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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 1-10473
PRIDE COMPANIES, L. P.
(Name of registrant)
Delaware 75-2313597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1209 North Fourth Street, Abilene, Texas 79601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(915) 677-5444
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate the number of units outstanding of each of the issuer's
classes of units, as of the latest practicable date.
Class Outstanding at August 1, 2002
----- -----------------------------
Common Units 4,950,000
Indicate by checkmark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
Yes [X] No [ ]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIDE COMPANIES, L. P.
BALANCE SHEETS
(Amounts in thousands, except unit amounts)
June 30,
2002 December 31,
(unaudited) 2001
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 7,351 $ 13,294
Restricted cash 843 909
Accounts receivable, less allowance
for doubtful accounts 11,828 14,464
Inventories 110 963
Other current assets 151 364
----------- -----------
Total current assets 20,283 29,994
Property, plant and equipment 31,057 30,772
Accumulated depreciation (17,486) (16,809)
----------- -----------
Property, plant and equipment - net 13,571 13,963
Assets no longer used in the business - 4,235
Other assets 81 105
----------- -----------
$ 33,935 $ 48,297
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Current liabilities not subject
to compromise:
Accounts payable $ 529 $ 1,619
Accrued payroll and related benefits 342 250
Accrued taxes 2,758 2,534
Other accrued liabilities 587 687
Current portion of long-term debt 725 2,055
----------- -----------
Subtotal 4,941 7,145
Current liabilities subject
to compromise 1,059 8,568
----------- -----------
Total current liabilities 6,000 15,713
Long-term liabilities subject
to compromise - 15,680
Redeemable preferred equity 11,500 5,693
Partners' capital:
Preferred units to the Special
General Partner (3,145 units
authorized, 514 units and 3,144
units outstanding, respectively) 514 3,144
Common units (5,275,000 units
authorized, 4,950,000 units
outstanding) 16,070 8,374
General partners' interest (149) (307)
----------- -----------
$ 33,935 $ 48,297
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L. P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
Three Months Ended June 30,
2002 2001
----------- -----------
Revenues $ 54,031 $ 74,987
Cost of sales and operating expenses,
excluding depreciation 52,779 72,261
Marketing, general and
administrative expenses 1,151 852
Depreciation 369 363
----------- -----------
Operating income (loss) (268) 1,511
Other income (expense):
Interest income 29 315
Interest expense (10) (249)
Credit and loan fees (2) (506)
Other - net 1 41
----------- -----------
18 (399)
----------- -----------
Net income (loss) from continuing
operations before reorganization items (250) 1,112
Reorganization items:
Professional fees and administrative
expenses 93 286
----------- -----------
Net income (loss) from continuing
operations (343) 826
Discontinued operations:
Loss on disposal of discontinued
operations (547) -
----------- -----------
Net income (loss) (890) 826
=========== ===========
Basic and diluted net income (loss)
per Common Unit:
Net income (loss) from continuing
operations less preferred
distributions $ (.11) $ .07
Net loss from discontinued operations (.11) -
----------- -----------
Basic and diluted net income (loss) $ (.22) $ .07
=========== ===========
Numerator for basic and diluted net
income (loss) per Common Unit:
Net income (loss) from continuing
operations $ (343) $ 826
Preferred distributions (216) (475)
----------- -----------
Net income (loss) from continuing
operations less preferred
distributions (559) 351
Net income (loss) from continuing
operations less preferred
distributions allocable to 2%
general partner interest (11) 7
----------- -----------
Numerator for basic and diluted net
income (loss) per Common Unit
from continuing operations
less preferred distributions $ (548) $ 344
=========== ===========
Net loss from discontinued
operations $ (547) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest (11) -
----------- -----------
Numerator for basic and diluted net
loss from discontinued operations
per Common Unit $ (536) $ -
=========== ===========
Numerator for basic and diluted net
income (loss) per Common Unit $ (1,084) $ 344
=========== ===========
Denominator:
Denominator for basic and diluted net
income (loss) per Common Unit 4,950 4,950
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
Six Months Ended June 30,
2002 2001
----------- -----------
Revenues $ 101,715 $ 131,881
Cost of sales and operating expenses,
excluding depreciation 99,718 127,939
Marketing, general and
administrative expenses 2,046 1,764
Depreciation 732 726
----------- -----------
Operating income (loss) (781) 1,452
Other income (expense):
Interest income 77 652
Interest expense (including interest
paid in kind of $2 and $0,
respectively) (34) (496)
Credit and loan fees 134 (850)
Gain on sale of assets 1,152 -
Other - net (88) 105
----------- -----------
1,241 (589)
----------- -----------
Net income from continuing operations
before reorganization items 460 863
Reorganization items:
Professional fees and administrative
expenses 318 371
Discount on retirement of Debt and
Redeemable Preferred Equity (21) -
----------- -----------
Net income from continuing operations 163 492
Discontinued operations:
Loss on disposal of discontinued
operations (547) -
----------- -----------
Net income (loss) from operations (384) 492
Extraordinary gain - Income from
cancellation of indebtedness 9,543 -
----------- -----------
Net income $ 9,159 $ 492
=========== ===========
Basic net income (loss) per Common Unit:
Net income (loss) from continuing
operations less preferred
distributions $ (.04) $ (.09)
Net loss from discontinued operations (.11) -
Extraordinary gain 1.89 -
----------- -----------
Basic net income (loss) $ 1.74 $ (.09)
=========== ===========
Diluted net income (loss) per Common Unit:
Net income (loss) from continuing
operations less preferred
distributions $ (.04) $ (.09)
Net loss from discontinued operations (.11) -
Extraordinary gain 1.85 -
----------- -----------
Diluted net income (loss) $ 1.70 $ (.09)
=========== ===========
Numerator for basic net income (loss)
per Common Unit:
Net income from continuing operations $ 163 $ 492
Preferred distributions (381) (937)
----------- -----------
Net income from continuing
operations less preferred
distributions (218) (445)
Net income from continuing
operations less preferred
distributions allocable to
2% general partner interest (4) (9)
----------- -----------
Numerator for basic net income
(loss) per Common Unit from
continuing operations less
preferred distributions $ (214) $ (436)
=========== ===========
Net loss from discontinued
operations $ (547) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest (11) -
----------- -----------
Numerator for basic net loss
from discontinued operations
per Common Unit $ (536) $ -
=========== ===========
Extraordinary gain $ 9,543 $ -
Extraordinary gain allocable to
2% general partner interest 191 -
----------- -----------
Numerator for basic extraordinary
gain per Common Unit $ 9,352 $ -
=========== ===========
Numerator for basic net income
(loss) per Common Unit $ 8,602 $ (436)
=========== ===========
Numerator for diluted net income (loss)
per Common Unit:
Net income from continuing operations $ 163 $ 492
Preferred distributions (381) (937)
Adjustments to compute diluted
net income (loss):
Subordinate Note A interest
expense 2 -
----------- -----------
Net income from continuing
operations less preferred
distributions (216) (445)
Net income from continuing
operations less preferred
distributions allocable to
2% general partner interest (4) (9)
----------- -----------
Numerator for diluted net income
(loss) per Common Unit from
continuing operations less
preferred distributions $ (212) $ (436)
=========== ===========
Net loss from discontinued
operations $ (547) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest (11) -
----------- -----------
Numerator for diluted net loss
from discontinued operations
per Common Unit $ (536) $ -
=========== ===========
Extraordinary gain $ 9,543 $ -
Extraordinary gain allocable to
2% general partner interest 191 -
----------- -----------
Numerator for diluted extraordinary
gain per Common Unit $ 9,352 $ -
=========== ===========
Numerator for diluted net income
(loss) per Common Unit $ 8,604 $ (436)
=========== ===========
Denominator:
Denominator for basic net income
(loss) per Common Unit 4,950 4,950
=========== ===========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A 21 -
B Preferred Units 60 -
C Preferred Units 32 -
----------- -----------
Total adjustments 113 -
----------- -----------
Denominator for diluted net income
(loss) per Common Unit 5,063 4,950
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L. P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income from continuing operations
before reorganization items $ 460 $ 863
Net loss from discontinued operations (547) -
Adjustments to reconcile net income
from continuing operations before
reorganization items and net loss
from discontinued operations to net
cash provided by (used in) operating
activities before reorganization
items:
Depreciation 732 726
Gain on sale of property,
plant and equipment (1,152) (32)
Paid in kind interest 2 -
Net effect of changes in:
Restricted cash 66 (502)
Accounts receivable 2,636 (3,120)
Other current assets 1,066 119
Accounts payable and other
long-term liabilities (1,090) 1,372
Accrued liabilities 216 916
----------- -----------
Total adjustments 2,476 (521)
----------- -----------
Net cash provided by operating
activities before
reorganization items 2,389 342
Reorganization items:
Professional fees and administrative
expenses (318) (371)
Extraordinary gain - Income from
cancellation of indebtedness 9,543 -
Net effect of changes in:
Accounts payable and other
long-term liabilities (9,889) -
Accrued liabilities (1,189) -
----------- -----------
Net cash used in operating activities
from reorganization items (1,853) (371)
----------- -----------
Net cash provided by (used in)
operating activities 536 (29)
Cash flows from investing activities:
Purchases of property, plant and
equipment (441) (4)
Proceeds from asset disposals 5,488 32
Other 24 38
----------- -----------
Net cash provided by investing activities 5,071 66
Cash flows from financing activities:
Redemption of G Preferred Units (550) -
----------- -----------
Net cash used in financing activities
before reorganization items (550) -
Payments on pre-petition debt (11,000) -
----------- -----------
Net cash used in financing activities
from reorganization items (11,000) -
----------- -----------
Net cash used in financing activities (11,550) -
----------- -----------
Net increase (decrease) in cash and
cash equivalents (5,943) 37
Cash and cash equivalents at the
beginning of the period 13,294 6,178
----------- -----------
Cash and cash equivalents at the
end of the period $ 7,351 $ 6,215
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L. P.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Pride Companies, L. P. (the "Partnership") was formed as a
limited partnership under the laws of the State of Delaware in January
1990. The Partnership owns and operates three products terminals
located in Abilene, Texas (the "Abilene Terminal"); San Angelo, Texas
(the "San Angelo Terminal"); and Aledo, Texas (the "Aledo Terminal")
(collectively the "Products Terminals") and one common carrier
products pipeline system that transports refined products from the
Abilene Terminal to the San Angelo Terminal (the "San Angelo
Pipeline") that are used to market conventional gasoline, low sulfur
diesel fuel, and military aviation fuel (the "Products Marketing
Business"). In April 1998, the Partnership began purchasing those
refined products from Equilon Enterprises Company LLC which is now
doing business as Shell Oil Products U. S. ("Shell") pursuant to the
agreement (the "Shell Agreement") to market through its Products
Terminals and the San Angelo Pipeline. The Partnership's operations
are conducted primarily in the State of Texas.
Prior to April 1998, the Partnership operated a simplex petroleum
refinery facility in Abilene, Texas (the "Refinery") and produced its
own refined products. The Refinery was idled when the Partnership
began purchasing its refined products requirements from Shell. At the
same time, the Partnership idled a pipeline which transported refined
product from the Abilene Terminal to the Aledo Terminal (the "Aledo
Pipeline"). On January 18, 2002, the Partnership sold both the
remaining Refinery equipment and Aledo Pipeline to Alon USA Refining,
Inc. ("Alon") for $5,400,000.
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"). Certain liabilities associated with the
Crude Gathering System were retained and have been presented in
liabilities subject to compromise at June 30, 2002 and December 31,
2001 (see Note 10). The Partnership also accrued an additional loss
of $547,000 on disposal of the discontinued operations in the second
quarter of 2002 as a result of a ruling by the bankruptcy court (see
below and Notes 5 and 10).
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in and serves as the
managing general partner of the Partnership. Pride SGP, Inc.
("Special General Partner" or "Pride SGP") owns a 0.1% general partner
interest in and serves as the special general partner of the
Partnership. The Managing General Partner and Pride SGP (collectively
the "General Partners") collectively own a 2% general partner
interest. In addition to its general partner interest, Pride SGP
owned the G Preferred Units of the Partnership with a stated value of
$514,000, as of June 30, 2002 (see Notes 8 and 11), and a 4.9%
interest in the Partnership through ownership of common limited
partner units ("Common Units"). As a result of the redemption of the
Departing Shareholders' interests in Pride SGP on April 3, 2002, all
of the outstanding stock of Pride SGP is now owned by certain officers
of the Managing General Partner (see Notes 4 and 8). Management,
which is comprised of the officers of the Managing General Partner
(the "Management"), collectively own a 25.3% interest as of June 30,
2002 in the Partnership through their ownership of Common Units. The
remaining Common Units, representing an aggregate 67.8% interest in
the Partnership, are publicly held. An owner of Common Units is
referred to herein as a common unitholder ("Common Unitholder"). 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 U. S. Bankruptcy Court for the Northern District of Texas, Abilene
Division (the "Bankruptcy Court"), and was authorized to continue
managing and operating its 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 was the Partnership's primary lender and also owned
two-thirds of the Partnership's redeemable preferred equity (see Notes
6 and 7).
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) ("Pride Marketing") each
filed a voluntary petition under Chapter 11 of the Federal Bankruptcy
Code in the Bankruptcy Court, and each of them was authorized to
continue managing and operating its business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
On January 11, 2002, the Partnership and Managing General
Partner's Bankruptcy Plan was confirmed by the Bankruptcy Court and
the Partnership and Managing General Partner emerged from Bankruptcy
on January 22, 2002 (see Notes 10 and 11).
Pride Marketing which was inactive has been liquidated.
Pride SGP's bankruptcy petition was dismissed.
2. Accounting Policies
The financial statements of the Partnership include all of its
wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated. The financial statements included in this
quarterly report on Form 10-Q are unaudited and condensed and do not
contain all information required by generally accepted accounting
principles for complete financial statements. In the opinion of
Management, the accompanying financial statements contain all material
adjustments necessary to present fairly the financial position,
results of operations, and cash flows for such periods. Interim
period results are not necessarily indicative of the results to be
achieved for the full year. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
The financial statements of the Partnership presented in its
Annual Report on Form 10-K for the year ended December 31, 2001
include a summary of significant accounting policies that should be
read in conjunction with this quarterly report on Form 10-Q. The
Partnership had one inactive corporate subsidiary which was a taxable
entity subject to federal income tax; however, that subsidiary has now
been liquidated.
3. Net Income (Loss) Per Common Unit
Basic net income (loss) per Common Unit is computed using the
weighted average number of Common Units outstanding. Diluted net
income (loss) per Common Unit is computed by adjusting the Common
Units outstanding and net income (loss) for the potential dilutive
effect of the convertible securities and unit appreciation rights.
The adjustment to net income for the potential dilution is $2,000 for
the first six months of 2002. For the first six months of 2002, the
weighted average number of Common Units associated with convertible
securities was 113,000. The unit appreciation rights were considered
antidilutive since the exercise price was greater than the average
market price of the Common Units for the first six months of 2002.
The effect of both the convertible securities and unit appreciation
rights was antidilutive for the first six months of 2001 and the
second quarters of 2002 and 2001.
4. Related Party Transactions
In accordance with the Partnership Agreement, the Managing
General Partner conducts, directs and exercises control over
substantially all of the activities of the Partnership. The Managing
General Partner has a 1.9% interest in the income and cash
distributions of the Partnership, subject to certain adjustments.
Members of Management of the Managing General Partner collectively own
a 25.3% interest in the Partnership through their ownership of Common
Units. Pride SGP has a 0.1% general partner interest, $514,000 in
Series G Preferred Units, as of June 30, 2002 (see Notes 8 and 11),
and a 4.9% limited partner interest in the Partnership.
The Partnership has no directors or officers; however, directors
and officers of the Managing General Partner are employed by the
Partnership to function in this capacity. Compensation of these
persons and any other expenses incurred on behalf of the Partnership
by the Managing General Partner and Pride SGP are paid by the
Partnership.
Effective 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 securities
issued by the Partnership to Varde: (i) $6,000,000 of the B Term Loan,
(ii) C Term Loan, (iii) Subordinate Note A, (iv) B Preferred Units,
(v) C Preferred Units and (vi) D Preferred Units (see Notes 6 and 7).
The note payable to Varde was secured by Management's interest in such
securities. Any current cash yield on Management's share of such
securities was payable to Varde as interest, net of applicable federal
income tax. On January 22, 2002, Management received $11,500,000 in
New Redeemable Preferred Equity of the Partnership for its one-third
interest in the C Term Loan, Subordinate Note A and Redeemable
Preferred Equity (see Notes 6, 7 and 11).
On January 8, 2002, the Partnership, the Managing General Partner
and Management entered into the Pride SGP settlement agreement ("Pride
SGP Settlement Agreement") with Pride SGP and the Departing
Shareholders of Pride SGP (see Notes 8 and 11). Under the Pride SGP
Settlement Agreement, the Partnership redeemed $104,000 of the G
Preferred Units held by Pride SGP for $50,000 on March 18, 2002 and,
on April 3, 2002, redeemed G Preferred Units with a stated value of
$2,526,000 from the Departing Shareholders of Pride SGP for $500,000
and a non-interest bearing payable of $725,000 due on September 30,
2002. Pride SGP had distributed G Preferred Units with a stated value
of $2,526,000 to the Departing Shareholders of Pride SGP in exchange
for their interest in Pride SGP. As a result of the redemption of the
Departing Shareholders' interests in Pride SGP, all of the outstanding
stock of Pride SGP is now owned by Messrs. Stephens, Malone and
Caddell.
The Partnership purchased an aircraft for $1,817,000 in March of
2002. In order to conserve working capital, the Partnership on May
24, 2002 sold the aircraft to the owners of the Managing General
Partner and the Chief Financial Officer at the same price and then
leased it back at a monthly rental of $18,000 over a term of seven
years. The Partnership is responsible for taxes, insurance and
maintenance and any other expenses of the aircraft during the lease
term. At the end of the seventh year, the Partnership will have the
option to continue leasing the aircraft. The Partnership has the
option to purchase the aircraft after the sixth year for $1,300,000.
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 Common Unitholders and, consequently, must
exercise good faith and integrity in handling the assets and affairs
of the Partnership.
5. Discontinued Operations
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. The Partnership retained certain liabilities
associated with the Crude Gathering System.
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 $92,000
currently accrued for remediation of the sites, the Partnership does
not expect future expenditures related to these retained environmental
liabilities to be material.
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.
In accordance with applicable Bankruptcy rules, a significant
portion of this debt was cancelled in the first quarter of 2002
because the holders of such claims did not file timely proofs of claim
or because such claims were not allowed even though proofs of claim
were timely filed (see Notes 1 and 8).
The Partnership also accrued an additional loss of $547,000 on
disposal of the discontinued operations in the second quarter of 2002
as a result of a ruling by the Bankruptcy Court (see Note 10).
As a result of the Bankruptcy, the liabilities of the
discontinued operation are included in liabilities subject to
compromise along with other prepetition liabilities of the continuing
operations at June 30, 2002 and December 31, 2001 (see Note 10).
6. Long-term Debt
Wells Fargo Bank, N.A. ("Wells Fargo") currently provides a
$721,000 letter of credit for the Partnership which is secured by a
certificate of deposit.
On December 31, 1997, Varde purchased and assumed the then
existing lenders' rights and obligations under the Partnership's
outstanding bank debt. Varde concurrently made additional loans to
the Partnership. As a result of Varde's assumption of the
Partnership's bank debt and additional loans made by it, Varde owned
the following securities of the Partnership: $20,000,000 of a Series A
Term Loan (the "A Term Loan"), $9,500,000 of a Series B Term Loan (the
"B Term Loan"), $4,689,000 of a Series C Term Loan (the "C Term
Loan"), $2,500,000 of a Subordinate Note A (the "Subordinate Note A"),
$9,322,000 of Series B Cumulative Convertible Preferred Units ("B
Preferred Units"), $5,000,000 of Series C Cumulative Convertible
Preferred Units ("C Preferred Units") and $2,757,000 of Series D
Cumulative Preferred Units ("D Preferred Units"). The A Term Loan, B
Term Loan, C Term Loan and Subordinate Note A are collectively
referred to herein as the debt (the "Debt"). The B Preferred Units,
the C Preferred Units and the D Preferred Units are collectively
referred to herein as redeemable preferred equity (the "Redeemable
Preferred Equity"). Effective 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
securities issued by the Partnership to Varde: (i) $6,000,000 of the B
Term Loan, (ii) the C Term Loan, (iii) the Subordinate Note A, (iv)
the B Preferred Units, (v) the C Preferred Units and (vi) the 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 Varde's assumption of the outstanding bank debt,
additional loans to the Partnership, subsequent interest being paid in
kind, proceeds from the sale of the Crude Gathering System being
applied to the A Term Loan, scheduled principal payments, payments out
of the proceeds from the Partnership's litigation against the United
States Defense Energy Support Center and payments under the Varde
Settlement Agreement, Varde's interest in such Debt and Redeemable
Preferred Equity was completely paid off.
Management's one-third interest in the C Term Loan, Subordinate
Note A and Redeemable Preferred Equity was converted into the New
Redeemable Preferred Equity on January 22, 2002 pursuant to the Plan
(see Notes 7 and 11).
Prior to the Initial Ruling by the Bankruptcy Court (see Note
10), the Partnership had accrued interest expense at the statutory
rate of 6% ("Statutory Rate") on $6,171,000 of the C Term Loan and
$2,000,000 of the Subordinate Note A beginning July 27, 2000 as a
result of the tender by the Partnership to Varde of $8,171,000 on such
date (the "Tender"). In the Initial Ruling, the Bankruptcy Court
determined that Varde was not entitled to interest on the Tender.
When the Partnership deposited $9,360,000 in the District Court of
Taylor County, Texas (the "Texas Court") on August 23, 2000 (the
"First Deposit"), the Partnership considered this a tender and
originally accrued 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; however, the Bankruptcy Court's
Initial Ruling concluded the First Deposit was not a valid tender and
interest continued to accrue on $1,188,000 of the Subordinate Note A
at the contractual rate. Prior to the Bankruptcy Court's Initial
Ruling, the Partnership accrued interest expense of $92,000 and
$48,000 at the Statutory Rate on the C Term Loan and Subordinate Note
A, respectively, in the second quarter of 2001 and $183,000 and
$95,000 at the Statutory Rate on the C Term Loan and Subordinate Note
A, respectively, in the first six months of 2001; however, the
accruals were reversed in the third quarter of 2001 as a result of the
Initial Ruling.
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 would be used to
redeem a portion of the Redeemable Preferred Equity along with paying
accumulated arrearages on those securities (see Note 7). The First
Deposit and Second Deposit are collectively referred to as the
deposits (the "Deposits"). For the second quarter of 2001 and the
first six months of 2001, the Deposits with the Texas Court accrued
interest income of $226,000 and $484,000, respectively. The Texas
Court returned the Deposits along with accrued interest of $1,037,000
to the Partnership in November 2001.
Prior to the Bankruptcy, cash interest and distributions were
limited under the loan documents. Interest in excess of those
limitations on the A Term Loan, B Term Loan, C Term Loan and
Subordinate Note A were paid in kind. Distributions in excess of
those limitations on the Redeemable Preferred Equity accumulated in
arrears (see Note 7). Prior to the Tender and the three payments by
the Partnership to Varde on July 25 and July 26, 2000, totaling
$16,606,000 (the "Payments"), 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 bore interest
of 18% through maturity. As mentioned before, the Partnership
originally accrued interest expense on the C Term Loan at the
Statutory Rate of 6% per annum after the Tender on July 27, 2000 and
on the Subordinate Note A at the Statutory Rate after the Tender on
July 27, 2000 and the First Deposit on August 23, 2000; however, the
accruals were reversed as a result of the Bankruptcy Court's Initial
Ruling. The Subordinate Note A bore interest at prime plus one
percent. The prime rate was 4.75% at January 22, 2002.
As a result of the cash interest and principal payment
limitations, interest on the B Term Loan, C Term Loan, and the
Subordinate Note A had been paid in kind prior to the Payments and the
Tender. Since the Tender only covered $2,000,000 of the Subordinate
Note A, interest continued to be paid in kind on $1,118,000 of the
Subordinate Note A through November 21, 2001. From November 22, 2001
through January 22, 2002, interest continued to be paid in kind on
$438,000 of the Subordinate Note A owned by Management. The preferred
distributions continued accumulating in arrears on the entire balance
of the Redeemable Preferred Equity through November 21, 2001. From
November 22, 2001 through January 22, 2002, the distributions
continued accumulating in arrears on the Redeemable Preferred Equity
owned by Management (see Note 7).
On November 21, 2001, pursuant to the Varde Settlement Agreement,
Varde received $12,000,000 and an allowed unsecured claim for
$11,000,000 (net of a $2,000,000 discount) ("Allowed Unsecured Claim")
from the Partnership and Varde's two-thirds interest in the C Term
Loan, Subordinate Note A, and Redeemable Preferred Equity were retired
(the amount of these securities retired were $4,110,000, $2,216,000
and $16,491,000 (which included accrued distributions of $5,104,000),
respectively). At December 31, 2001, the Allowed Unsecured Claim was
shown net of the $2,000,000 discount and $4,000,000 of the claim was
included in current liabilities subject to compromise and the other
$7,000,000 was included in long-term liabilities subject to
compromise.
The Partnership also recorded a premium of $183,000 in connection
with the Varde Settlement Agreement since the $12,000,000 payment to
Varde and the Allowed Unsecured Claim of $11,000,000 exceeded Varde's
share of the Debt and Redeemable Preferred Equity as of November 21,
2001. The Allowed Unsecured Claim of $11,000,000 did not accrue any
interest from November 21, 2001, to January 22, 2002, the date it was
paid.
On January 22, 2002, Management received $11,500,000 in New
Redeemable Preferred Equity of the Partnership for its one-third
interest in the C Term Loan, Subordinate Note A, and Redeemable
Preferred Equity (the balance on these securities as of January 22,
2002 was $2,055,000, $1,113,000 and $8,353,000 (which included accrued
distributions of $2,660,000), respectively) (see Notes 7 and 11).
The C Term Loan of $2,055,000 held by Management was secured by
substantially all of the Partnership's assets. On January 22, 2002,
Management received New Redeemable Preferred Equity of the Partnership
for the C Term Loan and as a result no longer has a security interest
in the Partnership's assets.
The Partnership does not currently have a working capital loan
facility. As a result of its receipt of $5,400,000 from the sale of
the remaining Refinery equipment and the Aledo Pipeline and $4,000,000
from the reduction of the Shell deposit, the Partnership believes it
does not currently need such a facility. The Partnership expects
that, for the foreseeable future, it will be able to fund its working
capital requirements and its planned capital expenditures from cash on
hand and cash generated from operations.
7. Redeemable Preferred Equity
In conjunction with Varde's assumption of the outstanding bank
debt, Varde received $17,079,000 of Redeemable Preferred Equity
including $9,322,000 of B Preferred Units, $5,000,000 of C Preferred
Units and $2,757,000 of D Preferred Units which were all redeemable on
December 31, 2002 (see Note 6). The preferential quarterly payments
on the B Preferred Units and C Preferred Units were 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 accumulated in arrears at 8% per annum in the first three
years. The preferential quarterly payments on the D Preferred Units
were 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 accumulated in arrears at 13% per annum in
the first three years.
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 6) would be
used to redeem $3,117,000 of the B Preferred Units and $1,672,000 of
the 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. The Partnership accrued interest
expense at the Statutory Rate (see Note 6 for the definition of
Statutory Interest) in the amount of $104,000 and $208,000 on the B
Preferred Units and C Preferred Units in the second quarter of 2001
and the first six months of 2001, respectively, to the extent that the
Second Deposit and $1,000 of the First Deposit were expected to be
applied to such securities. As a result of the Bankruptcy Court's
Initial Ruling, the Partnership reversed the interest expense accrual
in the third quarter of 2001 and increased the accumulated arrearages
on the B Preferred Units and C Preferred Units by $626,000 for the
period August 31, 2000 to June 30, 2001. For the second quarter of
2001 and the first six months of 2001, the Partnership accumulated
arrearages of $475,000 and $937,000, respectively, on the Redeemable
Preferred Equity. No arrearages accumulated on the Redeemable
Preferred Equity during the second quarter of 2002 or the first six
months of 2002. On November 21, 2001, the accumulated arrearages were
reduced by $5,104,000 as a result of Varde receiving $12,000,000 and
the Allowed Unsecured Claim of $11,000,000 (net of a $2,000,000
discount) under the Varde Settlement Agreement for its two-thirds
interest in the C Term Loan, Subordinate Note A and Redeemable
Preferred Equity.
On January 22, 2002, Management received $11,500,000 of Senior
Preferred Units of the Partnership ("New Redeemable Preferred Equity")
for its one-third interest in the C Term Loan, Subordinate Note A, and
Redeemable Preferred Equity which included accumulated arrearages on
such Redeemable Preferred Equity of $2,660,000. The New Redeemable
Preferred Equity issued to Management accrues distributions at 7.5%
per annum. Pursuant to the Plan, Management's C Term Loan and
Subordinate Note A were converted into $3,200,000 of New Redeemable
Preferred Equity which matures January 22, 2012 and is amortized in
ten equal annual installments beginning on January 22, 2003 and
Management's Redeemable Preferred Equity was converted into $8,300,000
of New Redeemable Preferred Equity which matures January 22, 2017 and
is amortized in fifteen equal annual installments beginning on January
22, 2003 (see Note 11). For the second quarter of 2002 and the first
six months of 2002, the New Redeemable Preferred Equity accrued
distributions of $216,000 and $381,000. Under the terms of the New
Redeemable Preferred Equity, the Partnership will make ten annual
installments of $1,406,000 and then five annual installments of
$940,000.
8. Partners' Capital
At June 30, 2002 and December 31, 2001, Pride SGP held the Series
G Preferred Units with a stated value of $514,000 and $3,144,000,
respectively ("G Preferred Units"). The Partnership, the Managing
General Partner and Management entered into the Pride SGP Settlement
Agreement with Pride SGP and the Departing Shareholders of Pride SGP
on January 8, 2002 (see Notes 4 and 11). Under the Pride SGP
Settlement Agreement, the Partnership redeemed G Preferred Units with
a stated value of $104,000 from Pride SGP for $50,000 on March 18,
2002 and, on April 3, 2002, redeemed G Preferred Units with a stated
value of $2,526,000 from the Departing Shareholders of Pride SGP for
$500,000 and a non-interest bearing payable of $725,000 due on
September 30, 2002. Pride SGP had distributed G Preferred Units with
a stated value of $2,526,000 to the Departing Shareholders of Pride
SGP in exchange for their interest in Pride SGP. The remaining
$514,000 of G Preferred Units held by Pride SGP will not accrue any
distributions prior to October 1, 2004. Beginning October 1, 2004,
distributions will accrue on the remaining G Preferred Units at a rate
equal to the lesser of (i) the Partnership's net income less any
distributions accrued or paid on the New Redeemable Preferred Equity
or (ii) 10% per annum.
At June 30, 2002 and December 31, 2001, 4,950,000 Common Units
were outstanding, representing a 98% limited partner interest. As of
June 30, 2002, Pride SGP, Management and the public owned 250,000,
1,277,000 and 3,423,000 Common Units, respectively.
The terms of the G Preferred Units prohibit the payment of
distributions on the Common Units as long as any G Preferred Units are
outstanding. In addition, the terms of the New Redeemable Preferred
Equity require that all distributions on the New Redeemable Preferred
Equity must be current before any distributions are paid on the G
Preferred Units or Common Units. Further, under the Partnership
Agreement, distributions payable on the Common Units are equal to 98%
of the Available Cash (as defined in the Partnership Agreement) of the
Partnership for a particular quarter. Generally, Available Cash is
equal to the net income of the Partnership plus depreciation less debt
payments and payments with respect to certain preferred equity,
capital expenditures and investments. Available Cash may also be
increased or decreased by reductions of or additions to, respectively,
certain reserves established by the Managing General Partner in
accordance with the Partnership Agreement. Based on current
operations, annual payments on the New Redeemable Preferred Equity and
restrictions on distributions contained in the G Preferred Unit
instrument, Management does not expect to pay distributions to Common
Unitholders for the foreseeable future.
At June 30, 2002, the Common Units rank behind debt, as well as
the New Redeemable Preferred Equity and G Preferred Units. As a
result of debt and preferred equity securities ranking ahead of the
Common Units and taking into consideration the various preferential
calls on available cash contained in the preferred equity securities
instruments (including annual distributions and required amortization
of the New Redeemable Preferred Equity), Common Unitholders could be
allocated taxable income under the Partnership Agreement in the future
without a corresponding distribution of cash to offset any potential
tax liability.
In accordance with applicable Bankruptcy rules, certain of the
Partnership's debt is being cancelled because the holders of such debt
did not file timely proofs of claim or because such claims are not
allowed even though proofs of claim were timely filed. As a result,
the Partnership is required to recognize income with respect to such
debt cancellation and, subject to the possible availability of
offsetting deductions, to allocate the resulting net taxable income to
Common Unitholders even though the Common Unitholders do not receive a
distribution of cash. The Partnership estimates taxable income of
$9,600,000 related to cancellation of indebtedness income of which 98%
will be allocated to Common Unitholders based on the number of months
each Common Unitholder held his or her Common Units during the taxable
year that ends December 31, 2002.
On January 18, 2002, the Partnership sold the remaining Refinery
equipment and Aledo Pipeline for $5,400,000 since those assets were no
longer used in its business and to further increase working capital.
The gain from the sale of those assets for tax purposes is estimated
to be $3,100,000 of which 98% will be allocated to Common Unitholders
before any basis adjustment attributable to specific Common
Unitholders. Common Unitholders who purchased Common Units after July
of 2000 do not have any basis in these assets based on the trading
price of the Common Units after such date. Therefore, those Common
Unitholders will recognize gain to the extent of their allocable share
of the proceeds of $5,400,000. Such gain will be allocated to those
Common Unitholders who held Common Units on January 31, 2002.
As a result of the Partnership paying Varde $11,000,000 on
January 22, 2002, Varde will be allocated $3,454,000 of gross income,
thus decreasing the amount of gross income allocable to Common
Unitholders by 98% of that amount. The reduction in gross income
allocated to Common Unitholders will be based on the number of months
each Common Unitholder held his or her Common Units during the taxable
year that ends December 31, 2002.
Common Unitholders will also be allocated 98% of a loss of
$2,100,000 on a loan to a subsidiary that is now considered worthless.
The deduction will be allocated to Common Unitholders based on the
number of months each Common Unitholder held his or her Common Units
during the taxable year that ends December 31, 2002.
The above allocations are in addition to the 98% of taxable
income that will be allocated to Common Unitholders from normal
operations for the taxable year ended December 31, 2002 adjusted for
basis adjustment attributable to specific Common Unitholders. The
actual tax impact on a Common Unitholder depends upon such Common
Unitholder's overall personal tax situation and whether such Common
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.
9. Contingencies
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Management believes that the outcome of all claims and litigation is
either adequately insured or will not have a material adverse effect
on the Partnership's financial position or results of operations.
The Partnership has no off-balance sheet arrangements or
transactions with unconsolidated, special purpose entities that would
expose the Partnership to liability that is not reflected on the face
of its financial statements.
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 $50,000 and had accrued for this amount at
June 30, 2002.
The Partnership continues to be responsible for certain
environmental liabilities associated with the Crude Gathering System
sold to Sun 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 $92,000 accrued as of June 30, 2002 for remediation of the sites,
the Partnership does not expect future expenditures related to these
retained environmental liabilities to be material.
Management does not believe any significant additional amounts
will be required to maintain compliance with the study, the retained
environmental liabilities of the Crude Gathering System or other
environmental requirements other than routine expenditures in the
ordinary course of business.
In April 2001, a Common Unitholder notified the Partnership he
believes the Partnership 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 demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership did
not change 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 were 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 Common
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.
For the second quarter of 2001 and the first six months of 2001,
the Partnership accrued legal fees and other expenses of $505,000 and
$847,000, respectively, in connection with the dispute with Varde.
For the first six months of 2002, the Partnership received a credit
for legal fees of $138,000 in connection with the dispute with Varde.
The Partnership did not record any legal fees or expenses related to
the dispute with Varde in the second quarter of 2002.
In the second quarters of 2002 and 2001, the Partnership accrued
$93,000 and $286,000, respectively, in bankruptcy related expenses.
The Partnership accrued $297,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$371,000 in bankruptcy related expenses for the first six months of
2002 and 2001, respectively.
10. Bankruptcy
On January 17, 2001, the Partnership filed Bankruptcy and was
authorized to continue managing and operating its 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 was the Partnership's primary lender and also owned two-thirds
of the Redeemable Preferred Equity (see Notes 1, 6 and 7). Varde was
claiming a transaction fee of $17,621,000 and the rights to certain
securities it had assigned to Management effective December 31, 1997.
An adversary proceeding involving all of the contested issues between
Varde and the Partnership was completed on April 6, 2001, and the
Bankruptcy Court issued its initial ruling ("Initial Ruling") on
September 4, 2001.
Under Chapter 11, certain claims against the Partnership in
existence prior to the filing of the petition for relief under the
federal bankruptcy laws were stayed while the Partnership continued
business as a debtor in possession. These claims are reflected in the
June 30, 2002 and December 31, 2001 balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to
compromise) may have arisen or may arise subsequent to the filing date
resulting from rejection of executory contracts, including leases, and
from determination by the Bankruptcy Court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed
amounts such as the claims of the former employees. Claims secured by
the Partnership's assets ("Secured Claims") also were stayed. The
Secured Claims were secured primarily by the Partnership's cash,
accounts receivables, and property, plant and equipment.
The Partnership received approval from the Bankruptcy Court to
pay or otherwise honor certain prepetition obligations, including
employee wages, liabilities for excise taxes and accounts payable owed
to Shell for the purchase of refined product.
On January 18, 2001, the Managing General Partner, the 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
Bankruptcy Court, and each of them was authorized to continue managing
and operating its business as debtors in possession subject to the
control and supervision of the Bankruptcy Court.
On or about May 17, 2001, the Partnership, the Managing General
Partner, and Pride SGP filed their proposed Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code and their
proposed Disclosure Statement relating thereto with the Bankruptcy
Court. To reflect the Initial Ruling of the Bankruptcy Court; the
Varde settlement agreement entered into by the Partnership, Varde and
others effective October 18, 2001 (the "Varde Settlement Agreement");
and certain other matters, the Partnership and the Managing General
Partner thereafter amended their Plan of Reorganization and their
Disclosure Statement several times. The Third Amended and Restated
Plan of Reorganization of the Partnership and the Managing General
Partner dated November 19, 2001 (as amended by modifications thereto
filed with the Bankruptcy Court on January 8, 2002 and January 11,
2002, respectively) is referred to herein as the "Plan" and the Third
Amended and Restated Disclosure Statement for Debtors' Joint Chapter
11 Plan of Reorganization dated November 19, 2001 is referred to
herein as the "Disclosure Statement." The Plan and Disclosure
Statement were mailed to the impaired creditors and equity holders who
were entitled to vote on confirmation of the Plan.
On January 11, 2002 (the "Confirmation Date"), the Bankruptcy
Court signed an order confirming the Plan after the Court heard
testimony on January 8, 2002 that all classes entitled to vote
("Impaired Classes") had voted in favor of the Plan. The Partnership
and the Managing General Partner emerged from Bankruptcy on January
22, 2002 (the "Effective Date").
At June 30, 2002, current liabilities subject to compromise
included liabilities of the Products Marketing Business (continuing
operations) of $68,000 and liabilities of the crude gathering business
(discontinued operations) of $991,000.
In the second quarters of 2002 and 2001, the Partnership accrued
$93,000 and $286,000, respectively, in bankruptcy related expenses.
The Partnership accrued $297,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$371,000 in bankruptcy related expenses for the first six months of
2002 and 2001, respectively.
On May 22, 2001, Messrs. Doug Morris, Brad Morris, Jimmy Morris,
Tommy Broyles, and Mike Dunigan, as beneficiary of certain Dunigan
family trusts, (collectively the "Claimants") each filed a proof of
claim against the Partnership and the Managing General Partner in the
amount of $14,541,000 each plus interest, attorney fees and costs.
The Claimants were shareholders of Pride SGP and directors of Pride
SGP with the exception of Mr. Jimmy Morris who was an advisory
director. The Claimants alleged that they and Pride SGP were
wrongfully deprived of assets, rents payable, interest due and other
claims as a result of certain transactions beginning in 1994. On
December 10, 2001, those shareholders and Pride SGP withdrew their
proof of claim.
On January 8, 2002, the Partnership, the Managing General Partner
and Management entered into the Pride SGP settlement agreement ("Pride
SGP Settlement Agreement") with Pride SGP and the Departing
Shareholders of Pride SGP (see Note 11). Under the Pride SGP
Settlement Agreement, the Partnership redeemed G Preferred Units with
a stated value of $104,000 from Pride SGP for $50,000 on March 18,
2002 and, on April 3, 2002, redeemed G Preferred Units with a stated
value of $2,526,000 from the Departing Shareholders of Pride SGP for
$500,000 and a non-interest bearing payable of $725,000 due on
September 30, 2002. Pride SGP had distributed G Preferred Units with
a stated value of $2,526,000 to the Departing Shareholders of Pride
SGP in exchange for their interest in Pride SGP. As a result of the
redemption of the Departing Shareholders' interests in Pride SGP, all
of the outstanding stock of Pride SGP is now owned by Messrs.
Stephens, Malone and Caddell.
On May 22, 2001, five former employees filed proofs of claim
totaling $3,213,000 plus amounts unknown related to unpaid
compensation for 1998 through 2000. After a ruling by the Bankruptcy
Court on May 14, 2002 concerning those proofs of claim, the
Partnership accrued $547,000 and has reported it as a loss on disposal
of discontinued operations in the second quarter of 2002 since the
former employees worked for the Crude Gathering System (see Note 5).
This is in addition to the $70,000 in severance that the Partnership
had accrued prior to that ruling. The former employees and the
Partnership have asked the Bankruptcy Court to reconsider certain
aspects of the ruling. The Partnership has not received an indication
of when or if the Bankruptcy Court will revise its ruling.
Several other parties have filed proofs of claim which the
Partnership has objected to or plans on objecting to; however, those
disputed claims are not expected to have a material effect on the
Partnership.
Current liabilities subject to compromise at June 30 and December
31, respectively, included the following components (in thousands):
2002 2001
---------- ----------
Continuing Operations:
Subordinate Note A $ - $ 1,111
Allowed Unsecured Claim (Current) - 4,000
Accounts payable 54 1,415
Accrued liabilities 14 1,231
Discontinued Operations:
Accounts payable 49 380
Crude suspense liability 325 361
Accrued payroll and related benefits 617 70
---------- ----------
$ 1,059 $ 8,568
========== ==========
Long-term liabilities subject to compromise at June 30 and
December 31, respectively, included the following components (in
thousands):
2002 2001
---------- ----------
Continuing Operations:
Allowed Unsecured Claim (Long-term) $ - $ 7,000
Discontinued Operations:
Crude suspense liability - 8,680
---------- ----------
$ - $ 15,680
========== ==========
11. Plan of Reorganization
On January 11, 2002, the Bankruptcy Court signed an order, after
a hearing on January 8, 2002, confirming, under Chapter 11 of the
United States Bankruptcy Code, the Plan submitted by the Partnership
and the Managing General Partner. The Plan took effect on January 22,
2002 and the two companies emerged from bankruptcy at that time. All
creditors whose claims are not disputed or who filed proofs of claim
that are allowed under the Bankruptcy Code are expected to be paid in
full as provided in the Plan. The following summary of the Plan is
qualified in its entirety by reference to the Plan. Capitalized terms
that are not defined herein shall have the meanings given them in the
Plan.
The Plan provides for the following treatment for the Allowed
Claims and Allowed Interests of Creditors and Interest holders of the
Partnership:
(i) Varde was deemed to have an Allowed Unsecured Claim against
the Partnership in the amount of $11,000,000 (net of a $2,000,000
discount) that would be paid by the Partnership as follows: (1)
$4,000,000 paid in cash on the Effective Date; and (2) the balance
paid by delivery of the Varde Unsecured Note in the original principal
amount of $9,000,000 (before the $2,000,000 discount). The
Partnership paid Varde $11,000,000 on the Effective Date and as a
result received the $2,000,000 discount on the Varde Unsecured Note.
(ii) Certain Claims and Interests of Management are treated
as follows:
a. The Allowed Secured Claims of Management (which is
referred to as the C Term Loan in the financial statements) against
the Partnership were satisfied with a separate series of New
Redeemable Preferred Equity with an aggregate $2,100,000 liquidation
preference, which provides for cumulative distributions of 7.5% per
annum, and is subject to mandatory redemption in equal annual
installments as necessary to fully redeem such series of New
Redeemable Preferred Equity over 10 years.
b. The Allowed Unsecured Claims of Management (which
includes the Subordinate Note A and amounts due under indemnity
agreements) against the Partnership was satisfied as follows: (i) the
Partnership paid $388,000 to Management on January 22, 2002 for their
Allowed Unsecured Claims arising under indemnity obligations of the
Partnership, plus (ii) Management received New Redeemable Preferred
Equity with an aggregate $1,100,000 liquidation preference, which
provides for cumulative distributions of 7.5% per annum, and is
subject to mandatory redemption in equal annual installments as
necessary to fully redeem such series of New Redeemable Preferred
Equity over 10 years.
c. The Allowed Existing Partnership Preferred Interests
(which is referred to as the Redeemable Preferred Equity in the
financial statements) of Management was satisfied by Management's
receipt of New Redeemable Preferred Equity with an aggregate
$8,300,000 liquidation preference, which provides cumulative
distributions of 7.5% per annum, and is subject to mandatory
redemption in equal annual installments as necessary to fully redeem
such series of New Redeemable Preferred Equity over 15 years. The New
Redeemable Preferred Equity was subject to a $2,000,000 potential
discount depending on when the Varde Unsecured Note was retired.
Since Varde was paid $11,000,000 on the Effective Date, the New
Redeemable Preferred Equity owned by Management was not discounted.
(iii) Other Creditors are treated as follows:
a. Allowed Administrative Expenses of the Partnership will
be paid in full as soon as practical after the Effective Date, or
after such expense is Allowed by the Court.
b. Allowed Unsecured Priority Tax Claims of the Partnership
will be paid in full on the later of (1) as soon as practicable after
the Effective Date, (2) as soon as practicable after such Claim
becomes an Allowed Claim, or (3) if the payment on the Claim is not
due as of the Confirmation Date, when the payment is due in the
ordinary course of the Partnership's business.
c. Allowed Secured Tax Claims of the Partnership will be
paid with interest at 8% per annum in the ordinary course of the
respective Partnership's business as described more fully in the Plan.
Creditors will retain any liens until the tax is paid.
d. Allowed Non-Tax Priority Claims will be paid in full by
the Partnership as soon as practical after the Effective Date or after
such claim is Allowed, whichever is later.
e. The Allowed Secured Claim of Fleet National Bank against
the Partnership will be paid in full by the Partnership as soon as
practical after the Effective Date or after such claim is Allowed,
whichever is earlier.
f. Allowed Royalty Claims against the Partnership will be
paid in full by the Partnership as due in the ordinary course of its
business, on the later of the Effective Date or such date that the
Claim becomes due in accord with the Texas Natural Resources Code (see
Note 5).
g. Allowed General Unsecured Claims of the Partnership will
be paid by the Partnership in full with 7.5% interest per annum from
the Effective Date upon the later of six months after the Effective
Date or when Allowed; however, if such claims are not disputed the
Partnership plans on paying them earlier.
(iv) Interest holders received the following treatment pursuant
to the Plan:
a. The Managing General Partner retained its Allowed
Existing Partnership General Partnership Interest.
b. At the Confirmation Hearing, the Partnership, the
Managing General Partner and Management, on the one hand, and Pride
SGP and certain of its shareholders (referred to herein as
the "Departing Shareholders"), on the other hand entered into the
Pride SGP Settlement Agreement. Messrs. Malone, Stephens and Caddell
retained their interest in Pride SGP. All other shareholders of Pride
SGP are Departing Shareholders. Under the Pride SGP Settlement
Agreement, Pride SGP retained its Existing Partnership General
Partnership Interest since the agreement was approved by the
Bankruptcy Court.
c. Pride SGP retained its Allowed Existing Partnership
Subordinated Preferred Interests (which is referred to as the G
Preferred Units in the financial statements) and such interest
continues to be subordinated to the New Redeemable Preferred Equity.
Pursuant to the SGP Settlement Agreement, however, the Plan was
amended to provide for the following alternative treatment since
certain Conditions Precedent were satisfied:
i. The Partnership paid the Departing Shareholders of
Pride SGP, who were holders of units of the Existing Partnership
Subordinated Preferred Interests (or G Preferred Units), $500,000 in
cash on April 3, 2002 (the "First Payment"). On September 30, 2002,
the Partnership will pay the Departing Shareholders an additional
$725,000 (the "Second Payment"). (Collectively, the First Payment and
Second Payment are referred to as the "Pride SGP Payments.") The
Pride SGP Payments will be in full and final settlement and redemption
of $2,526,000 (based on the stated value thereof) of the Existing
Partnership Subordinated Preferred Interests (or G Preferred Units)
that were distributed by Pride SGP to the Departing Shareholders. The
Pride SGP Payments will be made to Tommy Broyles as Trustee for the
Departing Shareholders and he shall be responsible for allocating the
Pride SGP Payments among the Departing Shareholders.
ii. The Partnership paid Pride SGP $50,000 in cash on
March 18, 2002 to redeem $104,000 (based on the stated value thereof)
of the Existing Partnership Subordinated Interests (or G Preferred
Units) held by Pride SGP.
d. Allowed Existing Partnership Common Interests retained
their Interests.
Also, as described above, existing Redeemable Preferred Equity
owned by Management was cancelled and New Redeemable Preferred Equity
was issued with respect thereto. In addition, Pride SGP retained its
Existing Partnership Subordinated Preferred Interests (or G Preferred
Units) and its Existing Partnership General Partnership Interest
remained outstanding and certain of its Existing Partnership
Subordinated Preferred Interests (or G Preferred Units) were redeemed
pursuant to the Pride SGP Settlement Agreement.
Under the Plan, the Partnership had proposed a reverse Common
Unit split so that the number of Common Unitholders would be less than
300 and the Partnership could avoid the expenses of being a public
company. Since the requisite number of Common Unitholders did not
vote for the reverse Common Unit split, the Common Units that they own
were unaffected by the Plan. All other voting classes in the
bankruptcy voted in favor of the Plan.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Overview
Pride Companies, L. P. is a Delaware limited partnership (the
"Partnership") which owns and operates three products terminals
located in Abilene, Texas (the "Abilene Terminal"); San Angelo, Texas
(the "San Angelo Terminal"); and Aledo, Texas (the "Aledo Terminal")
(collectively the "Products Terminals") and one common carrier
products pipeline system that transports refined products from the
Abilene Terminal to the San Angelo Terminal (the "San Angelo
Pipeline") that are used to market conventional gasoline, low sulfur
diesel fuel, and military aviation fuel ("Products Marketing
Business"). Pride Refining, Inc. is the managing general partner of
the Partnership ("Managing General Partner"). Pride SGP, Inc.
("Pride SGP" or "Special General Partner") is the special general
partner of the Partnership. The officers ("Management") of the
Managing General Partner operate the Products Marketing Business.
The following is a discussion of the financial condition and
results of operations of the Partnership. This discussion should be
read in conjunction with the financial statements included in this
report.
Forward Looking Statements
This Form 10-Q contains certain forward looking statements. Such
statements are typically punctuated by words or phrases such as
"anticipate," "estimate," "projects," "should," "may," "management
believes," and words or phrases of similar import. Such statements
are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the
key factors that may have a direct bearing on the Partnership's
results of operations and financial 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 Enterprises Company LLC which is now doing business as Shell
Oil Products U. S. ("Shell") 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 and
obligations under the preferred security instruments and (v)
fluctuations in refined product prices and their impact on working
capital. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition"
and "Part II. Other Information, Item 1. Legal Proceedings."
General
The Partnership's operating results for the Products Marketing
Business 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 Shell 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.
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 refined product prices and are
not necessarily an accurate reflection of the Partnership's
profitability.
Second Quarter 2002 Compared to Second Quarter 2001
General. Net loss for the second quarter of 2002 was $890,000
compared to net income of $826,000 for the second quarter of 2001.
Included in net loss for the second quarter of 2002 was a $547,000
loss on disposal of discontinued operations as a result of the award
by the Bankruptcy Court to five former employees (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Financial Resources and
Liquidity" and "Part II. Other Information, Item 1. Legal
Proceedings"). Net loss from continuing operations was $343,000 in
the second quarter of 2002. The decrease in results from continuing
operations in the second quarter of 2002 from the second quarter of
2001 was primarily due to a decline in gross margin of $1,448,000 and
an increase in general and administrative expenses of $299,000.
In addition, the Partnership reported a decline in interest
income, interest expense, credit and loan fees and reorganization
items in the second quarter of 2002 from the second quarter of 2001 of
$286,000, $239,000, $504,000 and $193,000 respectively. Interest
income declined in the second quarter of 2002 primarily as a result of
reporting $226,000 of interest income on the Deposits with the Texas
Court in the second quarter of 2001. Interest expense was lower due
to the accrual in the second quarter of 2001 of $244,000 at the
Statutory Rate on the C Term Loan, Subordinate Note A and the
Redeemable Preferred Equity to the extent those securities were
expected to be retired with the Tender and the Deposits (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Financial Resources and
Liquidity"). Credit and loan fees declined due to a decrease in
litigation expenses incurred in the dispute between Varde, the
Partnership and Management. Reorganization items declined as a result
of emerging from bankruptcy on January 22, 2002.
Operating loss was $268,000 for the second quarter of 2002
compared to operating income of $1,511,000 for the second quarter of
2001. Depreciation expense was $369,000 for the second quarter of
2002 compared to $363,000 for the second quarter of 2001. Operating
income excluding depreciation was $101,000 for the second quarter of
2002 compared to operating income excluding depreciation of $1,874,000
for the second quarter of 2001. Gross margin declined $1,448,000 from
the second quarter of 2001 to the second quarter of 2002 as a result
of a decline in the number of barrels sold and a decline in gross
margin realized per barrel. During the second quarter of 2002, the
Partnership marketed 18,776 barrels per day ("BPD") of refined
products compared to 21,029 BPD for the second quarter of 2001. The
net margin per barrel (after marketing, general and administrative
expenses) for the second quarter of 2002 was negative $0.16 compared
to positive $0.79 for the second quarter of 2001.
First Six Months of 2002 Compared to First Six Months of 2001
General. Net income for the first six months of 2002 was
$9,159,000 compared to net income of $492,000 for the first six months
of 2001. Included in net income for the first six months of 2002 was
$9,543,000 in extraordinary gain from cancellation of indebtedness and
a $547,000 loss on disposal of discontinued operations as a result of
the award by the Bankruptcy Court to five former employees (see "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Financial Resources and
Liquidity" and "Part II. Other Information, Item 1. Legal
Proceedings"). Net income from continuing operations was $163,000 in
the first six months of 2002. In the first six months of 2002, gross
margin declined $1,845,000 and general and administrative expenses
increased $282,000 from the first six months of 2001. This was
partially offset by a gain on sale of assets of $1,152,000 in the
first six months of 2002.
In addition, the Partnership reported a decline in interest
income, interest expense, credit and loan fees and reorganization
items in the first six months of 2002 from the first six months 2001
of $575,000, $462,000, $984,000 and $74,000 respectively. Interest
income declined in the first six months of 2002 primarily as a result
of reporting $484,000 of interest income on the Deposits with the
Texas Court in the first six months of 2001. Interest expense was
lower due to the accrual in the first six months of 2001 of $486,000
at the Statutory Rate on the C Term Loan, Subordinate Note A and the
Redeemable Preferred Equity to the extent those securities were
expected to be retired with the Tender and the Deposits (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Financial Resources and
Liquidity"). Credit and loan fees declined due to a decrease in
litigation expenses incurred in the dispute between Varde, the
Partnership and Management. Reorganization items declined as a result
of emerging from bankruptcy on January 22, 2002.
Operating loss was $781,000 for the first six months of 2002
compared to operating income of $1,452,000 for the first six months of
2001. Depreciation expense was $732,000 for the first six months of
2002 compared to $726,000 for the first six months of 2001. Operating
loss excluding depreciation was $49,000 for the first six months of
2002 compared to operating income excluding depreciation of $2,178,000
for the first six months of 2001. Gross margin declined $1,845,000
from the first six months of 2001 to the first six months of 2002 as a
result of a decline in gross margin realized per barrel. During the
first six months of 2002, the partnership marketed 19,279 barrels per
day ("BPD") of refined products compared to 19,127 BPD for the first
six months of 2001. The net margin per barrel (after marketing,
general and administrative expenses) for the first six months of 2002
was negative $0.22 compared to positive $0.42 for the first six months
of 2001.
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, refined
product prices and, with respect to certain products, seasonality and
weather. The Managing General Partner expects that such conditions
will continue to affect the Partnership's business to varying degrees
in the future. The order in which these factors are discussed is not
intended to represent their relative significance.
Environmental Compliance. Increasing public and governmental
concern about air quality is expected to result in continued
regulation of air emissions. Regulations relating to carbon monoxide
and regulations on oxygen content in gasoline and sulfur content in
both diesel fuel and gasoline are expected to be increasingly
important in urban areas. In addition, the Partnership plans to spend
approximately $321,000 from July 1, 2002 through December 31, 2003 on
several projects to maintain compliance with various other
environmental requirements, including $50,000 for 2002 related to an
investigative study by the Texas Natural Resource Conservation
Commission and an aggregate of $92,000 for 2002 and 2003 related to
the cleanup of an existing leak. The remaining $179,000 is for
various operating expenses to be incurred in the ordinary course of
business.
The Partnership is currently involved in the final stages of
Phase II of an investigative study by the Texas Natural Resource
Conservation Commission. Management estimates the remaining cost to
comply with this study approximates $50,000 and had accrued for this
amount at June 30, 2002.
The Partnership continues to be responsible for certain
environmental liabilities associated with the crude gathering business
sold to Sun Pipeline Services, Inc. ("Sun") on October 1, 1999
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 $92,000
currently accrued for remediation of the sites, the Partnership does
not expect future expenditures related to these retained environmental
liabilities to be material.
Management does not believe any significant additional amounts
will be required to maintain compliance with the study, the retained
environmental liabilities of the crude gathering business or other
environmental requirements other than routine expenditures 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.
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 Refined Product Prices. The Partnership is
impacted by fluctuations in the cost of refined products purchased
from Shell 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. None.
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
On January 17, 2001, the Partnership filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy ") in
the U. S. Bankruptcy Court for the Northern District of Texas, Abilene
Division (the "Bankruptcy Court"), and was authorized to continue
managing and operating its 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 was the Partnership's primary lender and also owned
two-thirds of the Redeemable Preferred Equity (see below). Varde was
claiming a transaction fee of $17,621,000 and the rights to certain
securities it had assigned to Management effective December 31, 1997.
An adversary proceeding involving all of the contested issues between
Varde and the Partnership was completed on April 6, 2001, and the
Bankruptcy Court issued its initial ruling ("Initial Ruling") on
September 4, 2001.
Under Chapter 11, certain claims against the Partnership in
existence prior to the filing of the petition for relief under the
federal bankruptcy laws were stayed while the Partnership continued
business as a debtor in possession. These claims are reflected in the
June 30, 2002 and December 31, 2001 balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to
compromise) may have arisen or may arise subsequent to the filing date
resulting from rejection of executory contracts, including leases, and
from determination by the Bankruptcy Court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed
amounts such as the claims of the former employees (see "Part II.
Other Information, Item 1. Legal Proceedings"). Claims secured by the
Partnership's assets ("Secured Claims") also were stayed. The Secured
Claims were secured primarily by the Partnership's cash, accounts
receivables, and property, plant and equipment.
The Partnership received approval from the Bankruptcy Court to
pay or otherwise honor certain prepetition obligations, including
employee wages, liabilities for excise taxes and accounts payable owed
to Shell for the purchase of refined product.
On January 18, 2001, the Managing General Partner, the 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
Bankruptcy Court, and each of them was authorized to continue managing
and operating its business as debtors in possession subject to the
control and supervision of the Bankruptcy Court.
On or about May 17, 2001, the Partnership, the Managing General
Partner, and Pride SGP filed their proposed Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code and their
proposed Disclosure Statement relating thereto with the Bankruptcy
Court. To reflect the Initial Ruling of the Bankruptcy Court; the
Varde settlement agreement entered into by the Partnership, Varde and
others effective October 18, 2001 (the "Varde Settlement Agreement");
and certain other matters, the Partnership and the Managing General
Partner thereafter amended their Plan of Reorganization and their
Disclosure Statement several times. The Third Amended and Restated
Plan of Reorganization of the Partnership and the Managing General
Partner dated November 19, 2001 (as amended by modifications thereto
filed with the Bankruptcy Court on January 8, 2002 and January 11,
2002, respectively) is referred to herein as the "Plan" and the Third
Amended and Restated Disclosure Statement for Debtors' Joint Chapter
11 Plan of Reorganization dated November 19, 2001 is referred to
herein as the "Disclosure Statement." The Plan and Disclosure
Statement were mailed to the impaired creditors and equity holders who
were entitled to vote on confirmation of the Plan.
On January 11, 2002 (the "Confirmation Date"), the Bankruptcy
Court signed an order confirming the Plan after the Court heard
testimony on January 8, 2002 that all classes entitled to vote
("Impaired Classes") had voted in favor of the Plan. The Partnership
and the Managing General Partner emerged from Bankruptcy on January
22, 2002 (the "Effective Date").
At June 30, 2002, current liabilities subject to compromise
included liabilities of the Products Marketing Business (continuing
operations) of $68,000 and liabilities of the crude gathering business
(discontinued operations) of $991,000.
In the second quarters of 2002 and 2001, the Partnership accrued
$93,000 and $286,000, respectively, in bankruptcy related expenses.
The Partnership accrued $297,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$371,000 in bankruptcy related expenses for the first six months of
2002 and 2001, respectively.
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. As a result of problems
associated with the startup of the products pipeline by Shell in 1998,
Shell agreed to certain contract concessions including maintaining the
Partnership's refined products inventory at the Products Terminals and
in the San Angelo Pipeline provided the Partnership reimburses Shell
for its carrying costs, which primarily includes interest costs. This
arrangement substantially reduces the lag between the time the
Partnership pays Shell for the product, 10 to 20 days after the sale,
and the time the Partnership receives payment from its customers.
As previously discussed, the Partnership is required to reimburse
Shell its carrying costs of inventory, including interest costs
beginning January 1, 2000. As an alternative to providing Shell with
a letter of credit to secure the Partnership's payable to Shell and to
offset the interest costs associated with carrying the inventory, the
Partnership deposited $14,000,000 with Shell in the first and second
quarters of 2000 and maintained the $14,000,000 deposit through
January 21, 2002. On January 22, 2002, Shell reduced the deposit by
$4,000,000. Generally, the deposit is included as an offset to
accounts payable in the financial statements; however, to the extent
the deposit to Shell exceeds the payable to Shell, the excess is
reclassified from accounts payable in the balance sheet to accounts
receivable. Since the deposit exceeded the payable at June 30, 2002
and December 31, 2001, the Partnership reclassified $220,000 and
$6,722,000, respectively, from accounts payable to accounts
receivable. Shell pays the Partnership interest income on the amount
by which the deposit exceeds the value of the refined products
inventory maintained by Shell.
Wells Fargo Bank, N.A. ("Wells Fargo") currently provides a
$721,000 letter of credit for the Partnership which is secured by a
certificate of deposit.
On December 31, 1997, Varde purchased and assumed the then
existing lenders' rights and obligations under the Partnership's
outstanding bank debt. Varde concurrently made additional loans to
the Partnership. As a result of Varde's assumption of the
Partnership's bank debt and additional loans made by it, Varde owned
the following securities of the Partnership: $20,000,000 of a Series A
Term Loan (the "A Term Loan"), $9,500,000 of a Series B Term Loan (the
"B Term Loan"), $4,689,000 of a Series C Term Loan (the "C Term
Loan"), $2,500,000 of a Subordinate Note A (the "Subordinate Note A"),
$9,322,000 of Series B Cumulative Convertible Preferred Units ("B
Preferred Units"), $5,000,000 of Series C Cumulative Convertible
Preferred Units ("C Preferred Units") and $2,757,000 of Series D
Cumulative Preferred Units ("D Preferred Units"). The A Term Loan, B
Term Loan, C Term Loan and Subordinate Note A are collectively
referred to herein as the debt (the "Debt"). The B Preferred Units,
the C Preferred Units and the D Preferred Units are collectively
referred to herein as redeemable preferred equity (the "Redeemable
Preferred Equity"). Effective 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
securities issued by the Partnership to Varde: (i) $6,000,000 of the B
Term Loan, (ii) the C Term Loan, (iii) the Subordinate Note A, (iv)
the B Preferred Units, (v) the C Preferred Units and (vi) the 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 Varde's assumption of the outstanding bank debt,
additional loans to the Partnership, subsequent interest being paid in
kind, proceeds from the sale of the Crude Gathering System being
applied to the A Term Loan, scheduled principal payments, payments out
of the proceeds from the Partnership's litigation against the United
States Defense Energy Support Center and payments under the Varde
Settlement Agreement, Varde's interest in such Debt and Redeemable
Preferred Equity was completely paid off.
Management's one-third interest in the C Term Loan, Subordinate
Note A and Redeemable Preferred Equity was converted into the New
Redeemable Preferred Equity on January 22, 2002 pursuant to the Plan
(see "Part II. Other Information, Item 1. Legal Proceedings").
Prior to the Initial Ruling by the Bankruptcy Court, the
Partnership had accrued interest expense at the statutory rate of 6%
("Statutory Rate") on $6,171,000 of the C Term Loan and $2,000,000 of
the Subordinate Note A beginning July 27, 2000 as a result of the
tender by the Partnership to Varde of $8,171,000 on such date (the
"Tender"). In the Initial Ruling, the Bankruptcy Court determined
that Varde was not entitled to interest on the Tender. When the
Partnership deposited $9,360,000 in the District Court of Taylor
County, Texas (the "Texas Court") on August 23, 2000 (the "First
Deposit"), the Partnership considered this a tender and originally
accrued 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; however, the Bankruptcy Court's Initial
Ruling concluded the First Deposit was not a valid tender and interest
continued to accrue on $1,188,000 of the Subordinate Note A at the
contractual rate. Prior to the Bankruptcy Court's Initial Ruling, the
Partnership accrued interest expense of $92,000 and $48,000 at the
Statutory Rate on the C Term Loan and Subordinate Note A,
respectively, in the second quarter of 2001 and $183,000 and $95,000
at the Statutory Rate on the C Term Loan and Subordinate Note A,
respectively, in the first six months of 2001; however, the accruals
were reversed in the third quarter of 2001 as a result of the Initial
Ruling.
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 would be used to
redeem a portion of the Redeemable Preferred Equity along with paying
accumulated arrearages on those securities (see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition - Cash Distributions and Preferred
Arrearages"). The First Deposit and Second Deposit are collectively
referred to as the deposits (the "Deposits"). For the second quarter
of 2001 and the first six months of 2001, the Deposits with the Texas
Court accrued interest income of $226,000 and $484,000, respectively.
The Texas Court returned the Deposits along with accrued interest of
$1,037,000 to the Partnership in November 2001.
Prior to the Bankruptcy, cash interest and distributions were
limited under the loan documents. Interest in excess of those
limitations on the A Term Loan, B Term Loan, C Term Loan and
Subordinate Note A were paid in kind. Distributions in excess of
those limitations on the Redeemable Preferred Equity accumulated in
arrears (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition -
Cash Distributions and Preferred Arrearages"). Prior to the Tender
and the three payments by the Partnership to Varde on July 25 and July
26, 2000, totaling $16,606,000 (the "Payments"), 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 bore interest of 18% through maturity. As mentioned
before, the Partnership originally accrued interest expense on the C
Term Loan at the Statutory Rate of 6% per annum after the Tender on
July 27, 2000 and on the Subordinate Note A at the Statutory Rate
after the Tender on July 27, 2000 and the First Deposit on August 23,
2000; however, the accruals were reversed as a result of the
Bankruptcy Court's Initial Ruling. The Subordinate Note A bore
interest at prime plus one percent. The prime rate was 4.75% at
January 22, 2002.
As a result of the cash interest and principal payment
limitations, interest on the B Term Loan, C Term Loan, and the
Subordinate Note A had been paid in kind prior to the Payments and the
Tender. Since the Tender only covered $2,000,000 of the Subordinate
Note A, interest continued to be paid in kind on $1,118,000 of the
Subordinate Note A through November 21, 2001. From November 22, 2001
through January 22, 2002, interest continued to be paid in kind on
$438,000 of the Subordinate Note A owned by Management. The preferred
distributions continued accumulating in arrears on the entire balance
of the Redeemable Preferred Equity through November 21, 2001. From
November 22, 2001 through January 22, 2002, the distributions
continued accumulating in arrears on the Redeemable Preferred Equity
owned by Management (see "Part II. Other Information, Item 1. Legal
Proceedings").
On November 21, 2001, pursuant to the Varde Settlement Agreement,
Varde received $12,000,000 and an allowed unsecured claim for
$11,000,000 (net of a $2,000,000 discount) ("Allowed Unsecured Claim")
from the Partnership and Varde's two-thirds interest in the C Term
Loan, Subordinate Note A, and Redeemable Preferred Equity were retired
(the amount of these securities retired were $4,110,000, $2,216,000
and $16,491,000 (which included accrued distributions of $5,104,000),
respectively). At December 31, 2001, the Allowed Unsecured Claim was
shown net of the $2,000,000 discount and $4,000,000 of the claim was
included in current liabilities subject to compromise and the other
$7,000,000 was included in long-term liabilities subject to
compromise.
The Partnership also recorded a premium of $183,000 in connection
with the Varde Settlement Agreement since the $12,000,000 payment to
Varde and the Allowed Unsecured Claim of $11,000,000 exceeded Varde's
share of the Debt and Redeemable Preferred Equity as of November 21,
2001. The Allowed Unsecured Claim of $11,000,000 did not accrue any
interest from November 21, 2001, to January 22, 2002, the date it was
paid.
On January 22, 2002, Management received $11,500,000 in New
Redeemable Preferred Equity of the Partnership for its one-third
interest in the C Term Loan, Subordinate Note A, and Redeemable
Preferred Equity (the balance on these securities as of January 22,
2002 was $2,055,000, $1,113,000 and $8,353,000 (which included accrued
distributions of $2,660,000), respectively) (see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition - Cash Distributions and Preferred
Arrearages" and "Part II. Other Information, Item 1. Legal
Proceedings").
The C Term Loan of $2,055,000 held by Management was secured by
substantially all of the Partnership's assets. On January 22, 2002,
Management received New Redeemable Preferred Equity of the Partnership
for the C Term Loan and as a result no longer has a security interest
in the Partnership's assets.
Cash flows will be significantly affected by fluctuations in the
cost and volume of refined products and the timing of accounts
receivable collections. For the first six months of 2002, cash was
provided by a decrease in accounts receivable (as a result of a
$6,502,000 decrease in the amount of the Shell payable being
reclassified from accounts payable to accounts receivable from
December 31, 2001 to June 30, 2002 and a decrease in refined product
prices) and was partially offset by a decrease in accounts payable (as
a result of the $4,000,000 reduction in the Shell deposit and a
decease in refined product prices). For the first six months of 2001,
cash was utilized as a result of an increase in accounts receivable
(as a result of the higher refined product prices).
As a result of emerging from Bankruptcy and fully paying off
Varde, the Partnership expects over the next several years to have
positive cash flow from operations and expects its net income before
extraordinary items during the current fiscal year to be close to
break even, in each case before annual payments of $1,406,000 for the
next ten years beginning January 22, 2003 (for the years eleven
through fifteen, the payments will decrease to $940,000 annually) on
the New Redeemable Preferred Equity held by Management and any
payments due on the G Preferred Units after October 1, 2004.
The Partnership's ability to improve its 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, 2002
and ends March 31, 2003, the Partnership will supply approximately
34,325,000 gallons, which is a 4% increase from the volumes that it
supplied under the previous contract with the Government, which began
April 1, 2001 and ended March 31, 2002. The Partnership believes that
its profit margins under the new contract should be similar to those
under the previous contract.
The Partnership's 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.
The Partnership does not currently have a working capital loan
facility. As a result of its receipt of $5,400,000 from the sale of
the remaining refinery equipment and the Aledo pipeline and $4,000,000
from the reduction of the Shell deposit, the Partnership believes it
does not currently need such a facility. The Partnership expects
that, for the foreseeable future, it will be able to fund its working
capital requirements and its planned capital expenditures from cash on
hand and cash generated from operations.
Capital Expenditures
Capital expenditures totaled $206,000 and $441,000 for the second
quarter of 2002 and the first six months of 2002, respectively,
compared to $3,000 and $4,000 for the second quarter of 2001 and the
first six months of 2001, respectively. In the first quarter of 2002,
the Partnership had included $1,817,000 in capital expenditures
related to the purchase of an aircraft. Since the aircraft was
subsequently sold to Management for $1,817,000 in the second quarter
of 2002, the Partnership excluded that amount from capital
expenditures in the second quarter of 2002 and the first six months of
2002. The Partnership is now leasing the aircraft from Management
(see Note 4 in the Financial Statements for additional information on
the lease terms).
Management anticipates spending an aggregate of $321,000 in the
last six months of 2002 and in the year 2003 for environmental
expenditures. The Partnership had accrued $142,000 at June 30, 2002
and currently expects to spend $72,000 and $107,000 for additional
environmental expenditures to be incurred in the ordinary course of
business for the remaining portion of 2002 and for 2003, respectively.
Cash Distributions and Preferred Arrearages
In conjunction with Varde's assumption of the outstanding bank
debt, Varde received $17,079,000 of Redeemable Preferred Equity
including $9,322,000 of B Preferred Units, $5,000,000 of C Preferred
Units and $2,757,000 of D Preferred Units which were all redeemable on
December 31, 2002 (see "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation - Financial Condition
- - Financial Resources and Liquidity"). The preferential quarterly
payments on the B Preferred Units and C Preferred Units were 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 accumulated in arrears at 8% per annum in the
first three years. The preferential quarterly payments on the D
Preferred Units were 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 accumulated in arrears
at 13% per annum in the first three years.
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 "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Financial Resources and
Liquidity") would be used to redeem $3,117,000 of the B Preferred
Units and $1,672,000 of the 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.
The Partnership accrued interest expense at the Statutory Rate (see
"Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation - Financial Condition - Financial Resources
and Liquidity" for the definition of Statutory Interest) in the amount
of $104,000 and $208,000 on the B Preferred Units and C Preferred
Units in the second quarter of 2001 and the first six months of 2001,
respectively, to the extent that the Second Deposit and $1,000 of the
First Deposit were expected to be applied to such securities. As a
result of the Bankruptcy Court's Initial Ruling, the Partnership
reversed the interest expense accrual in the third quarter of 2001 and
increased the accumulated arrearages on the B Preferred Units and C
Preferred Units by $626,000 for the period August 31, 2000 to June 30,
2001. For the second quarter of 2001 and the first six months of
2001, the Partnership accumulated arrearages of $475,000 and $937,000,
respectively, on the Redeemable Preferred Equity. No arrearages
accumulated on the Redeemable Preferred Equity during the second
quarter of 2002 or the first six months of 2002. On November 21,
2001, the accumulated arrearages were reduced by $5,104,000 as a
result of Varde receiving $12,000,000 and the Allowed Unsecured Claim
of $11,000,000 (net of a $2,000,000 discount) under the Varde
Settlement Agreement for its two-thirds interest in the C Term Loan,
Subordinate Note A and Redeemable Preferred Equity.
On January 22, 2002, Management received $11,500,000 of Senior
Preferred Units of the Partnership ("New Redeemable Preferred Equity")
for its one-third interest in the C Term Loan, Subordinate Note A, and
Redeemable Preferred Equity which included accumulated arrearages on
such Redeemable Preferred Equity of $2,660,000. The New Redeemable
Preferred Equity issued to Management accrues distributions at 7.5%
per annum. Pursuant to the Plan, Management's C Term Loan and
Subordinate Note A were converted into $3,200,000 of New Redeemable
Preferred Equity which matures January 22, 2012 and is amortized in
ten equal annual installments beginning on January 22, 2003 and
Management's Redeemable Preferred Equity was converted into $8,300,000
of New Redeemable Preferred Equity which matures January 22, 2017 and
is amortized in fifteen equal annual installments beginning on January
22, 2003. For the second quarter of 2002 and the first six months of
2002, the New Redeemable Preferred Equity accrued distributions of
$216,000 and $381,000. Under the terms of the New Redeemable
Preferred Equity, the Partnership will make ten annual installments of
$1,406,000 and then five annual installments of $940,000.
At June 30, 2002 and December 31, 2001, Pride SGP held the Series
G Preferred Units with a stated value of $514,000 and $3,144,000,
respectively ("G Preferred Units"). The Partnership, the Managing
General Partner and Management entered into the Pride SGP Settlement
Agreement with Pride SGP and the Departing Shareholders of Pride SGP
on January 8, 2002 (see "Part II. Other Information, Item 1. Legal
Proceedings"). Under the Pride SGP Settlement Agreement, the
Partnership redeemed G Preferred Units with a stated value of $104,000
from Pride SGP for $50,000 on March 18, 2002 and, on April 3, 2002,
redeemed G Preferred Units with a stated value of $2,526,000 from the
Departing Shareholders of Pride SGP for $500,000 and a non-interest
bearing payable of $725,000 due on September 30, 2002. Pride SGP had
distributed G Preferred Units with a stated value of $2,526,000 to the
Departing Shareholders of Pride SGP in exchange for their interest in
Pride SGP. The remaining $514,000 of G Preferred Units held by Pride
SGP will not accrue any distributions prior to October 1, 2004.
Beginning October 1, 2004, distributions will accrue on the remaining
G Preferred Units at a rate equal to the lesser of (i) the
Partnership's net income less any distributions accrued or paid on the
New Redeemable Preferred Equity or (ii) 10% per annum.
At June 30, 2002 and December 31, 2001, 4,950,000 common limited
partner units ("Common Units") were outstanding, representing a 98%
limited partner interest. As of June 30, 2002, Pride SGP, Management
and the public owned 250,000, 1,277,000 and 3,423,000 Common Units,
respectively. An owner of Common Units is referred to herein as a
common unitholder ("Common Unitholder").
The terms of the G Preferred Units prohibit the payment of
distributions on the Common Units as long as any G Preferred Units are
outstanding. In addition, the terms of the New Redeemable Preferred
Equity require that all distributions on the New Redeemable Preferred
Equity must be current before any distributions are paid on the G
Preferred Units or Common Units. Further, under the Third Amended and
Restated Agreement of Limited Partnership of Pride Companies, L. P.
(the "Partnership Agreement"), distributions payable on the Common
Units are equal to 98% of the Available Cash (as defined in the
Partnership Agreement) of the Partnership for a particular quarter.
Generally, Available Cash is equal to the net income of the
Partnership plus depreciation less debt payments and payments with
respect to certain preferred equity, capital expenditures and
investments. Available Cash may also be increased or decreased by
reductions of or additions to, respectively, certain reserves
established by the Managing General Partner in accordance with the
Partnership Agreement. Based on current operations, annual payments
on the New Redeemable Preferred Equity and restrictions on
distributions contained in the G Preferred Unit instrument, Management
does not expect to pay distributions to Common Unitholders for the
foreseeable future.
At June 30, 2002, the Common Units rank behind debt, as well as
the New Redeemable Preferred Equity and G Preferred Units. As a
result of debt and preferred equity securities ranking ahead of the
Common Units and taking into consideration the various preferential
calls on available cash contained in the preferred equity securities
instruments (including annual distributions and required amortization
of the New Redeemable Preferred Equity), Common Unitholders could be
allocated taxable income under the Partnership Agreement in the future
without a corresponding distribution of cash to offset any potential
tax liability.
In accordance with applicable Bankruptcy rules, certain of the
Partnership's debt is being cancelled because the holders of such debt
did not file timely proofs of claim or because such claims are not
allowed even though proofs of claim were timely filed. As a result,
the Partnership is required to recognize income with respect to such
debt cancellation and, subject to the possible availability of
offsetting deductions, to allocate the resulting net taxable income to
Common Unitholders even though the Common Unitholders do not receive a
distribution of cash. The Partnership estimates taxable income of
$9,600,000 related to cancellation of indebtedness income of which 98%
will be allocated to Common Unitholders based on the number of months
each Common Unitholder held his or her Common Units during the taxable
year that ends December 31, 2002.
On January 18, 2002, the Partnership sold the remaining Refinery
equipment and Aledo pipeline for $5,400,000 since those assets were no
longer used in its business and to further increase working capital.
The gain from the sale of those assets for tax purposes is estimated
to be $3,100,000 of which 98% will be allocated to Common Unitholders
before any basis adjustment attributable to specific Common
Unitholders. Common Unitholders who purchased Common Units after July
of 2000 do not have any basis in these assets based on the trading
price of the Common Units after such date. Therefore, those Common
Unitholders will recognize gain to the extent of their allocable share
of the proceeds of $5,400,000. Such gain will be allocated to those
Common Unitholders who held Common Units on January 31, 2002.
As a result of the Partnership paying Varde $11,000,000 on
January 22, 2002, Varde will be allocated $3,454,000 of gross income,
thus decreasing the amount of gross income allocable to Common
Unitholders by 98% of that amount. The reduction in gross income
allocated to Common Unitholders will be based on the number of months
each Common Unitholder held his or her Common Units during the taxable
year that ends December 31, 2002.
Common Unitholders will also be allocated 98% of a loss of
$2,100,000 on a loan to a subsidiary that is now considered worthless.
The deduction will be allocated to Common Unitholders based on the
number of months each Common Unitholder held his or her Common Units
during the taxable year that ends December 31, 2002.
The above allocations are in addition to the 98% of taxable
income that will be allocated to Common Unitholders from normal
operations for the taxable year ended December 31, 2002 adjusted for
basis adjustment attributable to specific Common Unitholders. The
actual tax impact on a Common Unitholder depends upon such Common
Unitholder's overall personal tax situation and whether such Common
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Under an agreement with Shell, Shell maintained refined products
inventory for the Partnership during the second quarters of 2002 and
2001 thus eliminating the Partnership's exposure to changing refined
product prices (see "Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operation - Financial Condition -
Financial Resources and Liquidity").
The Partnership did not have any debt outstanding under credit
facilities as of June 30, 2002.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
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 has no off-balance sheet arrangements or
transactions with unconsolidated, special purpose entities that would
expose the Partnership to liability that is not reflected on the face
of its financial statements.
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 $50,000 and had accrued for this amount at
June 30, 2002.
The Partnership continues to be responsible for certain
environmental liabilities associated with the crude gathering system
sold to Sun 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 $92,000 accrued as of June 30, 2002 for remediation of the sites,
the Partnership does not expect future expenditures related to these
retained environmental liabilities to be material (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Results of Operations - Other Factors").
Management does not believe any significant additional amounts
will be required to maintain compliance with the study, the retained
environmental liabilities of the Crude Gathering System or other
environmental requirements other than routine expenditures in the
ordinary course of business.
In April 2001, a Common Unitholder notified the Partnership he
believes the Partnership 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 demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership did
not change 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 were 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 Common
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.
For the second quarter of 2001 and the first six months of 2001,
the Partnership accrued legal fees and other expenses of $505,000 and
$847,000, respectively, in connection with the dispute with Varde.
For the first six months of 2002, the Partnership received a credit
for legal fees of $138,000 in connection with the dispute with Varde.
The Partnership did not record any legal fees or expenses related to
the dispute with Varde in the second quarter of 2002.
In the second quarters of 2002 and 2001, the Partnership accrued
$93,000 and $286,000, respectively, in bankruptcy related expenses.
The Partnership accrued $297,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$371,000 in bankruptcy related expenses for the first six months of
2002 and 2001, respectively.
On May 22, 2001, Messrs. Doug Morris, Brad Morris, Jimmy Morris,
Tommy Broyles, and Mike Dunigan, as beneficiary of certain Dunigan
family trusts, (collectively the "Claimants") each filed a proof of
claim against the Partnership and the Managing General Partner in the
amount of $14,541,000 each plus interest, attorney fees and costs.
The Claimants were shareholders of Pride SGP and directors of Pride
SGP with the exception of Mr. Jimmy Morris who was an advisory
director. The Claimants alleged that they and Pride SGP were
wrongfully deprived of assets, rents payable, interest due and other
claims as a result of certain transactions beginning in 1994. On
December 10, 2001, those shareholders and Pride SGP withdrew their
proof of claim.
On January 8, 2002, the Partnership, the Managing General Partner
and Management entered into the Pride SGP settlement agreement ("Pride
SGP Settlement Agreement") with Pride SGP and the Departing
Shareholders of Pride SGP (see below). Under the Pride SGP Settlement
Agreement, the Partnership redeemed G Preferred Units with a stated
value of $104,000 from Pride SGP for $50,000 on March 18, 2002 and, on
April 3, 2002, redeemed G Preferred Units with a stated value of
$2,526,000 from the Departing Shareholders of Pride SGP for $500,000
and a non-interest bearing payable of $725,000 due on September 30,
2002. Pride SGP had distributed G Preferred Units with a stated value
of $2,526,000 to the Departing Shareholders of Pride SGP in exchange
for their interest in Pride SGP. As a result of the redemption of the
Departing Shareholders' interests in Pride SGP, all of the outstanding
stock of Pride SGP is now owned by Messrs. Stephens, Malone and
Caddell.
On May 22, 2001, five former employees filed proofs of claim
totaling $3,213,000 plus amounts unknown related to unpaid
compensation for 1998 through 2000. After a ruling by the Bankruptcy
Court on May 14, 2002 concerning those proofs of claim, the
Partnership accrued $547,000 and has reported it as a loss on disposal
of discontinued operations in the second quarter of 2002 since the
former employees worked for the crude gathering system. This is in
addition to the $70,000 in severance that the Partnership had accrued
prior to that ruling. The former employees and the Partnership have
asked the Bankruptcy Court to reconsider certain aspects of the
ruling. The Partnership has not received an indication of when or if
the Bankruptcy Court will revise its ruling.
Several other parties have filed proofs of claim which the
Partnership has objected to or plans on objecting to; however, those
disputed claims are not expected to have a material effect on the
Partnership.
On January 11, 2002, the Bankruptcy Court signed an order, after
a hearing on January 8, 2002, confirming, under Chapter 11 of the
United States Bankruptcy Code, the Plan submitted by the Partnership
and the Managing General Partner. The Plan took effect on January 22,
2002 and the two companies emerged from bankruptcy at that time. All
creditors whose claims are not disputed or who filed proofs of claim
that are allowed under the Bankruptcy Code are expected to be paid in
full as provided in the Plan. The following summary of the Plan is
qualified in its entirety by reference to the Plan. Capitalized terms
that are not defined herein shall have the meanings given them in the
Plan.
The Plan provides for the following treatment for the Allowed
Claims and Allowed Interests of Creditors and Interest holders of the
Partnership:
(i) Varde was deemed to have an Allowed Unsecured Claim against
the Partnership in the amount of $11,000,000 (net of a $2,000,000
discount) that would be paid by the Partnership as follows: (1)
$4,000,000 paid in cash on the Effective Date; and (2) the balance
paid by delivery of the Varde Unsecured Note in the original principal
amount of $9,000,000 (before the $2,000,000 discount). The
Partnership paid Varde $11,000,000 on the Effective Date and as a
result received the $2,000,000 discount on the Varde Unsecured Note.
(ii) Certain Claims and Interests of Management are treated
as follows:
a. The Allowed Secured Claims of Management (which is
referred to as the C Term Loan in the financial statements) against
the Partnership were satisfied with a separate series of New
Redeemable Preferred Equity with an aggregate $2,100,000 liquidation
preference, which provides for cumulative distributions of 7.5% per
annum, and is subject to mandatory redemption in equal annual
installments as necessary to fully redeem such series of New
Redeemable Preferred Equity over 10 years.
b. The Allowed Unsecured Claims of Management (which
includes the Subordinate Note A and amounts due under indemnity
agreements) against the Partnership was satisfied as follows: (i) the
Partnership paid $388,000 to Management on January 22, 2002 for their
Allowed Unsecured Claims arising under indemnity obligations of the
Partnership, plus (ii) Management received New Redeemable Preferred
Equity with an aggregate $1,100,000 liquidation preference, which
provides for cumulative distributions of 7.5% per annum, and is
subject to mandatory redemption in equal annual installments as
necessary to fully redeem such series of New Redeemable Preferred
Equity over 10 years.
c. The Allowed Existing Partnership Preferred Interests
(which is referred to as the Redeemable Preferred Equity in the
financial statements) of Management was satisfied by Management's
receipt of New Redeemable Preferred Equity with an aggregate
$8,300,000 liquidation preference, which provides cumulative
distributions of 7.5% per annum, and is subject to mandatory
redemption in equal annual installments as necessary to fully redeem
such series of New Redeemable Preferred Equity over 15 years. The New
Redeemable Preferred Equity was subject to a $2,000,000 potential
discount depending on when the Varde Unsecured Note was retired.
Since Varde was paid $11,000,000 on the Effective Date, the New
Redeemable Preferred Equity owned by Management was not discounted.
(iii) Other Creditors are treated as follows:
a. Allowed Administrative Expenses of the Partnership will
be paid in full as soon as practical after the Effective Date, or
after such expense is Allowed by the Court.
b. Allowed Unsecured Priority Tax Claims of the Partnership
will be paid in full on the later of (1) as soon as practicable after
the Effective Date, (2) as soon as practicable after such Claim
becomes an Allowed Claim, or (3) if the payment on the Claim is not
due as of the Confirmation Date, when the payment is due in the
ordinary course of the Partnership's business.
c. Allowed Secured Tax Claims of the Partnership will be
paid with interest at 8% per annum in the ordinary course of the
respective Partnership's business as described more fully in the Plan.
Creditors will retain any liens until the tax is paid.
d. Allowed Non-Tax Priority Claims will be paid in full by
the Partnership as soon as practical after the Effective Date or after
such claim is Allowed, whichever is later.
e. The Allowed Secured Claim of Fleet National Bank against
the Partnership will be paid in full by the Partnership as soon as
practical after the Effective Date or after such claim is Allowed,
whichever is earlier.
f. Allowed Royalty Claims against the Partnership will be
paid in full by the Partnership as due in the ordinary course of its
business, on the later of the Effective Date or such date that the
Claim becomes due in accord with the Texas Natural Resources Code (see
Note 5).
g. Allowed General Unsecured Claims of the Partnership will
be paid by the Partnership in full with 7.5% interest per annum from
the Effective Date upon the later of six months after the Effective
Date or when Allowed; however, if such claims are not disputed the
Partnership plans on paying them earlier.
(iv) Interest holders received the following treatment pursuant
to the Plan:
a. The Managing General Partner retained its Allowed
Existing Partnership General Partnership Interest.
b. At the Confirmation Hearing, the Partnership, the
Managing General Partner and Management, on the one hand, and Pride
SGP and certain of its shareholders (referred to herein as
the "Departing Shareholders"), on the other hand entered into the
Pride SGP Settlement Agreement. Messrs. Malone, Stephens and Caddell
retained their interest in Pride SGP. All other shareholders of Pride
SGP are Departing Shareholders. Under the Pride SGP Settlement
Agreement, Pride SGP retained its Existing Partnership General
Partnership Interest since the agreement was approved by the
Bankruptcy Court.
c. Pride SGP retained its Allowed Existing Partnership
Subordinated Preferred Interests (which is referred to as the G
Preferred Units in the financial statements) and such interest
continues to be subordinated to the New Redeemable Preferred Equity.
Pursuant to the SGP Settlement Agreement, however, the Plan was
amended to provide for the following alternative treatment since
certain Conditions Precedent were satisfied:
i. The Partnership paid the Departing Shareholders of
Pride SGP, who were holders of units of the Existing Partnership
Subordinated Preferred Interests (or G Preferred Units), $500,000 in
cash on April 3, 2002 (the "First Payment"). On September 30, 2002,
the Partnership will pay the Departing Shareholders an additional
$725,000 (the "Second Payment"). (Collectively, the First Payment and
Second Payment are referred to as the "Pride SGP Payments.") The
Pride SGP Payments will be in full and final settlement and redemption
of $2,526,000 (based on the stated value thereof) of the Existing
Partnership Subordinated Preferred Interests (or G Preferred Units)
that were distributed by Pride SGP to the Departing Shareholders. The
Pride SGP Payments will be made to Tommy Broyles as Trustee for the
Departing Shareholders and he shall be responsible for allocating the
Pride SGP Payments among the Departing Shareholders.
ii. The Partnership paid Pride SGP $50,000 in cash on
March 18, 2002 to redeem $104,000 (based on the stated value thereof)
of the Existing Partnership Subordinated Interests (or G Preferred
Units) held by Pride SGP.
d. Allowed Existing Partnership Common Interests retained
their Interests.
Also, as described above, existing Redeemable Preferred Equity
owned by Management was cancelled and New Redeemable Preferred Equity
was issued with respect thereto. In addition, Pride SGP retained its
Existing Partnership Subordinated Preferred Interests (or G Preferred
Units) and its Existing Partnership General Partnership Interest
remained outstanding and certain of its Existing Partnership
Subordinated Preferred Interests (or G Preferred Units) were redeemed
pursuant to the Pride SGP Settlement Agreement.
Under the Plan, the Partnership had proposed a reverse Common
Unit split so that the number of Common Unitholders would be less than
300 and the Partnership could avoid the expenses of being a public
company. Since the requisite number of Common Unitholders did not
vote for the reverse Common Unit split, the Common Units that they own
were unaffected by the Plan. All other voting classes in the
bankruptcy voted in favor of the Plan.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
Prior to the Bankruptcy, cash interest and distributions were
limited under the loan documents. Interest in excess of those
limitations on the A Term Loan, B Term Loan, C Term Loan and
Subordinate Note A were paid in kind. Distributions in excess of
those limitation on the Redeemable Preferred Equity (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition - Cash Distributions and
Preferred Arrearages") accumulated in arrears. Distributions on the B
Preferred Units, C Preferred Units and D Preferred Units are payable
on the 5th day of the second month in each quarter. For the second
quarter of 2001 and the first six months of 2001, the Partnership
accumulated arrearages of $475,000 and $937,000, respectively, on
these preferred equity securities.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Third Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1999
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L. P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).
b. Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRIDE COMPANIES, L. P.
(Registrant)
By: Pride Refining, Inc.
as its Managing General Partner
Date: August 14, 2002 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: August 14, 2002 /s/ George Percival
Principal Financial Officer
(Signing as Principal Financial
Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pride Companies, L.P. (the
"Partnership"), on Form 10-Q for the quarterly period ended June 30,
2002, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), the undersigned, in the capacities and on the
dates indicated below, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the Partnership.
Date: August 14, 2002 By: /s/Brad Stephens
Brad Stephens
Chief Executive Officer
Date: August 14, 2002 By: /s/George Percival
Principal Financial Officer
PRIDE COMPANIES, L. P.
Exhibits to
Report to Form 10-Q
INDEX TO EXHIBITS
Exhibit Number
(Reference to
Item 601 of
Regulation S-K)
_________________
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Third Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1999
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L. P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).