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DRAFT 4/15/01 d8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 1-10473
PRIDE COMPANIES, L.P.
(Name of registrant)
Delaware 75-2313597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1209 North Fourth Street, Abilene, Texas 79601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(915) 677-5444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each
Title of Each Class: Exchange on Which Registered:
- ------------------- ----------------------------
Common Units NASDAQ OTC Bulletin Board
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of Common Units outstanding as of April 2, 2001: 4,950,000
The aggregate market value of the 3,702,000 Common Units held by
non-affiliates of the Partnership as of April 2, 2001 was
approximately $926,000, which was computed using the closing sales
price of the Common Units on April 2, 2001.
TABLE OF CONTENTS
PART I
Items 1 and 2.
Business and Properties
General
Partnership Operations and Products
Markets and Competition
Customers
Long-Term Product Supply Agreement
Employees
Environmental Matters
Forward Looking Statements
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Partnership's Common Units and Related
Unitholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Partnership
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
PART I
Items 1 and 2. Business and Properties
General
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 (see "Long-Term Product
Supply Agreement").
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"). See "Partnership Operations and
Products - Crude Gathering System". Accordingly, the Crude Gathering
System has been presented as discontinued operations for all periods
herein.
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. The Partnership
succeeded in January 1990 to the businesses of Pride SGP, Inc.
("Special General Partner" or "Pride SGP") which owns a 0.1% general
partner interest in and serves as the special general partner of the
Partnership. The Managing General Partner and 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 of $3,144,000 ("Subordinate Preferred
Units") (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition -
Financial Resources and Liquidity") and a 4.9% interest in the
Partnership through ownership of common limited partner units ("Common
Units"). Management which is comprised of the officers of the
Managing General Partner (the "Management") collectively own a 19.8%
interest in the Partnership through their ownership of Common Units
(see "Item 10. Directors and Executive Officers of the Partnership").
Public ownership represented by the remaining Common Units is 73.3%.
In accordance with the Third Amended and Restated Agreement of Limited
Partnership of Pride Companies, L.P. (the "Partnership Agreement"),
the Managing General Partner conducts, directs and exercises control
over substantially all of the activities of 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.
On January 17, 2001, the Partnership filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy") in
the Northern District of Texas, Abilene Division (the "Bankruptcy
Court"), and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and
supervision of the Bankruptcy Court. The filing was necessitated by
certain actions taken by Varde Partners, Inc. ("Varde") which is the
Partnership's primary lender and also holds $17,079,000 of redeemable
preferred equity. Varde is claiming a transaction fee of $17,621,000
and the rights to certain securities it had assigned to Management
effective December 30, 1997 (see "Item 3. Legal Proceedings"). An
adversary proceeding involving all of the contested issues between
Varde and the Partnership was completed on April 6, 2001. The
Partnership believes that if the Bankruptcy Court finds in favor of
the Partnership, that the Partnership will likely be able to pay all
of its creditors and emerge from Bankruptcy in a relatively short
period of time. However, if the Bankruptcy Court finds in favor of
Varde, the Partnership will unlikely be able to pay all of its
creditors in full and a negative ruling will cause further uncertainty
about the Partnership's future. The Partnership expects the
Bankruptcy Court to issue its ruling sometime after June 8, 2001,
after final briefs are filed.
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
The Partnership's principal business consists of marketing
military aviation fuel, conventional gasoline and low sulfur diesel
fuel. The San Angelo Pipeline transports products from the Abilene
Terminal to Dyess Air Force Base ("Dyess") in Abilene and to the San
Angelo Terminal. Prior to mothballing the Refinery, the Partnership
operated the Aledo pipeline ("Aledo Pipeline") which transported
product from the Abilene Terminal to the Aledo Terminal (southwest of
Fort Worth, Texas).
The Partnership's primary market area for refined products
includes Central and West Texas and is a region that is not
significantly served by the major refining centers of the Gulf Coast.
Alon USA L.P. ("Alon"), which purchased Fina, Inc.'s ("Fina") refinery
in Big Spring, Texas, in September, 2000, is a competitor of the
Partnership and has products pipeline access into Abilene, while the
Partnership is the only supplier with a products pipeline into San
Angelo.
In April 1998, Equilon converted an existing crude pipeline into
a products pipeline that delivers conventional gasoline, low sulfur
diesel fuel and military aviation fuel to the Abilene Terminal and
Aledo Terminal for distribution to the Partnership's existing
customers. In the Partnership's primary market area, product prices
reflect a premium due to transportation costs required to import
refined products from supply points outside of the market area.
Joint Reserve - Fort Worth, Dyess, and certain other military
installations have been long-time customers of the Partnership's
military aviation fuel. Management anticipates that the Partnership
will continue to bid for these and other military supply contracts in
the future although volumes have declined from prior years due to
increasing competition. See "Partnership Operations and Products" and
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors and Trends Affecting Operating
Results - Other Factors." Gasoline and diesel tankage and sales
facilities at the Aledo Terminal allow the Partnership access to the
smaller communities west of the Dallas-Fort Worth ("DFW") market along
Interstate 20 for conventional gasoline and the DFW market for low
sulfur diesel fuel. See "Markets and Competition" below.
Partnership Operations and Products
Products Marketing Business. The Partnership receives refined
products from Equilon at the Abilene Terminal and Aledo Terminal to
market through its Products Terminals in Abilene, San Angelo, and
Aledo. The Partnership transports refined products from the Abilene
Terminal to Dyess in Abilene and to the Partnership's San Angelo
Terminal through the San Angelo Pipeline. Prior to mothballing the
Refinery, the Partnership operated the Aledo Pipeline that transported
refined products from the Abilene Terminal to the Aledo Terminal. The
Aledo Pipeline was idled in April 1998, since Equilon's pipeline is
connected to the Aledo Terminal.
The Partnership delivers military aviation fuel to Dyess by
pipeline and trucks military aviation fuel from both the Abilene
Terminal and Aledo Terminal to other military installations supplied
by the Partnership. Conventional gasoline is marketed through the
Partnership's Products Terminals to non-military customers in the
Abilene area, San Angelo area, and in the communities west of the
Dallas-Fort Worth ("DFW") metropolitan area along Interstate 20. Low
sulfur diesel fuel is also marketed through the Products Terminals to
non-military customers in the Abilene area, the San Angelo area, and
in the DFW metropolitan area.
Military aviation fuel delivered by the San Angelo Pipeline to
Dyess is sold f.o.b. the Abilene Terminal with title passing to the
purchaser as the product enters the pipeline. Prior to 1998, the
Partnership had the only pipeline capable of delivering jet fuel
directly into Dyess. In late 1997, Fina purchased Conoco's products
terminal in Abilene and built its own pipeline from that terminal to
Dyess that now enables Alon to also deliver military aviation fuel by
pipeline into Dyess (see "General").
Sales of military aviation fuel constitute a significant portion
of the Partnership's revenues. See "Markets and Competition" below.
The expected volumes under the recently awarded contract are
32,850,000 gallons compared to 52,270,000 gallons under last year's
contract; however, margins under the new contract have improved from
last year's contract. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors
and Trends Affecting Operating Results - Other Factors." The
Partnership does not expect the Bankruptcy to affect the contract it
has with the Government since the Government was notified of the
Bankruptcy by the Partnership prior to such contract being awarded.
The Partnership and its predecessors have been supplying products
to Joint Reserve - Fort Worth and Dyess since the early 1960s.
Management believes that there will continue to be strong demand for
military aviation fuel in the Partnership's market area into the
foreseeable future; however, due to increased competition, the amount
of military aviation fuel supplied by the Partnership under the last
three contracts, was at reduced volumes from contracts prior to 1998.
Furthermore, future contracts may also be at reduced volumes. Dyess
is an Air Combat Command facility, formerly a strategic air command
facility, and the primary training base for the B-1 bomber crews. In
addition, Dyess also has two worldwide deployable airlift squadrons
which fly the C-130 Hercules. Under the contract that was effective
from April 1, 2000 through March 31, 2001, the Partnership contracted
to sell military aviation fuel to Dyess, Sheppard Air Force Base in
Wichita Falls, Texas, Joint Reserve - Fort Worth, E-Systems, Inc, AASF
in Grand Prairie, Texas, AASF in Dallas, Texas, and Goodfellow Air
Force Base in San Angelo, Texas. Under the new contract that is
effective from April 1, 2001 through March 31, 2002, the Partnership
will supply military aviation fuel to Dyess, Joint Reserve - Fort
Worth, AASF in Dallas, Texas, and AASF in Grand Prairie, Texas. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors and Trends Affecting Operating
Results - Other Factors."
For the year ended December 31, 2000, the Partnership collected
an award of $61,521,000 ("DESC Proceeds") from the United States of
America (the "Government"), also referred to as the Defense Energy
Support Center ("DESC"), related to underpayments by the Government
for jet fuel purchased from the Partnership over several years (see
"Item 3. Legal Proceedings").
Crude Gathering System. Prior to October 1, 1999, the
Partnership's businesses included the Crude Gathering System. The
Crude Gathering System consisted of an 800-mile pipeline system,
425,000 barrels of crude oil, 40 truck injection stations, 101 trucks
used to transport crude oil and other related equipment. For the
first seven months of 1999, the Partnership gathered 38,110 barrels
per day ("BPD") of crude oil.
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.
Refining. Prior to March 22, 1998, the principal business of the
Partnership was crude oil refining at its Refinery located
approximately ten miles north of Abilene, Texas. The Refinery had a
throughput capacity of 49,500 BPD and was permitted to process 44,500
BPD. For the first three months of 1998, the Refinery processed crude
oil into refined products at an average rate of approximately 28,090
BPD.
As a result of the mothballing of the Refinery, the Partnership
wrote down such assets by $40.0 million at December 31, 1997. In
December 1998, the Partnership sold its diesel desulfurization unit
for $3.1 million.
The other processing units previously utilized by the Refinery
are being held for sale along with the Aledo Pipeline. The timing of
any such sale is uncertain.
Markets and Competition
Alon, the Partnership's principal competitor in its primary
market area, operates a products pipeline in the Abilene area. This
competitor's pipeline originates in Big Spring, Texas (105 miles west
of Abilene) and supplies Abilene, Midland, and Wichita Falls, Texas
and the Midcontinent. However, the Partnership currently has the only
products pipeline access to the San Angelo area. Retailers and
jobbers who are not supplied by the Partnership or one of its exchange
partners must truck their products into San Angelo from locations as
far away as 90 to 200 miles. In April 1998, Equilon completed
conversion of an existing crude pipeline into a products pipeline that
delivers conventional gasoline, low sulfur diesel fuel and military
aviation fuel from the Gulf Coast to the Partnership's Abilene
Terminal and Aledo Terminal, and the Partnership ships product from
the Abilene Terminal to the San Angelo Terminal through the San Angelo
Pipeline. Other Gulf Coast refiners ship their products primarily
throughout the southeast and central United States. Total petroleum
product demand for the Partnership's market area is determined by
demand for conventional gasoline, low sulfur diesel fuel, and military
aviation fuel. In the case of each product, however, demand tends to
vary by locality and season. Aviation fuel consumption is from
regional military and civilian air facilities.
Longhorn Partners Pipeline, which has several major oil
companies' participating in the venture, is expected to bring
petroleum products into West Texas, New Mexico and Arizona from the
Gulf Coast. The exact timing is unknown. This would increase
competition in the Partnership's primary market areas.
In addition to its primary market areas in Abilene and San Angelo
for conventional gasoline and low sulfur diesel fuel, the Partnership
has access to a secondary market in the small communities west of
Dallas-Fort Worth along Interstate 20 for conventional gasoline and
the Dallas-Fort Worth metropolitan area for low sulfur diesel fuel.
The San Angelo market area is accessible via the San Angelo Pipeline
that is connected to storage tanks at the Abilene Terminal. Market
demand for gasoline and diesel in Abilene and in San Angelo is
estimated to be approximately 17,500 BPD and 11,000 BPD, respectively.
Market demand for petroleum products in the Dallas - Fort Worth area
is estimated to be approximately 343,000 BPD, with reformulated
gasoline, diesel and a limited amount of conventional gasoline
accounting for an aggregate of 195,000 BPD.
The Partnership sells gasoline to branded product companies and
to unbranded dealers. Low sulfur diesel fuel is primarily sold to
truck stops and end users with a limited amount sold to other branded
product companies. A number of major petroleum product marketers in
West Texas do not have local refinery facilities or sales terminals.
Accordingly, such marketers supplement their local needs by purchases
or product exchanges with local suppliers, such as the Partnership.
The Partnership currently sells or exchanges diesel, conventional
gasoline, and military aviation fuel, depending on local market needs
throughout the region. Some of the marketers in the area that
purchase from or exchange refined products with the Partnership
include Alon, Chevron Products Company ("Chevron"), Equiva, Exxon,
Phillips, Star Enterprise and Ultramar Diamond Shamrock. The
Partnership has one exchange agreement and two sales agreements with
these companies for product supplied out of the Abilene Terminal; four
exchange agreements and two sales agreements with these companies for
products supplied out of the San Angelo Terminal; and one exchange
agreement and two sales agreements with these companies for product
supplied out of the Aledo Terminal. After the Bankruptcy, one of the
marketers in the Partnership's area cancelled an exchange agreement
for product supplied out of the Aledo Terminal and San Angelo
Terminal. The Partnership does not expect any further cancellations,
however, such events are outside the Partnership's control. The
exchange agreements have enabled the Partnership to expand its
marketing area to Amarillo, Big Spring, Lubbock and Midland/Odessa,
Texas without incurring transportation costs to these cities. Prior
to March 31, 2000, the Partnership had operated several retail fueling
facilities.
Customers
Two of the Partnership's major customers are the DESC and
Chevron. Revenues from the DESC comprised 17.2%, 13.6% and 26.4% of
total revenues from the Products Marketing Business in 2000, 1999 and
1998, respectively. Revenues from Chevron comprised 8.1%, 6.7% and
0.4% of total revenues from the Products Marketing Business in 2000,
1999 and 1998, respectively.
At December 31, 2000 and 1999, the Partnership had $1,544,000 and
$283,000, respectively, in receivables from the DESC and $303,000 and
$240,000, respectively, in receivables from Chevron.
Long-Term Product Supply Agreement
In 1997, the Partnership executed a long-term product supply
agreement (see "General") with Equilon to supply gasoline, diesel fuel
and jet fuel to the Partnership. The Equilon Agreement has a 10-year
primary term which began in April 1998, the date Equilon completed its
system of pipelines and terminals. The Equilon Agreement also has
two-year renewal provisions for up to an additional 10 years. After
the initial five years of the initial ten-year term ("Primary Term"),
if Equilon determines that shipment of products on its new products
pipeline is no longer economical due to product prices, then Equilon
may notify the Partnership of proposed redetermined prices. If the
Partnership does not accept such redetermined prices, then Equilon may
elect to terminate the Equilon Agreement by 18 months' written notice.
After the Primary Term, if either party under the Equilon Agreement
can demonstrate that the prices for delivered products under the
Equilon Agreement are producing cash flows materially below that
received during the Primary Term, then such party may notify the other
party of proposed prices it must receive to continue. If the other
party does not accept such redetermined pricing, then the other party
may elect not to renew the Equilon Agreement not less than one year
prior to the end of the current term. The Equilon Agreement may
furthermore be terminated upon any breach by the other party which
continues beyond 30 days following notice of breach. Additionally,
the Equilon Agreement provides that the Partnership will purchase all
gasoline, diesel and jet fuel which it may desire to purchase,
exclusively from Equilon. The Partnership's cost for such product is
based primarily on the market price in the area in which the products
are received less a discount. The Partnership will use Equilon
products to supply its existing customer base, which includes
wholesale customers, exchange partners, and military bases, primarily
using the Products Terminals and San Angelo Pipeline.
In connection with the Equilon Agreement, the Partnership
mothballed its Refinery, but will continue to utilize the terminal and
storage facilities at the Refinery for a refined products terminalling
facility (the Abilene Terminal). As a result of the Agreements, the
Partnership believes that cash flows have been less volatile since the
Partnership is no longer exposed to the extremely volatile margins of
a refinery. The Partnership also believes that the Equilon Agreement
will better enable the Partnership to remain competitive as
environmental standards change and the industry trends toward
consolidation and realignments in the future.
Equilon has continued to provide refined products to the
Partnership subsequent to filing Bankruptcy and the Partnership
believes Equilon will continue to supply such refined products to the
Partnership provided the Partnership continues to pay Equilon in
accordance with the Equilon Agreement and Equilon has cash deposits or
a letter of credit to secure the credit (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and
Liquidity").
Employees
As of December 31, 2000, the Partnership had 32 employees in the
Products Marketing Business.
Environmental Matters
The Partnership's activities involve the transportation, storage,
and marketing of refined petroleum products that constitute or contain
substances regulated under certain federal and state environmental
laws and regulations. The Partnership is also subject to federal,
state and local laws and regulations relating to air emissions and
disposal of wastewater as well as other environmental laws and
regulations, including those governing the handling, release and
cleanup of hazardous materials and wastes. The Partnership has from
time to time expended resources, both financial and managerial, to
comply with environmental regulations and permit requirements and
anticipates that it will continue to be required to expend financial
and managerial resources for this purpose in the future. For the year
ended December 31, 2001, the Partnership expects to spend $30,000
related to an investigative study by the Texas Natural Resource
Conservation Commission. The Partnership spent $217,000 related to
that study for the year ended December 31, 2000. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors and Trends Affecting Operating
Results" and "Item 3. Legal Proceedings."
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 (vi)
resolution of the dispute with Varde concerning the application of
proceeds from the DESC claim. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation -
Financial Condition" and "Item 3. Legal Proceedings."
Item 3. 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, the Bankruptcy and certain tax
issues 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 $30,000 and had accrued for this amount at
December 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim in
the United States Court of Federal Claims against the Government or
DESC, relating to erroneous pricing of jet 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 lawsuit
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 a transportation premium of
$22.3 million), plus statutory interest of $15,815,000 under the
Contract Disputes Act. The DESC Proceeds were $61,521,000 (see "Items
1. and 2. Business and Properties - Partnership Operations and
Products"). The DESC did not appeal the decision and the Partnership
received $45,706,000 of the judgment on July 25, 2000 and paid total
legal fees to the Partnership's attorneys of $5,908,000 ("Legal
Fees"). On August 24, 2000, the Partnership received an additional
$15,815,000 which was for the statutory interest on the judgment. The
Partnership paid bonuses totaling $6,967,000 (the "Bonuses") from the
DESC Proceeds to Management. The DESC Proceeds less the Legal Fees
and Bonuses (which together approximate 21% of the DESC Proceeds) are
$48,646,000 ("DESC Income" or "Net DESC Proceeds"). The Partnership
reported the $45,706,000 less Legal Fees of $4,339,000 and bonuses of
$5,110,000 or a net of $36,257,000 in operating income for the year
ended December 31, 2000. The Partnership reported the other
$15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or
a net of $12,389,000 in other income for the year ended December 31,
2000.
On July 25, 2000 and July 26, 2000, the Partnership made three
payments to Varde totaling $16,606,000 (the "Payments') from the DESC
Proceeds to retire the Series A Term Loan and Series B Term Loan. On
August 23, 2000 and August 31, 2000, the Partnership also deposited
$9,360,000 (the "First Deposit") and $7,000,000 (the Second Deposit"),
respectively, for a total of $16,360,000 (the "Deposits") from the
DESC Proceeds with the District Court of Taylor County, Texas ("Texas
Court") which were expected to be used to retire debt and redeem
preferred equity securities prior to the Bankruptcy. The total of the
Payments and the Deposits is $32,966,000 (the "Disbursements"). The
balance of the Net 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 the Supreme Court of New York County, New York, ("New
York Court") and subject to the supervision of the Bankruptcy 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), Legal Fees and payments under the Partnership's bonus
plan, common unitholders were allocated income from the DESC Proceeds
without a corresponding distribution of cash to offset the tax
liability that arose from such income. The Partnership had originally
estimated that the net taxable income from the DESC Proceeds that
would be allocable to common unitholders would be approximately $41.0
million (or $8.28 per Common Unit). However, as a result of the
dispute with Varde, the net taxable income actually allocated to
common unitholders from the DESC Proceeds was $45,168,000 (or $9.12
per Common Unit). The Partnership had planned on redeeming all
preferred equity securities held by Varde with the DESC Proceeds in
conjunction with a new working capital facility, which would have
reduced the income allocated to the common unitholders as a result of
the payment of accumulated arrearages on the Varde preferred equity
securities (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity"). As a result of the DESC Claim
being paid in two installments, such net income was 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 wrote-off $2,556,000 of
deferred financing costs that were being amortized over the life of
the loans.
In accordance with the Partnership Agreement, the Managing
General Partner determined that for tax purposes it was necessary to
establish a convention for the Partnership under which the income and
certain expenses attributable to the judgment would be allocated to
the holders of Common Units. Under that convention, common
unitholders as of July 31, 2000 and August 31, 2000 were 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 would
be available to common unitholders to offset net income attributable
to the judgment; however, it is not certain the Internal Revenue
Service will agree with this position. The actual tax impact on a
common unitholder depends upon such unitholder's overall personal tax
situation and whether such unitholder has suspended losses which can
be used to offset the allocation of income. Each common unitholder
should consult with their own tax advisor regarding the use of
suspended losses.
Under the various loan documents with Varde, one-third of the
remaining DESC Proceeds after certain payments on the Series A Term
Loan and Series B Term Loan is required to be paid to Varde. The
Partnership had planned on eventually retiring all of Varde's Debt and
Redeemable Preferred Equity with the DESC Proceeds after a replacement
working capital facility was in place; however, 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 (see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity" for the definitions of Debt, Redeemable Preferred Equity
and Varde One-Third) as a transaction fee rather than applying the
Payments against the Debt and Redeemable Preferred Equity. The
Partnership believes 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 Redeemable Preferred Equity
that Varde holds. However, Varde's position is that since another
loan document executed at the same time as the credit agreement does
not specifically require application of the Varde One-Third to the
Debt and Redeemable Preferred Equity that the Varde One-Third should
be treated as a transaction fee ("Transaction Fee"). The Partnership
believes the two agreements can be read together and are not
inconsistent and that Varde must, therefore, apply the Varde One-Third
to its Debt and Redeemable Preferred Equity.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before the 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
(after Legal Fees of $5,908,000) 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 such
amounts as a Transaction Fee and not have to apply it to any of
Varde's Debt and Redeemable Preferred Equity. Further, if the Varde
One-Third is considered a Transaction Fee, net income would have
declined by $17,621,000 for the year ended December 31, 2000 to
$25,788,000. In addition, interest expense and distributions would
have increased for the year ended December 31, 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 Varde's 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
Varde's Debt and Redeemable Preferred Equity, as opposed to the
$9,672,000 Varde believes is owed as a transaction fee.
Due to the dispute with Varde, and rather than making additional
payments to Varde which Varde indicated that it would not apply in
accordance with the Partnership's interpretation of the loan
documents, the Partnership deposited $16,360,000 of the Net DESC
Proceeds with the Texas Court, which the Partnership believed should
eventually be used to retire the remaining Varde Debt and redeem a
portion of the Redeemable Preferred Equity. Under Varde's
interpretation of the loan documents, the Deposits should 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
should be applied and how Varde believes the Deposits should 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 (1) 3,117,000 -
Series C Preferred Units (1) 1,672,000 -
Accumulated Arrearages Series
B Preferred Units (1) 1,440,000 -
Accumulated Arrearages Series
C Preferred Units (1) 772,000 -
Transaction Fee - 9,672,000
B Term Loan - 6,688,000
----------- -----------
The Deposits $ 16,360,000 $ 16,360,000
=========== ===========
(1) Due to the Bankruptcy, it is unlikely that the full
$7,001,000 of the Deposits will be used to redeem the
Redeemable Preferred Equity.
The following table compares the outstanding balances of the Debt
and Redeemable Preferred Equity owed by the Partnership to Varde as of
December 31, 2000 after the expected application of the Payments and
the Deposits based on the Partnership's interpretation of the loan
documents prior to the Bankruptcy and Varde's interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
B Term Loan $ - $ 1,462,000
C Term Loan - 6,577,000
Subordinate Note A - 3,324,000
Series B Preferred Units (1) 6,205,000 9,322,000
Series C Preferred Units (1) 3,328,000 5,000,000
Series D Preferred Units 2,757,000 2,757,000
Accumulated Arrearages Series
B Preferred Units (1) 945,000 2,507,000
Accumulated Arrearages Series
C Preferred Units (1) 507,000 1,344,000
Accumulated Arrearages Series
D Preferred Units 1,294,000 1,294,000
----------- -----------
Outstanding Varde Debt and
Preferred Securities $15,036,000 $33,587,000
=========== ===========
(1) Due to the Bankruptcy, the redemption of the
Redeemable Preferred Equity shown in the previous
table is unlikely to occur in the amounts indicated;
therefore, the balance in this table will likely
increase by those amounts.
The Partnership advised Varde that it did not intend to make any
further payments until the above issues were resolved. The
Partnership filed suit against Varde in the 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
trial which was scheduled in the Texas Court for February 2, 2001, was
removed to the Bankruptcy Court by Varde.
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 new lawsuit in New York, 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 was based upon an instrument for the payment of money
only and that there was no defense to payment. The $18,592,000 is the
amount Varde claimed was still outstanding on the B Term Loan, C Term
Loan and the remaining balance of a Transaction Fee based on the first
receipt of $45,706,000 of DESC Proceeds before reduction for Legal
Fees.
On August 31, 2000, Varde filed a second New York lawsuit
claiming $48,749,000, the amount Varde claimed was 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 claimed that due to the defaults,
all of the aforementioned Debt and Redeemable Preferred Equity were
due.
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.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds. Because of these constraints, Management agreed to
extend a revolving loan to the Partnership of $4,200,000 ("Management
Revolver") from the Bonuses paid to Management as a result of the
successful litigation of the DESC Claim. The note was executed
September 18, 2000. The Partnership had drawn up to $1,990,000 during
the year ended December 31, 2000; however, the Partnership repaid the
note on November 15, 2000, and the loan balance was zero at year end.
Such note is secured by the assets of the Partnership. Although the
note accrued interest at prime plus 1.75%, Management waived such
interest for the period it was outstanding during the year ended
December 31, 2000. No further advances are expected under this
facility.
The trial in the New York Court that was scheduled for January
18, 2001 was automatically stayed by the filing of a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division on January 17, 2001. The
Partnership was authorized to continue managing and operating its
business as a debtor in possession subject to the control and
supervision of the Bankruptcy Court (see "Items 1. and 2. Business and
Properties - General"). The filing was necessitated by certain
actions taken by Varde which is the Partnership's primary lender and
also holds the Redeemable Preferred Equity of $17,079,000.
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division, and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
On January 31, 2001, Varde removed the Partnership's suit from
the Texas Court to the Bankruptcy Court and filed a motion with the
Bankruptcy Court for appointment of a trustee. Varde subsequently
removed both of the New York state lawsuits to New York federal court.
The motion for appointment of a trustee was heard on March 6, 2001 and
the Bankruptcy Court denied Varde's request on March 22, 2001.
For the year ended December 31, 2000, in addition to the Legal
Fees paid out of the DESC Proceeds, the Partnership incurred legal
fees and other expenses of $1,172,000 in connection with the dispute
with Varde and $55,000 related to the Bankruptcy.
In March 2001, the Partnership and Varde agreed to let the
Bankruptcy Court hear all disputes from each of the removed Texas and
New York lawsuits. Closing arguments were heard by the Bankruptcy
Court on April 6, 2001. Additional briefs will be filed in the case
which are expected to be delivered to the Bankruptcy Court by June 8,
2001. Once the Bankruptcy Court reviews those briefs, a ruling will
be issued.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
fiscal year 2000.
PART II
Item 5. Market for Partnership's Common Units and Related Unitholder
Matters
The Partnership's Common Units are traded on the NASDAQ OTC
bulletin board under the symbol PRDE. The following tables set forth,
for the periods indicated, the high and low closing prices of the
Common Units in 2000 and 1999 on the NASDAQ OTC bulletin board.
Quotations on the NASDAQ OTC bulletin board reflect interdealer,
without retail mark-up, mark-down, or commission, prices and may not
necessarily represent actual transactions. No distributions were made
on the Common Units during the past two fiscal years.
NASDAQ OTC Bulletin Board
- -------------------------
1999 HIGH LOW
____ ---- ---
First Quarter $ 0.19 $ 0.06
Second Quarter 0.50 0.13
Third Quarter 0.33 0.09
Fourth Quarter 0.17 0.11
2000 HIGH LOW
____ ____ ___
First Quarter $ 0.39 $ 0.13
Second Quarter 0.25 0.11
Third Quarter 0.31 0.02
Fourth Quarter 0.22 0.14
Assuming that the Second Deposit and $1,000 of the First Deposit
were to be used to redeem a portion of the Series B Preferred Units
and Series C Preferred Units, the remaining Series B Preferred Units
and Series C Preferred Units would be convertible into 985,000 and
528,000 Common Units, respectively. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition - Financial Resources and Liquidity."
Through December 31, 2000, these securities had total accumulated
arrearages of $4,958,000.
Based on information received from its transfer agent and
servicing agent, the Partnership estimates the number of beneficial
common unitholders of the Partnership at December 31, 2000 to be
approximately 2,900.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity" for a discussion of certain restrictions
imposed by Varde which is the Partnership's primary lender and
restrictions imposed under the terms of the preferred equity
securities on the payment of distributions to common unitholders while
such debt and preferred equity securities remain outstanding.
Item 6. Selected Financial Data
The following table sets forth, for the periods and at the dates
indicated, selected financial data for the Partnership. The table is
derived from the financial statements of the Partnership and should be
read in conjunction with those financial statements. See also "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The earnings per unit amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, Earnings per Share. For further discussion of earnings per
unit, see the notes to the consolidated financial statements.
The income statement data and balance sheet data for prior years
has been restated to reflect the Crude Gathering System as a
discontinued operation.
(The following table should be printed on 14" x 8.5" paper)
SELECTED FINANCIAL DATA
(In thousands, except per unit amounts and footnote amounts)
Year Ended December 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Income Statement Data:
Revenues
Products Marketing Business $ 294,328 $ 277,179 $ 121,189 $ 130,604 $ 234,929
Net DESC Proceeds - - - - 36,257
Costs of sales and operating
expenses, excluding depreciation 291,502 266,918 115,454 126,424 230,144
Refinery closure costs - 41,396 - - -
Marketing, general and administrative
expenses 5,512 4,769 3,761 3,700 3,406
Depreciation 4,972 4,955 1,422 1,496 1,467
-------- -------- -------- -------- --------
Operating income (loss) (7,658) (40,859) 552 (1,016) 36,169
-------- -------- -------- -------- --------
Other net 156 558 322 505 1,016
Net interest income from DESC - - - - 12,389
Interest expense (5,319) (4,829) (5,647) (5,095) (1,244)
Credit and loan fees (1,388) (1,242) (1,646) (2,080) (4,921)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations (14,209) (46,372) (6,419) (7,686) 43,409
Discontinued operations :
Income (loss) from operations of
the Crude Gathering System prior
to August 1, 1999 7,794 1,341 (2,138) 269 -
(Loss) on disposal - - - (251) -
-------- -------- -------- -------- --------
Net income (loss) $ (6,415) $ (45,031) $ (8,557) $ (7,668) $ 43,409
======== ======== ======== ======== ========
Basic net income (loss) per Common
Unit :
Net income (loss) from continuing
operations $ (2.81) $ (9.18) $ (1.62) $ (1.89) $ 8.26
Net income (loss) from
discontinued operations $ 1.54 $ .26 $ (.42) $ - $ -
-------- -------- -------- -------- --------
Net income (loss) $ (1.27) $ (8.92) $ (2.04) $ (1.89) $ 8.26
======== ======== ======== ======== ========
Diluted net income (loss) per Common
Unit:
Net income (loss) from continuing
operations $ (2.81) $ (9.18) $ (1.62) $ (1.89) $ 5.82
Net income (loss) from
discontinued operations $ 1.54 $ .26 $ (.42) $ - $ -
-------- -------- -------- -------- --------
Net income (loss) $ (1.27) $ (8.92) $ (2.04) $ (1.89) $ 5.82
======== ======== ======== ======== ========
Numerator:
Basic net income (loss) from continuing
operations $ (14,209) $ (46,372) $ (6,419) $ (7,686) $ 43,409
Preferred distributions - - (1,763) (1,854) (1,683)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (14,209) (46,372) (8,182) (9,540) 41,726
Net income (loss) from continuing
operations allocable to 2%
general partners' interest (284) (928) (163) (191) 835
-------- -------- -------- -------- --------
Numerator for basic earnings per
unit from continuing operations $ (13,925) $ (45,444) $ (8,019) $ (9,349) $ 40,891
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ 7,794 $ 1,341 $ (2,138) $ 18 $ -
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest 156 27 (43) - -
-------- -------- -------- -------- --------
Numerator for basic earnings per unit
from discontinued operations $ 7,638 $ 1,314 $ (2,095) $ 18 $ -
======== ======== ======== ======== ========
Numerator for basic earnings per unit $ (6,287) $ (44,130) $ (10,114) $ (9,331) $ 40,891
======== ======== ======== ======== ========
Diluted net income (loss) from
continuing operations $ (14,209) $ (46,372) $ (6,419) $ (7,686) $ 43,409
Preferred distributions - - (1,763) (1,854) (1,683)
Adjustments to compute diluted net income
(loss):
Subordinate Note A interest expense - - - - 186
Series B Preferred Unit distributions - - - - 795
Series C Preferred Unit distributions - - - - 427
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (14,209) (46,372) (8,182) (9,540) 43,134
Net income (loss) from continuing
operations allocable to 2%
general partners' interest (284) (928) (163) (191) 863
-------- -------- -------- -------- --------
Numerator for diluted earnings per
unit from continuing operations $ (13,925) $ (45,444) $ (8,019) $ (9,349) $ 42,271
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ 7,794 $ 1,341 $ (2,138) $ 18 $ -
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest 156 27 (43) - -
-------- -------- -------- -------- --------
Numerator for diluted earnings per unit
from discontinued operations $ 7,638 $ 1,314 $ (2,095) $ 18 $ -
======== ======== ======== ======== ========
Numerator for diluted earnings per unit $ (6,287) $ (44,130) $ (10,114) $ (9,331) $ 42,271
======== ======== ======== ======== ========
Cash distributions declared per
Common Unit $ - $ - $ - $ - $ -
Denominator :
Denominator for basic earnings per
unit :
Common Units 4,950 4,950 4,950 4,950 4,950
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A - - - - 292
Series B Preferred Units - - - - 1,315
Series C Preferred Units - - - - 705
-------- -------- -------- -------- --------
Total adjustments - - - - 2,312
-------- -------- -------- -------- --------
Denominator for diluted earnings
per unit after conversion :
Common Units 4,950 4,950 4,950 4,950 7,262
======== ======== ======== ======== ========
Balance Sheet Data (at end of period):
Net property, plant and equipment $ 70,993 $ 19,793 $ 17,518 $ 16,621 $ 15,301
Total assets 111,587 64,804 44,107 47,506 56,069
Long-term debt (including current
maturities) 51,098 37,465 39,594 25,799 9,359
Redeemable preferred equity - 19,529 19,529 17,079 17,079
Partners' capital (deficiency) 29,598 (15,433) (23,990) (28,514) 14,895
Operating Data Continuing Operations (BPD):
Products Marketing Business
Product sales - - 13,267 14,783 16,919
Refinery
Crude oil throughput 32,555 31,449 28,090 - -
Products refined 31,681 30,619 27,438 - -
Products System
Transportation volumes 13,509 11,415 7,335 - -
Prior to mothballing the Refinery on March 22, 1998, this data represents information for the Refinery and products pipelines
and terminals.
Discontinued operations for 1998, included a $1,197,000 lower of cost or market inventory adjustment due to the decline in
inventory values. Discontinued operations for 1999 included the reversal of a $1,197,000 lower of cost or market inventory
adjustment since the market value of the crude oil was more than its carrying value.
Refinery closure costs for the year ended December 31, 1997 includes a $40,000,000 noncash charge for impairment of fixed
assets, $1,750,000 related to closure of the Refinery and related severance costs, and $367,000 related to the write-off of
certain Refinery assets offset by $721,000 in accruals that were reversed as a result of the Refinery being mothballed.
Since a portion of the debt is subject to increasing rates of interest, the Partnership is accruing interest at the effective
rate over the term of the debt. Interest expense in 1998, 1999 and 2000 reflects an accrual of $1,030,000, $315,000 and
reversal of an accrual of $1,345,000, respectively, which is based on the difference between the effective interest rates and
the stated rates.
Credit and loan fees include costs associated with the restructuring and refinancing of the Partnership of $1,064,000,
$613,000, $1,325,000, $1,761,000 and $3,456,000 for 1996, 1997, 1998, 1999 and 2000, respectively.
On December 31, 1996 after the market closed the convertible preferred limited partner units were converted to Common Units
on a one-for-one basis. At the same time, existing common limited partner units were converted to Common Units on a one-for-
twenty-one reverse unit split. The basic and diluted net loss per unit calculations for 1996 have been restated to reflect
the outstanding Common Units after the conversion.
Since cash distributions were not paid on the preferred equity, the preferred equity accrued distributions of $1,763,000,
$1,854,000 and $1,683,000 for the years ended December 31, 1998, 1999 and 2000, respectively, which have been deducted in
determining net income (loss) per unit. Included in the preferred equity accrued distributions for the years ended December
31, 1998 and 1999 were $196,000 and $147,000, respectively, related to the Series E Preferred Units and Series F Preferred
Units. The accrued distributions on the Series E Preferred Units and Series F Preferred Units were cancelled in connection
with the Crude Gathering Sale on October 1, 1999 (see Footnote 10).
In 1997, 1998, 1999 and 2000, the calculations of diluted earnings per unit exclude 300,000, 300,000, 278,000, and 208,000,
respectively, officer and employee unit appreciation rights and 2,987,000, 3,027,000, 2,751,000 and 0, respectively, units
attributed to the convertible preferred equity and convertible debt because the effect would be antidilutive. For 2000,
2,312,000 Common Unit equivalents related to the convertible preferred equity and convertible debt was included in the
calculation of dilutive earnings per unit. The calculation for those four years also exclude 70,000 director unit
appreciation rights because the plan states they will be settled for cash.
At December 31, 1996, 1997, 1998, 1999 and 2000 current maturities were $6,412,000, $1,938,000, $65,000, $25,799,000 and
$9,359,000, respectively.
In connection with the Crude Gathering Sale, Pride SGP exchanged certain assets, receivables, and the Series E and F
Preferred Units for cash and Subordinate Preferred Units which are included in Partners' capital (deficiency) for the years
ended December 31, 1999 and 2000. See "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of
Operation - Factors and Trends Affecting Operating Results - Other Factors."
Due to the Refinery being mothballed on March 22, 1998, the operating data in 1998 for the Products Marketing Business is for
the period April 1, 1998 through December 31, 1998 and for the Refinery and Products System is for the period January 1, 1998
through March 31, 1998.
The Crude Gathering System segment was sold on October 1, 1999. Accordingly, the segment has been presented as discontinued
operations for all periods.
On May 10, 2000, the presiding judge in the Partnership's lawsuit 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 a
transportation premium of $22.3 million), plus 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 total Legal Fees to the Partnership's attorneys of $5,908,000. On August 24, 2000, the Partnership
received an additional $15,815,000 which was for the statutory interest on the judgment. The Partnership paid Bonuses
totaling $6,967,000 from the DESC Proceeds to Management. The Partnership reported the $45,706,000 less Legal Fees of
$4,339,000 and Bonuses of $5,110,000 or a net of $36,257,000 in operating income for the year ended December 31, 2000. The
Partnership reported the other $15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or a net of $12,389,000 in
other income for the year ended December 31, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
General
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.
As a result of mothballing the Refinery at the end of the first
quarter of 1998 and 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. Due to the
change in its core business, a comparison of the Products Marketing
Business to the Refinery and the prior products pipeline business
("Products System") would not be meaningful and, therefore, is not
included with this Form 10-K.
Prior to mothballing the Refinery and entering into the Equilon
Agreement, the Partnership's operating results depended principally on
(i) the rate of utilization of the Refinery, (ii) the margins between
the prices of its refined petroleum products and the cost of crude oil
and (iii) the volume throughput on the Products System.
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.
Also important to the evaluation of the Refinery's performance were
barrels of crude oil refined, gross margin (revenue less cost of
crude) per barrel, and operating expenses per barrel excluding
depreciation.
Year ended December 31, 2000 compared with year ended December 31,
1999.
General. Net income for the year ended December 31, 2000 was
$43.4 million compared to net loss of $7.7 million for the year ended
December 31, 1999. The results for the year ended December 31, 1999
included income of $18,000 from discontinued operations.
Continuing Operations (Products Marketing Business). Net income
from continuing operations was $43.4 million for the year ended
December 31, 2000 compared to a net loss from continuing operations of
$7.7 million for the year ended December 31, 1999. The results for
the year ended December 31, 2000 included $48.6 million of income from
the DESC Claim (see "Financial Condition - Financial Resources and
Liquidity"). The $12.4 million of interest income related to the DESC
Claim is reported separately from the $36.3 million included in
operating income which represents underpayments by the Government in
prior years for jet fuel purchased from the Partnership. As a result
of collecting the DESC Proceeds and applying it to the Debt (see
"Financial Condition - Financial Resources and Liquidity"), the
Partnership wrote-off $2.6 million of deferred financing costs that
were being amortized over the life of the loans and recognized income
of $1.3 million associated with the reversal of an accrual for
increasing rate accrued interest for the year ended December 31, 2000.
In addition, for the year ended December 31, 2000, marketing, general
and administrative expense declined $294,000 and operating expense
declined $634,000 for a total decrease of $928,000 (see "Item 3. Legal
Proceedings").
Operating income for the Products Marketing business was $36.2
million for the year ended December 31, 2000 compared to operating
loss of $1.0 million for the year ended December 31, 1999. Excluding
the $36.3 million of DESC Income (see "Item 3. Legal Proceedings")
included in operating income, the year ended December 31, 2000 would
have shown an operating loss of $88,000. As mentioned before, general
and administrative expenses and operating expenses declined a total of
$928,000 for the year ended December 31, 2000. Depreciation expense
for the Products Marketing Business was $1.5 million for both the
years ended December 31, 2000 and 1999. Operating income excluding
depreciation for the Products Marketing Business was $37.6 million for
the year ended December 31, 2000 compared to operating income
excluding depreciation of $480,000 for the year ended December 31,
1999. Excluding the $36.3 million of DESC income included in
operating income, the year ended December 31, 2000 would have shown
operating income excluding depreciation of $1.4 million. The
improvement for the year ended December 31, 2000 was due to a $928,000
reduction in general and administrative expenses and operating
expenses. For the year ended December 31, 2000, the Partnership
marketed 16,919 BPD of refined products compared to 14,783 BPD for the
year ended December 31, 1999. The net margin per barrel (after
marketing, general and administrative expenses) for the year ended
December 31, 2000 was breakeven compared to negative $0.19 for the
year ended December 31, 1999.
Discontinued Operations (Crude Gathering System). The Crude
Gathering System was sold on October 1, 1999. The results for the
year ended December 31, 1999 are discussed in the comparison of the
year ended December 31, 1999 to the year ended December 31, 1998 for
discontinued operations.
Year ended December 31, 1999 compared with year ended December 31,
1998.
General. Net loss for the year ended December 31, 1999 was $7.7
million compared to net loss of $8.6 million for the year ended
December 31, 1998. The improvement for the year ended December 31,
1999 was due to improved results from the discontinued operation which
was partially offset by weaker results in the continuing operations.
Continuing Operations (Products Marketing Business). Net loss
from continuing operations was $7.7 million for the year ended
December 31, 1999 compared to $6.4 million for the year ended December
31, 1998. The results for the year ended December 31, 1998 were
stronger due to the results for the Refinery in the first quarter of
1998 and the lower credit and loan fees for the year ended December
31, 1998. Credit and loan fees for the year ended December 31, 1999
increased due to certain deferred financing costs being amortized over
a shorter period as a result of the new maturity date of the
BankBoston facility (See "Financial Condition - Financial Resources
and Liquidity"). The stronger operating results for the year December
31, 1998 were partially offset by lower interest expense for the year
ended December 31, 1999 due to the payment of $15.0 million on the A
Term Loan (See "Financial Condition - Financial Resources and
Liquidity") and increased interest income for the year ended December
31, 1999 resulting from the proceeds of the sale of the Crude
Gathering System.
Operating loss, depreciation expense, and operating income
excluding depreciation from continuing operations was $1.0 million,
$1.5 million and $480,000, respectively, for the year ended December
31, 1999. Operating income from continuing operations was $552,000
for the year ended December 31, 1998 which included operating income
of $1.0 million from the Refinery and Products System for the first
three months of 1998. Depreciation expense from continuing operations
was $1.4 million for the year ended December 31, 1998 which included
depreciation expense of $368,000 from the Refinery and Products System
for the first three months of 1998. Operating income excluding
depreciation from continuing operations was $2.0 million for the year
ended December 31, 1998 which included operating income excluding
depreciation of $1.4 million from the Refinery and Products System for
the first three months of 1998. During the year ended December 31,
1999, the Partnership marketed 14,783 BPD of refined products compared
to 17,046 BPD for the year ended December 31, 1998. For the last nine
months of 1998 which excludes the Refinery and Products System, the
Partnership marketed 13,267 BPD of refined products. The net margin
per barrel for the year ended December 31, 1999 was negative $0.19
compared to positive $0.09 for the year ended December 31, 1998. For
the last nine months of 1998 which excludes the Refinery and Products
System, the net margin per barrel was negative $0.12. Although the
amount of refined products sold each day improved for the year ended
December 31, 1999 from the last nine months of 1998, such improvement
was not enough to offset certain temporary discounts Equilon gave the
Partnership during the last nine months of 1998 as concessions for the
startup problems it experienced when it began operating the new
refined products pipeline.
Discontinued Operations (Crude Gathering System). Net income
from discontinued operations was $269,000 for the seven months ended
July 31, 1999 compared to a loss of $2.1 million for the year ended
December 31, 1998. Net income from discontinued operations for the
year ended December 31, 1999 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 September 30, 1999, whereas, net loss from discontinued
operations for the year ended December 31, 1998 included a negative
$1.2 million lower of cost or market adjustment since the market value
of the crude oil owned by the Partnership was less than its carrying
value at December 31, 1998. The results from discontinued operations
for the seven months ended July 31, 1999 included $944,000 in higher
costs of sales due to hedging losses. See "Item 7a. Quantitative and
Qualitative Disclosure About Market Risk." The volume of crude oil
gathered by the Crude Gathering System decreased to 38,110 BPD for the
first seven months of 1999 from 43,508 BPD for the year ended December
31, 1998 due to the elimination of marginal contracts and lower crude
oil production in the field. For the seven months ended July 31,
1999, net margin increased to $0.12 per barrel from negative $0.04 per
barrel for the year ended December 31, 1998, which is primarily a
result of the lower of cost or market adjustments discussed earlier.
The Partnership also realized a loss for the year ended December
31, 1999 on the disposal of the discontinued operations of $251,000,
which includes operating losses incurred after the measurement date of
August 1, 1999 and prior to the disposal date of October 1, 1999.
From August 1, 1999 through October 1, 1999, the Partnership incurred
$1.3 million in higher costs of sales due to hedging losses which was
offset by the gain realized on the sale of crude oil to Sun on October
1, 1999 as part of the Crude Gathering Sale.
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 $333,000 for the years ended December 31, 2001 and 2002
on several projects to maintain compliance with various other
environmental requirements including $30,000 for 2001 related to an
investigative study by the Texas Natural Resource Conservation
Commission and an aggregate of $94,000 for 2001 and 2002 related to
the cleanup of an existing leak. The remaining $209,000 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 $30,000 and had accrued for this amount at
December 31, 2000. In the first quarter of 2001, the Partnership
completed Phase II and has submitted a report to the Texas Natural
Resource Conservation Commission. The Partnership spent $217,000
related to that study for the year ended December 31, 2000.
Management does not believe any significant additional amounts will be
required to maintain compliance with this study or other environmental
requirements other than expenditures incurred in the ordinary course
of business.
Effective January 1, 1995, the Clean Air Act Amendment of 1990
required that certain areas of the country use reformulated gasoline
("RFG"). The Abilene and San Angelo market areas do not require RFG.
Collin, Dallas, Denton, and Tarrant Counties, which comprise the
Dallas-Fort Worth ("DFW") metroplex area, do require RFG; however, the
Partnership's Aledo Terminal lies outside this area and is allowed to
supply conventional gasoline that is not destined for sale in these
four counties. 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 three 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 $94,000 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. The Government awarded the Partnership the right
to supply 32,850,000 gallons of military aviation fuel for the
contract period that began April 1, 2001 and ends March 31, 2002. The
award is for deliveries to Dyess, Joint Reserve - Fort Worth, Texas,
AASF in Dallas, Texas, and AASF in Grand Prairie, Texas. The contract
is a 37% decrease from the volumes that it supplied under the contract
which began April 1, 2000 and ended March 31, 2001; however, margins
under the new contract have improved from last year's contract. See
"Items 1. and 2. Business and Properties - Partnership Operations and
Products."
On January 17, 2001, the Partnership filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code in the Northern
District of Texas, Abilene Division, and was authorized to continue
managing and operating the business as a debtor in possession subject
to the control and supervision of the Bankruptcy Court. The filing
was necessitated by certain actions taken by Varde which is the
Partnership's primary lender and also holds the Redeemable Preferred
Equity of $17,079,000 (see "Item 3. Legal Proceedings").
In March 2001, the Partnership and Varde agreed to let the
Bankruptcy Court hear all disputes from each of the removed Texas and
New York lawsuits (see "Item 3. Legal Proceedings"). Closing
arguments were heard by the Bankruptcy Court on April 6, 2001.
Additional briefs will be filed in the case which are expected to be
delivered to the Bankruptcy Court by June 8, 2001. Once the
Bankruptcy Court reviews those briefs, a ruling will be issued.
The Partnership believes that if the Bankruptcy Court finds in
favor of the Partnership, that the Partnership will likely be able to
pay all of its creditors and emerge from Bankruptcy in a relatively
short period of time. However, if the Bankruptcy Court finds in favor
of Varde, the Partnership will unlikely be able to pay all of its
creditors in full and a negative ruling will cause further uncertainty
about the Partnership's future.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
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
letter of credit fees, the Partnership deposited $14,000,000 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 is in the
process of closing its bank accounts with BankBoston.
During the third quarter of 2000, the Partnership established a
relationship 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 was 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 "Item 3. 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 which with
accrued interest was $3,657,000 as of July 25, 2000 ("A Term Loan")
and pay $5,000,000 towards the Series B Term Loan which with accrued
interest was $12,949,000 as of July 25, 2000 ("B Term Loan"). The
amounts outstanding on the A Term Loan and B Term Loan shown above
were before the three payments on July 25, 2000 and July 26, 2000 to
Varde totaling $16,606,000 (the "Payments") from the DESC Proceeds.
In addition, Varde also receives one-third of the remaining DESC
proceeds after reduction for the $8,657,000 applied to the A Term Loan
and B Term Loan mentioned above ("Varde One-Third"). However, as a
result of the dispute with Varde, the Partnership did not pay the
entire amount of the Varde One-Third and instead deposited $16,360,000
with the Texas Court to cover the remaining Varde One-Third plus
retire additional securities with a portion of the Partnership's two-
thirds. The Partnership believes it is allowed to retain any
remaining DESC proceeds after the payment of the Varde One-Third;
however, the Partnership used some of the remaining proceeds to
further reduce Varde securities to reduce interest expense and
accumulated arrearages. As discussed in "Item 3. Legal Proceedings,"
there is a dispute about whether the DESC Proceeds are also reduced by
the Legal Fees paid to the Partnership's attorneys in calculating the
Varde One-Third. Under the Varde credit agreement, the Partnership
believes the Varde One-Third must be applied to Varde's Debt and
Redeemable Preferred Equity (see definition below). Therefore, the
Partnership believes that the Payments of $16,606,000 retired the A
Term Loan and B Term Loan. See "Item 3. 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 December 31, 2000. The Partnership began accruing interest
expense at the statutory rate of 6% ("Statutory Rate") on the C Term
Loan and $2,000,000 of the Subordinate Note A on July 27, 2000 as a
result of the tender by the Partnership to Varde of $8,171,000 (the
"Tender"). The Tender required that Varde had to apply the Tender in
accordance with the Partnership's interpretation of the credit
agreement. Varde refused the Tender. When the Partnership deposited
$9,360,000 in the Texas Court on August 23, 2000, the Partnership
began accruing interest expense at the Statutory Rate 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 on July 27, 2000. The Partnership believes the First Deposit
will eventually be used to retire the C Term Loan and Subordinate Note
A. The outstanding balance of $9,359,000 on the C Term Loan and
Subordinate Note A are included in current liabilities at December 31,
2000. The Partnership accrued total interest expense of $236,000 at
the Statutory Rate on $6,171,000 of the C Term Loan and $2,000,000 of
the Subordinate Note A from July 27, 2000 to December 31, 2000 and on
$1,188,000 of the Subordinate Note A from August 23, 2000 to December
31, 2000 and included the accrual in other accrued liabilities. See
"Item 3. Legal Proceedings" for discussion of dispute with Varde and
Varde's interpretation of the Varde loan documents.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
are collectively referred to as the debt (the "Debt").
On August 31, 2000, the Partnership deposited another $7,000,000
in the Texas Court. The Partnership believed the Second Deposit and
$1,000 of the First Deposit should be used to redeem a portion of the
Redeemable Preferred Equity along with paying accumulated arrearages
on those securities. However, due to the Bankruptcy, such redemption
using the Second Deposit and $1,000 of the First Deposit is unlikely.
For the year ended December 31, 2000, the Deposits with the Texas
Court accrued interest income of $391,000.
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 Redeemable Preferred Equity 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 as of July 25, 2000 which was subject to
interest rates of 18% through maturity. As mentioned before the
Partnership began accruing interest on the C Term Loan at the
Statutory Rate of 6% per annum after the Tender on July 27, 2000.
Prior to the Tender and the First Deposit which is expected to retire
the Subordinate Note A, such note was convertible into 504,000 Common
Units as of July 25, 2000 and bore interest at prime plus one percent.
The prime rate was 9.5% at December 31, 2000. After the Tender on
July 27, 2000 and the First Deposit on August 23, 2000, the
Partnership also began accruing interest expense on the Subordinate
Note A at the Statutory Rate of 6%. See "Item 3. 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 for the years ended
December 2000, 1999 and 1998 reflects the reversal of an accrual of
$1,345,000 and accruals of $315,000 and $1,030,000, 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 Redeemable Preferred Equity after the originally expected
application of the Second Deposit and $1,000 of the First Deposit
until the Partnership redeems such Redeemable Preferred Equity (see
"Item 3. Legal Proceedings").
From April 15, 1999 through January 2, 2001, the Partnership had
a $3,000,000 revolving credit facility with Varde ("Varde Revolver").
Advances under the Varde Revolver bore interest at 11% per annum,
payable monthly. The Partnership did not have any outstanding
borrowings under the Varde Revolver as of December 31, 2000.
Fees paid to Varde in the form of additional Series B Term Loans
were $150,000 in 1998 and $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
"Item 3. Legal Proceedings" for discussion of dispute with Varde and
Varde's interpretation of the Varde loan documents.
During the year ended December 31, 2000, the Partnership had
drawn up to approximately $2.6 million on the BankBoston Revolver.
The weighted average amount outstanding under the BankBoston Revolver
was approximately $37,000. The weighted average interest rate during
the 2000 period for the BankBoston Revolver was approximately 10.8%.
The Partnership did not draw on the Varde Revolver during the year
ended December 31, 2000. During the year ended December 31, 1999, the
Partnership had drawn up to approximately $4.2 million and $1.9
million on the BankBoston Revolver and Varde Revolver, respectively.
The weighted average amount outstanding under the BankBoston Revolver
and Varde Revolver was approximately $110,000 and $514,000,
respectively. The weighted average interest rate during the 1999
period for the BankBoston Revolver was approximately 9.5%. The Varde
Revolver accrued interest at a fixed rate of 11.0% per annum.
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 year ended December 31, 2000, cash
was utilized as a result of the Payments, 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 $14,000,000 in
cash deposited with Equilon). For the year ended December 31, 1999,
cash was provided by a decrease in accounts receivables and an
increase in accounts payable (resulting from the higher refined
product prices).
On December 31, 1997, 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 Preferred Units. 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 disputes this position and refuses to request the
Partnership to issue the securities.
The Partnership or Management had 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. Such call
lapsed December 31, 2000. The securities held by Varde have certain
antidilution provisions and registration rights.
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 common unitholders and holders of the preferred
equity securities.
In conjunction with Varde's assumption of the previous existing
bank debt, Varde received preferred equity securities. As a result of
the assumption, Varde holds $17,079,000 of redeemable preferred equity
("Redeemable Preferred Equity") including $9,322,000 of Series B
Cumulative Convertible Preferred Units ("Series B Preferred Units"),
$5,000,000 of Series C Cumulative Convertible 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 had expected prior to the
Bankruptcy that once the dispute with Varde was resolved that the
Second Deposit of $7,000,000 and $1,000 from the First Deposit would
be used to redeem $3,117,000 of the Series B Preferred Units and
$1,672,000 of the Series C Preferred Units (See "Item 3. Legal
Proceedings") or a total of $4,789,000 along with payment of
accumulated arrearages on the Redeemable Preferred Equity of
$2,212,000 (see below) or a total of $7,001,000. At December 31, 2000
and after adjusting for the expected redemption with the Second
Deposit and $1,000 from the First Deposit and prior to the Bankruptcy,
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 began accruing
interest at the Statutory Rates on the Series B Preferred Units and
Series C Preferred Units to the extent that the Second Deposit and
$1,000 of the First Deposit were expected to be applied to such
securities prior to the Bankruptcy. The Partnership accrued interest
expense of $140,000 related to that portion of the Redeemable
Preferred Equity as of December 31, 2000 and included it in other
accrued liabilities. Due to the Bankruptcy, such redemption using the
Second Deposit and $1,000 of the First Deposit is now unlikely. 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. For the years ended December 31, 2000 and 1999,
the Partnership accumulated arrearages of $1,683,000 and $1,707,000,
respectively, on the Redeemable Preferred Equity. Through December
31, 2000, these securities had total accumulated arrearages of
$4,958,000. The Partnership had expected that once the dispute with
Varde was resolved, that part of the Second Deposit and $1,000 of the
First Deposit would 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. However, due to the Bankruptcy, such payments of the
accumulated arrearages using the Second Deposit and $1,000 of the
First Deposit is now unlikely. Prior to the Bankruptcy, the
Partnership also expected to redeem additional Redeemable Preferred
Equity and pay additional accumulated arrearages once a replacement
working capital facility was in place (See "Item 3. Legal
Proceedings").
The Partnership also accumulated arrearages of $343,000 on
preferred equity securities owned by Pride SGP through 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, as described in the following paragraph.
In connection with the Crude Gathering Sale on October 1, 1999,
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 ("Subordinate
Preferred Units") in the face amount of $3,144,000. The Subordinate
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 Redeemable Preferred Equity or October 1, 2004. The
Subordinate 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 the
Redeemable Preferred Equity held by Varde or (ii) 10% per annum.
At December 31, 2000, Pride SGP held the Subordinate Preferred
Units in the face amount of $3,144,000.
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.
At December 31, 2000, 4,950,000 Common Units were outstanding,
representing a 98% limited partner interest. Pride SGP, Management
and the public own 250,000, 998,000 and 3,702,000 Common Units,
respectively.
The Common Units rank behind the Partnership's indebtedness with
Varde, as well as, the Series B Preferred Units, Series C Preferred
Units, Series D Preferred Units and Subordinate Preferred Units
(collectively "Preferred Equity Securities"). As a result of the
layers of debt and the Preferred Equity Securities ahead of the Common
Units and taking into consideration the various preferential calls on
available cash contained in the debt instruments and Preferred Equity
Securities instruments (including accumulated arrearages on the
Preferred Equity Securities), common unitholders were allocated income
under the Partnership Agreement for the year ended December 31, 2000
as a result of the DESC Proceeds without a corresponding distribution
of cash to offset any potential tax liability.
In the future common unitholders may also receive allocations of
income from operations, asset sales or litigation to the extent cash
generated from such activities is required to be applied to debt and
preferred equity securities. The actual impact on a common unitholder
of repayment of debt and retirement of the preferred equity securities
is dependent upon each common unitholder's personal tax basis in their
Common Units and such common unitholder's overall personal tax
situation.
Under the terms of the Partnership's loan documents with Varde,
Varde restricted the payment of distributions to common unitholders
throughout the term of the loan documents. In addition, the Preferred
Equity Securities instruments also limit distributions to common
unitholders. Future distributions will be dependent on, among other
things, payment in full of the Varde Debt, the termination of the loan
documents and the redemption of all Preferred Equity Securities.
As of December 31, 2000 and after the previously expected
redemption with the Second Deposit and $1,000 of the First Deposit
prior to the Bankruptcy, 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 convertible securities into
Common Units, the number of Common Units outstanding would increase
from 4,950,000 Common Units to 6,463,000 Common Units.
The Partnership has to maintain compliance with certain financial
and other covenants, as defined in the credit agreement with Varde;
however, the Partnership feels it has defenses to alleged defaults
occurring after July 25, 2000. The Varde credit agreement contains
restrictive covenants including, among other things, restrictions on
additional indebtedness, commitments and payments thereon, sale of
assets and securities, 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 on receipt
of the DESC Proceeds. 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 on October 1, 1999, it was
unlikely the Partnership could have complied with the current
financial covenants during the year ended December 31, 2000 without
receipt of the DESC Proceeds (see "Item 3. 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 has
utilized 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 and
subject to the supervision of the Bankruptcy Court. Prior to the
dispute with Varde and the Bankruptcy, the Partnership had hoped to
obtain a new working capital facility. Due to the dispute with Varde
and the Bankruptcy, it is unlikely a lender will provide a replacement
working capital facility until such dispute is resolved and the
Bankruptcy Court approves a plan of reorganization. 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 and the Bankruptcy Court approves a plan of reorganization.
Substantially all of the Partnership's assets are pledged as
collateral to Varde in connection with the credit agreement. See
"Item 3. 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 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, for not providing certain financial information, for the
engagement of independent certified public accountants without Varde's
consent, for failing to retire the Subordinate Note A and for failing
to redeem the Redeemable Preferred Equity which events occurred after
July 25, 2000. The Partnership believes it has complied with the
Varde One-Third requirement with the Tender and the Deposits (see
"Item 3. Legal Proceedings"). As discussed in the preceding
paragraph, the Partnership feels it has defenses to the other alleged
defaults occurring after July 25, 2000.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds (see "Item 3. Legal Proceedings"). Because of these
constraints, Management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the Bonuses paid to Management as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000. The Partnership had drawn up to
$1,990,000 during the year ended December 31, 2000; however, the
Partnership repaid the note on November 15, 2000, and the loan balance
was zero at year end. Such note is secured by the assets of the
Partnership. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding
during the year ended December 31, 2000. No further advances are
expected under this facility.
Excluding the income resulting from the DESC Claim, the
Partnership has continually incurred operating losses prior to the
year ended December 31, 2000. Operating results prior to the year
ended December 31, 2000 suffered as a result of increasing
competition, depressed operating margins and higher financing costs.
If the Partnership's interpretation of the loan documents is correct
and the Partnership emerges from Bankruptcy, then the Partnership
expects to retire the Varde Debt. In such event, the Partnership
believes it will have positive cash flow and net income will be close
to break even.
The Partnership's ability to improve 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,
2001 and ends March 31, 2002, the Partnership will supply
approximately 32,850,000, gallons which is a 37% decrease from the
volumes that it supplied under the contract which began April 1, 2000
and ended March 31, 2001; however, margins under the new contract have
improved from 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 the interest costs associated with carrying
the inventory and to reduce letters of credit fees, the Partnership
deposited $14,000,000 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 on the difference between the amount
deposited and the value of the refined products inventory maintained
by Equilon at the Partnership's terminals.
The Partnership has been able to achieve certain reductions in
operating expenses and marketing, general and administrative expenses
over recent years. The expenses of the Products Marketing Business
have recently been reduced through staff reductions and computer
automation. The ability to generate profits could be adversely
affected if other Gulf Coast refiners bring refined products into West
Texas from the Gulf Coast via pipeline.
Regardless of any changes made to the Partnership operations, the
Partnership will need a new working capital facility. There can be no
assurances that the Partnership will be successful in obtaining a new
working capital facility particularly in light of the Bankruptcy.
Management is also attempting to sell the idle refining equipment and
the Aledo Pipeline to further increase working capital.
Also, the Partnership will have to receive approval from the
Bankruptcy Court for a plan of reorganization that allows it to pay
certain debt and preferred equity securities over an extended period
of time. There can be no assurance that the Bankruptcy Court will
approve such a plan.
The Partnership was delisted from trading on the New York Stock
Exchange effective August 17, 1998 for failing to meet certain listing
requirements. The Partnership is now listed on the NASDAQ OTC
bulletin board under the symbol PRDE.
Capital Expenditures
Capital expenditures totaled $202,000 for the year ended December
31, 2000 compared to $1.2 million for the year ended December 31,
1999. Included in capital expenditures for the year ended December
31, 1999 was $494,000 and $705,000 for the Products Marketing Business
and the Crude Gathering System, respectively.
Management anticipates spending $139,000 for the year ended
December 31, 2001 for environmental expenditures, of which $80,000 was
accrued at December 31, 2000 and capital expenditures for 2001, are
budgeted at $200,000.
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk
During the year ended December 31, 1999, the Partnership hedged
its crude oil inventory after an increase in crude oil prices in 1999
from the weak prices in December 1998 to mitigate possible future
declines in crude oil prices. The Partnership hedged the inventory to
reduce the negative impact that previous declines in crude oil prices
had on the borrowing base. The Partnership hedged between 125,000
barrels to 375,000 barrels during 1999. The hedged position resulted
in a loss of $2.3 million and was offset by an increase in the value
of the 425,000 barrels of crude oil sold to Sun on October 1, 1999 as
part of the Crude Gathering Sale.
Under an agreement with Equilon, Equilon maintained refined
products inventory for the Partnership during 2000 and 1999 thus
eliminating the Partnership's exposure to changing refined product
prices (see "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operation - Financial Condition - Financial
Resources and Liquidity").
The Partnership's debt was subject to market risks based on
changes in the prime rate. The Partnership does not hedge this market
risk. Approximate debt maturities for the next five years and
applicable interest rates as of December 31, 2000 are as follows:
(This page should be printed on 14" x 8.5" paper)
2001
-----------------
Amount Rate Total
---------- ---- ------------
C Term Loan 6,171,000 6% 6,171,000
Subordinate Note A (Prime+1%) 3,188,000 6% 3,188,000
---------- ----------
$ 9,359,000 $ 9,359,000
========== ==========
As a result of the Tender and the First Deposit, the Partnership is accruing interest on the C Term Loan and Subordinate Note
A at the Statutory Rate of 6%.
At December 31, 1999, the five year maturities and applicable
interest rate were as follows assuming the lenders do not exercise
their rights to accelerate maturities:
(This page should be printed on 14" x 8.5" paper)
2000 2001 2002
------------------ ----------------- -----------------
Amount Rate Amount Rate Amount Rate Total
----------- ---- ---------- ---- ---------- ---- ------------
Revolver (LIBOR+3% or Prime+1.75%) $ - - $ 18,000 - $ - - $ 18,000
A Term Loan 4,973,000 15% - - - - 4,973,000
B Term Loan - 15% - 17% 11,825,000 18% 11,825,000
C Term Loan - 15% - 17% 5,666,000 18% 5,666,000
Subordinate Note A (Prime+1%) - - - - 3,002,000 - 3,002,000
Other Installment Loans (8% to 9%) 315,000 9% - - - - 315,000
---------- ---------- ---------- ------------
$ 5,288,000 $ 18,000 $ 20,493,000 $ 25,799,000
========== ========== ========== ============
Prior to the Payments, the Tender and the First Deposit during the year ended December 31, 2000, the A Term Loan, B Term Loan
and C Term Loan were to bear interest at 15%, 17% and 18% in 2000, 2001 and 2002, respectively, except for $4,318,000 of the
B Term Loan as of December 31, 1999 which was to bear interest at 18%.
Due to covenant violations in 1999 and the fact that the
Partnership intends to pay off all the existing debt at December 31,
2000 with the First Deposit if the dispute with Varde is successfully
concluded, all amounts have been classified as current at December 31,
1999 and 2000 (see "Item 3. Legal Proceedings").
Given the financial condition of the Partnership as discussed in Note
1 of Notes to Financial Statements, and because quoted prices are not
readily obtainable, Management believes it is not practicable to
estimate the fair value of its debt and credit facilities for 2000.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Partnership, together with
the reports thereon of DAVIS, KINARD & CO., P.C., and ERNST & YOUNG
LLP ("Ernst & Young") for 1999 and 1998, appear after the signature
pages. See the Index to Financial Statements at the beginning of the
Financial Statements.
The independent auditors reports for the years ended December 31,
2000 and 1999, include going concern paragraphs and reference
conditions that raise substantial doubt about the Partnership's
ability to continue as a going concern.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On September 26, 2000, Ernst & Young notified the Partnership of
their resignation as auditors of the Partnership, effective as of that
date. During the Partnership's two most recent fiscal years for the
period ended December 31, 1999 and the subsequently completed quarters
preceding the resignation of Ernst & Young, there were no
disagreements with Ernst & Young on any matter of accounting
principles 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 reports of Ernst &
Young on the Partnership's financial statements for 1998 and 1999 did
not contain an adverse opinion, a disclaimer of opinion and were not
qualified as to audit scope or accounting principles. The report of
Ernst & Young on the fiscal year ended December 31, 1999 was modified
as to uncertainty regarding the ability of the Partnership to continue
as a going concern.
PART III
Item 10. Directors and Executive Officers of the Partnership
Set forth below is certain information concerning the executive
officers and directors of the Managing General Partner as of December
31, 2000 who are responsible for the operations of the Partnership.
All directors of the Managing General Partner are elected by its
shareholders. All officers of the Managing General Partner serve at
the discretion of the board of directors of the Managing General
Partner.
POSITION WITH THE
NAME AGE MANAGING GENERAL PARTNER
____ ___ ________________________
E. Peter Corcoran 72 Chairman of the Board
Brad Stephens 50 Chief Executive Officer, Treasurer,
Assistant Secretary and Director
D. Wayne Malone 57 President, Chief Operating Officer,
Assistant Secretary and Director
Douglas Y. Bech 55 Director
Clark Johnson 55 Director
Robert Rice 78 Director
Craig Sincock 48 Director
Dave Caddell 51 Vice President, General Counsel
and Assistant Secretary
George Percival 41 Chief Financial Officer
E. Peter Corcoran. Mr. Corcoran served as a director of
Pride Pipeline Company, an affiliate of the Partnership, from
1985 to 1990 and became a director of the Managing General
Partner in 1990. In March 1994, he became Chairman. In 1991, Mr.
Corcoran retired from Lazard Freres & Co., having been a limited
partner thereof since 1983 and a general partner from 1968 until
1983. Mr. Corcoran serves as a member of the Audit and Conflicts
Committee of the Board of Directors of the Managing General
Partner.
Brad Stephens. Mr. Stephens served as Vice President of one
of the predecessor companies of the Partnership ("Predecessor
Companies") from 1988 until June 1989, when he became Executive
Vice President and Chief Financial Officer. In March 1994, he
became Chief Executive Officer. Prior to 1988, Mr. Stephens was
President of Independent Bankshares and First State Bank of
Abilene, where he had been employed since 1978. Mr. Stephens is
a Certified Public Accountant and prior to 1978, he was employed
by the accounting firm of Deloitte, Haskins & Sells.
D. Wayne Malone. Mr. Malone has been associated with the
Predecessor Companies since 1979 and has been an officer, director,
and shareholder of the various companies since 1981. Mr. Malone
became President of Pride Pipeline Company in 1980, President of Pride
Marketing of Texas, Inc. in 1984 in charge of retail, wholesale, and
aviation fuel sales, and President of a predecessor of Pride SGP in
March 1988, adding the responsibilities of refining and product
trucking. Mr. Malone also served as President of Carswell Pipeline
Company. In March 1994, he became President and Chief Operating
Officer.
Douglas Y. Bech. Mr. Bech became a director of the Managing
General Partner in 1993. He is Chairman and Chief Executive Officer
of Raintree Resorts International, Inc. and the founding partner of
Raintree Capital Company, L.L.C., a merchant banking firm. From 1994
to 1998, Mr. Bech was a partner in the law firm of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., and from 1993 to 1994 he was a partner
in the law firm of Gardere & Wynne, L.L.P. From 1970 to 1993, he was
associated with and a senior partner of the law firm of Andrews &
Kurth, L.L.P. Mr. Bech is also a director of Frontier Oil Corporation
and j2 Global Communications.com. Mr. Bech serves as a member of the
Compensation Committee of the Board of Directors of the Managing
General Partner.
Clark Johnson. Mr. Johnson became a director of the Managing
General Partner in 1993. He is President and CEO of Orion Refining
Corporation, an independent refining and marketing company. Prior to
his position with Orion Refining Corporation, he held the positions of
President and CEO of Frontier Refining and Marketing, Executive Vice
President and Chief Operations Officer of Kerr-McGee Refining
Corporation, and senior management positions with Coastal Corporation
and Tenneco Oil Company. Mr. Johnson serves as a member of the Audit
and Conflicts Committee and as Chairman of the Compensation Committee
of the Managing General Partner.
Robert Rice. Mr. Rice became a director of the Managing General
Partner in 1990. He is an independent investor. Mr. Rice serves as
Chairman of the Audit and Conflicts Committee and as a member of the
Compensation Committee of the Board of Directors of the Managing
General Partner.
Craig Sincock. Mr. Sincock became a director of the Managing
General Partner in February, 1994. He is President and a director of
Avfuel Corporation, a privately held corporation and independent
supplier of aviation fuel headquartered in Ann Arbor, Michigan. He
has been associated with Avfuel Corporation since the early 1980's and
is an active real estate investor. Mr. Sincock serves as a member of
the Audit and Conflicts Committee of the Board of Directors of the
Managing General Partner.
Dave Caddell. Mr. Caddell is Vice President and General Counsel.
He practiced general corporate law as a sole practitioner from
November 1992 to March 1994. Previously, he served as Vice President
and General Counsel of the Predecessor Companies and the Partnership
from 1985 to October 1992.
George Percival. Mr. Percival, a Certified Public Accountant,
came to the Partnership in June 1990, and has served as Chief
Financial Officer since August of 1994. Prior to joining the
Partnership, he was with Computer Language Research (d.b.a. Fast-Tax),
where he had been the Senior Tax Manager since 1987. Prior to that he
was employed by the accounting firms of Coopers & Lybrand (1984 to
1987), and Fox and Company (1981 to 1984).
Item 11. Executive Compensation
(a) Compensation of the General Partners. In respect of their
general partner interests in the Partnership, the General Partners are
allocated an aggregate of 2% of the income, gains, losses and
deductions arising from the Partnership's operations and receive an
aggregate of 2% of any distributions. For the year ended December 31,
2000, the General Partners did not receive any distributions in
respect of their 2% general partner interest in the Partnership. The
compensation set forth below under Officers' Compensation is in
addition to any 2% distribution to the General Partners. The General
Partners are not required to make any contributions to the capital of
the Partnership, beyond those made upon formation of the Partnership,
to maintain such 2% interest in allocations and distributions of the
Partnership. The General Partners do not receive, as general partners
of the Partnership, any compensation other than amounts attributable
to their 2% general partner interest in the Partnership.
Additionally, the Special General Partner is allocated a portion of
the income, gains, losses and deductions arising from the
Partnership's operations in respect of its Common Units. The Managing
General Partner did receive a $300,000 bonus related to the Crude
Gathering Sale in 1999 and a $1,989,000 bonus from the DESC Proceeds
(See "Item 3. Legal Proceedings" and "Benefit Plans").
For the year ended December 31, 2000, the Special General Partner
did not receive any distributions in respect of the Common Units. The
Partnership reimburses the General Partners for all their direct and
indirect costs (including general and administrative costs) allocable
to the Partnership. See "Item 13. Certain Relationships and Related
Transactions."
(b) Summary Officers' Compensation Table. The following table
sets forth certain compensation paid during fiscal 2000, 1999 and 1998
by the Partnership to the executive officers of the Managing General
Partner:
(The following table should be printed on 11" x 8.5" paper)
SUMMARY COMPENSATION TABLE
All Other
Year Salary Bonus Compensation
---- -------- ---------- ------------
Brad Stephens 2000 $225,000 $2,218,400 $ 35,700
Chief Executive Officer 1999 225,000 127,900 26,900
1998 225,000 12,500 27,300
D. Wayne Malone 2000 225,000 2,218,400 35,900
Chief Operating Officer 1999 225,000 127,900 26,900
1998 225,000 12,500 27,300
Dave Caddell 2000 165,000 1,293,100 31,900
Vice President/General 1999 165,000 67,900 26,700
Counsel 1998 165,000 10,000 27,200
George Percival 2000 115,000 686,600 8,000
Chief Financial Officer 1999 115,000 40,000 4,600
1998 115,000 20,000 4,900
In this column is the Partnership's contribution to the Section 401(k) Plan for each officer,
reimbursement of income taxes on certain perquisites and directors and advisor fees for Messrs.
Stephens, Malone and Caddell. See "Benefit Plans - Section 401(k) Plan" and "Compensation of
Directors" below.
In connection with the Crude Gathering Sale, the Managing General Partner was paid a $300,000
bonus. Subsequently, the Managing General Partner paid Messrs. Caddell and Percival a bonus in
the amount of $18,700 and $30,000, respectively, and a cash distribution to Messrs. Corcoran,
Stephens, Malone and Caddell in the amount of $16,300, $97,900, $97,900 and $39,200,
respectively. Messrs. Stephens, Malone, Caddell and Percival also received a bonus of $30,000,
$30,000, $10,000 and $10,000, respectively, in February 2000, which was accrued as of December
31, 1999, related to meeting certain expense reduction goals.
Under the management bonus plan, which bases such bonuses on cash flow of the Partnership
including litigation proceeds, Messrs. Stephens, Malone, Caddell and Percival and the Managing
General Partner were paid bonuses of $1,716,800, $1,716,800, $981,100, $490,500 and $1,989,600,
respectively, during the year ended December 31, 2000 (see "Benefit Plans"). The Partnership
also paid payroll taxes of $71,600 on such bonuses. The total bonus paid by the Partnership
including taxes were $6,967,000. Subsequently, the Managing General Partner paid Messrs.
Stephens, Malone, Caddell and Percival bonuses in the amount of $97,300, $97,300, $150,400 and
$196,100 respectively, plus payroll taxes of $7,800 also in the year ended December 31, 2000.
The Managing General Partner also paid a cash distribution to Messrs. Corcoran, Stephens,
Malone and Caddell in the amount of $67,400, $404,300, $404,300 and $161,700, respectively.
(c) Benefit Plans. In order to attract, retain and motivate
officers and other employees who provide administrative and managerial
services, the Partnership provides incentives for key executives
employed by the Partnership through an Annual Incentive Plan. The
Annual Incentive Plan was originally proposed in 1996 by the
Compensation Committee, which is comprised of outside directors, and
was approved by the Board in 1996. The Plan now provides for certain
key executives to share in a bonus pool which varies in size with the
Partnership's operating income plus depreciation, calculated after
bonus accrual, after payments under the Partnership's unit
appreciation plan, and after proceeds of litigation, to the extent not
otherwise included in operating income ("Cash Flow"). Provided that
Cash Flow exceeds $2 million, the key executive bonus pool includes 8%
of an amount equal to the Partnership's first $2 million of Cash Flow
in excess of $2 million, plus 12% of the next $4 million of Cash Flow,
plus 15% of any Cash Flow in excess of $8 million. The Partnership
paid Bonuses of $6,967,000 under this plan for the year ended December
31, 2000.
Unit Appreciation Rights. During 1996, the Partnership
implemented a Unit Appreciation Rights Plan for officers and key
employees. Under the plan, individual employees can be granted UARs
whereby a holder of the UARs is entitled to receive in cash or in
Common Units the increase, if any, between the exercise price, as
determined by the board of directors of the Managing General Partner
at the date of grant, and the fair market value on the exercise date.
The employees awarded and the number of UARs awarded to the employees
are subject to the discretion of the board of directors of the
Managing General Partner. The term of all awards is ten years from
the grant date. It is anticipated that UARs aggregating approximately
10% of the total Common Units will be reserved for issuance to key
employees. However, no Common Units are expected to be issued under
this plan.
On December 9, 1996, four officers and twelve employees were
awarded a total of 292,760 UARs at an exercise price of $3.75 per
unit. Because the fair market value of the UARs did not exceed the
exercise price at December 9, 1996, no compensation expense was
accrued. Effective December 31, 1997, the number of UARs was
increased to 299,996, reallocated among four officers and eleven
employees, and the exercise price was reduced to $1.94 per unit. The
UARs of eight employees were terminated in 1999 and 2000 thus reducing
the total outstanding UARs to the officers and employees to 207,604 at
December 31, 2000. A one-time award of 70,000 UARs was made in 1996
to five non-employee directors at an exercise price of $3.75 which
were fully vested on December 31, 1997. Effective December 31, 1997,
the exercise price was amended and reduced to $1.94 per unit. The
UARs were fully vested on December 31, 1998; however, none have been
exercised as of December 31, 2000.
Section 401(k) Plan. The Pride Employees' 401(k) Retirement Plan
and Trust ("Plan") is a defined contribution plan covering
substantially all full-time employees. Under the Plan, the
Partnership must make a mandatory contribution each year equal to 3%
of a participant's compensation and may make discretionary matching
contributions of up to an additional 3% of a participant's
compensation depending on the Partnership's cash flow for such year.
The participant's contribution to the plan may not exceed the
limitation as outlined under Internal Revenue Code section 402(g).
The Partnership's contributions vest over a seven-year period, subject
to immediate vesting upon retirement. The Summary Compensation Table
above includes amounts contributed to the plan by the Partnership on
behalf of the four most highly compensated executive officers in the
column titled "All Other Compensation."
The Partnership also has in effect, for the benefit of its
employees, a Long-term Disability Plan, a Safety Incentive Plan,
Accidental Death and Dismemberment Insurance, Life Insurance, Group
Hospitalization Insurance, Dental Plan, Cancer Plan, Medical
Reimbursement Plan and Dependent Care Plan.
(d) Compensation of Directors. The Chairman of the Managing
General Partner receives an annual retainer of $42,000, $2,000 for
each board meeting attended and is reimbursed for travel and lodging
expenses incurred to attend board meetings. Members of the board of
directors of the Managing General Partner receive an annual retainer
of $12,000, $2,000 for each board meeting attended and are reimbursed
for travel and lodging expenses incurred to attend board meetings.
Dave Caddell, an advisor to the Board of Directors of the Managing
General Partner, receives an annual retainer of $12,000, $2,000 for
each board meeting attended and is reimbursed for travel and lodging
expenses to attend board meetings. Directors have also received UARs
as discussed under Benefit Plans.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a) Security Ownership of Certain Beneficial Owners as of March 30,
2001.
The following table sets forth certain information with respect
to each person known by the Partnership to own beneficially 5% or more
of the Common Units as of March 30, 2001.
Percent
of
Title of Class Name and Address Amount Class
______________ ________________ ______ _______
Common Units Brad Stephens 378,000 7.6%
1209 North Fourth Street
Abilene, TX 79601
Common Units Wayne Malone 340,635 6.9%
1209 North Fourth Street
Abilene, TX 79601
Common Units Pride SGP, Inc. 250,000 5.1%
1209 North Fourth Street
Abilene, TX 79601
Common Units Varde Partners, Inc. 1,513,000
3600 West 80th Street
Suite 425
Minneapolis, MN 55431
[FN]
The percentages for Messrs. Stephens and Malone represent the
securities they hold directly. In addition, they have an interest in
the Common Units held by Pride SGP and the convertible securities held
by Varde.
In conjunction with Varde's assumption of the outstanding bank debt on
December 31, 1997, Varde holds the Redeemable Preferred Equity
including $9,322,000 of Series B Preferred Units and $5,000,000 of
Series C Preferred Units, which are convertible into 985,000 and
528,000 Common Units, respectively, which was after the expected
redemption with the Second Deposit and $1,000 of the First Deposit
prior to the Bankruptcy. If all such securities were converted as of
December 31, 2000, such 1,513,000 Common Units would represent 23.4%
of the 6,463,000 potentially outstanding Common Units as a result of
the conversion of all convertible securities. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity."
b) Security Ownership of Management
The following table sets forth certain information, as of March
30, 2001, concerning the beneficial ownership of Common Units by each
director and officer of the Managing General Partner and by all
directors and officers of the Managing General Partner as a group.
The table does not reflect the various securities assigned to
Management by Varde effective December 30, 1997 or the loan made by
Management during the year ended December 31, 2000 (see "Item 13.
Certain Relationships and Related Transactions").
Percentage of
Name Number of Common Units Class
- ---- ---------------------- -------------
E. Peter Corcoran - -
Brad Stephens 378,000 7.6%
D. Wayne Malone 340,635 6.9%
Douglas Y. Bech 300
Clark Johnson - -
Robert Rice - -
Craig Sincock - -
Dave Caddell 186,000 3.8%
George Percival 93,000 1.9%
------- -----
All directors and
officers as a group
(9 persons) 997,935 20.2%
======= =====
[FN]
Unless otherwise indicated, the persons named above have sole voting
and investment power over the Common Units reported.
This director of the Managing General Partners owned beneficially, as
of March 30, 2001, less than 1% of the Common Units outstanding on
such date.
The foregoing does not include any Common Units which would
be obtained by Management as a consequence of their purchase of an
interest from Varde in the B Term Note, C Term Loan, Subordinate Note
A, Series B Preferred Units, Series C Preferred Units and Series D
Preferred Units. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity."
Item 13. Certain Relationships and Related Transactions
The Partnership is managed by the Managing General Partner
pursuant to the Partnership Agreement. See "Items 1. and 2. Business
and Properties - General" and "Item 11. Executive Compensation -
Compensation of the General Partners" for certain information related
to compensation and reimbursement of the General Partners. The
Special General Partner is beneficially owned approximately 18% by Mr.
Schumacher (a past officer and director of the Managing General
Partner), 11% by Mr. Jerry Namy (a business partner of
Mr. Schumacher), 10% by Mr. Malone, 7% by Mr. Stephens, 5% by Mr. T.M.
Broyles (a past officer of the Managing General Partner), 2% by Mr.
Caddell, 35% by trusts established for the relatives of certain
deceased members of management, and 12% by relatives of certain
deceased members of management. The Managing General Partner is
beneficially owned approximately 39% by Mr. Malone, 39% by Mr.
Stephens, 16% by Mr. Caddell, and 6% by Mr. Corcoran.
Prior to the Crude Gathering Sale, the Partnership had an
agreement with Pride SGP to lease defined segments of the Crude
Gathering System. As consideration for this lease, the Partnership
agreed to perform all routine and emergency maintenance and repair
operations to the pipelines. The value of such services was
approximately $300,000 annually. In addition, the Partnership paid
the taxes, insurance, and other costs. Rentals accruing to Pride SGP
from the Partnership for the years ended December 31, 1999 and 1998
totaled approximately $300,000 and $400,000, respectively, for the
lease of the pipeline and are included in income (loss) from
discontinued operations in the statements of operations. For certain
periods between August 1995 and December 1997, payments to Pride SGP
were suspended pursuant to the terms of an amendment to the then
existing credit agreement. Beginning January 1, 1999, rental payments
to Pride SGP were suspended again. The lease agreement with Pride SGP
was not entered into on an arm's-length basis. While Management was
not able to determine whether the terms of the lease were comparable
to those which could have been obtained by unaffiliated parties,
Management believed such terms were fair and reasonable given the
importance to the Partnership of the Hearne to Comyn pipeline segment
which enabled the Partnership to gather and transport a greater supply
of high quality crude oil for sale to other refiners.
Pride SGP made two unsecured loans to the Partnership on March
26, 1993 and September 7, 1995 in the aggregate principal amount of
$2,450,000 and required the Partnership to pay interest only during
the term of such loans. The loans were used to fund working capital.
Beginning the latter part of 1995, the Partnership ceased interest
payments on the loans to Pride SGP in accordance with an amendment to
the then existing credit agreement. On December 31, 1997, the two
unsecured loans were converted into the Series E Preferred Units of
$2,000,000 and the Series F Preferred Units of $450,000. The Series E
Preferred Units were convertible into 317,000 Common Units prior to
the exchange discussed in the next paragraph.
In connection with the Crude Gathering Sale, Pride SGP exchanged
(a) the pipeline mentioned above, (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
in the face amount of $2,000,000 held by Pride SGP, and (e) the 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 Subordinated Preferred
Units in the face amount of $3,144,000.
The Partnership utilizes an airplane from time to time, as
needed, on a per hour market rate basis from an entity controlled by
Messrs. Malone and Stephens. Payments to this entity totaled $79,000,
$70,000 and $70,000, during 2000, 1999 and 1998, respectively.
The Partnership leases property from a relative of Mr. Stephens.
Lease payments were approximately $41,000, $40,000 and $40,000 in
2000, 1999 and 1998, respectively.
The Managing General Partner has a 1.9% interest in the income
and cash distributions of the Partnership, subject to certain
adjustments. 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, $3,144,000 in Subordinate Preferred
Units, and a 4.9% limited partner interest in the Partnership (See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition - Financial Resources
and Liquidity"). Compensation of directors and officers of the
Managing General Partner 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 1, 2000, the Managing General Partner of the
Partnership exercised a call option and purchased 930,000 Common Units
of the Partnership for $251,000. The Managing General Partner of the
Partnership paid $150,000 on July 25, 2000 to J-Hawk Corporation for
the call option. In January, 2001, the Managing General Partner sold
95,000 of those Common Units to certain members of Management and
distributed the remaining 835,000 Common Units it held to its
shareholders (see "Item 12. Security Ownership of Certain Beneficial
Owners and Management - Security Ownership of Management")
The Common 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.
On December 31, 1997, 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 Preferred Units, (v) Series C Preferred Units and (vi) Series
D Preferred Units. 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 disputes this position and refuses to request the
Partnership to issue the securities.
Varde and Management of the Managing General Partner have the right
to receive a total of up to 23.4% of the Partnership's Common Units,
through the conversion of the Series B Preferred Units and Series C
Preferred Units as described in the Partnership's 1996 consent
solicitation. See "Item 7. Management's Discussion and Analysis of
Operations and Financial Condition - Financial Condition - Financial
Resources and Liquidity."
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds (see "Item 3. Legal Proceedings"). Because of these
constraints, Management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the Bonuses paid to Management as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000. The Partnership had drawn up to
$1,990,000 during the year ended December 31, 2000; however, the
Partnership repaid the note on November 15, 2000, and the loan balance
was zero at year end. Such note is secured by the assets of the
Partnership. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding
during the year ended December 31, 2000. No further advances are
expected under this facility.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements and (2) Financial Statement
Schedules: See Index to Financial Statements after the signatures
pages for financial statements filed as a part of this Report.
(3) Exhibits: See Index to Exhibits after the Financial
Statement for a description of the exhibits filed as a part of this
Report.
(b) Reports on Form 8-K filed during the quarter ended
December 31, 2000:
None
All schedules are omitted because they are not applicable or the
required information is shown elsewhere in this report.
SIGNATURES
Pride Companies, L.P., pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, 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 Managing General Partner
By: /s/Brad Stephens
Chief Executive Officer, Treasurer, and Director
DATED: April 16, 2001
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Brad Stephens
and D. Wayne Malone and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any or all amendments in connection
herewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report and power of attorney has been signed below
by the following persons on behalf of the Partnership and in the
capacities and on the date indicated.
PRIDE REFINING, INC.
Signature Title Date
_________ _____ ____
/s/E. Peter Corcoran Chairman and Director April 16, 2001
/s/Brad Stephens Chief Executive Officer, April 16, 2001
Treasurer, and Director
/s/D. Wayne Malone President, Chief Operating April 16, 2001
Officer, and Director
/s/Douglas Y. Bech Director April 16, 2001
/s/Clark Johnson Director April 16, 2001
/s/Robert Rice Director April 16, 2001
/s/Craig Sincock Director April 16, 2001
/s/Dave Caddell Vice President and April 16, 2001
General Counsel
/s/George Percival Chief Financial Officer April 16, 2001
(Principal Financial Officer
and Accounting Officer)
INDEX TO FINANCIAL STATEMENTS
Report of Davis, Kinard & Co., P.C., Independent Auditors
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets at December 31, 2000 and 1999
Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Statements of Changes in Partners' Capital (Deficiency)
for the years ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Financial Statements
INDEPENDENT AUDITORS REPORT
The Board of Directors of the
Managing General Partner
We have audited the accompanying balance sheet of Pride Companies,
L.P. (the "Partnership") as of December 31, 2000, and the related
statements of operations, changes in partners' capital (deficiency),
and cash flows for the year then ended. These financial statements
are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pride
Companies, L.P. as of December 31, 2000, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that
Pride Companies, L.P. will continue as a going concern. As more fully
described in Note 1, the Partnership is involved in significant
litigation with its primary lender which could have a material adverse
effect on the Partnership's financial position or results of
operations and resulted in the filing of a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code on
January 17, 2001. The Partnership was authorized to continue managing
and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. These conditions
raise substantial doubt about the Partnership's ability to continue as
a going concern. Management's plans regarding those matters also are
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DAVIS, KINARD & CO., P.C.
Abilene, Texas
February 19, 2001.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors of the
Managing General Partner
We have audited the accompanying balance sheet of Pride Companies,
L.P. (the "Partnership") as of December 31, 1999, and the related
statements of operations, changes in partners' capital (deficiency),
and cash flows for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pride
Companies, L.P. at December 31, 1999, and the results of its
operations and its cash flows for each of the two years in the period
ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming
Pride Companies, L.P. will continue as a going concern. As more fully
described in Note 1, the Partnership has incurred operating losses and
has not complied with certain covenants of loan agreements with
lenders. These conditions raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible
future effects of recoverability and classification of assets or the
amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Fort Worth, Texas
February 11, 2000.
BALANCE SHEETS
PRIDE COMPANIES, L.P.
At December 31, 2000 and 1999
(In thousands, except unit amounts)
2000 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents--Note 2 $ 6,178 $ 16,018
Restricted cash--Note 2 17,634 235
Accounts receivable, less allowance
for doubtful accounts of $227 and
$99 for 2000 and 1999, respectively
--Note 6 12,005 6,513
Inventories--Note 2 107 180
Prepaid expenses 500 158
-------- --------
TOTAL CURRENT ASSETS 36,424 23,104
PROPERTY, PLANT AND EQUIPMENT, net--Note 3 15,301 16,621
ASSETS NO LONGER USED IN THE
BUSINESS--Note 3 4,235 4,235
DEFERRED FINANCING COSTS--Note 1 - 3,546
OTHER ASSETS 109 -
-------- --------
$ 56,069 $ 47,506
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 1,371 $ 16,714
Accrued payroll and related
benefits 150 552
Accrued taxes 1,982 2,659
Other accrued liabilities 1,845 724
Net current liabilities of
discontinued operations--Note 11 942 2,837
Current portion of long-term debt--Note 4 9,359 25,799
-------- --------
TOTAL CURRENT LIABILITIES 15,649 49,285
LONG-TERM DEBT--Note 4 - -
OTHER LONG-TERM LIABILITIES--Note 2 - 1,345
NET LONG-TERM LIABILITIES OF
DISCONTINUED OPERATIONS--Note 11 8,446 8,311
COMMITMENTS AND CONTINGENCIES--Note 5
REDEEMABLE PREFERRED EQUITY
--Note 8 17,079 17,079
PARTNERS' CAPITAL (DEFICIENCY)
Preferred Units to the Special
General Partner (3,145 and 3,145, units
authorized and 3,144 and 3,144, units
outstanding at December 31, 2000 and
1999, respectively)--Notes 5, 7 and 9 3,144 3,144
Common Units (5,275,000 units
authorized and 4,950,000 units
outstanding)--Notes 5 and 9 11,984 (30,557)
General partners' interest (233) (1,101)
-------- --------
$ 56,069 $ 47,506
======== ========
See accompanying notes.
STATEMENTS OF OPERATIONS
PRIDE COMPANIES, L.P.
Years ended December 31, 2000, 1999 and 1998
(In thousands, except per unit amounts)
2000 1999 1998
-------- -------- --------
Revenues:
Refinery and Products Marketing
Business--Note 6 $ 234,929 $ 130,604 $ 121,189
Net DESC proceeds--Note 5 36,257 - -
Cost of sales and operating expenses,
excluding depreciation--Note 7 230,144 126,424 115,454
Marketing, general and administrative
expenses--Note 7 3,406 3,700 3,761
Depreciation 1,467 1,496 1,422
--------- --------- ---------
OPERATING INCOME (LOSS) 36,169 (1,016) 552
Other income (expense):
Interest income 1,062 441 98
Net interest income from DESC--Note 5 12,389 - -
Interest expense (including interest
paid in kind of $1,673, $2,691
and $1,344 and increasing rate
accrued interest of ($1,345),
$315 and $1,030 in 2000, 1999 and
1998, respectively) (1,244) (5,095) (5,647)
Credit and loan fees (including
amortization and write-off of
$3,546, $1,761 and $1,323 and
credit and loan fees paid in
kind of $0, $100 and $150 in
2000, 1999 and 1998, respectively) (4,921) (2,080) (1,646)
Other - net (46) 64 224
--------- --------- ---------
7,240 (6,670) (6,971)
--------- --------- ---------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 43,409 (7,686) (6,419)
Discontinued operations:
Income (loss) from operations of
the Crude Gathering System prior
to August 1, 1999 - 269 (2,138)
Loss on disposal - (251) -
--------- --------- ---------
NET INCOME (LOSS) $ 43,409 $ (7,668) $ (8,557)
========= ========= =========
Basic income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 8.26 $ (1.89) $ (1.62)
Net income (loss) from discontinued
operations - - (.42)
--------- --------- ---------
Basic net income (loss) $ 8.26 $ (1.89) $ (2.04)
========= ========= =========
Diluted income (loss) per Common Unit:
Net income (loss) from continuing
operations $ 5.82 $ (1.89) $ (1.62)
Net income (loss) from discontinued
operations - - (.42)
--------- --------- ---------
Diluted net income (loss) $ 5.82 $ (1.89) $ (2.04)
========= ========= =========
Numerator for basic net earnings
per unit:
Net income (loss) from continuing
operations $ 43,409 $ (7,686) $ (6,419)
Preferred distributions (1,683) (1,854) (1,763)
--------- --------- ---------
Net income (loss) from continuing
operations less preferred
distributions 41,726 (9,540) (8,182)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 835 (191) (163)
--------- --------- ---------
Numerator for basic earnings per
unit from continuing operations $ 40,891 $ (9,349) $ (8,019)
========= ========= =========
Net income (loss) from discontinued
operations $ - $ 18 $ (2,138)
Net income (loss) from discontinued
operations allocable to 2%
general partner interest - - (43)
--------- --------- ---------
Numerator for basic earnings per
unit from discontinued
operations $ - $ 18 $ (2,095)
========= ========= =========
Numerator for basic
earnings per unit $ 40,891 $ (9,331) $ (10,114)
========= ========= =========
Numerator for diluted net earnings
per unit:
Net income (loss) from continuing
operations $ 43,409 $ (7,686) $ (6,419)
Preferred distributions (1,683) (1,854) (1,763)
Adjustments to compute diluted
net income (loss):
Subordinate Note A interest
expense 186 - -
Series B Preferred Unit
distributions 795 - -
Series C Preferred Unit
distributions 427 - -
--------- --------- ---------
Net income (loss) from continuing
operations less preferred
distributions 43,134 (9,540) (8,182)
Net income (loss) from continuing
operations allocable to 2%
general partner interest 863 (191) (163)
--------- --------- ---------
Numerator for diluted earnings per
unit from continuing operations $ 42,271 $ (9,349) $ (8,019)
========= ========= =========
Net income (loss) from discontinued
operations $ - $ 18 $ (2,138)
Net income (loss) from discontinued
operations allocable to 2%
general partner interest - - (43)
--------- --------- ---------
Numerator for diluted earnings
per unit from discontinued
operations $ - $ 18 $ (2,095)
========= ========= =========
Numerator for diluted
earnings per unit $ 42,271 $ (9,331) $ (10,114)
========= ========= =========
Denominator:
Denominator for basic
earnings per unit 4,950 4,950 4,950
========= ========= =========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A 292 - -
Series B Preferred Units 1,315 - -
Series C Preferred Units 705 - -
--------- --------- ---------
Total adjustments 2,312 - -
--------- --------- ---------
Denominator for diluted
earnings per unit 7,262 4,950 4,950
========= ========= =========
See accompanying notes.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIENCY)
PRIDE COMPANIES, L.P.
Years ended December 31, 2000, 1999 and 1998
(In thousands)
General
Preferred Common Partners'
Units Units Interest Total
--------- --------- --------- ---------
Balance at December 31, 1997 $ - $ (14,656) $ (777) $ (15,433)
Net loss - (8,386) (171) (8,557)
--------- --------- --------- ---------
Balance at December 31, 1998 - (23,042) (948) (23,990)
Issuance of Preferred Units
Notes 7 and 9 3,144 - - 3,144
Net loss - (7,515) (153) (7,668)
--------- --------- --------- ---------
Balance at December 31, 1999 3,144 (30,557) (1,101) (28,514)
Net income - 42,541 868 43,409
--------- --------- --------- ---------
Balance at December 31, 2000 $ 3,144 $ 11,984 $ (233) $ 14,895
========= ========= ========= =========
See accompanying notes.
STATEMENTS OF CASH FLOWS
PRIDE COMPANIES, L.P.
Years ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 43,409 $ (7,668) $ (8,557)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 1,467 2,992 3,438
Amortization and write-off
of loan costs 3,546 1,761 1,323
Deferred tax benefit - (98) (110)
(Gain) loss on sale of property,
plant and equipment (49) 93 (223)
(Gain) on disposal of
discontinued operations - (1,226) -
Paid in kind interest and
credit and loan fees 1,673 2,791 1,494
Increasing rate accrued interest (1,345) 315 1,030
Lower of cost or market adjustment - (1,197) 1,197
Net effect of changes in:
Restricted cash (17,399) 418 (28)
Accounts receivable (5,229) 3,276 4,491
Inventories 73 2,228 4,257
Prepaid expenses (342) 546 76
Accounts payable and other
long-term liabilities (16,989) 2,737 (9,902)
Accrued liabilities (378) (929) (3,205)
-------- -------- --------
Total adjustments (34,972) 13,707 3,838
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 8,437 6,039 (4,719)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (202) (1,245) (1,541)
Proceeds from asset disposals 104 391 3,453
Transaction with the Special
General Partner - (2,000) -
Transaction and exit costs related
to sale of discontinued operations - (2,040) -
Proceeds from sale of
discontinued operations - 29,595 -
Other (66) 23 (8)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (164) 24,724 1,904
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt and credit
facilities 2,014 17,025 87,247
Payments on debt and credit
facilities (20,127) (33,779) (86,816)
Deferred financing costs - - (60)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (18,113) (16,754) 371
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (9,840) 14,009 (2,444)
Cash and cash equivalents at
beginning of the period 16,018 2,009 4,453
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 6,178 $ 16,018 $ 2,009
======== ======== ========
See accompanying notes.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Organization and Nature of Operations: 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"). See Notes 4 and 11. Accordingly, the
Crude Gathering System has been presented as discontinued operations
for all periods.
The Products Marketing Business operates the Products Terminals
and one common carrier products pipeline, that originates at the
Abilene Terminal and terminates at the San Angelo Terminal (the "San
Angelo Pipeline"). The Partnership's operations are conducted
primarily in the State of Texas.
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in and serves as the
managing general partner of the Partnership. The Partnership
succeeded in January 1990 to the business of Pride SGP, Inc. ("Special
General Partner" or "Pride SGP") which owns a 0.1% general partner
interest in and serves as the special general partner of the
Partnership. The Managing General Partner and 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 of $3,144,000 (see Note 9) and a 4.9%
interest in the Partnership through ownership of common limited
partner units ("Common Units"). Management which is comprised of the
officers of the Managing General Partner (the "Management")
collectively own a 19.8% interest in the Partnership through their
ownership of Common Units. Public ownership represented by the
remaining Common Units is 73.3%. In accordance with the Third Amended
and Restated Agreement of Limited Partnership of Pride Companies, L.P.
(the "Partnership Agreement"), the Managing General Partner conducts,
directs and exercises control over substantially all of the activities
of 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.
The financial statements of the Partnership include all of its
wholly owned subsidiaries including partnership interests. All
significant intercompany transactions have been eliminated.
Going Concern and Operating Environment: Certain key events beginning
in 1997 are key to evaluating the Partnership's current operating
environment.
1997 Restructuring and Recapitalization: Effective December 31, 1997,
Varde Partners, Inc. ("Varde") purchased and assumed the then existing
lenders' rights and obligations under the Partnership's outstanding
bank debt ("Old 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 on
December 31, 1997. Pride SGP converted two notes into redeemable
preferred equity securities (see Note 7). The Partnership incurred
costs of $60,000 and $6,570,000 in 1998 and 1997, respectively
(including $3,257,000 in noncash fees in 1997), related to the
restructuring and recapitalization, which are included in deferred
financing costs. During 2000, 1999 and 1998, the Partnership expensed
$3,546,000 (of which $990,000 was amortization of deferred financing
costs and $2,556,000 of deferred financing costs were written off as a
result of retiring or tendering payment on Varde's debt), $1,761,000
(all of which was amortization of the deferred financing costs), and
$1,325,000 (of which $1,323,000 was amortization of the deferred
financing costs), respectively, related to the restructuring and
recapitalization.
In addition to the assumption by Varde of the Old Bank Debt,
Varde loaned the Partnership an additional $4,693,000 for working
capital purposes, including fees and costs associated with the
restructuring and recapitalization. After completion of the
restructuring and recapitalization, Varde held the following
securities, in order of seniority:
(i) Series A Term Loan ("A Term Loan") maturing December 31,
2002;
(ii) Series B Term Loan ("B Term Loan") maturing December 31,
2002 in the original amount of $9,500,000;
(iii) Series C Term Loan ("C Term Loan") maturing December 31,
2002 in the original amount of $4,689,000;
(iv) Series A Unsecured Loan ("Subordinate Note A") in the
original amount of $2,500,000 maturing December 31, 2002;
(v) Series B Cumulative Convertible Preferred Units ("Series
B Preferred Units") in the amount of $9,322,000, which
are subject to mandatory redemption at December 31, 2002;
(vi) Series C Cumulative Convertible Preferred Units ("Series
C Preferred Units") in the amount of $5,000,000, which
are subject to mandatory redemption at December 31, 2002,
and
(vii) Series D Cumulative Preferred Units ("Series D Preferred
Units") in the amount of $2,757,000 which are subject to
mandatory redemption at December 31, 2002.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
are collectively referred to as the debt ("Debt") (see Note 4).
The Series B Preferred units, Series C Preferred Units and Series
D Preferred Units are collectively referred to as redeemable preferred
equity ("Redeemable Preferred Equity") (see Note 8).
On December 31, 1997, 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 Preferred Units, (v) Series C Preferred Units
and (vi) Series D Preferred Units. 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 5), 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 disputes this position and
refuses to request the Partnership to issue the securities (see "2001
Bankruptcy Filing").
The Partnership or Management had 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. Such call
lapsed December 31, 2000. The securities held by Varde have certain
antidilution provisions and registration rights.
1999 Sale of Operating Assets Utilized by the Crude Gathering System:
As previously discussed, the Partnership sold the operating assets of
the Crude Gathering System to Sun on October 1, 1999. See Notes 4 and
11. The net proceeds were applied as follows: $15,000,000 principal
payment on the A Term Loan (see Note 4), $2,000,000 was paid to Pride
SGP as part of the exchange (see Note 7), and $10,007,000 net of
transaction and exit costs of $2,588,000 was retained for working
capital. This sale resulted in a taxable loss allocable to the
unitholders. None of the proceeds are available for distribution to
unitholders.
In connection with the Crude Gathering Sale on October 1, 1999,
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 Cumulative Convertible
Preferred Units ("Series E Preferred Units") in the face amount of
$2,000,000 held by Pride SGP, and (e) the Series F Cumulative
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) a newly
issued Series G Preferred Units ("Subordinated Preferred Units") in
the face amount of $3,144,000 (see Note 9).
Operating Losses: Excluding the income resulting from the DESC Claim
(see below and Note 5), the Partnership has continually incurred
operating losses. Operating results prior to the year ended December
31, 2000 suffered as a result of increasing competition, depressed
operating margins and higher financing costs. Income from continuing
operations in 2000 increased to $43,409,000, from a net loss from
continuing operations of $7,686,000 as a result of DESC Income (see
below) of $48,646,000. Excluding the DESC Income and the write-off of
deferred financing costs of $2,556,000, net loss from continuing
operations would have been $2,681,000 for the year ended December 31,
2000. The deferred financing costs were written off as a result of
retiring part of the Debt with the Net DESC Proceeds (see below) and
tendering payment on the remaining Varde Debt (see "2001 Bankruptcy
Filing" below).
As a result of the operating losses at December 31, 1999 and
because the debt covenants for the year ended December 31, 1999 were
based on the combined results of the Products Marketing Business and
Crude Gathering System, the Partnership was not in compliance with its
debt covenants and all the debt was classified as current. Further,
the lenders had the right to refuse additional advances under the
revolving facilities as well as the right to accelerate the
Partnership's obligations.
2000 Collection on Judgment from the Government: For the year ended
December 31, 2000, the Partnership collected an award of $61,521,000
("DESC Proceeds") from the United States of America (the
"Government"), also referred to as the Defense Energy Support Center
("DESC"), related to underpayments for jet fuels purchased from the
Partnership and from that paid legal fees of $5,908,000 to the
Partnership's attorneys ("Legal Fees") and bonuses of $6,967,000
("Bonuses") to Management (see Note 5). The DESC Proceeds less the
Legal Fees and Bonuses are $48,646,000 ("DESC Income" or "Net DESC
Proceeds") of which $36,257,000 was included in operating income and
$12,389,000 was included in other income (see Note 5).
The Partnership planned on using the Net DESC Proceeds to retire
Varde's Debt, redeem the Redeemable Preferred Equity and provide
working capital. Out of the Net DESC Proceeds, the Partnership paid
$16,606,000 on its Debt and deposited $16,360,000 with the District
Court of Taylor County, Texas (the "Texas Court") pending resolution
of the Partnership's dispute with Varde (see "2001 Bankruptcy
Filing"). The remaining $15,680,000 of the Net DESC Proceeds as
permitted by the Bankruptcy Court is being used for working capital.
None of the Net DESC Proceeds is available for distribution to common
unitholders.
2001 Bankruptcy Filing: On January 17, 2001, the Partnership filed a
voluntary petition under Chapter 11 of the Federal Bankruptcy Code
(the "Bankruptcy") in the Northern District of Texas, Abilene Division
(the "Bankruptcy Court"), and was authorized to continue managing and
operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. The filing was
necessitated by certain actions taken by Varde Partners, Inc.
("Varde") which is the Partnership's primary lender and also holds the
Redeemable Preferred Equity of $17,079,000(see Notes 4, 5 and 8).
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division, and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
Under the various loan documents with Varde, one-third of the
remaining DESC Proceeds after certain payments on the A Term Loan and
B Term Loan is required to be paid to Varde. The Partnership had
planned on eventually retiring all of Varde's Debt and Redeemable
Preferred Equity with the DESC Proceeds after a replacement working
capital facility was in place; however, 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 (see Note 4) as a
transaction fee rather than applying the Payments against the Debt and
Redeemable Preferred Equity. The Partnership believes 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 Redeemable Preferred Equity that it holds. However, Varde's
position is that since another loan document executed at the same time
as the credit agreement does not specifically require application of
the Varde One-Third to the Debt and Redeemable Preferred Equity that
the Varde One-Third should be treated as a transaction fee
("Transaction Fee"). The Partnership believes the two agreements can
be read together and are not inconsistent and that Varde must,
therefore, apply the Varde One-Third to its Debt and Redeemable
Preferred Equity.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before the 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
(after Legal Fees of $5,908,000) that the Partnership believes is
correct.
An adversary proceeding involving all of the contested issues
between Varde and the Partnership was completed on April 6, 2001. The
Partnership believes that if the Bankruptcy Court finds in favor of
the Partnership, that the Partnership will likely be able to pay all
of its creditors and emerge from Bankruptcy in a relatively short
period of time. However, if the Bankruptcy Court finds in favor of
Varde, the Partnership will unlikely be able to pay all of its
creditors in full and a negative ruling will cause further uncertainty
about the Partnership's future. The Partnership expects the
Bankruptcy Court to issue its ruling sometime after June 8, 2001,
after final briefs are filed.
Future Outlook: If the Partnership's interpretation of the loan
documents is correct and the Partnership emerges from Bankruptcy, then
the Partnership expects to retire the Varde Debt. In such event, the
Partnership believes it will have positive cash flow and net income
will be close to break even.
The Partnership's ability to improve 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 Government which began April 1, 2001
and ends March 31, 2002, the Partnership will supply approximately
32,850,000 gallons, which is a 37% decrease from the volumes that it
supplied under the contract, which began April 1, 2000 and ended March
31, 2001; however, margins under the new contract have improved from
last year's contract.
The Partnership has been able to achieve certain reductions in
operating expenses and marketing, general and administrative expenses
over recent years. The expenses of the Products Marketing Business
have been reduced through staff reductions and computer automation.
The ability to generate profits could be adversely affected if other
Gulf Coast refiners bring refined products into West Texas from the
Gulf Coast via pipeline.
Regardless of any changes made to the Partnership operations, the
Partnership will need a new working capital facility. There can be no
assurances that the Partnership will be successful in obtaining a new
working capital facility particularly in light of the Bankruptcy.
Management is also attempting to sell the idle refining equipment and
the Aledo pipeline to further increase working capital.
Also, the Partnership will have to receive approval from the
Bankruptcy Court for a plan of reorganization that allows it to pay
certain debt and preferred equity securities over an extended period
of time. There can be no assurance that the Bankruptcy Court will
approve such a plan.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: 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.
Revenue Recognition: Revenue is recognized from the sale of refined
products at the time of delivery to the customer. Transportation fees
are recognized when the refined products are delivered to the
contracted destination.
Net Income (Loss) Per Unit: Basic net income (loss) per Common Unit
is computed using the weighted average number of Common Units
outstanding. Diluted net income per Common Unit is computed by
adjusting the primary units outstanding and net income for the
potential dilutive effect of the conversion of the Subordinate Note A,
Series B Preferred Units and Series C Preferred Units (collectively
the "Convertible Securities") outstanding during the period and the
elimination of the related interest and distributions and the
potential effect of the exercise of officers and employees' unit
appreciation rights. When the effect of including the conversion of
the Convertible Securities, on diluted net income (loss) per unit, is
antidilutive, as was the case for the years ended December 31, 1999
and 1998, such Convertible Securities are not included in the
calculation of dilutive net income (loss) per unit. The unit
appreciation rights were antidilutive for the years ended December 31,
2000, 1999 and 1998.
Inventories: Inventories are stated at the lower of average cost or
market value.
Property, Plant and Equipment and Assets No Longer Used In The
Business: Property, plant and equipment is stated at cost.
Depreciation is computed by the straight-line method based upon the
estimated useful lives of the various assets (see Note 3).
Maintenance, repairs, minor renewals and replacements are charged
to expense when incurred. Betterments, major renewals and
replacements are capitalized. Repairs and maintenance expense for
continuing operations for the years ended December 31, 2000, 1999 and
1998 was $230,000, $589,000, and $822,000, respectively.
Assets no longer used in the business are stated at estimated fair
value. On March 22, 1998, the Partnership mothballed the refinery;
however, some refinery assets are still used in connection with the
Equilon Agreement. Accordingly, the Partnership evaluated the ongoing
value of the refinery assets that would no longer be used in the
business in accordance with Statement of Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("FAS 121"). Based on this evaluation, the
Partnership determined that assets with a carrying amount of
$47,353,000 were impaired and wrote them down by $40,000,000 to their
estimated fair value. Fair value was based on independent appraisals
discounted at a market rate of interest. The Partnership is in the
process of marketing these assets to potential buyers; however, there
can be no assurance that these efforts will be successful.
Other Long-Term Liabilities: At December 31, 1999, other long-term
liabilities consisted of interest accruals to Varde of $1,345,000 for
increasing rate accrued interest (see Note 4).
Income Taxes: As a limited partnership, the Partnership is not a
taxable entity for federal income tax purposes and any federal income
taxes are the direct responsibility of the individual partners.
Accordingly, no federal income tax provision is made in the
accompanying statement of operations related to the operations of the
Partnership itself. The Partnership's tax bases in assets and
liabilities are greater than the bases for financial reporting
purposes by approximately $5,693,000, at December 31, 2000. The
taxable income reported by the Partnership for the year ended December
31, 2000 is $39,359,000. The major reconciling items between the net
income for financial purposes and tax purposes are as follows:
depreciation for tax purposes is $2,531,000, greater than for
financial purposes, and accrued expenses for tax purposes is
$1,553,000 more than for financial purposes.
Deferred income taxes were previously provided for Pride Borger,
Inc., a corporate subsidiary, which was a separate taxable entity.
The subsidiary was disposed of as part of the sale of the Crude
Gathering System in 1999 and the tax effects are included in
discontinued operations.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
Retirement Plan: The Pride Employees' 401(k) Retirement Plan and
Trust ("Plan") is a defined contribution plan covering substantially
all
full-time employees. Under the Plan, the Partnership must make a
mandatory contribution equal to 3% of a participant's compensation and
may make discretionary matching contributions of up to an additional
3% of a participant's compensation depending on the Partnership's cash
flow for such year. The Partnership's contributions vest over a seven
year period, subject to immediate vesting upon retirement. Retirement
plan expense for continuing operations for the years ended December
31, 2000, 1999 and 1998 was $102,000, $0 and $72,000, respectively.
Incentive Compensation Plan: The Partnership has elected to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in
accounting for its Unit Appreciation Rights ("Rights"). Under APB 25,
if the exercise price of the Rights equals or exceeds the market of
the underlying units on the date of grant, no compensation expense is
recognized at the date of grant. To the extent the price of the
Partnership's units increase above that at the grant date, such excess
value to be paid upon exercise is charged to operations over the
respective vesting period.
Fair Value of Financial Instruments: The carrying amount of cash and
cash equivalents, receivables, and accounts payable approximates fair
value. Given the financial condition of the Partnership as discussed
in Note 1, and because quoted prices are not readily obtainable,
Management believes it is not practicable to estimate the fair value
of its debt and credit facilities.
Statements of Cash Flows: For purposes of the statements of cash
flows, Management considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Restrictions on Certain Cash Balances: The Partnership had
$16,751,000 (including accrued interest of $391,000) on deposit with
the Texas Court at December 31, 2000 in connection with the Varde
dispute (see Note 5), $754,000 (including accrued interest of $17,000)
invested in certificates of deposit to secure a letter of credit and
credit card payments at December 31, 2000, maintains a restricted
money market account with Alexander Insurance Group with a balance of
$59,000 and $165,000 at December 31, 2000 and 1999 respectively, and
$70,000 in escrow with American International Recovery at December 31,
2000 and 1999 as a condition of its insurance policies.
Changes in Presentation: Certain prior year amounts have been
reclassified to conform to the 2000 presentation.
Recent Accounting Standard: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), was issued. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that all
derivatives be recognized as either assets or liabilities in the
statement of financial position and that those instruments be measured
at fair value. The Company adopted SFAS 133 on January 1, 2001. The
statement did not have a significant impact on its financial position
or results of operation.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT AND ASSETS NO LONGER USED IN
THE BUSINESS
A summary of property, plant and equipment at December 31 follows
(in
thousands):
Estimated
Useful
2000 1999
Lives
-------- --------
- ----------
Terminal and storage facilities $ 7,205 $ 7,027 4-30
years
Pipelines and related facilities 11,503 11,495 5-30
years
Transportation and terminal equipment 8,668 8,510 3-5
years
Marketing facilities and equipment 803 978 3-5
years
Administrative facilities and equipment 2,444 2,317 2-5
years
Construction-in-progress 43 342
-------- --------
30,666 30,669
Less accumulated depreciation 15,365 14,048
-------- --------
$ 15,301 $ 16,621
======== ========
NOTE 4--DEBT AND CREDIT FACILITIES
On December 31, 1997, Varde purchased and assumed the then
existing lenders' rights and obligations under the Partnership's
outstanding bank debt (see Note 1). In conjunction with Varde's
purchase and assumption of the lenders' rights and obligations under
such bank debt, 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 is in the
process of closing its bank accounts with BankBoston.
During the third quarter of 2000, the Partnership established a
relationship 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 was 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 5) (the "Prepayments"). On receipt of proceeds
from legal claims, the loan documents require that the Partnership
must first retire the A Term Loan which with accrued interest was
$3,657,000 as of July 25, 2000 and pay $5,000,000 towards the B Term
Loan which with accrued interest was $12,949,000 as of July 25, 2000.
The amounts outstanding on the A Term Loan and B Term Loan shown above
were before the three payments on July 25, 2000 and July 26, 2000 to
Varde totaling $16,606,000 (the "Payments") from the DESC Proceeds.
In addition, Varde also receives one-third of the remaining DESC
Proceeds after reduction for the $8,657,000 applied to the A Term Loan
and B Term Loan mentioned above ("Varde One-Third"). However, as a
result of the dispute with Varde, the Partnership did not pay the
entire amount of the Varde One-Third and instead deposited $16,360,000
with the Texas Court to cover the remaining Varde One-Third plus
retire additional securities with a portion of the Partnership's two-
thirds. The Partnership believes it is allowed to retain any
remaining DESC Proceeds after the payment of the Varde One-Third;
however, the Partnership used some of the remaining proceeds to
further reduce Varde securities to reduce interest expense and
accumulated arrearages. As discussed in Note 5, there is a dispute
about whether the DESC Proceeds are also reduced by the Legal Fees
paid to the Partnership's attorneys in calculating the Varde One-
Third. Under the Varde credit agreement, the Partnership believes the
Varde One-Third must be applied to Varde's Debt and Redeemable
Preferred Equity. Therefore, the Partnership believes that the
Payments of $16,606,000 retired the A Term Loan and B Term Loan. See
Note 5 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 December 31, 2000. The Partnership began accruing interest
expense at the statutory rate of 6% ("Statutory Rate") on the C Term
Loan and $2,000,000 of the Subordinate Note A on July 27, 2000 as a
result of the tender by the Partnership to Varde of $8,171,000 (the
"Tender"). The Tender required that Varde had to apply the Tender in
accordance with the Partnership's interpretation of the credit
agreement. Varde refused the Tender. When the Partnership deposited
$9,360,000 in the Texas Court on August 23, 2000 (the "First
Deposit"), the Partnership began accruing interest expense at the
Statutory Rate 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 on July 27, 2000. The
Partnership believes the First Deposit will eventually be used to
retire the C Term Loan and Subordinate Note A. The outstanding
balance of $9,359,000 on the C Term Loan and Subordinate Note A are
included in current liabilities at December 31, 2000. The Partnership
accrued total interest expense of $236,000 at the Statutory Rate on
$6,171,000 of the C Term Loan and $2,000,000 of the Subordinate Note A
from July 27, 2000 to December 31, 2000 and on $1,188,000 of the
Subordinate Note A from August 23, 2000 to December 31, 2000 and
included the accrual in other accrued liabilities. See Note 5 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 Texas Court (the "Second Deposit"). The Partnership believed the
Second Deposit and $1,000 of the First Deposit should be used to
redeem a portion of the Redeemable Preferred Equity along with paying
accumulated arrearages on those securities. However, due to the
Bankruptcy, such redemption using the Second Deposit and $1,000 of the
First Deposit is unlikely. The First Deposit and Second Deposit are
collectively referred to as the deposits (the "Deposits"). For the
year ended December 31, 2000, the Deposits with the Texas Court
accrued interest income of $391,000.
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 Redeemable Preferred Equity 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 as of July 25, 2000 which was subject to
interest rates of 18% through maturity. As mentioned before, the
Partnership began accruing interest on the C Term Loan at the
Statutory Rate of 6% per annum after the Tender on July 27, 2000.
Prior to the Tender and the First Deposit which is expected to retire
the Subordinate Note A, such note was convertible into 504,000 Common
Units as of July 25, 2000 and bore interest at prime plus one percent.
The prime rate was 9.5% at December 31, 2000. After the Tender on
July 27, 2000 and the First Deposit on August 23, 2000, the
Partnership also began accruing interest expense on the Subordinate
Note A at the Statutory Rate of 6% per annum. See Note 5 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 for the years ended
December 31, 2000, 1999 and 1998 reflects the reversal of an accrual
of $1,345,000 and accruals of $315,000 and $1,030,000, 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 Redeemable Preferred Equity after the originally expected
application of the Second Deposit and $1,000 of the First Deposit
until the Partnership redeems such Redeemable Preferred Equity (see
Note 5).
From April 15, 1999 through January 2, 2001, the Partnership had
a $3,000,000 revolving credit facility with Varde ("Varde Revolver").
Advances under the Varde Revolver bore interest at 11% per annum,
payable monthly. The Partnership did not have any outstanding
borrowings under the Varde Revolver as of December 31, 2000.
Fees paid to Varde in the form of additional B Term Loans were
$150,000 in 1998 and $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 5 for discussion of dispute with Varde and Varde's interpretation
of the Varde loan documents.
The Partnership has to maintain compliance with certain financial
and other covenants, as defined in the credit agreement with Varde;
however, the Partnership feels it has defenses to alleged defaults
occurring after July 25, 2000. The Varde credit agreement contains
restrictive covenants including, among other things, restrictions on
additional indebtedness, commitments and payments thereon, sale of
assets and securities, 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 on receipt
of the DESC Proceeds (see Note 5). 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 on October
1, 1999 it was unlikely the Partnership could have complied with the
financial covenants during the year ended December 31, 2000 without
receipt of the DESC Proceeds. 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 has utilized 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 the Supreme Court of New York County, New York ("New York
Court") and subject to the supervision of the Bankruptcy Court (see
Note 5). Prior to the dispute with Varde and the Bankruptcy, the
Partnership had hoped to obtain a new working capital facility. Due
to the dispute with Varde and the Bankruptcy, it is unlikely a lender
will provide a replacement working capital facility until such dispute
is resolved and the Bankruptcy Court approves a plan of
reorganization. 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 and the Bankruptcy Court approves
a plan of reorganization. Substantially all of the Partnership's
assets are pledged as collateral to Varde in connection with the
credit agreement. See Note 5 for information on the dispute with
Varde and the potentially material adverse effects such dispute could
have on the Partnership's financial condition.
Varde 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, for not providing certain financial information, for the
engagement of independent certified public accountants without Varde's
consent, for failing to retire the Subordinate Note A and for failing
to redeem the Redeemable Preferred Equity which events occurred after
July 25, 2000. The Partnership believes it has complied with the
Varde One-Third requirement with the Tender and the Deposits. As
discussed in the preceding paragraph, the Partnership feels it has
defenses to the other alleged defaults occurring after July 25, 2000
(see Note 5).
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds (see Note 5). Because of these constraints,
Management agreed to extend a revolving loan to the Partnership of
$4,200,000 ("Management Revolver") from the Bonuses paid to Management
as a result of the successful litigation of the DESC Claim. The note
was executed September 18, 2000. The Partnership had drawn up to
$1,990,000 during the year ended December 31, 2000; however, the
Partnership repaid the note on November 15, 2000, and the loan balance
was zero at year end. Such note is secured by the assets of the
Partnership. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding
during the year ended December 31, 2000. No further advances are
expected under this facility.
Amounts outstanding under these credit facilities at December 31
(in thousands):
2000 1999
-------- --------
BankBoston Revolver $ - $ 18
Management Revolver - -
A Term Loan - 4,973
B Term Loan - 11,825
C Term Loan 6,171 5,666
Subordinate Note A 3,188 3,002
Other Installment Loans - 315
-------- --------
9,359 25,799
Less current portion 9,359 25,799
-------- --------
$ - $ -
======== ========
Interest paid (excluding interest on the note assumed by Sun) for
the years ended December 31, 2000, 1999 and 1998 was
$697,000,$2,040,000 and $3,274,000, respectively.
NOTE 5--COMMITMENTS AND CONTINGENCIES
At December 31, 2000, the Partnership is committed to operating
leases which require fixed monthly rentals for administrative office
space, transportation equipment, computers and related equipment and
other miscellaneous equipment, some of which contain residual value
guarantees. Excluding rentals accrued to Pride SGP prior to October 1,
1999 (see Note 7) for certain pipeline segments, rental expense for
the continuing operations for the years ended December 31, 2000, 1999
and 1998 was $163,000, $194,000 and $208,000, respectively. The
minimum future rentals under noncancellable operating leases at
December 31, 2000 are as follows (in thousands):
2001 $ 95
2002 85
2003 83
2004 66
2005 64
Thereafter -
-------
$ 393
=======
At December 31, 2000, Pride SGP held the Subordinate Preferred
Units in the face amount of $3,144,000 (see Note 9). The Subordinate
Preferred Units are subordinate to the Redeemable Preferred Equity
(see Notes 1 and 8) and at the Partnership's option may be redeemed on
the latter of the retirement of such Redeemable Preferred Equity or
October 1, 2004. The Subordinate 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 the Redeemable Preferred Equity held by Varde or
(ii) 10% per annum.
At December 31, 2000 and December 31, 1999, 4,950,000 Common Units
are outstanding, representing a 98% limited partner interest. Pride
SGP, Management and the public own 250,000, 998,000 and 3,702,000
Common Units, respectively.
Under the terms of the Partnership's loan agreement with Varde,
Varde restricted the payment of distributions to common unitholders
throughout the term of the loan documents. In addition the preferred
equity securities instruments also limit distributions to common
unitholders. Future distributions will be dependent on, among other
things, payment in full of the Varde Debt, the termination of the loan
documents and the redemption of all preferred equity securities.
At December 31, 2000 and after the previously expected redemption
with the Second Deposit and $1,000 of the First Deposit prior to the
Bankruptcy (see Note 8), the remaining 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.
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, the Bankruptcy and certain tax
issues 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 $30,000 and had accrued for this amount at
December 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim in
the United States Court of Federal Claims against the Government or
DESC, relating to erroneous pricing of jet 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 lawsuit
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 a transportation premium of
$22.3 million), plus statutory interest of $15,815,000 under the
Contract Disputes Act. The DESC Proceeds were $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 total Legal Fees to the
Partnership's attorneys of $5,908,000. On August 24, 2000, the
Partnership received an additional $15,815,000 which was for the
statutory interest on the judgment. The Partnership paid Bonuses
totaling $6,967,000 from the DESC Proceeds to Management. The
Partnership reported the $45,706,000 less Legal Fees of $4,339,000 and
Bonuses of $5,110,000 or a net of $36,257,000 in operating income for
the year ended December 31, 2000. The Partnership reported the other
$15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or
a net of $12,389,000 in other income for the year ended December 31,
2000.
The Partnership used the Net DESC Proceeds for the Payments of
$16,606,000 on the Varde Debt (see Note 4) and the Deposits of
$16,360,000 (see Note 4). The total of the Payments and the Deposits
is $32,966,000 (the "Disbursements"). The balance of the Net 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 and subject to the supervision of the Bankruptcy 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 Redeemable Preferred
Equity), Legal Fees and payments under the Partnership's bonus plan,
common unitholders were allocated income from the DESC Proceeds
without a corresponding distribution of cash to offset the tax
liability that arose from such income. The Partnership had originally
estimated that the net taxable income from the DESC Proceeds that
would be allocable to common unitholders would be approximately $41.0
million (or $8.28 per Common Unit). However, as a result of the
dispute with Varde, the net taxable income actually allocated to
common unitholders from the DESC Proceeds was $45,168,000 (or $9.12
per Common Unit). The Partnership had planned on redeeming all
Redeemable Preferred Equity held by Varde with the DESC Proceeds in
conjunction with a new working capital facility, which would have
reduced the income allocated to the common unitholders as a result of
the payment of accumulated arrearages on the Varde Redeemable
Preferred Equity. As a result of the DESC Claim being paid in two
installments, such net income was 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 wrote-off $2,556,000 of
deferred financing costs that were being amortized over the life of
the loans.
In accordance with the Partnership Agreement, the Managing General
Partner determined that for tax purposes it was necessary to establish
a convention for the Partnership under which the income and certain
expenses attributable to the judgment would be allocated to the
holders of Common Units. Under that convention, common unitholders as
of July 31, 2000 and August 31, 2000 were 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 would be available
to common unitholders to offset net income attributable to the
judgment; however, it is not certain the Internal Revenue Service will
agree with this position. The actual tax impact on a common
unitholder depends upon such unitholder's overall personal tax
situation and whether such unitholder has suspended losses which can
be used to offset the allocation of income. Each common unitholder
should consult with their own tax advisor regarding the use of
suspended losses.
Under the various loan documents with Varde, one-third of the
remaining DESC Proceeds after certain payments on the A Term Loan and
B Term Loan is required to be paid to Varde. The Partnership had
planned on eventually retiring all of Varde's Debt and Redeemable
Preferred Equity with the DESC Proceeds after a replacement working
capital facility was in place; however, 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 (see Note 4) as a
transaction fee rather than applying the Payments against the Debt and
Redeemable Preferred Equity. The Partnership believes 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 Redeemable Preferred Equity that it holds. However, Varde's
position is that since another loan document executed at the same time
as the credit agreement does not specifically require application of
the Varde One-Third to the Debt and Redeemable Preferred Equity that
the Varde One-Third should be treated as a transaction fee
("Transaction Fee"). The Partnership believes the two agreements can
be read together and are not inconsistent and that Varde must,
therefore, apply the Varde One-Third to its Debt and Redeemable
Preferred Equity.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before the 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
(after Legal Fees of $5,908,000) 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 such
amount as a Transaction Fee and not have to apply it to any of Varde's
Debt and Redeemable Preferred Equity. Further, if the Varde One-Third
is considered a Transaction Fee, net income would have declined by
$17,621,000 for the year ended December 31, 2000 to $25,788,000. In
addition, interest expense and distributions would have increased for
the year ended December 31, 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 Varde's 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
Varde's Debt and Redeemable Preferred Equity, as opposed to the
$9,672,000 Varde believes is owed as a transaction fee.
Due to the dispute with Varde, and rather than making additional
payments to Varde which Varde indicated that it would not apply in
accordance with the Partnership's interpretation of the loan
documents, the Partnership deposited $16,360,000 of the Net DESC
Proceeds with the Texas Court, which the Partnership believed should
eventually be used to retire the remaining Varde Debt and redeem a
portion of the Redeemable Preferred Equity. Under Varde's
interpretation of the loan documents, the Deposits should 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
should be applied and how Varde believes the Deposits should 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 (1) 3,117,000 -
Series C Preferred Units (1) 1,672,000 -
Accumulated Arrearages Series
B Preferred Units (1) 1,440,000 -
Accumulated Arrearages Series
C Preferred Units (1) 772,000 -
Transaction Fee - 9,672,000
B Term Loan - 6,688,000
----------- -----------
The Deposits $16,360,000 $16,360,000
=========== ===========
(1) Due to the Bankruptcy, it is unlikely that the full
$7,001,000 of the Deposits will be used to redeem the
Redeemable Preferred Equity.
The following table compares the outstanding balances of the Debt
and Redeemable Preferred Equity owed by the Partnership to Varde as of
December 31, 2000 after the expected application of the Payments and
the Deposits based on the Partnership's interpretation of the loan
documents prior to the Bankruptcy and Varde's interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
B Term Loan $ - $ 1,462,000
C Term Loan - 6,577,000
Subordinate Note A - 3,324,000
Series B Preferred Units (1) 6,205,000 9,322,000
Series C Preferred Units (1) 3,328,000 5,000,000
Series D Preferred Units 2,757,000 2,757,000
Accumulated Arrearages Series
B Preferred Units (1) 945,000 2,507,000
Accumulated Arrearages Series
C Preferred Units (1) 507,000 1,344,000
Accumulated Arrearages Series
D Preferred Units 1,294,000 1,294,000
----------- -----------
Outstanding Varde Debt and
Preferred Securities $15,036,000 $33,587,000
=========== ===========
(1) Due to the Bankruptcy, the redemption of the Redeemable
Preferred Equity shown in the second table is unlikely to
occur in the amounts indicated; therefore, the balance
in this table will likely increase by those amounts.
The Partnership advised Varde that it did not intend to make any
further payments until the above issues were resolved. The
Partnership filed suit against Varde in the 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
trial which was scheduled in the Texas Court for February 2, 2001, was
removed to the Bankruptcy Court by Varde.
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 new lawsuit in New York, 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 was based upon an instrument for the payment of money
only and that there was no defense to payment. The $18,592,000 is the
amount Varde claimed was still outstanding on the B Term Loan, C Term
Loan and the remaining balance of a Transaction Fee based on the first
receipt of $45,706,000 of DESC Proceeds before reduction for Legal
Fees.
On August 31, 2000, Varde filed a second New York lawsuit
claiming $48,749,000, the amount Varde claimed was 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 Redeemable Preferred Equity are
due.
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.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds. Because of these constraints, Management agreed to
extend a revolving loan to the Partnership of $4,200,000 from the
Bonuses paid to Management as a result of the successful litigation of
the DESC Claim. The note was executed September 18, 2000. The
Partnership had drawn up to $1,990,000 during the year ended December
31, 2000; however, the Partnership repaid the note on November 15,
2000, and the loan balance was zero at year end. Such note is secured
by the assets of the Partnership. Although the note accrued interest
at prime plus 1.75%, Management waived such interest for the period it
was outstanding during the year ended December 31, 2000. No further
advances are expected under this facility.
The trial in the New York Court that was scheduled for January
18, 2001 was automatically stayed by the filing of a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division on January 17, 2001. The
Partnership was authorized to continue managing and operating its
business as a debtor in possession subject to the control and
supervision of the Bankruptcy Court (see "Note 1"). The filing was
necessitated by certain actions taken by Varde which is the
Partnership's primary lender and also holds the Redeemable Preferred
Equity of $17,079,000.
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division, and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
On January 31, 2001, Varde removed the Partnership's suit from
the Texas Court to the Bankruptcy Court and filed a motion with the
Bankruptcy Court for appointment of a trustee. Varde subsequently
removed both of the New York state lawsuits to New York federal court.
The motion for appointment of a trustee was heard on March 6, 2001 and
the Bankruptcy Court denied Varde's request on March 22, 2001.
For the year ended December 31, 2000, in addition to the Legal
Fees paid out of the DESC Proceeds, the Partnership incurred legal
fees and other expenses of $1,172,000 in connection with the dispute
with Varde and $55,000 related to the Bankruptcy.
In March 2001, the Partnership and Varde agreed to let the
Bankruptcy Court hear all disputes from each of the removed Texas and
New York lawsuits. Closing arguments were heard by the Bankruptcy
Court on April 6, 2001. Additional briefs will be filed in the case
which are expected to be delivered to the Bankruptcy Court by June 8,
2001. Once the Bankruptcy Court reviews those briefs, a ruling will
be issued.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
NOTE 6--MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Two of the Partnership's major customers are the DESC and Chevron
Products Company ("Chevron"). Revenues from the DESC comprised 17.2%,
13.6% and 26.4% of total revenues from the Products Marketing Business
in 2000, 1999 and 1998, respectively. Revenues from Chevron comprised
8.1%, 6.7% and 0.4% of total revenues from the Products Marketing
Business in 2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, the Partnership had $1,544,000 and
$283,000, respectively, in receivables from the DESC and $303,000 and
$240,000, respectively, in receivables from Chevron. In some cases,
the Partnership requires letters of credit from customers.
Historically, the Partnership's credit losses have been insignificant.
NOTE 7--RELATED PARTY TRANSACTIONS
Prior to the Crude Gathering Sale, the Partnership had an
agreement with Pride SGP to lease defined segments of the Crude
Gathering System. As consideration for this lease, the Partnership
agreed to perform all routine and emergency maintenance and repair
operations to the pipelines. The value of such services was
approximately $300,000 annually. In addition, the Partnership paid
the taxes, insurance, and other costs. Rentals accruing to Pride SGP
from the Partnership for the years ended December 31, 1999 and 1998
totaled approximately $300,000 and $400,000, respectively, for the
lease of the pipeline and are included in income (loss) from
discontinued operations in the statements of operations. For certain
periods between August 1995 and December 1997, payments to Pride SGP
were suspended pursuant to the terms of an amendment to the then
existing credit agreement. Beginning January 1, 1999, rental payments
to Pride SGP were suspended again. The lease agreement with Pride SGP
was not entered into on an arm's-length basis. While Management was
not able to determine whether the terms of the lease were comparable
to those which could have been obtained by unaffiliated parties,
Management believed such terms were fair and reasonable given the
importance to the Partnership of the Hearne to Comyn pipeline segment
which enabled the Partnership to gather and transport a greater supply
of high quality crude oil for sale to other refiners.
Pride SGP made two unsecured loans to the Partnership on March
26, 1993 and September 7, 1995 in the aggregate principal amount of
$2,450,000 and required the Partnership to pay interest only during
the term of such loans. The loans were used to fund working capital.
Beginning the latter part of 1995, the Partnership ceased interest
payments on the loans to Pride SGP in accordance with an amendment to
the then existing credit agreement. On December 31, 1997, the two
unsecured loans were converted into the Series E Preferred Units of
$2,000,000 and the Series F Preferred Units of $450,000. The Series E
Preferred Units were convertible into 317,000 Common Units prior to
the exchange discussed in the next paragraph.
In connection with the Crude Gathering Sale on October 1, 1999,
Pride SGP exchanged (a) the pipeline mentioned above, (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 in the face amount of $2,000,000 held by
Pride SGP, and (e) the 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 Subordinated Preferred Units in the face amount of $3,144,000
(see Notes 1 and 9).
The Partnership utilizes an airplane from time to time, as
needed, on a per hour market rate basis from an entity controlled by
two officers of the Managing General Partner. Payments to this entity
totaled $79,000, $70,000, and $70,000, during 2000, 1999 and 1998,
respectively.
The Partnership leases property from a relative of one of the
officers of the Managing General Partner. Lease payments were
approximately $41,000, $40,000 and $40,000 in 2000, 1999 and 1998,
respectively.
The Managing General Partner has a 1.9% interest in the income
and cash distributions of the Partnership, subject to certain
adjustments. Members of management of the Managing General Partner
are also members of the management of Pride SGP, which has a 0.1%
general partner interest, $3,144,000 in Subordinate Preferred Units,
and a 4.9% limited partner interest in the Partnership as discussed in
Note 9. Compensation of directors and officers of the Managing
General Partner 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 1, 2000, the Managing General Partner of the
Partnership exercised a call option and purchased 930,000 Common Units
of the Partnership for $251,000. The Managing General Partner of the
Partnership paid $150,000 on July 25, 2000 to J-Hawk Corporation for
the call option. In January, 2001, the Managing General Partner sold
95,000 of those Common Units to certain members of Management and
distributed the remaining 835,000 Common Units it held to its
shareholders.
The Common 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.
On December 31, 1997, 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 Preferred Units, (v) Series C Preferred Units and (vi) Series
D Cumulative Convertible Preferred Units. 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 disputes this position and refuses to
request the Partnership to issue the securities to Management.
Varde and Management have the right to receive a total of up to
an additional 23.4% of the Partnership's Common Units, through the
conversion of the Series B Preferred Units and Series C Preferred
Units (see Note 8) as described in the Partnership's 1996 consent
solicitation.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds. Because of these constraints, Management agreed to
extend a revolving loan to the Partnership of $4,200,000 from the
Bonuses paid to Management as a result of the successful litigation of
the DESC Claim. The note was executed September 18, 2000. The
Partnership had drawn up to $1,990,000 during the year ended December
31, 2000; however, the Partnership repaid the note on November 15,
2000, and the loan balance was zero at year end. Such note is secured
by the assets of the Partnership. Although the note accrued interest
at prime plus 1.75%, Management waived such interest for the period it
was outstanding during the year ended December 31, 2000. No further
advances are expected under this facility.
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.
NOTE 8--REDEEMABLE PREFERRED EQUITY
Effective April 15, 1999, the Partnership amended the terms of its
Partnership Agreement and Redeemable Preferred Equity 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 common unitholders and holders of the preferred
equity
securities.
In conjunction with Varde's assumption of the previous existing
bank debt, Varde received the Redeemable Preferred Equity (see Note
1). As a result of the assumption, Varde holds $17,079,000 of
Redeemable Preferred Equity including $9,322,000 of Series B Preferred
Units, $5,000,000 of Series C Preferred Units and $2,757,000 of Series
D Preferred Units which are all redeemable on December 31, 2002. The
Partnership had expected prior to the Bankruptcy that once the dispute
with Varde was resolved that the Second Deposit of $7,000,000 and
$1,000 from the First Deposit (see Note 4) would be used to redeem
$3,117,000 of the Series B Preferred Units and $1,672,000 of the
Series C Preferred Units or a total of $4,789,000, along with payment
of accumulated arrearages on the Redeemable Preferred Equity of
$2,212,000 or a total of $7,001,000. At December 31, 2000 and after
adjusting for the expected redemption with the Second Deposit and
$1,000 from the First Deposit and prior to the Bankruptcy, 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 began accruing interest at
the Statutory Rate (see Note 4) on the Series B Preferred Units and
Series C Preferred Units to the extent that the Second Deposit and
$1,000 of the First Deposit were expected to be applied to such
securities prior to the Bankruptcy. The Partnership accrued interest
expense of $140,000 related to that portion of the Redeemable
Preferred Equity as of December 31, 2000 and included it in other
accrued liabilities. Due to the Bankruptcy, such redemption using the
Second Deposit and $1,000 of the First Deposit is now unlikely. 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. For the years ended December 31, 2000 and 1999,
the Partnership accumulated arrearages of $1,683,000 and $1,707,000,
respectively, on the Redeemable Preferred Equity. Through December
31, 2000, these securities had total accumulated arrearages of
$4,958,000. The Partnership had expected prior to the Bankruptcy that
once the dispute with Varde was resolved, that part of the Second
Deposit and $1,000 of the First Deposit would 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. However, due to the
Bankruptcy, such payment of the accumulated arrearage using the Second
Deposit and $1,000 of the First Deposit is now unlikely. Prior to the
Bankruptcy, the Partnership also expected to redeem additional
Redeemable Preferred Equity and pay additional accumulated arrearages
once a replacement working capital facility was in place (see Note 5).
The Partnership also accumulated arrearages of $343,000 on
preferred equity securities owned by Pride SGP through 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.
NOTE 9--PARTNERS' CAPITAL (DEFICIENCY)
At December 31, 2000, Pride SGP held the Subordinate Preferred
Units in the face amount of $3,144,000. The Subordinate 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
Redeemable Preferred Equity or October 1, 2004. The Subordinate
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 the Redeemable
Preferred Equity held by Varde or (ii) 10% per annum.
At December 31, 2000, 4,950,000 Common Units are outstanding,
representing a 98% limited partner interest. Pride SGP, Management
and the public own 250,000, 998,000 and 3,702,000 Common Units,
respectively.
Under the terms of the Partnership's loan documents with Varde,
Varde restricted the payment of distributions to unitholders
throughout the term of the loan documents. In addition the preferred
equity securities instruments also limit distributions to common
unitholders. Future distributions will be dependent on, among other
things, payment in full of the Varde Debt, the termination of the loan
documents and the redemption of all preferred equity securities.
As of December 31, 2000 and after the expected redemption prior to
the Bankruptcy with the Second Deposit and $1,000 of the First Deposit
(see Note 5), 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.
NOTE 10--UNIT APPRECIATION RIGHTS
During 1996, the Partnership implemented an incentive
compensation plan for officers and key employees. Under the plan,
individual employees can be granted unit appreciation rights
("Rights") whereby a holder of the Rights is entitled to receive in
cash or in Common Units the increase, if any, between the exercise
price, as determined by the board of directors of the Managing General
Partner at the date of grant, and the fair market value on the
exercise date. The employees awarded and the number of Rights awarded
to the employees are subject to the discretion of the board of
directors of the Managing General Partner. The term of all awards is
ten years from the grant date.
Rights transactions from December 31, 1997 are as follows:
Officers/
Employees Directors Total
--------- --------- ---------
-------- -------- --------
Outstanding at December 31, 1997
and 1998 299,996 70,000 369,996
Granted - - -
Exercised - - -
Terminated (22,348) - (22,348)
-------- -------- --------
Outstanding at December 31, 1999 277,648 70,000 347,648
Granted - - -
Exercised - - -
Terminated (70,044) - (70,044)
-------- -------- --------
Outstanding at December 31, 2000 207,604 70,000 277,604
======== ======== ========
On December 9, 1996, four officers and twelve employees were
awarded a total of 292,760 Rights at an exercise price of $3.75 per
unit. Because the fair market value of the Rights did not exceed the
exercise price at December 9, 1996, no compensation was accrued.
Effective December 31, 1997, the number of Rights was increased to
299,996, reallocated among four officers and eleven employees and the
exercise price was reduced to $1.94 per unit. The Rights of eight
employees were terminated in 1999 and 2000 thus reducing the total
outstanding Rights to the officers and employees to 207,604 at
December 31, 2000. A one-time award of 70,000 Rights was made in 1996
to five non-employee directors at an exercise price of $3.75 which
fully vested on December 31, 1998. Effective December 31, 1997, the
exercise price was amended and reduced to $1.94 per unit.
The Rights fully vested on December 31, 1998; however, none have
been exercised. Rights exercisable under the plan were 277,604,
347,648 and 369,996 at December 31, 2000, 1999 and 1998, respectively.
Since the fair market value of the Rights did not exceed the exercise
price at the grant date nor at the repricing date, no compensation
expense has been accrued in accordance with APB 25.
The weighted average fair value of the Rights granted is
approximately $1.40 per Right and the pro forma effect (as required by
Statement 123) is not material to the operations of the Partnership.
NOTE 11--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, 1999 was the measurement
date for computing gain (loss) on disposal, discontinued operations
for the year ended December 31, 1999 are based on operations through
July 31, 1999. 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 the Debt.
After the sale, the Partnership continues to be responsible for
certain environmental liabilities associated with the Crude Gathering
System including three 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 $94,000
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 $241,483,000 and
$259,438,000 for the first nine months of 1999 and the year ended
December 31, 1998, respectively. Under the terms of the asset sale,
the Partnership retained receivables of $13,669,000, other payables
excluding suspense liability of $20,410,000, and crude suspense
liability of $10,935,000 as of the disposal date of October 1, 1999.
In connection with the Crude Gathering System operations, as
first purchaser of crude oil the Partnership was responsible for
distribution of payments to the various revenue and royalty interest
owners. Often, the legal rights of the interest owners were unclear
or the owners could not be located for long periods of time. When
such was the case, the Partnership retained the liability for the
payments until the ownership interest was clarified or the owners
located, at which time payment was made. When an owner could not be
located, state statutes generally required that the unpaid amounts be
escheated to the state after the passage of a specified number of
years. Because such liabilities take years to be resolved and paid,
an estimate has been made of the amounts expected to be paid during
the next year and included in net current liabilities of discontinued
operations with the remainder included in net long-term liabilities of
discontinued operations. At December 31, 2000 and 1999, net long-term
liabilities of discontinued operations included $8,484,000 and
$8,392,000, respectively, related to crude suspense liabilities.
Net current liabilities of discontinued operations included the
following components as of December 31 (in thousands):
2000 1999
-------- --------
Accounts receivable $ - $ (263)
Accounts payable 455 1,109
Crude suspense liability 460 1,531
Accrued payroll and related benefits 77 398
Accrued taxes (50) -
Other accrued liabilities - 62
-------- --------
$ 942 $ 2,837
======== ========
Net long-term liabilities of discontinued operations included the
following components as of December 31 (in thousands):
2000 1999
-------- --------
Other assets $ (38) $ (81)
Crude suspense liability 8,484 8,392
-------- --------
$ 8,446 $ 8,311
======== ========
(This page should be printed on 11" x 8.5" paper)
NOTE 12--QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Net income Basic Diluted
Operating Net (loss) after Income Income
Net Income Income preferred (Loss) (Loss)
Quarter Ended Revenues (Loss) (Loss) distributions per Unit per Unit
- ------------- -------- --------- -------- ------------- -------- --------
March 31, 1999 $ 21,321 $ (460) $ (700) $ (1,158) $(0.23) $(0.23)
June 30, 1999 27,390 197 (2,487) (2,961) (0.59) (0.59)
September 30, 1999 39,582 (575) (3,010) (3,491) (0.69) (0.69)
December 31, 1999 42,311 (178) (1,471) (1,912) (0.38) (0.38)
March 31, 2000 50,293 152 (1,080) (1,532) (0.30) (0.30)
June 30, 2000 63,721 124 (1,050) (1,512) (0.30) (0.30)
September 30, 2000 97,486 35,797 46,429 46,003 9.11 6.33
December 31, 2000 59,686 96 (890) (1,233) (0.25) (0.25)
Net income (loss) and net income (loss) after preferred distributions for the
four quarters ending in 1999 included results for both continuing operations
and discontinued operations. Net income (loss) from discontinued operations
was $1,415,000, ($632,000), ($514,000) and ($251,000) for the quarters ending
March 31, June 30, September 30, and December 31, 1999, respectively. Basic
and diluted net loss per Common Unit excluding discontinued operations was
$0.51, $0.46, $0.59 and $0.33 for the quarters ending March 31, June 30,
September 30, and December 31, 1999, respectively.
Net revenues, operating income (loss), and net income (loss) for the quarter
ended September 30, 2000 includes $36,257,000, $36,257,000 and $48,646,000,
respectively, as a result of the DESC Claim (see Note 5).
INDEX TO EXHIBITS TO REPORT ON FORM 10-K
Exhibit Number
(Reference to
Item 601 of
Regulation S-K) Description
_______________ ___________
3.1 Third Amended and Restated Agreement of Limited Partnership of
the Partnership (incorporated by reference to Exhibit 3.3 of
the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (Commission File No. 1-10473)).
4.1 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)).
4.2 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)).
4.4 Form of Depositary Receipt for Old Common Units of Pride
Companies, L.P. (included as Exhibit B to the Deposit
Agreement, which is 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)).
4.5 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)).
10.1 Pipeline Lease Agreement by and between the Partnership and
Pride SGP, Inc. (incorporated by reference to Exhibit 10.2
of the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-10473)).
10.2 Amendment 1 to Pipeline Lease Agreement by and between the
Partnership and Pride SGP, Inc. (incorporated by reference to
Exhibit 10.3 of the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Commission File
No. 1-10473)).
10.3 Registration Rights Agreement dated March 30, 1990, by and
between the Partnership and Pride SGP, Inc. (incorporated by
reference to Exhibit 10.5 of the Partnership's Registration
Statement on Form S-1 (Commission File No. 33-42115), as
amended).
10.5 Promissory Note between Pride SGP, Inc. ("Lender") and the
Partnership ("Borrower") dated March 26, 1993 (incorporated
by reference to Exhibit 10.14 of the Partnership's Annual
Report on Form 10K for the fiscal year ended December 31,
1992 (Commission File No. 1-10473)).
10.6 Amendment 2 to Pipeline Lease Agreement by and between the
Partnership and Pride SGP, Inc. (incorporated by reference
to Exhibit 10.16 of the Partnership's Annual Report on Form
10K for the fiscal year ended December 31, 1992 (Commission
File No. 1-10473)).
10.7 Partnership Agreement for Desulfur Partnership, dated as of
August 10, 1993, which is 99% owned by the Partnership and 1%
owned by Pride Marketing of Texas, a wholly-owned subsidiary
of the Partnership (incorporated by reference to Exhibit 28.1
of the Partnership's Quarterly Report on Form 10Q for the
quarter ended September 30, 1993 (Commission File No.
1-10473)).
10.8 Bill of Sale, dated as of August 10, 1993, for the sale of the
desulfurization unit by the Partnership to the Desulfur
Partnership, a subsidiary of the Partnership (incorporated
by reference to Exhibit 28.2 of the Partnership's Quarterly
Report on Form 10Q for the quarter ended September 30, 1993
(Commission File No. 1-10473)).
10.9 Promissory Note, dated as of August 10, 1993, related to
the sale of the desulfurization unit by the Partnership
("Payee") to the Desulfur Partnership ("Maker")
(incorporated by reference to Exhibit 28.3 of the
Partnership's Quarterly Report on Form 10Q for the
quarter ended September 30, 1993 (Commission File No.
1-10473)).
10.10 Master Lease Agreement, dated as of August 10, 1993, between
the Partnership (Lessee) and the Desulfur Partnership (a
subsidiary partnership) (Lessor), for the lease of the
desulfurization unit (incorporated by reference to
Exhibit 28.4 of the Partnership's Quarterly Report on
Form 10Q for the quarter ended September 30, 1993
(Commission File No. 1-10473)).
10.11 Letter, dated November 10, 1993, from Ernst & Young (the
Partnership's independent auditors) to the Partnership
concerning the change to the LIFO method of accounting for
inventories (incorporated by reference to Exhibit 28.7 of
the Partnership's Quarterly Report on Form 10Q for the
quarter ended September 30, 1993 (Commission File No.
1-10473)).
10.12 Stock Purchase Agreement, dated as of September 1, 1994,
between Pride Refining, Inc. (Purchaser), Diamond Shamrock
Refining and Marketing Company (Seller), and D-S Pipeline
Corporation (Acquired Company) (incorporated by reference
to Exhibit 10.15 of the Partnership's Annual Report on Form
10K for the fiscal year ended December 31, 1994 (Commission
File No. 1-10473)).
10.13 First Amendment to Stock Purchase Agreement between Pride
Refining, Inc. (Purchaser), Diamond Shamrock Refining and
Marketing Company (Seller), and D-S Pipeline Corporation
(Acquired Company) (incorporated by reference to Exhibit
10.16 of the Partnership's Annual Report on Form 10K for
the fiscal year ended December 31, 1994 (Commission File
No. 1-10473)).
10.14 Promissory Note dated as of January 9, 1995, between
United Bank & Trust ("Lender") and the Partnership
("Borrower") related to the renovation and refinancing
of the Partnership's administrative offices (incorporated
by reference to Exhibit 28.1 of the Partnership's
Quarterly Report on Form 10Q for the quarter ended
June 30, 1995 (Commission File No. 1-10473)).
10.15 Promissory Note between Pride SGP, Inc. ("Lender") and
the Partnership ("Borrower") dated September 7, 1995
(incorporated by reference to Exhibit 28.2 of the
Partnership's Quarterly Report on Form 10Q for the
quarter ended September 30, 1995 (Commission File No.
1-10473)).
10.16 Note Agreement dated August 13, 1996, among the
Partnership ("Borrower"), Pride Refining, Inc.,
Pride SGP, Inc., Desulfur Partnership, Pride
Marketing of Texas (Cedar Wind), Inc., and Pride
Borger, Inc. (collectively Guarantors), and
NationsBank of Texas, N.A. as Agent, and
NationsBank of Texas, N.A. and Bank One Texas,
N.A. as Lenders (incorporated by reference to
Exhibit 28.2 of the Partnership's Quarterly Report
on Form 10Q for the quarter ended June 30, 1996
(Commission File No. 1-10473)).
10.17 Unit Appreciation Rights Plan (incorporated by reference
to Exhibit 10.26 of the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996
(Commission File No. 1-10473)).
10.18 Sixth Restated and Amended Credit Agreement, dated as
of December 30, 1997, by and among Pride Companies, L.P.
("Borrower"), Pride Refining, Inc., Pride SGP, Inc.,
Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc., as Guarantors, and
Varde Partners, Inc. as Lender (incorporated by
reference to Exhibit 10.29 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-10473)).
10.19 Seventh Amendment to the Fifth Restated and Amended Credit
Agreement, dated as of December 30, 1997, by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc., as Guarantors, and Varde
Partners, Inc. as Lender (incorporated by reference to Exhibit
10.30 of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No. 1-
10473)).
10.20 Restructuring and Override Agreement, dated as of December 30,
1997, by and among Varde Partners, Inc., Pride Companies,
L.P., Pride Refining, Inc., and Pride SGP, Inc. (Commission
File No. 1-10473).
10.21 Certificates of Designation - Series B and Series C Cumulative
Convertible Preferred Units of Pride Companies, L.P., pursuant
to the Second Amended and Restated Agreement of Limited
Partners, effective as of December 30, 1997 (Commission File
No. 1-10473).
10.22 Revolving Credit and Term Loan Agreement, dated as of December
30, 1997, among Pride Companies, L.P., Pride SGP, Inc., Pride
Refining, Inc., Desulfur Partnership, Pride Borger, Inc. and
Pride Marketing of Texas (Cedar Wind), Inc., BankBoston, N.A.,
as an Agent and as a Lender, Lehman Commercial Paper Inc., as
a Lender and as Documentation Agent (Commission File No. 1-
10473).
10.23 Guarantee and Security Agreement, dated as of December 30,
1997, among Pride Companies, L.P., Pride SGP, Inc., Pride
Refining, Inc., Desulfur Partnership, Pride Marketing of
Texas (Cedar Wind), Inc., Pride Borger, Inc. and BankBoston,
N.A., as Agent. (Commission File No. 1-10473).
10.24 Intercreditor and Agency Agreement, dated as of December 30,
1997, among BankBoston, N.A., as Agent and Collateral Agent,
Varde Partners, Inc., as Term Lender, and acknowledged and
consented to by Pride Companies, L.P., as Company, and Pride
SGP, Inc., Pride Refining, Inc., Pride Borger, Inc., Desulfur
Partnership, and Pride Marketing of Texas (Cedar Wind), Inc.,
as Guarantors (Commission File No. 1-10473).
10.25 Pride SGP Subordination Agreement, dated December 30, 1997,
among Pride Companies, L.P., Pride Refining, Inc., Pride
Borger, Inc., Desulfur Partnership, Pride Marketing of Texas
(Cedar Wind), Inc., as the Obligors, Pride SGP, Inc., and
BankBoston, N.A., as Agent (Commission File No. 1-10473).
10.26 Varde Subordination Agreement, dated as of December 30, 1997,
among Pride Companies, L.P., Pride SGP, Inc., Pride Refining,
Inc., Pride Borger, Inc., Desulfur Partnership, Pride Marketing
of Texas (Cedar Wind), Inc., as Obligors, Varde Partners, Inc.,
and BankBoston, N.A., as Agent (Commission File No. 1-10473).
10.27 Equity Conversion Agreement, dated December 31, 1997, between
Pride SGP, Inc., Pride Companies, L.P., and Varde Partners,
Inc. (Commission File No. 1-10473).
10.28 Amendment No. 3 to Pipeline Lease Agreement, effective as of
December 31, 1997, between Pride SGP, Inc. and Pride Companies,
L.P.(Commission File No. 1-10473).
10.29 First Amendment to Sixth Restated and Amended Credit Agreement
dated as of April 15, 1998, by and among Pride Companies, L.P.
("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and
Pride Borger, Inc. (collectively Guarantors) and Varde
Partners, Inc. as Lender (incorporated by reference to Exhibit
28.1 of the Partnership's Quarterly Report on Form 10Q for the
quarter ended June 30, 1998 (Commission File No. 1-10473)).
10.30 Amendment No. 1 to the Revolving Credit and Term Loan
Agreement, dated as of April 15, 1998, among Pride Companies,
L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur
Partnership, Pride Borger, Inc., Pride Marketing of Texas
(Cedar Wind), Inc., and BankBoston, N.A., as an Agent and
as a Lender, Lehman Brothers Commercial Paper, Inc. as a
Lender and as a Documentation Agent (incorporated by
reference to Exhibit 28.2 on Form 10Q for the quarter
ended June 30, 1998 (Commission File No. 1-10473)).
10.31 Waiver dated as of October 29, 1998 to the First Amendment
to Sixth Restated and Amended Credit Agreement among Pride
Companies, L.P. as borrower, Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc. and Pride Borger, Inc., as guarantors, and Varde
Partners, Inc., as lender (incorporated by reference to
Exhibit 28.1 of the Partnership's Quarterly Report on Form
10Q for the quarter ended September 30, 1998 (Commission
File No. 1-10473)).
10.32 Waiver dated as of August 1, 1998 to the Revolving Credit
and Term Loan Agreement dated December 30, 1997, as amended,
among Pride Companies, L.P., as borrower, Pride SGP, Inc.,
Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc.
and Pride Marketing of Texas (Cedar Wind), Inc., BankBoston,
N.A., as Agent, Lehman Commercial Paper, Inc., as Documentation
Agent, and BankBoston, N.A., Lehman Commercial Paper Inc. and
Union Bank of California, N.A. (incorporated by reference to
Exhibit 28.2 of the Partnership's Quarterly Report on Form 10Q
for the quarter ended September 30, 1998 (Commission File No.
1-10473)).
10.33 Second Amendment to the Sixth Restated and Amended Credit
Agreement dated as of November 20, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc. (collectively Guarantors)
and Varde Partners, Inc. as Lender (incorporated by reference
to Exhibit 10.33 of the Partnership's Annual Report on Form
10K for the year ended December 31, 1998 (Commission File No.
1-10473)).
10.34 Third Amendment to the Sixth Restated and Amended Credit
Agreement dated as of December 1, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc. (collectively Guarantors)
and Varde Partners, Inc. as Lender (incorporated by reference
to Exhibit 10.34 of the Partnership's Annual Report on Form
10K for the year ended December 31, 1998 (Commission File
No. 1-10473)).
10.35 Fourth Amendment to the Sixth Restated and Amended Credit
Agreement dated as of December 31, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride
SGP, Inc., Desulfur Partnership, Pride Marketing of Texas
(Cedar Wind), Inc., and Pride Borger, Inc. (collectively
Guarantors) and Varde Partners, Inc. as Lender (incorporated
by reference to Exhibit 10.35 of the Partnership's Annual
Report on Form 10K for the year ended December 31, 1998
(Commission File No. 1-10473)).
10.36 Fifth Amendment to the Sixth Restated and Amended Credit
Agreement dated as of March 1999 by and among Pride Companies,
L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc.,
Desulfur Partnership, Pride Marketing of Texas (Cedar Wind),
Inc., and Pride Borger, Inc. (collectively Guarantors) and
Varde Partners, Inc. as Lender (incorporated by reference
to Exhibit 10.36 of the Partnership's Annual Report on Form
10K for the year ended December 31, 1998 (Commission File No.
1-10473)).
10.37 Amendment No. 2 to the Revolving Credit and Term Loan
Agreement, dated as of November 20, 1998, among Pride
Companies, L.P., Pride SGP, Inc., Pride Refining, Inc.,
Desulfur Partnership, Pride Borger, Inc., Pride Marketing of
Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent
and as a Lender, Lehman Brothers Commercial Paper, Inc. as a
Lender and as a Documentation Agent (incorporated by reference
to Exhibit 10.37 of the Partnership's Annual Report on Form
10K for the year ended December 31, 1998 (Commission File
No. 1-10473)).
10.38 Amendment No. 3 to the Revolving Credit and Term Loan
Agreement, dated as of December 31, 1998, among Pride
Companies, L.P., Pride SGP, Inc., Pride Refining, Inc.,
Desulfur Partnership, Pride Borger, Inc., Pride Marketing of
Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent
and as a Lender, Lehman Brothers Commercial Paper, Inc. as a
Lender and as a Documentation Agent (incorporated by reference
to Exhibit 10.38 of the Partnership's Annual Report on
Form 10K for the year ended December 31, 1998 (Commission File
No. 1-10473)).
10.39 Amendment No. 4 to the Revolving Credit and Term Loan
Agreement, dated as of March 1999, among Pride Companies,
L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur
Partnership, Pride Borger, Inc., Pride Marketing of Texas
(Cedar Wind), Inc., and BankBoston, N.A., as an Agent and
as a Lender, Lehman Brothers Commercial Paper, Inc. as a
Lender and as a Documentation Agent (incorporated by
reference to Exhibit 10.39 of the Partnership's Annual
Report on Form 10K for the year ended December 31, 1998
(Commission File No. 1-10473)).
10.40 Amendment No. 5 to the Revolving Credit and Term Loan
Agreement dated as of April 15, 1999 among Pride Companies,
L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur
Partnership, Pride Borger, Inc., Pride Marketing of Texas
(Cedar Wind), Inc., and BankBoston, N.A., as an Agent and
as a Lender, Lehman Brothers Commercial Paper, Inc. as a
Lender and as a Documentation Agent (incorporated by
reference to Exhibit 10.1 of the Partnership's Quarterly
Report on Form 10Q for the quarter ending March 31, 1999
(Commission File No. 1-10473)).
10.41 The Sixth Amendment to the Sixth Restated and Amended Credit
Agreement as of April 15, 1999 among Pride Companies,L.P. (the
"Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and
Pride Borger, Inc. (collectively, the "Guarantors"), and Varde
Partners, Inc. (incorporated by reference to Exhibit 10.1 of
the Partnership's Quarterly Report on Form 10Q for the quarter
ending June 30, 1999 (Commission File No. 1-10473)).
10.42 Amended and Restated Certificates of Designation of Series B,
C, D, E and F Cumulative Convertible Preferred Units of Pride
Companies, L.P. pursuant to the Third Amended and Restated
Agreement of Limited Partnership effective as of April 15,
1999 (incorporated by reference to Exhibit 10.2 of the
Partnership's Quarterly Report on Form 10Q for the quarter
ending June 30 1999 (Commission File No. 1-10473)).
10.43 Purchase and Sale Agreement dated August 4, 1999 by and among
Pride Companies, L.P. and Pride SGP, Inc., as Sellers, and Sun
Pipe Line Services Co., as Buyer (incorporated by reference to
Exhibit 10.3 of the Partnership's Quarterly Report on Form 10Q
for the quarter ending June 30, 1999 (Commission File No. 1-
10473)).
10.44 Waiver and Consent dated as of October 1, 1999 among Pride
Companies, L.P. (the "Borrower"), Pride Refining, Inc., Pride
SGP, Inc., Pride Marketing of Texas (Cedar Wind), Inc. and
Pride Borger, Inc. (collectively, the "Guarantors"), and Varde
Partners, Inc., ("Lender") (incorporated by reference to
Exhibit 10.1 of the Partnership's Quarterly Report on Form 10Q
for the quarter ending September 30, 1999 (Commission File No.
1-10473)).
10.45 Amendment No. 6 to the Revolving Credit and Term Loan
Agreement, dated as of October 1, 1999 among Pride Companies,
L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur
Partnership, Pride Borger, Inc., Pride Marketing of Texas
(Cedar Wind), Inc., and BankBoston, N.A., as Agent and as a
Lender, Lehman Brothers Commercial Paper, Inc. as a Lender and
as a Documentation Agent (incorporated by reference to Exhibit
10.2 of the Partnership's Quarterly Report on Form 10Q for the
quarter ending September 30, 1999 (Commission File No. 1-
10473)).
10.46 Certificates of Designation of Series G Subordinate Preferred
Units of Pride Companies, L.P. pursuant to the Third Amended
and Restated Agreement of Limited Partnership effective as of
October 1, 1999 (incorporated by reference to Exhibit 10.46 of
the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (Commission File No. 1-10473)).
10.47 Promissory Note dated September 18, 2000, between Pride
Companies, L.P., as borrower, and Dave Caddell, in his
individual capacity and as trustee for Brad Stephens, Wayne
Malone, and George Percival, as lenders (Commission File No.
1-10473).
25.1 Power of Attorney (included on the signature page of this
Report).