oil gathered by the Crude Gathering System
was 38,110 BPD for the first seven months of 1999. For the first
seven months of 1999, net margin was $0.12 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 $351,000 in the last three months of 2000 and for the
year ended December 31, 2001 on several projects to maintain
compliance with various other environmental requirements including
$150,000 related to an investigative study by the Texas Natural
Resource Conservation Commission and $52,000 related to the cleanup of
an existing crude oil leak. The remaining $149,000 is for various
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 $150,000 and had accrued for this amount at
September 30, 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 $45,706,000 (comprised of
an additional long-term contract premium of $23.4 million and an
additional transportation premium of $22.3 million), along with
statutory interest of $15,815,000 under the Contract Disputes Act.
The total award was $61,521,000. The DESC did not appeal the decision
and the Partnership received $45,706,000 of the judgment on July 25,
2000 and paid legal fees of $5,908,000 leaving the Partnership with
DESC proceeds of $39,798,000. On August 24, 2000, the Partnership
received an additional $15,815,000 which was for the statutory
interest on the judgement (See "See Part II. Other Information, Item
1. Legal Proceedings").
The Partnership used the DESC Proceeds for the Payments of
$16,606,000, the Deposits of $16,360,000 and for management bonuses of
$6,967,000 under the Partnership's bonus plan (See "- Financial
Condition - Financial Resources and Liquidity"). The total of the
Payments, the Deposits and the management bonuses is $39,933,000. The
balance of the DESC Proceeds after the disbursements is $15,680,000
and has been used by the Partnership for working capital to the extent
permitted under temporary injunctions issued by both the Texas Court
and New York Court (See below).
After the Partnership made the Payments of $16,606,000 to Varde,
Varde claimed for the first time that it was entitled to the Varde
One-Third as a transaction fee ("- Financial Condition - Financial
Resources and Liquidity"). This position conflicts with the credit
agreement between Varde and the Partnership in that it requires that
the Varde One-Third must be applied to the debt and preferred equity
securities it holds. However, Varde's position is that since another
loan document executed at the same time as the credit agreement
doesn't specifically require application of the DESC Proceeds to the
debt and preferred equity securities that the Varde One-Third should
be treated as a transaction fee. The Partnership believes the two
agreements can be read together and are not inconsistent; therefore,
Varde must apply the Varde One-Third to their debt and preferred
equity securities.
The Partnership has advised Varde that it does not intend to make
any further payments until the above issues are resolved. The
Partnership filed suit against Varde in the District Court of Taylor
County, Texas ("Texas Court"), on August 3, 2000, demanding among
other things that Varde apply the proceeds from the DESC Claim in
accordance with the credit agreement. The Partnership also deposited
$16,360,000 with the Texas Court. The case is currently set for trial
on January 29, 2001.
On August 14, 2000, the Partnership requested an injunction from
the Texas Court to prevent Varde from accelerating the loans and
foreclosing on the collateral. On August 28, 2000, a hearing was held
and the Texas Court signed an order on September 15, 2000 that among
other things restrained Varde from seizing or foreclosing on any
collateral while the case was pending.
On August 8, 2000, Varde filed a notice of motion for summary
judgment in lieu of complaint in the amount of $18,592,000 plus
interest from August 8, 2000 on the ground that the action is based
upon an instrument for the payment of money only and the claim that
there is no defense to their action. The $18,592,000 is what Varde
claims is still outstanding on the B Term Loan, C Term Loan and the
remaining balance of a transaction fee based on the First DESC Receipt
before reduction for legal fees (See "- Financial Condition -
Financial Resources and Liquidity"). The motion was filed in the
Supreme Court of New York County, New York ("New York Court").
On August 31, 2000, Varde filed a second lawsuit claiming
$48,749,000, which is what Varde claims is still outstanding on the B
Term Loan, C Term Loan, Subordinate Note A, Series B Preferred Units,
Series C Preferred Units, Series D Preferred Units and the remaining
balance of the transaction fee associated with the receipt of the DESC
Proceeds (See "- Financial Condition - Financial Resources and
Liquidity" and "- Financial Condition - Cash Distributions and
Arrearages"). Varde claims that due to the defaults, all of the
aforementioned debt and preferred equity securities are due. The
second lawsuit was filed in the New York Court. A trial date has not
been set by the New York Court, however, the court has set a January
10, 2001 deadline to complete discovery. At that time, there will be
a hearing to determine how to proceed.
On September 7, 2000, Varde requested and received a temporary
restraining order from the New York Court which among other things
enjoined the Partnership from transferring or otherwise disposing of
any personal or real property (including cash) to the extent of
$48,749,000 received as a result of the DESC Claim.
On October 10, 2000, the New York Court issued a preliminary
injunction, replacing the temporary restraining order, enjoining the
Partnership from transferring or disposing of any property to the
extent of the amount claimed of $48,749,000.
<PAGE>
<PAGE>
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 $14.0 million
with Equilon in the first and second quarters of 2000, which is
included as an offset 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 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.
At the request of BankBoston, the BankBoston Revolver was reduced
to zero during the third quarter of 2000. The Partnership still
maintains certain bank accounts with BankBoston, but BankBoston has
requested that those accounts be closed by December 31, 2000.
During the third quarter of 2000, the Partnership invested a
portion of its cash balances with Wells Fargo Bank, N.A. ("Wells
Fargo") and also had Wells Fargo issue a letter of credit for
$721,000.
Under the Varde loan documents, the Partnership is required to
make quarterly principal payments on the Series A Term Loan. In
addition, the Varde loan documents provide for the following
prepayments: (a) prepayments at the Partnership's option, (b)
prepayments of excess cash flow, (c) prepayments of proceeds from the
issuance of new securities, (d) prepayments from asset sales and (e)
prepayments from proceeds of legal claims which includes DESC proceeds
(See "Part II. Other Information, Item 1. Legal Proceedings") (the
"Prepayments"). On receipt of proceeds from legal claims, the loan
documents require that the Partnership must first retire the Series A
Term Loan of $3,657,000 ("A Term Loan") and pay $5,000,000 towards the
Series B Term Loan of $12,949,000 ("B Term Loan"). The amounts
outstanding on the A Term Loan and B Term Loan shown above were before
the three payments from the DESC proceeds on July 25, 2000 and July
26, 2000 to Varde totaling $16,606,000 (the "Payments"). In addition,
Varde also receives one-third of the remaining DESC proceeds after
reduction for the $8,657,000 mentioned above ("Varde One-Third"). The
Partnership is allowed to retain any remaining DESC proceeds after the
payments to Varde. Under the Varde credit agreement, the Varde One-
Third reduces the debt and preferred equity securities. Therefore,
the Partnership believes that the Payments retired the A Term Loan and
B Term Loan. See "Part II. Other Information, Item 1. Legal
Proceedings" for discussion of dispute with Varde and Varde's
interpretation of the loan documents.
As a result of Varde's assumption of the outstanding bank debt,
additional loans to the Partnership, subsequent interest being paid in
kind, proceeds from the Crude Gathering Sale being applied to the A
Term Loan, scheduled principal payments and payments out of the DESC
proceeds, Varde now holds a Series C Term Loan of $6,171,000 ("C Term
Loan") and Series A Unsecured Loan of $3,188,000 ("Subordinate Note
A") as of September 30, 2000. The Partnership ceased accruing
interest on the C Term Loan and $2,000,000 of the Subordinate Note A
on July 27, 2000 as a result of the conditional tender by the
Partnership to Varde of $8,171,000 (the "Tender"). The condition of
the Tender was that Varde had to apply it in accordance with the
credit agreement. Varde refused the Tender. When the Partnership
deposited $9,360,000 on August 23, 2000 in the District Court of
Taylor County, Texas (the "First Deposit"), the Partnership ceased
accruing interest on an additional $1,188,000 of the Subordinate Note
A which is what would have been the remaining balance of the
Subordinate Note A had Varde accepted the Tender. The Partnership
believes the First Deposit will eventually be used to retire the C
Term Loan and Subordinate Note A. The outstanding balance on the C
Term Loan and Subordinate Note A are included in current liabilities
at September 30, 2000. See "Part II. Other Information, Item 1. Legal
Proceedings" for discussion of dispute with Varde and Varde's
interpretation of the Varde loan documents.
On August 31, 2000, the Partnership deposited another $7,000,000
in the District Court of Taylor County, Texas (the "Second Deposit").
The Partnership believes the Second Deposit will eventually be used to
redeem a portion of the preferred equity securities along with paying
accumulated arrearages on those securities. The First Deposit and
Second Deposit are collectively referred to as the deposits (the
"Deposits").
Under the amended terms, cash interest payments on the Varde
Revolver and cash interest and principal payments on the A Term Loan
were 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 and Subordinate Note A were paid in kind. Distributions on
Varde's preferred equity securities accumulate in arrears. Prior to
the Payments and the Tender, the A Term Loan, B Term Loan, and C Term
Loan bore interest rates of 11%, 13%, 15%, 17% and 18% for the first,
second, third, fourth and fifth years, respectively, except for
$4,779,000 of the B Term Loan which was subject to interest rates of
18% through maturity. Prior to the Tender and the First Deposit which
is expected to retire the Subordinate Note A, such note was
convertible into 502,000 Common Units and bore interest at prime plus
one percent. The prime rate was 9.5% at September 30, 2000. See
"Part II. Other Information, Item 1. Legal Proceedings" for discussion
of dispute with Varde and Varde's interpretation of the Varde loan
documents.
Because a portion of the debt was subject to increasing rates of
interest, the Partnership was accruing interest at the effective rate
over the term of the debt. Interest expense in the third quarters of
2000 and 1999 reflects the reversal of $1,087,000 and an accrual of
$137,000, 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, interest on the B
Term Loan, C Term Loan, and Subordinate Note A had been paid in kind
prior to the Payments, the Tender and the First Deposit which are
expected to be used to retire such debt. The preferred distributions
will continue to accumulate in arrears on the remaining preferred
equity securities after application of the Second Deposit until the
Partnership redeems such preferred equity securities with the
remaining DESC proceeds and the Partnership obtains a replacement
working capital facility (See "Part II. Other Information, Item 1.
Legal Proceedings).
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 September 30, 2000. Cash advances under the
Varde Revolver mature January 2, 2001. However, due to the current
dispute with Varde, it is unlikely that further advances will occur
under this facility (See "Part II. Other Information, Item 1. Legal
Proceedings").
Fees paid to Varde in the form of additional Series B Term Loans
were $100,000 in 1999.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
were originally due December 31, 2002. As previously mentioned, the
Partnership was required to make quarterly principal payments on the A
Term Loan as well as Prepayments under certain circumstances. Varde
agreed to forego all regular principal payments in 1998 and 1999.
However, the Partnership applied $15,000,000 of the cash proceeds from
the Crude Gathering Sale to the A Term Loan on October 1, 1999, made a
quarterly principal payment of $1,353,000 on the A Term Loan in the
second quarter of 2000, and used $3,657,000 and $12,949,000 of the
Payments to retire the A Term Loan and B Term Loan, respectively. See
"Part II. Other Information, Item 1. Legal Proceedings" for discussion
of dispute with Varde and Varde's interpretation of the Varde loan
documents.
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 $7,500,000 over Varde's cost. The securities
held by Varde have certain antidilution provisions and registration
rights.
On December 31, 1997, certain members of management invested an
aggregate of $2,000,000 in the form of a note payable to Varde and
received a one-third economic non-directive interest in the following:
(i) $6,000,000 of the B Term Loan, (ii) C Term Loan, (iii)
Subordinate Note A, (iv) Series B Cumulative Convertible Preferred
Units, (v) Series C Cumulative Convertible Preferred Units and (vi)
Series D Cumulative Convertible Preferred Units (See "- Cash
Distributions and Preferred Arrearages"). The note payable to Varde
was secured by management's interest in such securities. Any current
cash yield on management's share of such securities was payable to
Varde as interest, net of applicable federal income tax. As a result
of the Payments, management believes the note payable to Varde of
$2,000,000 has been retired and the above securities should be issued
directly to management. Varde apparently does not agree as it refuses
to request the Partnership to issue the securities.
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, pro rata to the Series B
Preferred Units and 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 nine months of 2000, cash was
utilized as a result of the Deposits, an increase in accounts
receivable (as a result of the higher refined product prices) and a
decrease in accounts payable (resulting from the $14.0 million in cash
deposited with Equilon). For the first nine months of 1999, cash was
provided by an increase in accounts payable (resulting from the higher
crude oil prices and refined product prices). This was partially
offset by an increase in accounts receivable (resulting from 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. Prior to the receipt of the DESC
proceeds, the Partnership was not in compliance with the consolidated
operating cash flow to consolidated debt service ("COCF/CDS Covenant")
and earnings before interest, taxes, depreciation and amortization
covenant ("EBITDA Covenant"); however, it came in compliance beginning
on July 25, 2000. The financial covenants in the Varde credit
agreement for the year 2000 were based on the combined results of the
Products Marketing Business and the Crude Gathering System and due to
the sale of the Crude Gathering System it was unlikely the Partnership
could have complied with the current financial covenants without
receipt of the DESC proceeds (See "Part II. Other Information, Item 1.
Legal Proceedings"). The Partnership is still not in compliance with
the requirement that the auditors' opinion on the financial statements
contain no material qualifications or going concern uncertainties.
The Partnership plans on retaining a portion of the DESC proceeds to
provide the necessary working capital to the extent permitted under
temporary injunctions issued by both the Texas Court and New York
Court while the Partnership seeks a replacement working capital
facility. Due to the current dispute with Varde, it is unlikely a
lender will provide a replacement working capital facility until such
dispute is resolved. Also, there can be no assurance that the
Partnership will be successful in obtaining a replacement working
capital facility even after such dispute is resolved. Substantially
all of the Partnership's assets are pledged as collateral to Varde in
connection with the credit agreement. See "Part II. Other
Information, Item 1. Legal Proceedings" for information on the dispute
with Varde and the potentially material adverse effects such dispute
could have on the Partnership's financial condition.
Varde has sent the Partnership notices of defaults and
accelerations under the credit agreement and the preferred equity
instruments for not paying the Varde One-Third within two days of
receipt of the DESC Proceeds and for not providing certain financial
information. The Partnership believes it has complied with the Varde
One-Third requirement with the Tender and the Deposits. Further, the
Partnership is taking the position that because Varde breached the
contract that the reporting requirements are no longer enforceable
(See "Part II. Other Information, Item 1. Legal Proceedings").
Due to the constraints imposed during the period the temporary
restraining order issued by the New York Court on September 10, 2000
was outstanding (See "Part II. Other Information, Item 1. Legal
Proceedings"), management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the bonus management received as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000 and accrues interest at prime plus 1.75%.
The Partnership had drawn up to $1,990,000 during the quarter;
however, the loan balance was zero at September 30, 2000. Such note
is secured by the assets of the Partnership.
Prior to the receipt of the DESC Proceeds, the Partnership
continued to incur net losses and had a working capital deficiency.
Operating results have suffered as a result of increasing competition,
depressed operating margins and higher financing costs.
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 began 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 ended 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 and to reduce letters
of credit fees, the Partnership deposited cash of $14.0 million in the
first and second quarters of 2000 with Equilon, which is included as
an offset 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 $14.0
million cash deposit over the value of the inventory, which was
approximately $12.5 million at September 30, 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.
On September 26, 2000, Ernst & Young resigned as the auditors for
the Partnership. During the Partnership's two most recent fiscal
years for the period ended December 31, 1999 and the subsequent
interim periods preceding the resignation of Ernst & Young, there were
no disagreements with Ernst & Young on any matter of accounting
principle or practice, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of
Ernst & Young, would have caused Ernst & Young to make a reference to
the matter in connection with their reports. The Partnership has
engaged Davis, Kinard & Co., P.C. to audit the financial statements
for the year ending December 31, 2000.
Capital Expenditures
Capital expenditures totaled $8,000 and $119,000 for the third
quarter of 2000 and the first nine months of 2000, respectively,
compared to $450,000 and $1,121,000 for the third quarter of 1999 and
the first nine months of 1999, respectively. The third quarter of
1999 and first nine months of 1999 included $272,000 and $705,000,
respectively, in capital expenditures for the Crude Gathering System.
Management anticipates spending $180,000 in the fourth quarter of
2000 for environmental expenditures, of which $138,000 was accrued
at September 30, 2000 and capital expenditures for 2001, 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, there are now 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 Partnership expects that once the dispute with
Varde is resolved that part of the Second Deposit of $7,000,000 and
$1,000 from the First Deposit ("- Financial Condition - Financial
Resources and Liquidity") will be used to redeem $3,117,000 of the
Series B Preferred Units and $1,672,000 of the Series C Preferred
Units (See "Part II. Other Information, Item 1. Legal Proceedings") or
a total of $4,789,000. The $4,789,000 of Series B Preferred Units and
Series C Preferred Units along with accumulated arrearages on such
preferred equity securities of $2,212,000 (See below) or a total of
$7,001,000 is included in current liabilities at September 30, 2000.
At September 30, 2000 and after adjusting for the expected redemption
with the Second Deposit, the Series B Preferred Units and Series C
Preferred Units are convertible into 985,000 and 528,000 Common Units,
respectively or a total of 1,513,000 Common Units. 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. On August 31, 2000,
the Partnership ceased accumulating arrearages on the Series B
Preferred Units and Series C Preferred Units to the extent that the
Second Deposit is expected to be applied to such securities. 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 third quarters of 2000 and 1999, the
Partnership accumulated arrearages of $426,000 and $432,000,
respectively, on these preferred equity securities. Through September
30, 2000, these securities had total accumulated arrearages of
$4,615,000. The Partnership expects that once the dispute with Varde
is resolved, that part of the Second Deposit will be used to pay
$1,440,000 of the accumulated arrearages on the Series B Preferred
Units and $772,000 of the accumulated arrearages on the Series C
Preferred Units or a total of $2,212,000. In addition, the
Partnership expects to redeem additional preferred equity securities
and pay additional accumulated arrearages once a replacement working
capital facility is in place (See "Part II. Other Information, Item 1.
Legal Proceedings").
The Partnership also accumulated arrearages of $49,000 on
preferred equity securities owned by Pride SGP in the third quarter of
1999. These accumulated arrearages were canceled on October 1, 1999
as part of an exchange between Pride SGP and the Partnership.
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
$2,146,000, (d) the Series E Preferred Units ("Series E Preferred
Units") in the face amount of $2,000,000 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) $2,000,000 in cash and
(z) newly issued Series G Preferred Units ("Series G Preferred Units")
in the face amount of $3,144,000. 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 equity securities issued to Varde or
(ii)
10% per annum.
At September 30, 2000, Pride SGP held the Series G Preferred
Units in the face amount of $3,144,000.
At September 30, 2000 and December 31, 1999, 4,950,000 Common
Units were outstanding, representing a 98% limited partner interest.
Pride SGP and the public own 250,000 and 4,700,000 Common Units,
respectively.
The Common Units rank behind the Partnership's indebtedness with
Varde and 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 will 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 loan agreement with Varde,
Varde 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 Varde
debt, the termination of the credit agreement and the redemption of
all preferred equity securities.
At September 30, 2000 and after the expected redemption with the
Second Deposit (See "- Financial Resources and Liquidity"), the Series
B Preferred Units and Series C Preferred Units held by Varde are
convertible into 1,513,000 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 6,463,000 Common Units.
<PAGE>
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Other than the dispute with Varde discussed below, 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 $150,000 and had accrued for this amount at
September 30, 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 $45,706,000 (comprised of an additional
long-term contract premium of $23.4 million and an additional
transportation premium of $22.3 million), along with statutory
interest of $15,815,000 under the Contract Disputes Act. The total
award was $61,521,000. The DESC did not appeal the decision and the
Partnership received $45,706,000 of the judgment on July 25, 2000 and
paid legal fees of $5,908,000 leaving the Partnership with DESC
proceeds of $39,798,000 ("First DESC Receipt"). On August 24, 2000,
the Partnership received an additional $15,815,000 which was for the
statutory interest on the judgement ("Second DESC Receipt"). The
First DESC Receipt and Second DESC Receipt totaled $55,613,000 ("DESC
Proceeds").
The Partnership used the DESC Proceeds for the Payments of
$16,606,000 ("- Financial Condition - Financial Resources and
Liquidity"), the Deposits of $16,360,000 ("- Financial Condition -
Financial Resources and Liquidity") and for management bonuses of
$6,967,000 under the Partnership's bonus plan ("Management Bonuses").
The total of the Payments, the Deposits and the Management Bonuses is
$39,933,000 (the "Disbursements"). The balance of the DESC Proceeds
after the Disbursements is $15,680,000 and has been used by the
Partnership for working capital to the extent permitted under
temporary injunctions issued by both the Texas Court and New York
Court (See below).
Due to various layers of debt and the Partnership's preferred
equity securities, and taking into consideration preferential calls on
available cash contained in the Partnership's debt instruments and
preferred equity security instruments (including distributions paid in
kind on debt and accumulated arrearages owed on preferred equity
securities) and payments under the Partnership's bonus plan, a common
unitholder will be allocated income from the DESC proceeds without a
corresponding distribution of cash to offset the tax liability that
arises from such income. The Partnership had originally estimated
that the net taxable income from the judgment that would be allocable
to common unitholders would be approximately $41.0 million (or $8.28
per Common Unit). However, due to the dispute with Varde (See below),
the timing and amount of certain deductions related to the DESC Claim
is uncertain. As a result of the dispute with Varde, the net taxable
income may be as much as $45,168,000 (or $9.12 per Common Unit) unless
the dispute is resolved by December 31, 2000. As a result of the DESC
Claim being paid in two installments, such net income will be reported
to common unitholders in two different months (See below).
As a result of the expected retirement of the debt with the
Payments and the Deposits, the Partnership deducted $2,556,000 of
deferred financing costs.
In accordance with the Partnership's partnership agreement, the
Managing General Partner has determined that for tax purposes it is
necessary to establish a convention under which the income and certain
expenses attributable to the judgment will be allocated to the holders
of Common Units. Under that convention, common unitholders as of July
31, 2000 and August 31, 2000 will be allocated the income attributable
to the portion of the proceeds from the judgment actually received by
the Partnership during those months. The Partnership intends to take
the position that suspended losses will be available to unitholders to
offset net income attributable to the judgment; however, it is not
certain the Internal Revenue Service would agree with this position.
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. Each common unitholder
should consult with his own tax advisor regarding his use of suspended
losses.
The Partnership had planned on eventually retiring all of Varde's
debt and preferred equity securities with the DESC Proceeds and after
a replacement working capital facility was in place.
After the Partnership made the Payments of $16,606,000 to Varde,
Varde claimed for the first time that it was entitled to the Varde
One-Third as a transaction fee ("- Financial Condition - Financial
Resources and Liquidity"). This position conflicts with the credit
agreement between Varde and the Partnership in that it requires that
the Varde One-Third must be applied to the debt and preferred equity
securities it holds. However, Varde's position is that since another
loan document executed at the same time as the credit agreement
doesn't specifically require application of the DESC Proceeds to the
debt and preferred equity securities that the Varde One-Third should
be treated as a transaction fee. The Partnership believes the two
agreements can be read together and are not inconsistent; therefore,
Varde must apply the Varde One-Third to their debt and preferred
equity securities.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before any legal fees associated with the
DESC Claim and, therefore, the amount of proceeds used to calculate
the Varde One-Third should be $61,521,000 rather than the $55,613,000
that the Partnership believes is correct.
If Varde's interpretations of the loan documents are correct, the
Varde One-Third would equal $17,621,000 and Varde would receive it as
a transaction fee ("Transaction Fee") and not have to apply it to any
of the debt and preferred equity securities. Further, if the Varde
One-Third is considered a Transaction Fee, net income would decline by
$17,621,000 for both the third quarter of 2000 and first nine months
of 2000 to $28,808,000 and $26,678,000, respectively. In addition,
interest expense and distribution expense would increase $358,000 and
$46,000, respectively, for both the third quarter of 2000 and the
first nine months of 2000.
The following table compares how the Partnership believes the
Payments of $16,606,000 should be applied according to its
interpretation of the loan documents and how Varde believes the
Payment should be applied according to their interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
A Term Loan $ 3,657,000 $ 3,657,000
B Term Loan 12,949,000 5,000,000
Transaction Fee (1) - 7,949,000
----------- -----------
The Payments $16,606,000 $16,606,000
=========== ===========
(1) Based on Varde's interpretation, the Partnership would owe
Varde a Transaction Fee of $17,621,000; therefore, after the
Payments, Varde would still be owed an additional $9,672,000
as a transaction fee.
Under the Partnership's interpretation and after the above
Payments, Varde was due an additional $7,797,000 to be applied to the
debt and preferred equity securities as opposed to the $9,672,000
Varde believes is owed them as a transaction fee.
Due to the dispute with Varde and rather than making additional
payments to Varde which Varde indicated they would not apply in
accordance with the credit agreement, the Partnership deposited
$16,360,000 of the DESC Proceeds with the District Court of Taylor
County, Texas which the Partnership believes will eventually be used
to retire the remaining debt and redeem a portion of the preferred
equity securites. Under Varde's interpretation of the loan documents,
the Deposits would go to Varde as a Transaction Fee and retire a
portion of the B Term Loan. The following table compares how the
Partnership believes the Deposits will eventually be applied and how
Varde believes the Deposits will eventually be applied:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
C Term Loan $ 6,171,000 $ -
Subordinate Note A 3,188,000 -
Series B Preferred Units 3,117,000 -
Series C Preferred Units 1,672,000 -
Accumulated Arrearages Series
B Preferred Units 1,440,000 -
Accumulated Arrearages Series
C Preferred Units 772,000 -
Transaction Fee - 9,672,000
B Term Loan - 6,688,000
----------- -----------
The Deposits $16,360,000 $16,360,000
=========== ===========
The following table compares the outstanding balances of the debt
and preferred equity securities owed by the Partnership to Varde as of
September 30, 2000 after application of the Payments and the Deposits
based on the Partnership's interpretation of the Varde loan documents
and Varde's interpretation of the Varde loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
B Term Loan $ - $ 1,405,000
C Term Loan - 6,335,000
Subordinate Note A - 3,238,000
Series B Preferred Units 6,205,000 9,322,000
Series C Preferred Units 3,328,000 5,000,000
Series D Preferred Units 2,757,000 2,757,000
Accumulated Arrearages Series
B Preferred Units 805,000 2,275,000
Accumulated Arrearages Series
C Preferred Units 432,000 1,220,000
Accumulated Arrearages Series
D Preferred Units 1,166,000 1,166,000
----------- -----------
Outstanding Varde Debt and
Preferred Securities $14,693,000 $32,718,000
=========== ===========
The Partnership has advised Varde that it does not intend to make
any further payments until the above issues are resolved. The
Partnership filed suit against Varde in the District Court of Taylor
County, Texas ("Texas Court"), on August 3, 2000, demanding among
other things that Varde apply the proceeds from the DESC Claim in
accordance with the credit agreement. The Partnership also deposited
$16,360,000 with the Texas Court. The case is currently set for trial
on January 29, 2001.
On August 14, 2000, the Partnership requested an injunction from
the Texas Court to prevent Varde from accelerating the loans and
foreclosing on the collateral. On August 28, 2000, a hearing was held
and the Texas Court signed an order on September 15, 2000 that among
other things restrained Varde from seizing or foreclosing on any
collateral while the case was pending.
On August 8, 2000, Varde filed a notice of motion for summary
judgment in lieu of complaint in the amount of $18,592,000 plus
interest from August 8, 2000 on the ground that the action is based
upon an instrument for the payment of money only and the claim that
there is no defense to their action. The $18,592,000 is what Varde
claims is still outstanding on the B Term Loan, C Term Loan and the
remaining balance of a transaction fee based on the First DESC Receipt
before reduction for legal fees. The motion was filed in the Supreme
Court of New York County, New York ("New York Court").
On August 31, 2000, Varde filed a second lawsuit claiming
$48,749,000, which is the amount Varde claims is still outstanding on
the B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred
Units, Series C Preferred Units, Series D Preferred Units and the
remaining balance of the transaction fee associated with the receipt
of the DESC Proceeds. Varde claims that due to the defaults, all of
the aforementioned debt and preferred equity securities are due. The
second lawsuit was filed in the New York Court. A trial date has not
been set by the New York Court, however, the court has set a January
10, 2001 deadline to complete discovery. At that time, there will be
a hearing to determine how to proceed.
On September 7, 2000, Varde requested and received a temporary
restraining order from the New York Court which among other things
enjoined the Partnership from transferring or otherwise disposing of
any personal or real property (including cash) to the extent of
$48,749,000 received as a result of the DESC Claim.
On October 10, 2000, the New York Court issued a preliminary
injunction, replacing the temporary restraining order, enjoining the
Partnership from transferring or disposing of any property to the
extent of the amount claimed of $48,749,000.
Due to the constraints imposed during the period the temporary
restraining order issued by the New York Court on September 10, 2000
was outstanding, management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the bonus management received as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000 and accrues interest at prime plus 1.75%.
The Partnership had drawn up to $1,990,000 during the quarter;
however, the loan balance was zero at September 30, 2000. Such note
is secured by the assets of the Partnership.
During the third quarter of 2000, the Partnership incurred legal
fees of $141,000 in connection with the dispute with Varde.
While the Partnership believes it is unlikely, if either court
ruled that Varde was entitled to a Transaction Fee of $17,621,000,
such ruling would have a material adverse effect on the Partnership's
financial condition. In addition, if the New York Court order has the
effect of materially restricting the use by the Partnership of its
assets, such restriction could have a material adverse effect on the
Partnership's financial condition. Finally, if the Partnership is
forced to redeem the remaining preferred equity securities after
application of the Second Deposit but before the Partnership has a
replacement working capital facility, such forced redemption could
have a material adverse effect on the Partnership's financial
condition. As a result, the Partnership may be forced to seek
bankruptcy protection should any of the above events occur. Due to
the uncertainties involved with the dispute, there may also be other
circumstances under which the Partnership seeks bankruptcy protection.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
Under the terms agreed to on April 15, 1999, payments to Varde
were capped at $2,500,000 per annum. To the extent the interest and
distributions on the various Varde securities exceeded the cap on cash
payments, the excess was paid in kind or increased accumulated
arrearages, respectively.
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 third
quarters of 2000 and 1999, the Partnership accumulated arrearages of
$426,000 and $432,000, respectively, on these preferred equity
securities. Through September 30, 2000, these securities had total
accumulated arrearages of $4,615,000. Provided the dispute with Varde
(See "- Item 1. Legal Proceedings") concerning the application of the
proceeds from the DESC Claim is resolved favorably, the Partnership
currently intends to redeem additional preferred equity securities
held by Varde once a replacement working capital facility is in place.
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. Prior to the receipt of the DESC
proceeds, the Partnership was not in compliance with the consolidated
operating cash flow to consolidated debt service ("COCF/CDS Covenant")
and earnings before interest, taxes, depreciation and amortization
covenant ("EBITDA Covenant"); however, it came in compliance beginning
on July 25, 2000. The financial covenants in the Varde loan agreement
for the year 2000 were based on the combined results of the Products
Marketing Business and the Crude Gathering System and due to the sale
of the Crude Gathering System it was unlikely the Partnership could
have complied with the current financial covenants without receipt of
the DESC proceeds (See "- Item 1. Legal Proceedings"). The
Partnership is still not in compliance with the requirement that the
auditors' opinion on the financial statements contain no material
qualifications or going concern uncertainties. The Partnership plans
on retaining a portion of the DESC proceeds to provide the necessary
working capital to the extent permitted under temporary injunctions
issued by both the Texas Court and New York Court while the
Partnership seeks a replacement working capital facility. Due to the
current dispute with Varde, it is unlikely a lender will provide a
replacement working capital facility until such dispute is resolved.
Also, there can be no assurance that the Partnership will be
successful in obtaining a replacement working capital facility even
after such dispute is resolved. Substantially all of the
Partnership's assets are pledged as collateral to Varde in connection
with the credit agreement. See "- Item 1. Legal Proceedings" for
information on the dispute with Varde and the potentially material
adverse effects such dispute could have on the Partnership's financial
condition.
Varde has sent the Partnership notices of defaults and
accelerations under the credit agreement and the preferred equity
instruments for not paying the Varde One-Third within two days of
receipt of the DESC Proceeds and for not providing certain financial
information. The Partnership believes it has complied with the Varde
One-Third requirement with the Tender and the Deposits. Further, the
Partnership is taking the position that because Varde breached the
contract that the reporting requirements are no longer enforceable
(See "- Item 1. Legal Proceedings").
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
As a result of the proceeds from the DESC Claim, the fair value
of the debt and preferred equity securities has increased
significantly relative to the face amount of such debt and preferred
equity securities. No other 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-KA 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 Third Quarter of 2000.
b. Reports on Form 8-K:
Notice of resignation of Ernst & Young as the
Partnership's certifying accountants as of
September 26, 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: November 14, 2000 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: November 14, 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-KA 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 Third Quarter of 2000.
<PAGE>
