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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 September 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 November 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)
September 30,
2002 December 31,
(unaudited) 2001
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 5,722 $ 13,294
Restricted cash 762 909
Accounts receivable, less allowance
for doubtful accounts 14,917 14,464
Inventories 83 963
Other current assets 500 364
----------- -----------
Total current assets 21,984 29,994
Property, plant and equipment 31,057 30,772
Accumulated depreciation (17,863) (16,809)
----------- -----------
Property, plant and equipment - net 13,194 13,963
Assets no longer used in the business - 4,235
Other assets 10 105
----------- -----------
$ 35,188 $ 48,297
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Current liabilities not subject
to compromise:
Accounts payable $ 2,836 $ 1,619
Accrued payroll and related benefits 256 250
Accrued taxes 1,407 2,534
Other accrued liabilities 883 687
Current portion of long-term debt 725 2,055
----------- -----------
Subtotal 6,107 7,145
Current liabilities subject
to compromise 687 8,568
----------- -----------
Total current liabilities 6,794 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) 16,519 8,374
General partners' interest (139) (307)
----------- -----------
$ 35,188 $ 48,297
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L. P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
Three Months Ended September 30,
2002 2001
----------- -----------
Revenues $ 65,941 $ 63,364
Cost of sales and operating expenses,
excluding depreciation 64,092 60,942
Marketing, general and
administrative expenses 1,178 834
Depreciation 378 359
----------- -----------
Operating income 293 1,229
Other income (expense):
Interest income 32 252
Interest expense (including interest
paid in kind of $0 and $126,
respectively) (4) 731
Credit and loan fees (1) (20)
Loss on sale of assets (11) -
Other - net (2) 7
----------- -----------
14 970
----------- -----------
Net income from continuing operations
before reorganization items 307 2,199
Reorganization items:
Professional fees and administrative
expenses 51 259
----------- -----------
Net income from continuing
operations 256 1,940
Discontinued operations:
Loss on disposal of discontinued
operations (8) -
----------- -----------
Net income from operations 248 1,940
Extraordinary gain - Income from
cancellation of indebtedness 211 -
----------- -----------
Net income $ 459 $ 1,940
=========== ===========
Basic and diluted net income
per Common Unit:
Net income from continuing
operations less preferred
distributions $ .01 $ .12
Net loss from discontinued operations - -
Extraordinary gain .04 -
----------- -----------
Basic and diluted net income $ .05 $ .12
=========== ===========
Numerator for basic and diluted net
income per Common Unit:
Net income from continuing
operations $ 256 $ 1,940
Preferred distributions (216) (1,345)
----------- -----------
Net income from continuing
operations less preferred
distributions 40 595
Net income from continuing
operations less preferred
distributions allocable to 2%
general partner interest 1 12
----------- -----------
Numerator for basic and diluted net
income per Common Unit
from continuing operations
less preferred distributions $ 39 $ 583
=========== ===========
Net loss from discontinued
operations $ (8) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest - -
----------- -----------
Numerator for basic and diluted net
loss from discontinued operations
per Common Unit $ (8) $ -
=========== ===========
Extraordinary gain $ 211 $ -
Extraordinary gain allocable to
2% general partner interest 4 -
----------- -----------
Numerator for basic and diluted
extraordinary gain per
Common Unit $ 207 $ -
=========== ===========
Numerator for basic and diluted net
income per Common Unit $ 238 $ 583
=========== ===========
Denominator:
Denominator for basic and diluted net
income 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)
Nine months Ended September 30,
2002 2001
----------- -----------
Revenues $ 167,656 $ 195,245
Cost of sales and operating expenses,
excluding depreciation 163,810 188,881
Marketing, general and
administrative expenses 3,224 2,598
Depreciation 1,110 1,085
----------- -----------
Operating income (loss) (488) 2,681
Other income (expense):
Interest income 109 904
Interest expense (including interest
paid in kind of $2 and $126,
respectively) (38) 235
Credit and loan fees 133 (870)
Gain on sale of assets 1,141 -
Other - net (90) 112
----------- -----------
1,255 381
----------- -----------
Net income from continuing operations
before reorganization items 767 3,062
Reorganization items:
Professional fees and administrative
expenses 369 630
Discount on retirement of Debt and
Redeemable Preferred Equity (21) -
----------- -----------
Net income from continuing operations 419 2,432
Discontinued operations:
Loss on disposal of discontinued
operations (555) -
----------- -----------
Net income (loss) from operations (136) 2,432
Extraordinary gain - Income from
cancellation of indebtedness 9,754 -
----------- -----------
Net income $ 9,618 $ 2,432
=========== ===========
Basic net income per Common Unit:
Net income from continuing
operations less preferred
distributions $ (.04) $ .03
Net loss from discontinued operations (.11) -
Extraordinary gain 1.94 -
----------- -----------
Basic net income $ 1.79 $ .03
=========== ===========
Diluted net income per Common Unit:
Net income from continuing
operations less preferred
distributions $ (.03) $ .03
Net loss from discontinued operations (.11) -
Extraordinary gain 1.90 -
----------- -----------
Diluted net income $ 1.76 $ .03
=========== ===========
Numerator for basic net income
per Common Unit:
Net income from continuing operations $ 419 $ 2,432
Preferred distributions (597) (2,282)
----------- -----------
Net income from continuing
operations less preferred
distributions (178) 150
Net income from continuing
operations less preferred
distributions allocable to
2% general partner interest (4) 3
----------- -----------
Numerator for basic net income
per Common Unit from
continuing operations less
preferred distributions $ (174) $ 147
=========== ===========
Net loss from discontinued
operations $ (555) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest (11) -
----------- -----------
Numerator for basic net loss
from discontinued operations
per Common Unit $ (544) $ -
=========== ===========
Extraordinary gain $ 9,754 $ -
Extraordinary gain allocable to
2% general partner interest 195 -
----------- -----------
Numerator for basic extraordinary
gain per Common Unit $ 9,559 $ -
=========== ===========
Numerator for basic net income
per Common Unit $ 8,841 $ 147
=========== ===========
Numerator for diluted net income
per Common Unit:
Net income from continuing operations $ 419 $ 2,432
Preferred distributions (597) (2,282)
Adjustments to compute diluted
net income:
Subordinate Note A interest
expense 2 -
----------- -----------
Net income from continuing
operations less preferred
distributions (176) 150
Net income from continuing
operations less preferred
distributions allocable to
2% general partner interest (4) 3
----------- -----------
Numerator for diluted net income
per Common Unit from
continuing operations less
preferred distributions $ (172) $ 147
=========== ===========
Net loss from discontinued
operations $ (555) $ -
Net loss from discontinued
operations allocable to 2%
general partner interest (11) -
----------- -----------
Numerator for diluted net loss
from discontinued operations
per Common Unit $ (544) $ -
=========== ===========
Extraordinary gain $ 9,754 $ -
Extraordinary gain allocable to
2% general partner interest 195 -
----------- -----------
Numerator for diluted extraordinary
gain per Common Unit $ 9,559 $ -
=========== ===========
Numerator for diluted net income
per Common Unit $ 8,843 $ 147
=========== ===========
Denominator:
Denominator for basic net income
per Common Unit 4,950 4,950
=========== ===========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A 14 -
B Preferred Units 40 -
C Preferred Units 21 -
----------- -----------
Total adjustments 75 -
----------- -----------
Denominator for diluted net income
per Common Unit 5,025 4,950
=========== ===========
See accompanying notes.
PRIDE COMPANIES, L. P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine months Ended September 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income from continuing operations
before reorganization items $ 767 $ 3,062
Net loss from discontinued operations (555) -
Adjustments to reconcile net income
from continuing operations before
reorganization items and net loss
from discontinued operations to net
cash provided by operating activities
before reorganization items:
Depreciation 1,110 1,085
Gain on sale of property,
plant and equipment (1,141) (32)
Paid in kind interest 2 126
Net effect of changes in:
Restricted cash 147 (700)
Accounts receivable (453) (2,541)
Other current assets 744 (27)
Accounts payable and other
long-term liabilities 1,217 1,577
Accrued liabilities (925) (883)
----------- -----------
Total adjustments 701 (1,395)
----------- -----------
Net cash provided by operating
activities before
reorganization items 913 1,667
Reorganization items:
Professional fees and administrative
expenses (369) (630)
Extraordinary gain - Income from
cancellation of indebtedness 9,754 -
Net effect of changes in:
Accounts payable and other
long-term liabilities (10,247) -
Accrued liabilities (1,203) -
----------- -----------
Net cash used in operating activities
from reorganization items (2,065) (630)
----------- -----------
Net cash provided by (used in)
operating activities (1,152) 1,037
Cash flows from investing activities:
Purchases of property, plant and
equipment (453) (6)
Proceeds from asset disposals 5,488 32
Other 95 40
----------- -----------
Net cash provided by investing activities 5,130 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 (7,572) 1,103
Cash and cash equivalents at the
beginning of the period 13,294 6,178
----------- -----------
Cash and cash equivalents at the
end of the period $ 5,722 $ 7,281
=========== ===========
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 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 September 30, 2002 and December
31, 2001 (see Note 10). The Partnership also accrued an additional
loss of $8,000 and $555,000 on disposal of the discontinued operations
in the third quarter of 2002 and the first nine months of 2002,
respectively, associated with the claims of five former employees (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 September 30, 2002 (see Note 8), and a 4.9% interest
in the Partnership through ownership of common limited partner units
("Common Units"). As a result of the redemption of certain
shareholders' (referred to herein as 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 27.3% interest as of September 30, 2002 in the
Partnership through their ownership of Common Units. The remaining
Common Units, representing an aggregate 65.8% 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).
The Bankruptcy Court issued a final decree closing the Bankruptcy
case of the Partnership and Managing General Partner on October 31,
2002.
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 nine months of 2002. For the first nine months of 2002, the
weighted average number of Common Units associated with convertible
securities was 75,000. 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 nine months of 2002.
The effect of both the convertible securities and unit appreciation
rights was antidilutive for the first nine months of 2001 and the
third 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 27.3% 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 September 30, 2002 (see Note 8), and a
4.9% limited partner interest in the Partnership.
The Partnership has no directors or officers; however, directors
and officers of the Managing General Partner are employed by the
Partnership to function in this capacity. Compensation of these
persons and any other expenses incurred on behalf of the Partnership
by the Managing General Partner and Pride SGP are paid by the
Partnership.
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 and 7).
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 1, 8 and 10). 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 which was retired on
October 10, 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. The Partnership
has accrued $92,000 for remediation of the sites. The Partnership
does not expect any other 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 $8,000 and
$555,000 on disposal of the discontinued operations in the third
quarter of 2002 and the first nine months of 2002, respectively,
associated with the claims of five former employees (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 September 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 4 and 7).
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. From July 27, 2000 through June 30, 2001,
the Partnership had accrued total interest expense of $342,000 and
$172,000 at the Statutory Rate on the C Term Loan and Subordinate Note
A, respectively; however, those accruals were reversed resulting in a
credit to interest expense of $514,000 and $236,000 in the third
quarter of 2001 and the first nine months of 2001, respectively. In
addition, the Partnership recorded paid in kind interest of $126,000
on $1,188,000 of the Subordinate Note A for the period August 23, 2000
to September 30, 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 third quarter of 2001 and the
first nine months of 2001, the Deposits with the Texas Court accrued
interest income of $194,000 and $678,000, 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 (see Note 10) and the Partnership recorded paid in kind
interest of $126,000 for the period August 23, 2000 to September 30,
2001 in the third quarter of 2001 based on the contractual rates on
$1,188,000 of the Subordinate Note A. 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 Notes 4 and 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 4 and 7).
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. From August 23, 2000 through
June 30, 2001, the Partnership had accrued total interest expense of
$348,000 at the Statutory Rate (see Note 6 for the definition of
Statutory Interest) on the B Preferred Units and C Preferred Units to
the extent that the Second Deposit and $1,000 of the First Deposit
were expected to be applied to such securities. However, the
Bankruptcy Court's Initial Ruling concluded that the Deposits were not
a valid tender and the B Preferred Units and C Preferred Units
expected to be retired with the Second Deposit and $1,000 of the First
Deposit continued to accumulate arrearages (see Notes 6 and 10). As a
result of the Bankruptcy Court's Initial Ruling, the accrual was
reversed resulting in a credit to interest expense of $348,000 and
$140,000 in the third quarter of 2001 and the first nine months of
2001, respectively, and an increase in the accumulated arrearages on
the B Preferred Units and C Preferred Units of $626,000 for the period
August 31, 2000 to June 30, 2001. For the third quarter of 2001 and
the first nine months of 2001, the Partnership accumulated arrearages
of $1,345,000 and $2,282,000, respectively, on the Redeemable
Preferred Equity. No arrearages accumulated on the Redeemable
Preferred Equity during the third quarter of 2002 or the first nine
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 redeemable 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 redeemable in fifteen equal annual installments beginning on
January 22, 2003. For the third quarter of 2002 and the first nine
months of 2002, the New Redeemable Preferred Equity accrued
distributions of $216,000 and $597,000, respectively. Under the terms
of the New Redeemable Preferred Equity, the Partnership will redeem
the New Redeemable Preferred Equity in ten annual installments of
$1,406,000 and then five annual installments of $940,000.
8. Partners' Capital
At September 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 1 and 4). 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 which was
retired on October 10, 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 September 30, 2002 and December 31, 2001, 4,950,000 Common
Units were outstanding, representing a 98% limited partner interest.
As of September 30, 2002, Pride SGP, Management and the public owned
250,000, 1,379,000 and 3,321,000 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 September 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
$9,800,000 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.
Tax counsel is currently reviewing certain of the above
allocations to see if the tax impact to Common Unitholders can be
ameliorated.
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 $29,000 and had accrued for this amount at
September 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. The
Partnership has accrued $92,000 as of September 30, 2002 for
remediation of the sites. The Partnership does not expect any other
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 third quarter of 2001 and the first nine months of 2001,
the Partnership incurred legal fees and other expenses of $17,000 and
$864,000, respectively, in connection with the dispute with Varde.
For the first nine 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 third quarter of 2002.
In the third quarters of 2002 and 2001, the Partnership incurred
$51,000 and $259,000, respectively, in bankruptcy related expenses.
The Partnership incurred $348,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$630,000 in bankruptcy related expenses for the first nine 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
September 30, 2002 and December 31, 2001 balance sheet as "liabilities
subject to compromise." 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 September 30, 2002, liabilities subject to compromise of the
crude gathering business (discontinued operations) were $687,000, and
all liabilities subject to compromise of the Products Marketing
Business (continuing operations) had been paid.
In the third quarters of 2002 and 2001, the Partnership incurred
$51,000 and $259,000, respectively, in bankruptcy related expenses.
The Partnership incurred $348,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$630,000 in bankruptcy related expenses for the first nine 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. 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 which was retired on October 10,
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. The Partnership entered into an
agreement with the five former employees to settle the dispute for
$625,000. As a result of the agreement, the Partnership accrued an
additional $8,000 in the third quarter of 2002 and has reported it as
a loss on disposal of discontinued operations in the third quarter of
2002 since the former employees worked for the Crude Gathering System
(see Note 5). For the first nine months of 2002, the Partnership
accrued an additional $555,000 and has also reported it as a loss on
disposal of discontinued operations.
Current liabilities subject to compromise at September 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 - 1,415
Accrued liabilities - 1,231
Discontinued Operations:
Accounts payable 41 380
Crude suspense liability 21 361
Accrued payroll and related benefits 625 70
---------- ----------
$ 687 $ 8,568
========== ==========
Long-term liabilities subject to compromise at September 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 17, 2001, the Partnership filed Bankruptcy with the
Bankruptcy Court in Abilene, Texas (see Note 1). 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 Bankruptcy Court issued a final decree closing the Bankruptcy
case of the Partnership and Managing General Partner on October 31,
2002.
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 refined 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 Operations - 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.
Third quarter 2002 Compared to Third quarter 2001
General. Net income for the third quarter of 2002 was $459,000
compared to net income of $1,940,000 for the third quarter of 2001.
Included in net income for the third quarter of 2002 was $211,000 in
extraordinary gain from cancellation of indebtedness and an additional
$8,000 loss on disposal of discontinued operations as a result of the
settlement with the five former employees (see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and Liquidity"
and "Part II. Other Information, Item 1. Legal Proceedings"). Net
income from continuing operations was $256,000 in the third quarter of
2002. The decrease in results from continuing operations in the third
quarter of 2002 from the third quarter of 2001 was primarily due to an
increase in interest expense of $735,000, a decline in gross margin of
$683,000, an increase in general and administrative expenses of
$344,000 and a decline in interest income of $220,000. In the third
quarter of 2001, $862,000 in interest expense accruals were reversed
as a result of the Bankruptcy Court's Initial Ruling (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity"). Interest income declined in the third quarter of 2002
primarily as a result of reporting $194,000 of interest income on the
Deposits with the Texas Court in the third quarter of 2001 (see "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity"). The above mentioned items were partially offset by a
decrease in reorganization items of $208,000 as a result of emerging
from bankruptcy on January 22, 2002.
Operating income was $293,000 for the third quarter of 2002
compared to operating income of $1,229,000 for the third quarter of
2001. Depreciation expense was $378,000 for the third quarter of 2002
compared to $359,000 for the third quarter of 2001. Operating income
excluding depreciation was $671,000 for the third quarter of 2002
compared to operating income excluding depreciation of $1,588,000 for
the third quarter of 2001. Gross margin declined $683,000 from the
third quarter of 2001 to the third quarter of 2002 as a result of a
decline in gross margins from diesel sales. During the third quarter
of 2002, the Partnership marketed 20,998 barrels per day ("BPD") of
refined products compared to 19,572 BPD for the third quarter of 2001.
The net margin per barrel (after marketing, general and administrative
expenses) for the third quarter of 2002 was $0.15 compared to $0.68
for the third quarter of 2001.
First Nine months of 2002 Compared to First Nine months of 2001
General. Net income for the first nine months of 2002 was
$9,618,000 compared to net income of $2,432,000 for the first nine
months of 2001. Included in net income for the first nine months of
2002 was $9,754,000 in extraordinary gain from cancellation of
indebtedness and a $555,000 loss on disposal of discontinued
operations as a result of the settlement with the five former
employees (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity" and "Part II. Other Information,
Item 1. Legal Proceedings"). Net income from continuing operations
was $419,000 in the first nine months of 2002. In the first nine
months of 2002, gross margin declined $2,528,000 and general and
administrative expenses increased $626,000 from the first nine months
of 2001. This was partially offset by a gain on sale of assets of
$1,141,000 in the first nine months of 2002.
In addition, the Partnership reported declines in interest
income, credit and loan fees and reorganization items in the first
nine months of 2002 from the first nine months 2001 of $795,000,
$1,003,000 and $282,000 respectively. Interest income declined in the
first nine months of 2002 primarily as a result of reporting $678,000
of interest income on the Deposits with the Texas Court in the first
nine months of 2001. 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.
The above items were partially offset by an increase in interest
expense of $273,000 in the first nine months of 2002 from the first
nine months of 2001. In the first nine months of 2001, $376,000 in
interest accruals were reversed as a result of the Bankruptcy Court's
Initial Ruling (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity").
Operating loss was $488,000 for the first nine months of 2002
compared to operating income of $2,681,000 for the first nine months
of 2001. Depreciation expense was $1,110,000 for the first nine
months of 2002 compared to $1,085,000 for the first nine months of
2001. Operating income excluding depreciation was $622,000 for the
first nine months of 2002 compared to operating income excluding
depreciation of $3,766,000 for the first nine months of 2001. Gross
margin declined $2,528,000 from the first nine months of 2001 to the
first nine months of 2002 as a result of a decline in gross margins
from diesel sales. During the first nine months of 2002, the
partnership marketed 19,858 barrels per day ("BPD") of refined
products compared to 19,277 BPD for the first nine months of 2001.
The net margin per barrel (after marketing, general and administrative
expenses) for the first nine months of 2002 was negative $0.09
compared to positive $0.51 for the first nine 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 expects to
incur approximately $305,000 from October 1, 2002 through December 31,
2003 on several projects to maintain compliance with various other
environmental requirements, including $29,000 related to an
investigative study by the Texas Natural Resource Conservation
Commission and $92,000 related to the cleanup of an existing leak.
The remaining $184,000 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 $29,000 and had accrued for this
amount at September 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
September 30, 2002 and December 31, 2001 balance sheet as "liabilities
subject to compromise." 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").
The Bankruptcy Court issued a final decree closing the Bankruptcy
case of the Partnership and Managing General Partner on October 31,
2002.
At September 30, 2002, liabilities subject to compromise of the
crude gathering business (discontinued operations) were $687,000, and
all liabilities subject to compromise of the Products Marketing
Business (continuing operations) had been paid.
In the third quarters of 2002 and 2001, the Partnership incurred
$51,000 and $259,000, respectively, in bankruptcy related expenses.
The Partnership incurred $348,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$630,000 in bankruptcy related expenses for the first nine 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 December 31,
2001, the Partnership reclassified $6,722,000 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.
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. From July 27, 2000 through June 30, 2001, the
Partnership had accrued total interest expense of $342,000 and
$172,000 at the Statutory Rate on the C Term Loan and Subordinate Note
A, respectively; however, those accruals were reversed resulting in a
credit to interest expense of $514,000 and $236,000 in the third
quarter of 2001 and the first nine months of 2001, respectively. In
addition, the Partnership recorded paid in kind interest of $126,000
on $1,188,000 of the Subordinate Note A for the period August 23, 2000
to September 30, 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
Operations - Financial Condition - Cash Distributions and Preferred
Arrearages"). The First Deposit and Second Deposit are collectively
referred to as the deposits (the "Deposits"). For the third quarter
of 2001 and the first nine months of 2001, the Deposits with the Texas
Court accrued interest income of $194,000 and $678,000, 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 Operations - 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 (see above) and the Partnership
recorded paid in kind interest of $126,000 for the period August 23,
2000 to September 30, 2001 in the third quarter of 2001 based on the
contractual rates on $1,188,000 of the Subordinate Note A. 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 "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition
- - Cash Distributions and Preferred Arrearages").
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
Operations - Financial Condition - Cash Distributions and Preferred
Arrearages").
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 nine months of 2002, cash was
provided by a decrease in other current assets due to the sale of
miscellaneous diesel inventory on hand at December 31, 2001 and an
increase in accounts payable as a result of increased product prices
and was partially offset by an increase in accounts receivable as a
result of increased product prices and a decrease in accrued
liabilities due to a reduction in the excise taxes payable at
September 30, 2002. For the first nine months of 2001, cash was
utilized as a result of an increase in accounts receivable (resulting
from increased sales of refined product) and a decrease in accrued
liabilities due to a reduction in the excise taxes payable at
September 30, 2001 which was partially offset by an increase in
accounts payable (resulting from increased purchases of refined
product).
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 the 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 current 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 $12,000 and $453,000 for the third
quarter of 2002 and the first nine months of 2002, respectively,
compared to $2,000 and $6,000 for the third quarter of 2001 and the
first nine 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 nine 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 $305,000 in the
last three months of 2002 and in the year 2003 for environmental
expenditures. The Partnership had accrued $121,000 at September 30,
2002 and currently expects to incur $70,000 and $114,000 for
additional environmental expenditures 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 Operations - 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 Operations - 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.
From August 23, 2000 through June 30, 2001, the Partnership had
accrued total interest expense of $348,000 at the Statutory Rate (see
"Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition - Financial Resources
and Liquidity" for the definition of Statutory Interest) on the B
Preferred Units and C Preferred Units to the extent that the Second
Deposit and $1,000 of the First Deposit were expected to be applied to
such securities. However, the Bankruptcy Court's Initial Ruling
concluded that the Deposits were not a valid tender and the B
Preferred Units and C Preferred Units expected to be retired with the
Second Deposit and $1,000 of the First Deposit continued to accumulate
arrearages (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity"). As a result of the Bankruptcy
Court's Initial Ruling, the accrual was reversed resulting in a credit
to interest expense of $348,000 and $140,000 in the third quarter of
2001 and the first nine months of 2001, respectively, and an increase
in the accumulated arrearages on the B Preferred Units and C Preferred
Units of $626,000 for the period August 31, 2000 to June 30, 2001.
For the third quarter of 2001 and the first nine months of 2001, the
Partnership accumulated arrearages of $1,345,000 and $2,282,000,
respectively, on the Redeemable Preferred Equity. No arrearages
accumulated on the Redeemable Preferred Equity during the third
quarter of 2002 or the first nine 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 redeemable 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 redeemable in fifteen equal annual installments beginning on
January 22, 2003. For the third quarter of 2002 and the first nine
months of 2002, the New Redeemable Preferred Equity accrued
distributions of $216,000 and $597,000, respectively. Under the terms
of the New Redeemable Preferred Equity, the Partnership will redeem
the New Redeemable Preferred Equity in ten annual installments of
$1,406,000 and then five annual installments of $940,000.
At September 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 certain shareholders of Pride
SGP (referred to herein as the "Departing Shareholders") on January 8,
2002. 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 which was retired on October 10, 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 September 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 September 30, 2002, Pride SGP,
Management and the public owned 250,000, 1,379,000 and 3,321,000
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 September 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
$9,800,000 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.
Tax counsel is currently reviewing certain of the above
allocations to see if the tax impact to Common Unitholders can be
ameliorated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Under an agreement with Shell, Shell maintained refined products
inventory for the Partnership during the third 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 Operations - Financial Condition -
Financial Resources and Liquidity").
The Partnership did not have any debt outstanding under credit
facilities as of September 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 $29,000 and had accrued for this amount at
September 30, 2002.
The Partnership continues to be responsible for certain
environmental liabilities associated with the crude gathering system
sold to Sun Pipe Line Services, Inc. ("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. The Partnership has accrued $92,000 as of September
30, 2002 for remediation of the sites. The Partnership does not
expect any other 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
Operations - 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 third quarter of 2001 and the first nine months of 2001,
the Partnership incurred legal fees and other expenses of $17,000 and
$864,000, respectively, in connection with the dispute with Varde.
For the first nine 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 third quarter of 2002.
In the third quarters of 2002 and 2001, the Partnership incurred
$51,000 and $259,000, respectively, in bankruptcy related expenses.
The Partnership incurred $348,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management) and
$630,000 in bankruptcy related expenses for the first nine 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 "Item 2. Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Financial
Condition - Financial Resources and Liquidity"). 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 which was
retired on October 10, 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. The Partnership entered into an
agreement with the five former employees to settle the dispute for
$625,000. As a result of the agreement, the Partnership accrued an
additional $8,000 in the third quarter of 2002 and has reported it as
a loss on disposal of discontinued operations in the third quarter of
2002 since the former employees worked for the crude gathering system.
For the first nine months of 2002, the Partnership accrued an
additional $555,000 and has also reported it as a loss on disposal of
discontinued operations.
On January 17, 2001, the Partnership filed Bankruptcy with the
Bankruptcy Court in Abilene, Texas (see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and
Liquidity"). 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 Bankruptcy Court issued a final decree closing the Bankruptcy
case of the Partnership and Managing General Partner on October 31,
2002.
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. The Partnership recorded paid
in kind interest of $126,000 on $1,188,000 of the Subordinate Note A
for the period August 23, 2000 to September 30, 2001 in the third
quarter of 2001 as a result of the Initial Ruling (see "Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity"). 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 Operations - 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 third quarter of 2001 and the first nine
months of 2001, the Partnership accumulated arrearages of $1,345,000
and $2,282,000, 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: November 14, 2002 /s/ Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
Date: November 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 September
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: November 14, 2002 By: /s/Brad Stephens
Brad Stephens
Chief Executive Officer
Date: November 14, 2002 By: /s/George Percival
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)).