Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each
Title of Each Class: Exchange on Which Registered:
- ------------------- ----------------------------
Common Units NASDAQ OTC Bulletin Board
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the 3,321,000 Common Units held by
non-affiliates of the Partnership as of December 31, 2002 was
approximately $2,424,000, which was computed using the closing sales
price of the Common Units on June 18, 2002 (which was the last
business day in the second quarter of 2002 that the Common Units
traded).
Number of Common Units outstanding as of March 28, 2003: 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 [ ]
TABLE OF CONTENTS
PART I
Items 1 and 2. Business and Properties
General
Partnership Operations and Products
Markets and Competition
Customers
Long-Term Product Supply Agreement
Employees
Environmental Matters
Forward Looking Statements
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Partnership's Common Units and Related
Unitholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Partnership
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Controls and Procedures
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
PART I
Items 1 and 2. Business and Properties
General
Pride Companies, L. P. (the "Partnership") was formed as a
limited partnership under the laws of the State of Delaware in January
1990. The Partnership owns and operates 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 (see "Long-Term Product Supply
Agreement"). 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. See "Partnership Operations and
Products - Products Marketing Business."
Prior to October 1, 1999, the Partnership also owned and operated
a crude oil gathering business that gathered, transported, resold and
redelivered crude oil in the Texas market (the "Crude Gathering
System"). On October 1, 1999, the Partnership sold the operating
assets utilized by the Crude Gathering System to Sun Pipe Line
Services, Inc. ("Sun") for $29,595,000 in cash proceeds and the
assumption by Sun of certain indebtedness in the amount of $5,334,000.
See "Partnership Operations and Products - Crude Gathering System."
Certain liabilities associated with the Crude Gathering System were
retained and have been presented in accounts payable and liabilities
subject to compromise at December 31, 2002 and 2001, respectively.
The Partnership also accrued an additional loss of $555,000 on
disposal of the discontinued operations for the year ended December
31, 2002, associated with the claims of five former employees since
the former employees worked for the Crude Gathering System (see "Item
3. Legal Proceedings" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation - Financial
Condition - Financial Resources and Liquidity").
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in, and serves as the
managing general partner of, the Partnership. The Partnership
succeeded in January 1990 to the businesses of Pride SGP, Inc.
("Special General Partner" or "Pride SGP") which owns a 0.1% general
partner interest in, and serves as the special general partner of, the
Partnership. The Managing General Partner and Pride SGP (collectively
the "General Partners") collectively own a 2% general partner
interest. In addition to its general partner interest, Pride SGP
owned the Series G Preferred Units of the Partnership with a stated
value of $514,000 ("G Preferred Units"), as of December 31, 2002, and
a 4.9% interest in the Partnership through ownership of common limited
partner units ("Common Units") (see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation -
Financial Condition - Financial Resources and Liquidity"). 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 "Item 3. Legal
Proceedings", "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition -
Financial Resources and Liquidity" and "Item 13. Certain Relationships
and Related Transactions"). Management, which is comprised of the
officers of the Managing General Partner (the "Management"),
collectively own a 39.7% interest as of March 11, 2003 in the
Partnership through their ownership of Common Units (see "Item 10.
Directors and Executive Officers of the Partnership" and "Item 12.
Security Ownership of Certain Beneficial Owners and Management"). The
remaining Common Units, representing an aggregate 53.4% 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 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 "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition -
Financial Resources and Liquidity").
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) ("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 (see
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation - Financial Condition - Financial Resources
and Liquidity").
On January 11, 2002 (the "Confirmation Date"), the Bankruptcy
Court signed an order confirming the Third Amended and Restated Joint
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, 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") (see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation - Financial Condition
- - Financial Resources and Liquidity").
Pride SGP's bankruptcy petition was dismissed on May 2, 2002.
Pride Marketing, which was inactive, was liquidated on July 17,
2002.
The Partnership's principal business consists of marketing
conventional gasoline, low sulfur diesel fuel and military aviation
fuel. The San Angelo Pipeline transports products from the Abilene
Terminal to Dyess Air Force Base ("Dyess") in Abilene and to the San
Angelo Terminal.
The Partnership's primary market area for refined products
includes Central and West Texas and is a region that is not
significantly served by the major refining centers of the Gulf Coast.
Alon, which purchased Fina, Inc.'s refinery in Big Spring, Texas, in
September, 2000, is a competitor of the Partnership and has products
pipeline access into Abilene, while the Partnership is the only
supplier with a products pipeline into San Angelo.
In April 1998, Shell converted an existing crude pipeline into a
refined products pipeline that delivers conventional gasoline, low
sulfur diesel fuel and military aviation fuel to the Abilene Terminal
and Aledo Terminal for distribution to the Partnership's existing
customers. In the Partnership's primary market area, product prices
reflect a premium due to transportation costs required to import
refined products from supply points outside of the market area.
Joint Reserve Fort Worth ("Joint Reserve"), Dyess, and certain
other military installations have been long-time customers of the
Partnership's military aviation fuel. Management anticipates that the
Partnership will continue to bid for these and other military supply
contracts in the future although volumes have declined from prior
years due to increasing competition. See "Partnership Operations and
Products - Products Marketing Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Factors and Trends Affecting Operating Results - Other
Factors." Gasoline and diesel tankage and sales facilities at the
Aledo Terminal allow the Partnership access to the smaller communities
west of the Dallas-Fort Worth ("DFW") market along Interstate 20 for
conventional gasoline and the DFW market for low sulfur diesel fuel.
See "Markets and Competition" below.
Partnership Operations and Products
Products Marketing Business. The Partnership receives refined
products from Shell at the Abilene Terminal and Aledo Terminal to
market through its Products Terminals in Abilene, San Angelo, and
Aledo. The Partnership transports refined products from the Abilene
Terminal to Dyess in Abilene and to the Partnership's San Angelo
Terminal through the San Angelo Pipeline. Prior to idling the
Refinery, the Partnership operated the Aledo Pipeline that transported
refined products from the Abilene Terminal to the Aledo Terminal. The
Aledo Pipeline was idled in April 1998, since Shell's pipeline is
connected to the Aledo Terminal. As discussed earlier, the
Partnership sold both the remaining Refinery equipment and Aledo
Pipeline to Alon for $5,400,000 on January 18, 2002.
The Partnership delivers military aviation fuel to Dyess by
pipeline and trucks military aviation fuel from both the Abilene
Terminal and Aledo Terminal to other military installations supplied
by the Partnership. Conventional gasoline is marketed through the
Partnership's Products Terminals to non-military customers in the
Abilene area, the San Angelo area, and the communities west of the DFW
metropolitan area along Interstate 20. Low sulfur diesel fuel is also
marketed through the Products Terminals to non-military customers in
the Abilene area, the San Angelo area, and the DFW metropolitan area.
Military aviation fuel delivered by the San Angelo Pipeline to
Dyess is sold f.o.b. the Abilene Terminal with title passing to the
purchaser as the product enters the pipeline. Prior to 1998, the
Partnership had the only pipeline capable of delivering jet fuel
directly into Dyess. In late 1997, Alon's predecessor purchased
Conoco's products terminal in Abilene and built its own pipeline from
that terminal to Dyess that now enables Alon to also deliver military
aviation fuel by pipeline into Dyess (see "General").
Sales of military aviation fuel constitute a significant portion
of the Partnership's revenues. See "Markets and Competition" below.
The expected volumes under the most recently awarded contract are
20,450,000 gallons compared to 34,325,000 gallons under the previous
contract. The Partnership believes that its profit margins under the
new contract will be approximately $626,000 less than those under the
previous contract. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors and Trends
Affecting Operating Results - Other Factors." The Bankruptcy has not
affected the contract the Partnership has with the United States of
America (the "Government").
The Partnership and its predecessors have been supplying products
to Joint Reserve and Dyess since the early 1960s. Management believes
that there will continue to be strong demand for military aviation
fuel in the Partnership's market area in the foreseeable future;
however, due to increased competition, the amount of military aviation
fuel supplied by the Partnership, under its last five contracts
relating thereto, was at reduced volumes from contracts prior to 1998.
Furthermore, any future contracts may be at further reduced volumes.
Dyess is an Air Combat Command facility (it was formerly a strategic
air command facility) and is the primary training base for the B-1
bomber crews. In addition, Dyess also has two worldwide deployable
airlift squadrons which fly the C-130 Hercules. Under a contract with
the Government that was effective from April 1, 2002 through March 31,
2003, the Partnership contracted to sell military aviation fuel to
Dyess, Joint Reserve, AASF in Dallas, Texas, and AASF in Grand
Prairie, Texas. Under a new contract with the Government that is
effective from April 1, 2003 through March 31, 2004, the Partnership
will supply military aviation fuel to Dyess, Joint Reserve, Raytheon
in Greenville, Texas, AASF in Dallas, Texas, and Goodfellow Air Force
Base in San Angelo, Texas. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors
and Trends Affecting Operating Results - Other Factors."
In the year ended December 31, 2000, the Partnership collected an
award of $61,521,000 ("DESC Proceeds") from the Government, also
referred to as the Defense Energy Support Center ("DESC"), related to
underpayments by the Government for jet fuel purchased from the
Partnership over several years (see "Item 3. Legal Proceedings").
Crude Gathering System. Prior to October 1, 1999, the
Partnership's businesses included the Crude Gathering System. The
Crude Gathering System consisted of an 800-mile pipeline system,
425,000 barrels of crude oil, 40 truck injection stations, 101 trucks
used to transport crude oil and other related equipment.
On October 1, 1999, the Partnership sold the operating assets
utilized by the Crude Gathering System to Sun for $29,595,000 in cash
proceeds and the assumption by Sun of certain indebtedness in the
amount of $5,334,000.
Refining. Prior to March 22, 1998, the principal business of the
Partnership was refining crude oil at its Refinery located
approximately ten miles north of Abilene, Texas. The Refinery had a
throughput capacity of 49,500 BPD and was permitted to process 44,500
BPD.
As a result of idling the Refinery, the Partnership wrote down
such assets by $40,000,000 at December 31, 1997. Some of the tanks
and the rack facility also referred to as the Abilene Terminal that
were once part of the Refinery are still being used in connection with
the Shell Agreement. In December 1998, the Partnership sold its
diesel desulfurization unit for $3,100,000. On January 18, 2002, the
Partnership sold the remaining Refinery equipment and Aledo Pipeline
to Alon for $5,400,000.
Markets and Competition
Alon, the Partnership's principal competitor in its primary
market area, operates a products pipeline in the Abilene area. This
competitor's pipeline originates in Big Spring, Texas (105 miles west
of Abilene) and supplies Abilene, Midland, and Wichita Falls, Texas
and the Midcontinent region of the United States. However, the
Partnership currently has the only products pipeline access to the San
Angelo area. Retailers and jobbers who are not supplied by the
Partnership or one of its exchange partners must truck their products
into San Angelo from locations as far away as 90 to 200 miles. In
April 1998, Shell completed conversion of an existing crude pipeline
into a refined products pipeline that delivers conventional gasoline,
low sulfur diesel fuel and military aviation fuel from the Gulf Coast
to the Partnership's Abilene Terminal and Aledo Terminal, and the
Partnership ships product from the Abilene Terminal to the San Angelo
Terminal through the San Angelo Pipeline. Other Gulf Coast refiners
ship their products primarily throughout the southeast and central
United States. Total petroleum product demand for the Partnership's
market area is determined by demand for conventional gasoline, low
sulfur diesel fuel, and military aviation fuel. In the case of each
product, however, demand tends to vary by locality and season.
Aviation fuel consumption is from regional military and civilian air
facilities.
Longhorn Partners Pipeline, which has several major oil
companies' participating in the venture, is expected to bring
petroleum products into West Texas, New Mexico and Arizona from the
Gulf Coast. The exact timing is unknown. This would increase
competition in the Partnership's primary market areas.
In addition to its primary market areas in Abilene and San
Angelo for conventional gasoline and low sulfur diesel fuel, the
Partnership has access to a secondary market in the small communities
west of DFW along Interstate 20 for conventional gasoline and the DFW
metropolitan area for low sulfur diesel fuel. The San Angelo market
area is accessible via the San Angelo Pipeline that is connected to
storage tanks at the Abilene Terminal. Market demand for gasoline and
diesel in Abilene and in San Angelo is estimated to be approximately
17,500 BPD and 11,000 BPD, respectively. Market demand for petroleum
products in the Dallas - Fort Worth area is estimated to be
approximately 343,000 BPD, with reformulated gasoline, diesel and a
limited amount of conventional gasoline accounting for an aggregate of
195,000 BPD.
The Partnership sells gasoline to branded product companies and
to unbranded dealers. Low sulfur diesel fuel is primarily sold to
truck stops and end users with a limited amount sold to other branded
product companies. A number of major petroleum product marketers in
West Texas do not have local refinery facilities or sales terminals.
Accordingly, such marketers supplement their local needs by purchases
or product exchanges with local suppliers, such as the Partnership.
The Partnership currently sells or exchanges diesel, conventional
gasoline, and military aviation fuel, depending on local market needs
throughout the region. Some of the marketers in the area that
purchase from or exchange refined products with the Partnership
include Alon, ChevronTexaco ("Chevron"), Exxon Mobil, Shell, Star
Enterprise and Valero. The Partnership has two exchange agreements
and two sales agreements with certain of these companies for product
supplied out of the Abilene Terminal; three exchange agreements and
one sales agreement with certain of these companies for products
supplied out of the San Angelo Terminal; and one exchange agreement
and one sales agreement with certain of these companies for product
supplied out of the Aledo Terminal. After the Bankruptcy, one of the
marketers in the Partnership's area cancelled an exchange agreement
for product supplied out of the Aledo Terminal and San Angelo
Terminal. The Partnership does not expect any further cancellations;
however, such events are outside the Partnership's control. The
exchange agreements have enabled the Partnership to expand its
marketing area to Amarillo, Big Spring, Fort Worth and Midland/Odessa,
Texas without incurring transportation costs to these cities. Prior
to March 31, 2000, the Partnership had operated several retail fueling
facilities.
Customers
Two of the Partnership's major customers are the DESC and
Chevron. Revenues from the DESC comprised 11.2%, 12.8% and 17.2% of
total revenues from the Products Marketing Business in 2002, 2001 and
2000, respectively. Revenues from Chevron comprised 4.3%, 7.5% and
8.1% of total revenues from the Products Marketing Business in 2002,
2001 and 2000, respectively.
At December 31, 2002 and 2001, the Partnership had $1,906,000 and
$537,000, respectively, in receivables from the DESC and $1,015,000
and $971,000, respectively, in receivables from Chevron.
Long-Term Product Supply Agreement
In 1997, the Partnership executed a long-term product supply
agreement (see "General") with Shell to supply gasoline, diesel fuel
and jet fuel to the Partnership. The Shell Agreement has a 10-year
primary term which began in April 1998 (the "Primary Term"), the date
Shell completed its system of pipelines and terminals. The Shell
Agreement also has two-year renewal provisions for up to an additional
10 years. Commencing in March 2003, if Shell determines that shipment
of products on its products pipeline is no longer economical due to
product prices, then Shell may notify the Partnership of proposed
redetermined prices. If the Partnership does not accept such
redetermined prices, then Shell may elect to terminate the Shell
Agreement by 18 months' written notice. After the Primary Term, if
either party under the Shell Agreement can demonstrate that the prices
for delivered products under the Shell Agreement are producing cash
flows materially below that received during the Primary Term, then
such party may notify the other party of proposed prices it must
receive to continue. If the other party does not accept such
redetermined pricing, then the other party may elect not to renew the
Shell Agreement not less than one year prior to the end of the current
term. The Shell Agreement may furthermore be terminated upon any
breach by the other party which continues beyond 30 days following
notice of breach. Additionally, the Shell Agreement provides that the
Partnership will purchase all gasoline, diesel and jet fuel which it
may desire to purchase, exclusively from Shell. The Partnership's
cost for such product is based primarily on the market price in the
area in which the products are received less a discount. The
Partnership uses Shell products to supply its existing customer base,
which includes wholesale customers, exchange partners, and military
bases, primarily using the Products Terminals and San Angelo Pipeline.
In connection with the Shell Agreement, the Partnership idled its
Refinery, but continues to utilize the terminal and storage facilities
at the Refinery as part of the Abilene Terminal. As a result of the
Shell Agreement, the Partnership believes that cash flows have been
less volatile since the Partnership is no longer exposed to the
extremely volatile margins of a refinery. The Partnership also
believes that the Shell Agreement better enables the Partnership to
remain competitive as environmental standards change and the industry
trends toward consolidation and realignments in the future.
During the Bankruptcy, Shell continued providing refined products
to the Partnership. As of December 31, 2002, the Partnership's
purchases were secured by a cash deposit of $10,000,000 (see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity").
Employees
As of December 31, 2002, the Partnership had 33 full-time
employees.
Environmental Matters
The Partnership's activities involve the transportation,
storage, and marketing of refined petroleum products that constitute
or contain substances regulated under certain federal and state
environmental laws and regulations. The Partnership is also subject
to federal, state and local laws and regulations relating to air
emissions and disposal of wastewater as well as other environmental
laws and regulations, including those governing the handling, release
and cleanup of hazardous materials and wastes. The Partnership has
from time to time expended resources, both financial and managerial,
to comply with environmental regulations and permit requirements and
anticipates that it will continue to be required to expend financial
and managerial resources for this purpose in the future. For the year
ending December 31, 2003, the Partnership expects to spend $15,000
related to an investigative study by the Texas Natural Resource
Conservation Commission. The Partnership spent $50,000, $31,000 and
$217,000 related to that study for the years ended December 31, 2002,
2001 and 2000, respectively. See "Item 3. Legal Proceedings" and
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors and Trends Affecting Operating
Results."
Forward Looking Statements
This Form 10-K contains certain forward looking statements. Such
statements are typically punctuated by words or phrases such as
"anticipate," "estimate," "projects," "should," "may," "management
believes," and words or phrases of similar import. Such statements
are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the
key factors that may have a direct bearing on the Partnership's
results of operations and financial condition in the future are: (i)
the margins between the revenue realized by the Partnership on the
sale of refined products and the cost of those products purchased from
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 obligations under the preferred security
instruments and (v) fluctuations in refined product prices and their
impact on working capital. See "Item 3. Legal Proceedings" and "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors and Trends Affecting Operating
Results."
Item 3. 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 $15,000 and had accrued for this amount at
December 31, 2002. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim
in the United States Court of Federal Claims against the United States
of America, also referred to as the DESC (see "Items 1. and 2.
Business and Properties - Partnership Operations and Products -
Products Marketing Business"), relating to erroneous pricing of jet
fuel purchased over a period of several years from the Partnership and
its predecessors (the "DESC Claim"). The Partnership had sued the
DESC based on an illegal economic price adjustment ("EPA") provision
present in 12 jet fuel contracts between the Partnership and the DESC.
Although the DESC acknowledged the illegality of the EPA provision,
the parties disagreed on whether the Partnership had incurred damages.
On May 10, 2000, the presiding judge in the Partnership's lawsuit
against the DESC rendered a judgment in favor of the Partnership in
the amount of $45,706,000 (comprised of an additional long-term
contract premium of $23.4 million and a transportation premium of
$22.3 million), plus statutory interest of $15,815,000 under the
Contract Disputes Act. The DESC Proceeds were $61,521,000 (see "Items
1. and 2. Business and Properties - Partnership Operations and
Products - Products Marketing Business") from which the Partnership
paid legal fees of $5,908,000 to the Partnership's attorneys ("Legal
Fees") and bonuses of $6,967,000 to Management ("Bonuses"). The DESC
Proceeds less the Legal Fees and Bonuses were $48,646,000 ("DESC
Income" or "Net DESC Proceeds"). The Partnership reported the
$45,706,000 less Legal Fees of $4,339,000 and Bonuses of $5,110,000 or
a net of $36,257,000 in operating income for the year ended December
31, 2000. The Partnership reported the other $15,815,000 less Legal
Fees of $1,569,000 and Bonuses of $1,857,000 or a net of $12,389,000
in other income for the year ended December 31, 2000.
Out of the Net DESC Proceeds, the Partnership paid $16,606,000 on
the Debt and deposited $16,360,000 with the District Court of Taylor
County, Texas ("Texas Court") pending resolution of the Partnership's
dispute with Varde (see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation - Financial Condition"
for the definition of Debt). The remaining $15,680,000 of the Net
DESC Proceeds, as permitted by the Bankruptcy Court, was used for
working capital.
Before the dispute with Varde, the Partnership had planned on
retiring the Redeemable Preferred Equity (as defined in "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Financial Condition") with the DESC Proceeds in
conjunction with a new working capital facility, which would have
reduced the income allocated to the Common Unitholders as a result of
the payment of accumulated arrearages on such Redeemable Preferred
Equity. As a result of the DESC Claim being paid in two installments,
such net income was reported to Common Unitholders in two different
months (see below).
As a result of the expected retirement of the Debt with the
Payments and the Deposits, the Partnership wrote-off $2,556,000 of
deferred financing costs that were being amortized over the life of
the loans in the third quarter of 2000 (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition" for the definitions of Payments and
Deposits).
In accordance with the Partnership Agreement, the Managing
General Partner determined that for tax purposes it was necessary to
establish a convention for the Partnership under which the income and
certain expenses attributable to the judgment would be allocated to
the Common Unitholders. Under that convention, Common Unitholders as
of July 31, 2000 and August 31, 2000 were allocated the income
attributable to the portion of the proceeds from the judgment actually
received by the Partnership during those months. The Partnership also
took the position that suspended losses would be available to Common
Unitholders to offset net income attributable to the judgment;
however, it is not certain the Internal Revenue Service will agree
with that position. 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. The Partnership suggested
that Common Unitholders should consult with their own tax advisors
regarding the use of suspended losses.
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.
On January 17, 2001, the Partnership filed Bankruptcy under
Chapter 11 of the Federal Bankruptcy Code (see "Items 1. and 2.
Business and Properties - Partnership Operations and Products -
General"), 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
the above mentioned actions taken by Varde which was the Partnership's
primary lender and also owned two-thirds of the Redeemable Preferred
Equity (see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Financial Condition").
On January 18, 2001, the Managing General Partner, the Special
General Partner and Pride Marketing each filed Bankruptcy under
Chapter 11 of the Federal Bankruptcy Code, 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 (see "Items 1. and 2. Business and Properties - Partnership
Operations and Products - General" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition").
On September 4, 2001, the Bankruptcy Court issued initial
findings of fact and conclusions of law in the adversary proceeding
between Varde and the Partnership held in April 2001 (the "Initial
Ruling"). The Bankruptcy Court held, among other things, that Varde
was not owed $17,621,000 as a transaction fee and therefore all
payments to Varde had to be applied against the Debt and Redeemable
Preferred Equity; the Tender (as defined in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition") was effective and, as a result,
interest ceased accruing on the Debt to the extent of the Tender; and
the Deposits were not an effective tender and, therefore, the Debt and
Redeemable Preferred Equity expected to be retired with such Deposits
continued to accrue interest and accumulate arrearages at the
contractual rates. The Bankruptcy Court did not rule on the propriety
or significance of Varde's acceleration of the Debt.
On October 18, 2001, Varde, the Partnership and Management
entered into a settlement agreement ("Varde Settlement Agreement")
that ended the litigation between them. The Varde Settlement
Agreement was subsequently approved by the Bankruptcy Court on
November 15, 2001. Under the Varde Settlement Agreement, Varde
received $12,000,000 on November 21, 2001 and an allowed unsecured
claim of $11,000,000 (net of a $2,000,000 discount) ("Allowed
Unsecured Claim") or a total of $23,000,000 for its two-thirds
interest in the remaining Debt and Redeemable Preferred Equity (see
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition - Financial Resources
and Liquidity"). The Partnership paid Varde the $11,000,000 Allowed
Unsecured Claim on January 22, 2002 and received the $2,000,000
discount mentioned above. Management received $11,500,000 of New
Redeemable Preferred Equity (as defined in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and Liquidity")
for its one-third interest in the remaining Debt and Redeemable
Preferred Equity on the Effective Date (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and Liquidity"
and "Item 13. Certain Relationships and Related Transactions").
Under the Varde Settlement Agreement, the Partnership owed
approximately the same amount as it did prior to the settlement;
however, the distribution rates on the New Redeemable Preferred Equity
are substantially lower, the maturity dates were extended and the
Partnership avoided having to further litigate these issues.
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 a settlement agreement with Pride SGP and
the Departing Shareholders of Pride SGP ("Pride SGP Settlement
Agreement") (see "Items 1. and 2. Business and Properties -
Partnership Operations and Products - General"). 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 loss of $555,000 on disposal of the discontinued operations
for the year ended December 31, 2002 since the former employees worked
for the Crude Gathering System.
For the years ended December 31, 2001 and 2000, the Partnership
incurred legal fees and other expenses of $900,000 and $1,172,000,
respectively, in connection with the dispute with Varde. For the year
ended December 31, 2002, the Partnership received a credit for legal
fees of $138,000 in connection with the dispute with Varde.
For the years ended December 31, 2002, 2001 and 2000, the
Partnership incurred $365,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management),
$1,294,000 (includes a premium of $183,000 related to the Varde
Settlement Agreement) and $55,000, respectively, in bankruptcy related
expenses.
The Partnership previously disclosed that it estimated taxable
income of approximately $9,800,000 would be required to be recognized
and reported for the year ended December 31, 2002 as a result of what
was assumed to be cancellation of debt as a result of the holders of
certain of the Partnership's debt not filing timely proofs of claim in
the Bankruptcy. The Partnership reported that 98% of such income
would be allocated to Common Unitholders. Based upon independent
legal advice, the Partnership has determined that the situation should
not be deemed to result in cancellation of debt of the Partnership,
and that it is not appropriate to report any income therefrom for tax
purposes. The Partnership also believes, based upon the independent
legal advice it has received, that if a challenge to this treatment by
the Internal Revenue Service ("IRS") were successful and cancellation
of indebtedness income were found to exist in 2002, then such income
should be allocated solely to the general partners of the Partnership
and not to the Common Unitholders. There are, however, significant
uncertainties regarding the Partnership's tax position and no
assurance can be given that the Partnership's position will be
sustained if challenged by the IRS. If the Partnership's tax position
on both of these issues were successfully challenged, as previously
disclosed by the Partnership, the Common Unitholders would be
allocated 98% of an estimated $9,754,000 of income based on the number
of months each Common Unitholder held his Units during calendar year
2002, without a corresponding distribution of cash to offset the
potential tax liability. In that event, the Common Unitholders would
also be liable for interest on any unpaid tax, plus possible
penalties. No letter ruling has been or will be obtained from the IRS
by the Partnership regarding this issue. If the Partnership's tax
position on this matter prevails and the Partnership is subsequently
liquidated and its net assets distributed to the Common Unitholders
and the general partners, the amount distributable to Pride SGP or the
general partners (depending on whether the first position or second
position prevails) of the Partnership potentially will increase, and
the aggregate amount distributable to the Common Unitholders
potentially will decrease, by up to 98% of $9,754,000; however, Pride
SGP has agreed to subordinate the increase in its capital account that
would result in it receiving the increased distribution on liquidation
in exchange for the redemption of the remaining G Preferred Units held
by Pride SGP for their stated value of $514,000. The redemption is
expected to occur in April 2003. The Managing General Partner has not
agreed to subordination should the second position prevail.
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 was $3,224,000
of which 98% was allocated to Common Unitholders before any basis
adjustment attributable to specific Common Unitholders. Common
Unitholders who purchased Common Units after July of 2000 did not have
any basis in these assets based on the trading price of the Common
Units after such date. Therefore, those Common Unitholders recognized
gain to the extent of their allocable share of the proceeds of
$5,400,000. Such gain was 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 was 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 was 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 were also allocated 98% of a loss of
$2,108,000 on a loan to a subsidiary that is now considered worthless.
The deduction was 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 was 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 any
allocation of income for the year ended December 31, 2002. Each
Common Unitholder should consult with their own tax advisor regarding
the use of suspended losses.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
fiscal year 2002.
PART II
Item 5. Market for Partnership's Common Units and Related Unitholder
Matters
The Partnership's Common Units are traded on the NASDAQ OTC
bulletin board under the symbol PRDE. The following tables set forth,
for the periods indicated, the high and low closing prices of the
Common Units in 2002 and 2001 on the NASDAQ OTC bulletin board.
Quotations on the NASDAQ OTC bulletin board reflect interdealer,
without retail mark-up, mark-down, or commission, prices and may not
necessarily represent actual transactions. No distributions were made
on the Common Units during the past two fiscal years.
NASDAQ OTC Bulletin Board
- -------------------------
2001 HIGH LOW
---- ---- ---
First Quarter $ 0.38 $ 0.16
Second Quarter 0.40 0.25
Third Quarter 0.90 0.33
Fourth Quarter 0.89 0.56
2002 HIGH LOW
---- ---- ---
First Quarter $ 0.80 $ 0.64
Second Quarter 0.88 0.73
Third Quarter 0.84 0.43
Fourth Quarter 1.01 0.58
Based on information received from its transfer agent and
servicing agent, the Partnership estimates the number of beneficial
Common Unitholders of the Partnership at December 31, 2002 to be
approximately 2,700.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity" for a discussion of certain restrictions on
the payment of distributions to Common Unitholders while the New
Redeemable Preferred Equity and G Preferred Units remain outstanding.
Item 6. Selected Financial Data
The following table sets forth, for the periods and at the dates
indicated, selected financial data for the Partnership. The table is
derived from the financial statements of the Partnership and should be
read in conjunction with those financial statements. See also "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The income statement data and balance sheet data for the year
1998 has been restated to reflect the Crude Gathering System as a
discontinued operation.
(The following table should be printed on 14" x 8.5" paper)
SELECTED FINANCIAL DATA
(In thousands, except per unit amounts, operating data and footnote amounts)
Year Ended December 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Income Statement Data:
Revenues
Products Marketing Business $ 121,189$ 130,604 $ 234,929 $ 236,510 $ 234,234
Net DESC Proceeds - - 36,257 - -
Costs of sales and operating
expenses, excluding depreciation 115,454 126,424 230,144 229,280 228,282
Marketing, general and administrative
expenses 3,761 3,700 3,406 3,434 4,081
Depreciation 1,422 1,496 1,467 1,444 1,490
-------- -------- -------- -------- --------
Operating income (loss) 552 (1,016) 36,169 2,352 381
-------- -------- -------- -------- --------
Other net 322 505 1,016 1,047 56
Net interest income from DESC - - 12,389 - -
Interest expense (5,647) (5,095) (1,244) 222 (40)
Credit and loan fees (1,646) (2,080) (4,921) (907) 131
Gain on sale of assets - - - - 1,240
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations before reorganization items (6,419) (7,686) 43,409 2,714 1,768
Reorganization items:
Professional fees and
administrative expenses - - - 1,111 386
Premium (discount) on retirement of Debt
and Redeemable Preferred Equity - - - 183 (21)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations (6,419) (7,686) 43,409 1,420 1,403
Discontinued operations :
Income (loss) from operations of
the Crude Gathering System prior
to August 1, 1999 (2,138) 269 - -
(Loss) on disposal - (251) - - (555)
-------- -------- -------- -------- --------
Net income (loss) from operations (8,557) (7,668) 43,409 1,420 848
Extraordinary gain - income from
cancellation of indebtedness - - - - 9,754
-------- -------- -------- -------- --------
Net income (loss) $ (8,557) $ (7,668) $ 43,409 $ 1,420 $ 10,602
======== ======== ======== ======== ========
Basic net income (loss) per Common
Unit:
Net income (loss) from continuing
operations $ (1.62) $ (1.89) $ 8.26 $ (0.27) $ 0.11
Net loss from discontinued
operations (0.42) - - - (0.11)
Extraordinary gain - - - - -
-------- -------- -------- -------- --------
Basic net income (loss) $ (2.04) $ (1.89) $ 8.26 $ (0.27) $ -
======== ======== ======== ======== ========
Diluted net income (loss) per Common
Unit:
Net income (loss) from continuing
operations $ (1.62) $ (1.89) $ 5.82 $ (0.27) $ 0.11
Net loss from discontinued
operations (0.42) - - - (0.11)
Extraordinary gain - - - - -
-------- -------- -------- -------- --------
Diluted net income (loss) $ (2.04) $ (1.89) $ 5.82 $ (0.27) $ -
======== ======== ======== ======== ========
Numerator:
Basic net income (loss) from continuing
operations $ (6,419) $ (7,686) $ 43,409 $ 1,420 $ 1,403
Preferred distributions (1,763) (1,854) (1,683) (2,806) (827)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (8,182) (9,540) 41,726 (1,386) 576
Net income (loss) from continuing
operations less preferred
distributions allocable to 2%
general partners' interest (163) (191) 835 (28) 12
-------- -------- -------- -------- --------
Numerator for basic net income
(loss) from continuing operations
less preferred distributions per
Common Unit $ (8,019) $ (9,349) $ 40,891 $ (1,358) $ 564
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ (2,138) $ 18 $ - $ - $ (555)
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest (43) - - - (11)
-------- -------- -------- -------- --------
Numerator for basic net income
(loss) from discontinued operations
per Common Unit $ (2,095) $ 18 $ - $ - $ (544)
======== ======== ======== ======== ========
Extraordinary gain - - - - 9,754
Extraordinary gain allocable 100%
to general partners' interest - - - - 9,754
-------- -------- -------- -------- --------
Numerator for basic extraordinary
gain per Common Unit $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
Numerator for basic net income
(loss) per Common Unit $ (10,114) $ (9,331) $ 40,891 $ (1,358) $ 20
======== ======== ======== ======== ========
Diluted net income (loss) from
continuing operations $ (6,419) $ (7,686) $ 43,409 $ 1,420 $ 1,403
Preferred distributions (1,763) (1,854) (1,683) (2,806) (827)
Adjustments to compute diluted net income
(loss):
Subordinate Note A interest expense - - 186 - -
B Preferred Unit distributions - - 795 - -
C Preferred Unit distributions - - 427 - -
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (8,182) (9,540) 43,134 (1,386) 576
Net income (loss) from continuing
operations less preferred
distributions allocable to 2%
general partners' interest (163) (191) 863 (28) 12
-------- -------- -------- -------- --------
Numerator for diluted net income
(loss) from continuing operations
less preferred distributions
per Common Unit $ (8,019) $ (9,349) $ 42,271 $ (1,358) $ 564
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ (2,138) $ 18 $ - $ - $ (555)
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest (43) - - - (11)
-------- -------- -------- -------- --------
Numerator for diluted net income
(loss) from discontinued
operations per Common Unit $ (2,095) $ 18 $ - $ - $ (544)
======== ======== ======== ======== ========
Extraordinary gain $ - $ - $ - $ - $ 9,754
Extraordinary gain allocable 100%
to general partners' interest - - - - 9,754
-------- -------- -------- -------- --------
Numerator for diluted extraordinary
gain per Common Unit $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
Numerator for diluted net income
(loss) per Common Unit $ (10,114) $ (9,331) $ 42,271 $ (1,358) $ 20
======== ======== ======== ======== ========
Cash distributions declared per
Common Unit $ - $ - $ - $ - $ -
Denominator :
Denominator for basic net income
(loss) per Common Unit: 4,950 4,950 4,950 4,950 4,950
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A - - 292 - -
B Preferred Units - - 1,315 - -
C Preferred Units - - 705 - -
-------- -------- -------- -------- --------
Total adjustments - - 2,312 - -
-------- -------- -------- -------- --------
Denominator for diluted net income
(loss) per Common Unit: 4,950 4,950 7,262 4,950 4,950
======== ======== ======== ======== ========
Balance Sheet Data (at end of period):
Net property, plant and equipment $ 17,518 $ 16,621 $ 15,301 $ 13,963 $ 13,013
Total assets 44,107 47,506 56,069 48,297 40,058
Long-term debt (including current
maturities) 39,594 25,799 9,359 14,166 -
Redeemable Preferred Equity 19,529 17,079 17,079 5,693 11,500
Partners' capital (deficiency) (23,990) (28,514) 14,895 11,211 17,878
Operating Data Continuing Operations (BPD):
Products Marketing Business
Product sales 13,267 14,783 16,919 18,758 19,981
Refinery
Crude oil throughput 28,090 - - - -
Products refined 27,438 - - - -
Products System
Transportation volumes 7,335 - - - -
Prior to idling the Refinery on March 22, 1998, this data represents information for the Refinery, products pipelines and
terminals.
Discontinued operations for 1998, included a $1,197,000 lower of cost or market inventory adjustment due to the decline in
inventory values. Discontinued operations for 1999 included the reversal of a $1,197,000 lower of cost or market inventory
adjustment since the market value of the crude oil was more than its carrying value.
Since a portion of the debt was subject to increasing rates of interest, the Partnership was accruing interest at the
effective rate over the term of the debt. Interest expense in 1998, 1999 and 2000 reflects an accrual of $1,030,000,
$315,000 and reversal of an accrual of $1,345,000, respectively, which was based on the difference between the effective
interest rates and the stated rates.
Credit and loan fees include costs associated with the restructuring and refinancing of the Partnership of $1,325,000,
$1,761,000 and $3,456,000 for 1998, 1999 and 2000, respectively, and legal fees associated with the Varde dispute of
$1,172,000, $900,000, and a credit of $138,000 for 2000, 2001 and 2002, respectively.
The preferred equity accrued distributions of $1,763,000, $1,854,000, $1,683,000, $2,806,000, and $827,000 for the years
ended December 31, 1998, 1999, 2000, 2001, and 2002 respectively, which have been deducted in determining net income (loss)
per Common Unit. Included in the preferred equity accrued distributions for the years ended December 31, 1998 and 1999 were
$196,000 and $147,000, respectively, related to the E Preferred Units and F Preferred Units. The accrued distributions on
the E Preferred Units and F Preferred Units were cancelled in connection with the Crude Gathering Sale on October 1, 1999.
See footnote 8 below and "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operation -
Factors and Trends Affecting Operating Results - Financial Resources and Liquidity."
In 1998, 1999, 2000, 2001 and 2002, the calculations of diluted net income per Common Unit excluded 300,000, 278,000,
208,000, 160,000, and 160,000, respectively, officer and employee unit appreciation rights and 3,027,000, 2,751,000, 0,
934,000, and 56,000 respectively, units attributed to the convertible preferred equity and convertible debt because the
effect would be antidilutive. For 2000, 2,312,000 Common Unit equivalents related to the convertible preferred equity and
convertible debt was included in the calculation of diluted net income per Common Unit. The calculation for those five years
also excluded 70,000 director unit appreciation rights because the plan states they will be settled for cash.
At December 31, 1998, 1999, 2000 and 2001 current maturities were $65,000, $25,799,000, $9,359,000 and $7,166,000 (of which
$5,111,000 was included in current liabilities subject to compromise at December 31, 2001), respectively.
In connection with the Crude Gathering Sale, Pride SGP exchanged certain assets, receivables, and the E Preferred Units and F
Preferred Units for $2,000,000 and $3,144,000 G Preferred Units which are included in Partners' capital (deficiency) for the
years ended December 31, 1999, 2000 and 2001. As a result of the redemption of G Preferred Units with a stated value of
$2,630,000, $514,000 G Preferred Units were included in Partners' capital (deficiency) at December 31, 2002. See "Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of Operation - Factors and Trends Affecting
Operating Results - Financial Resources and Liquidity."
Due to the Refinery being idled on March 22, 1998, the operating data in 1998 for the Products Marketing Business is for the
period April 1, 1998 through December 31, 1998 and for the Refinery and Products System is for the period January 1, 1998
through March 31, 1998.
The Crude Gathering System segment was sold on October 1, 1999. Accordingly, the segment has been presented as discontinued
operations for all periods.
On May 10, 2000, the presiding judge in the Partnership's lawsuit against the DESC rendered a judgment in favor of the
Partnership in the amount of $45,706,000 (comprised of an additional long-term contract premium of $23.4 million and a
transportation premium of $22.3 million), plus statutory interest of $15,815,000 under the Contract Disputes Act. The total
award was $61,521,000. The DESC did not appeal the decision and the Partnership received $45,706,000 of the judgment on July
25, 2000 and paid total Legal Fees to the Partnership's attorneys of $5,908,000. On August 24, 2000, the Partnership
received an additional $15,815,000 which was for the statutory interest on the judgment. The Partnership paid Bonuses
totaling $6,967,000 from the DESC Proceeds to Management. The Partnership reported the $45,706,000 less Legal Fees of
$4,339,000 and Bonuses of $5,110,000 or a net of $36,257,000 in operating income for the year ended December 31, 2000. The
Partnership reported the other $15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or a net of $12,389,000 in
other income for the year ended December 31, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
General
The following is a discussion of the financial condition and
results of operations of the Partnership. This discussion should be
read in conjunction with the financial statements included in this
report.
The 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.
The Crude Gathering System was sold on October 1, 1999 and
accordingly the Crude Gathering System is treated as a discontinued
operation in the financial statements of the Partnership. For the
year ended December 31, 2002, the Partnership accrued an additional
loss of $555,000 on disposal of the discontinued operations associated
with the claims of five former employees since the former employees
worked for the Crude Gathering System (see "Item 3. Legal
Proceedings").
In evaluating the financial performance of the Partnership,
Management believes it is important to look at operating income
excluding depreciation in addition to operating income which is after
depreciation. Operating income excluding depreciation measures the
Partnership's ability to generate and sustain working capital and
ultimately cash flows from operations. However, such measure is
before debt service, so it does not indicate the amount available for
distribution, reinvestment or other discretionary uses. Gross
revenues primarily reflect the level of crude oil prices and are not
necessarily an accurate reflection of the Partnership's profitability.
Year ended December 31, 2002 compared with year ended December 31,
2001.
Products Marketing Business. Net income was $10,602,000 for the
year ended December 31, 2002 compared to $1,420,000 for the year ended
December 31, 2001. The results for the year ended December 31, 2002
included $9,754,000 of cancellation of indebtedness income for
financial purposes as to the Partnership associated with the
Bankruptcy. Net income from operations for the year ended December
31, 2002 which excludes the extraordinary gain of $9,754,000 was
$848,000 (see "Item 3. Legal Proceedings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and
Liquidity").
The decline in net income from operations before extraordinary
gain for the year ended December 31, 2002 was primarily due to a
decline in operating income, a decline in interest income and an
increase in loss on disposal of discontinued operations of $1,971,000,
$809,000 and $555,000, respectively. Operating income declined for
the year ended December 31, 2002 primarily as a result of weaker
product margins (see below). Interest income for the year ended
December 31, 2002 was lower due to interest earned on the Deposits of
$646,000 during the year ended December 31, 2001 and lower interest
rates earned on cash and cash equivalents for the year ended December
31, 2002. The loss on disposal of the discontinued operations for the
year ended December 31, 2002 resulted from the settlement of the
claims of the five former employees who worked for the Crude Gathering
System. See "Item 3. Legal Proceedings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and Liquidity."
The above items were partially offset by gain on sale of assets,
a decline in credit and loan fees and a decrease in reorganization
expenses of $1,240,000, $1,038,000 and $929,000, respectively, for the
year ended December 31, 2002. Gain on sale of assets increased due to
the sale of the remaining Refinery equipment and the Aledo Pipeline on
January 18, 2002. Credit and loan fees for the year ended December
31, 2001 were higher due to legal expenses associated with the Varde
litigation in that year. Reorganization expenses declined as a result
of the Partnership emerging from Bankruptcy in January 2002. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition - Financial Resources
and Liquidity."
Operating income for the Products Marketing business was $381,000
for the year ended December 31, 2002 compared to $2,352,000 for the
year ended December 31, 2001. The decline was primarily attributable
to a decline in gross margin for the year ended December 31, 2002 of
$2,017,000 due to weak diesel margins. Marketing, general and
administrative expenses also increased $647,000 for the year ended
December 31, 2002 due to one time expenses of $308,000 for director
bonuses and an advisory fee paid to an outside company and $145,000
associated with lease payments on the new plane. The above was
partially offset by a decrease in operating expenses of $664,000 due
primarily to a reduction in certain tax accruals. Depreciation
expense for the Products Marketing Business was $1,490,000 and
$1,444,000 for the years ended December 31, 2002 and 2001,
respectively. Operating income excluding depreciation for the
Products Marketing Business was $1,871,000 for the year ended December
31, 2002 compared to $3,796,000 for the year ended December 31, 2001.
For the year ended December 31, 2002, the Partnership marketed 19,981
BPD of refined products compared to 18,758 BPD for the year ended
December 31, 2001. The net margin per barrel (after marketing,
general and administrative expenses) for the year ended December 31,
2002 was $0.05 compared to $0.34 for the year ended December 31, 2001.
Year ended December 31, 2001 compared with year ended December 31,
2000.
Products Marketing Business. Net income was $1,420,000 for the
year ended December 31, 2001 compared to $43,409,000 for the year
ended December 31, 2000. The results for the year ended December 31,
2000 included $48,646,000 of income from the DESC Claim. The
$12,389,000 of interest income related to the DESC Claim is reported
separately from the $36,257,000 included in operating income which
represents underpayments by the Government in prior years for jet fuel
purchased from the Partnership. As a result of collecting the DESC
Proceeds and applying it to the Debt, the Partnership wrote-off
$2,556,000 of deferred financing costs that were being amortized over
the life of the loans and recognized income of $1,345,000 associated
with the reversal of an accrual for increasing rate accrued interest
for the year ended December 31, 2000. See "Item 3. Legal Proceedings"
and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity."
For the year ended December 31, 2001, interest expense decreased
$1,466,000 as a result of retiring the Debt with the DESC Proceeds and
the reversal of an accrual for interest expense of $862,000 on certain
Debt and Redeemable Preferred Equity expected to be retired and
redeemed with the Deposits. In addition, credit and loan fees
declined $4,014,000 for the year ended December 31, 2001 primarily
because the Partnership amortized and wrote-off $990,000 and
$2,556,000, respectively, in deferred financing costs in 2000. This
was partially offset by an increase in reorganization costs associated
with the Bankruptcy of $1,294,000 for the year ended December 31,
2001. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity."
Operating income for the Products Marketing business was
$2,352,000 for the year ended December 31, 2001 compared to
$36,169,000 for the year ended December 31, 2000. Excluding the
$36,257,000 of DESC Income (see "Item 3. Legal Proceedings") included
in operating income, the year ended December 31, 2000 would have shown
an operating loss of $88,000. Depreciation expense for the Products
Marketing Business was $1,444,000 and $1,467,000 for the years ended
December 31, 2001 and 2000, respectively. Operating income excluding
depreciation for the Products Marketing Business was $3,796,000 for
the year ended December 31, 2001 compared to $37,636,000 for the year
ended December 31, 2000. Excluding the $36,257,000 of DESC income
included in operating income, the year ended December 31, 2000 would
have shown operating income excluding depreciation of $1,379,000.
Excluding the DESC Income for the year ended December 31, 2000, the
improvement for the year ended December 31, 2001 was primarily due to
an increase in gross margins of $2,888,000 for the year ended December
31, 2001 which was partially offset by an increase in operating
expenses of $368,000 for the same period. For the year ended December
31, 2001, the Partnership marketed 18,758 BPD of refined products
compared to 16,919 BPD for the year ended December 31, 2000. The net
margin per barrel (after marketing, general and administrative
expenses and excluding the DESC Income) for the year ended December
31, 2001 was $0.34 compared to breakeven for the year ended December
31, 2000.
Factors and Trends Affecting Operating Results
A number of factors have affected the Partnership's operating
results, both indirectly and directly, such as environmental
compliance, other regulatory requirements, industry trends, price of
crude oil and, with respect to certain products, seasonality and
weather. The Managing General Partner expects that such conditions
will continue to affect the Partnership's business to varying degrees
in the future. The order in which these factors are discussed is not
intended to represent their relative significance.
Environmental Compliance. Increasing public and governmental
concern about air quality is expected to result in continued
regulation of air emissions. Regulations relating to carbon monoxide
and regulations on oxygen content in gasoline and sulfur content in
both diesel fuel and gasoline are expected to be increasingly
important in urban areas. In addition, the Partnership plans to spend
approximately $405,000 for the years ended December 31, 2003 and 2004
on several projects to maintain compliance with various other
environmental requirements, including $15,000 for 2003 related to an
investigative study by the Texas Natural Resource Conservation
Commission and an aggregate of $92,000 for 2003 and 2004 related to
the cleanup of an existing leak. The remaining $298,000 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 $15,000 and had accrued for this
amount at December 31, 2002. The Partnership spent $50,000, $31,000
and $217,000 related to that study for the years ended December 31,
2002, 2001 and 2000, respectively. Management does not believe any
significant additional amounts will be required to maintain compliance
with this study or other environmental requirements other than
expenditures incurred in the ordinary course of business.
Effective January 1, 1995, the Clean Air Act Amendment of 1990
required that certain areas of the country use reformulated gasoline
("RFG"). The Abilene and San Angelo market areas do not require RFG.
Collin, Dallas, Denton, and Tarrant Counties, which comprise the
Dallas-Fort Worth ("DFW") metroplex area, do require RFG; however, the
Partnership's Aledo Terminal lies outside this area and is allowed to
supply conventional gasoline that is not destined for sale in these
four counties. In addition to the requirement for RFG in certain
areas, new but much less restrictive regulations took effect that
impose new quality standards for conventional gasoline in the rest of
the country. Management does not believe that these have had or will
have a material adverse effect on the Partnership's operations.
After the Crude Gathering Sale, the Partnership continues to be
responsible for certain environmental liabilities associated with the
Crude Gathering System including three on-going remediation sites, any
refined product contamination associated with the assets sold and
certain inactive crude gathering lines retained by the Partnership.
The Partnership has accrued $92,000 as of December 31, 2002 for
remediation of the sites. The Partnership does not expect any other
future expenditures related to these retained environmental
liabilities to be material.
Other Regulatory Requirements. The Partnership is subject to the
rules and regulations of, among others, the Occupational Safety and
Health Administration, Texas Railroad Commission, Texas Commission on
Environmental Quality, United States Department of Transportation and
United States Environmental Protection Agency.
Industry Trends and Price of Crude Oil. The Partnership is
impacted by fluctuations in the cost of products purchased from
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. The Government awarded the Partnership the right
to supply 20,450,000 gallons of military aviation fuel for the
contract period that begins April 1, 2003 and ends March 31, 2004.
The award is for deliveries to Dyess, Joint Reserve, Raytheon in
Greenville, Texas, AASF in Dallas, Texas, and Goodfellow Air Force
Base in San Angelo, Texas. The contract provides for a 40% decline
from the volumes that it supplied under the previous contract which
began April 1, 2002 and ends March 31, 2003. The Partnership believes
that its profit margins under the new contract will be approximately
$626,000 less than those under the previous contract. See "Items 1.
and 2. Business and Properties - Partnership Operations and Products -
Products Marketing Business."
Financial Condition
Inflation
Although the Partnership's operating costs are generally impacted
by inflation, the Managing General Partner does not expect general
inflationary trends to have a material adverse impact on the
Partnership's operations.
Financial Resources and Liquidity
With respect to the Products Marketing Business, the Partnership
receives payments from the United States Government, major oil
companies, and other customers within approximately 7 to 15 days from
shipment in the case of product sales. 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 from October 1, 1998 to December 31, 1999
(see "Items 1. and 2. Business and Properties - Partnership Operations
and Products - General"). Shell agreed to maintain the refined
products inventory in tanks leased to Shell by the Partnership at the
Partnership's marketing facilities. On April 15, 1999, Shell further
agreed to extend the lease and maintain the inventory provided the
Partnership reimburses Shell for its carrying costs beginning January
1, 2000, 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 has been required to
reimburse Shell its carrying costs of inventory, including interest
costs, since 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. The deposit is included as an offset to
accounts payable in the financial statements. 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
(see below).
Prior to the Initial Ruling by the Bankruptcy Court (see "Item 3.
Legal Proceedings"), 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 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
$222,000 for the year ended December 31, 2001. In addition, the
Partnership recorded paid in kind interest of $134,000 on the
Subordinate Note A for the period August 23, 2000 to December 31, 2001
as a result of the Initial Ruling. From January 1, 2002 through
January 22, 2002, the Partnership recorded paid in kind interest of
$2,000 on the Subordinate Note A.
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. The First Deposit and
Second Deposit are collectively referred to as the deposits (the
"Deposits"). For the years ended December 31, 2001 and 2000, the
Deposits with the Texas Court accrued interest income of $646,000 and
$391,000, 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. 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 and the Partnership recorded paid in kind interest of $134,000
for the period August 23, 2000 to December 31, 2001 based on the
contractual rates on the Subordinate Note A. From January 1, 2002
through January 22, 2002, the Partnership recorded paid in kind
interest of $2,000 on 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.
Because a portion of the Debt was subject to increasing rates of
interest in 2000 and before, the Partnership was accruing interest at
the effective rate over the term of the Debt. Interest expense for
the year ended December 31, 2000 reflects the reversal of an accrual
of $1,345,000 which is based on the difference between the effective
interest rates and the stated rates accrued in prior years.
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 December 31, 2001, the distributions
continued accumulating in arrears on the Redeemable Preferred Equity
owned by Management.
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) 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).
Cash flows will be significantly affected by fluctuations in the
cost and volume of refined products and the timing of accounts
receivable collections. For the year ended December 31, 2002, cash
was provided by an increase in accounts payable (as a result of the
higher refined product prices) and a decrease in accounts receivables
(due to the reclassification of $6,772,000 from accounts payable to
accounts receivable at December 31, 2001 since the Shell deposit
exceeded the payable to Shell at that time (see above)). For the year
ended December 31, 2001, cash was provided by the Texas Court
returning the Deposits and an increase in accounts payable since the
Partnership could not pay certain liabilities while it was in
Bankruptcy, which was partially offset by an increase in accounts
receivable (as a result of the higher refined product prices).
The Supreme Court of New York, County of New York ("New York
Court") issued a temporary restraining order on September 7, 2000,
which imposed restrictions on the Partnership's use of DESC Proceeds.
Because of those constraints, Management agreed to extend a revolving
loan to the Partnership of $4,200,000 ("Management Revolver") from the
Bonuses paid to Management as a result of the successful litigation of
the DESC Claim (see "Item 3. Legal Proceedings"). A note evidencing
the Management Revolver was executed September 18, 2000. During the
third and fourth quarters of 2000, Management made advances under this
facility. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding.
The facility was subsequently cancelled and the amounts outstanding
thereunder were repaid.
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.
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. 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 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 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. As a result of the Bankruptcy
Court's Initial Ruling, the accrual was reversed resulting in a credit
to interest expense of $348,000 for the year ended December 31, 2001
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 years ended December 31, 2001 and 2000, the
Partnership accumulated arrearages of $2,806,000 (which includes the
adjustment of $626,000 mentioned above for the period August 31, 2000
to June 30, 2001) and $1,683,000, respectively, on the Redeemable
Preferred Equity. No arrearages accumulated on the Redeemable
Preferred Equity for the year ended December 31, 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.
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 on January 22, 2002. 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 15, 2012 and is
redeemable in ten equal annual installments which began on January 15,
2003 and Management's Redeemable Preferred Equity was converted into
$8,300,000 of New Redeemable Preferred Equity which matures January
15, 2017 and is redeemable in fifteen equal annual installments which
began on January 15, 2003. For the year ended December 31, 2002, the
New Redeemable Preferred Equity accrued distributions of $827,000.
Under the terms of the New Redeemable Preferred Equity, the
Partnership was to redeem the New Redeemable Preferred Equity in ten
annual installments of $1,406,000 and then five annual installments of
$940,000 beginning January 15, 2003. The Partnership is required to
redeem the New Redeemable Preferred Equity upon a change in control or
a change in financial condition. On January 15, 2003, the Partnership
paid $1,025,000 on the New Redeemable Preferred and asked Messrs.
Stephens and Malone to defer principal payments of $381,000 until July
15, 2003 in order to conserve cash, to which they agreed.
At December 31, 2002 and 2001, Pride SGP held the G Preferred
Units with a stated value of $514,000 and $3,144,000, respectively
(see "Items 1. and 2. Business and Properties - General"). 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. 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. The remaining G Preferred Units owned
by Pride SGP are expected to be redeemed in April 2003 (see "Item 3.
Legal Proceedings").
At December 31, 2002 and 2001, 4,950,000 Common Units were
outstanding, representing a 98% limited partner interest. As of March
11, 2003, Pride SGP, Management and the public owned 250,000,
2,004,000 and 2,696,000 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 December 31, 2002, the Common Units ranked 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 (see "Item 3. Legal Proceedings" for discussion of
certain tax issues associated with ownership of Common Units).
The Partnership's ability to improve its profits is principally
dependent upon increased volumes and/or improved profit margins, as
well as continued cost control initiatives. Under a new military
aviation fuel contract with the Government that begins April 1, 2003
and ends March 31, 2004, the Partnership will supply approximately
20,450,000 gallons, which is a 40% decline from the volumes that it
supplied under the previous contract with the Government, that began
April 1, 2002 and ends March 31, 2003. The Partnership believes that
its profit margins under the new contract will be approximately
$626,000 less 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.
As previously discussed, in January 2002, the Partnership sold
the remaining Refinery equipment and Aledo Pipeline for $5,400,000.
On January 22, 2002, Shell also returned $4,000,000 of the $14,000,000
in cash the Partnership had deposited with Shell to secure its payable
to Shell for refined product purchases. The Partnership believes, in
light of these two events, that it has adequate liquidity to operate
currently without a working capital facility. The Partnership expects
that, for the foreseeable future, it will be able to fund its working
capital requirements, its planned capital expenditures and required
amortization of the New Redeemable Preferred Equity from cash on hand
and cash generated from operations.
As previously discussed, 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.
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 (see "Item 3. Legal Proceedings" and "Item 13. Certain
Relationships and Related Transactions"). 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 the Initial Ruling on September 4, 2001 (see "Item 3. Legal
Proceedings").
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
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 each filed Bankruptcy under
Chapter 11 of the Federal Bankruptcy Code, 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 (see "Items 1. and 2. Business and Properties - General").
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; 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 Joint 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 December 31, 2001, current liabilities subject to compromise
included liabilities of the Products Marketing Business (continuing
operations) of $7,707,000 and liabilities of the Crude Gathering
System (discontinued operations) of $861,000, whereas long-term
liabilities subject to compromise included $7,000,000 of liabilities
from the Products Marketing Business (continuing operations) and
$8,680,000 of liabilities from the Crude Gathering System
(discontinued operations).
For the years ended December 31, 2002, 2001 and 2000, the
Partnership incurred $365,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management),
$1,294,000 (includes a premium of $183,000 related to the Varde
Settlement Agreement) and $55,000, respectively, in bankruptcy related
expenses.
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 (see "Item 3. Legal Proceedings").
On January 8, 2002, 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. 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 (see "Item 10. Directors and
Executive Officers of the Partnership" and "Item 13. Certain
Relationships and Related Transactions").
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 loss of $555,000 on disposal of the discontinued operations
for the year ended December 31, 2002 since the former employees worked
for the Crude Gathering System. The Partnership paid the $625,000 to
the five former employees on November 22, 2002.
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 were not disputed or who filed proofs of claim
that were allowed under the Bankruptcy Code are expected to be paid in
full as provided in the Plan.
Pride SGP's bankruptcy petition was dismissed on May 2, 2002.
Pride Marketing, which was inactive, was liquidated on July 17,
2002.
Capital Expenditures
Capital expenditures totaled $791,000 for the year ended December
31, 2002 compared to $106,000 for the year ended December 31, 2001.
Of the $791,000 incurred for the year ended December 31, 2002,
$568,000 was for expenditures on the new airplane.
Management anticipates spending $286,000 for the year ended
December 31, 2003 for environmental expenditures, of which $85,000 was
accrued at December 31, 2002. Another $22,000 was accrued at December
31, 2002 for environmental expenditures expected to be incurred during
the year ended December 31, 2004. Maintenance capital expenditures
for 2003 are budgeted at $100,000.
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk
Under an agreement with Shell, Shell maintained the refined
products inventory for the Partnership during 2002, 2001 and 2000 thus
eliminating the Partnership's exposure to changing refined product
prices (see "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operation - Financial Condition - Financial
Resources and Liquidity").
The Partnership did not have any outstanding debt at December 31,
2002.
At December 31, 2001, the five year maturities and applicable
interest rate were as follows:
Maturities in
2002
-----------------
Amount Rate Total
----------- ---- -----------
C Term Loan $ 2,055,000 0% $ 2,055,000
Subordinate Note A 673,000 0% 673,000
Subordinate Note A (Prime+1%) 438,000 5.75% 438,000
Varde Unsecured Claim 11,000,000 0% 11,000,000
----------- -----------
$14,166,000 $14,166,000
=========== ===========
The Bankruptcy Court ruled the Partnership did not owe interest on the
C Term Loan or Subordinate Note A to the extent payment was tendered
on that debt on July 27, 2000.
Under the Varde Settlement Agreement, the Varde Unsecured Claim does
not accrue interest.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Partnership, together with
the reports thereon of DAVIS, KINARD & CO., P.C. ("Davis Kinard")
appear after the signature pages. See the Index to Financial
Statements at the beginning of the Financial Statements.
The independent auditors reports for the year ended December 31,
2000 included a going concern paragraph and referenced conditions that
raised substantial doubt about the Partnership's ability to continue
as a going concern at that time.
Davis Kinard billed the Partnership $66,000 for audit fees
related to the 2002 financial statements, which included $13,000 for
quarterly reviews required by the Securities and Exchange Commission.
Davis Kinard did not provide any non-audit services during 2002;
therefore, no fees for such services were billed to the Partnership.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Partnership
Set forth below is certain information concerning the executive
officers and directors of the Managing General Partner as of December
31, 2002 who are responsible for the operations of the Partnership.
All directors of the Managing General Partner are elected by its
shareholders. All officers of the Managing General Partner serve at
the discretion of the board of directors of the Managing General
Partner.
POSITION WITH THE
NAME AGE MANAGING GENERAL PARTNER
____ ___ ________________________
E. Peter Corcoran 74 Chairman of the Board
Brad Stephens 52 Chief Executive Officer, Treasurer,
Assistant Secretary and Director
D. Wayne Malone 59 President, Chief Operating Officer,
Assistant Secretary and Director
Douglas Y. Bech 57 Director
Clark Johnson 57 Director
Robert Rice 80 Director
Craig Sincock 50 Director
Dave Caddell 53 Vice President, General Counsel
and Assistant Secretary
George Percival 43 Chief Financial Officer
E. Peter Corcoran. Mr. Corcoran served as a director of Pride
Pipeline Company, an affiliate of the Partnership, from 1985 to 1990
and became a director of the Managing General Partner in 1990. In
March 1994, he became Chairman. In 1991, Mr. Corcoran retired from
Lazard Freres & Co., having been a limited partner thereof since 1983
and a general partner from 1968 until 1983. Mr. Corcoran serves as a
member of the Audit and Conflicts Committee of the Board of Directors
of the Managing General Partner.
Brad Stephens. Mr. Stephens served as Vice President of one of
the predecessor companies of the Partnership ("Predecessor Companies")
from 1988 until June 1989, when he became Executive Vice President and
Chief Financial Officer. In March 1994, he became Chief Executive
Officer. Prior to 1988, Mr. Stephens was President of Independent
Bankshares and First State Bank of Abilene, where he had been employed
since 1978. Mr. Stephens is a Certified Public Accountant and prior
to 1978, he was employed by the accounting firm of Deloitte, Haskins &
Sells.
D. Wayne Malone. Mr. Malone has been associated with the
Predecessor Companies since 1979 and has been an officer, director,
and shareholder of the various companies since 1981. Mr. Malone
became President of Pride Pipeline Company in 1980, President of Pride
Marketing of Texas, Inc. in 1984 in charge of retail, wholesale, and
aviation fuel sales, and President of a predecessor of Pride SGP in
March 1988, adding the responsibilities of refining and product
trucking. Mr. Malone also served as President of Carswell Pipeline
Company. In March 1994, he became President and Chief Operating
Officer.
Douglas Y. Bech. Mr. Bech became a director of the Managing
General Partner in 1993. He is Chairman and Chief Executive Officer
of Raintree Resorts International, Inc. and the founding partner of
Raintree Capital Company, L.L.C., a merchant banking firm. From 1994
to 1998, Mr. Bech was a partner in the law firm of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., and from 1993 to 1994 he was a partner
in the law firm of Gardere & Wynne, L.L.P. From 1970 to 1993, he was
associated with and a senior partner of the law firm of Andrews &
Kurth, L.L.P. Mr. Bech is also a director of Frontier Oil Corporation
and j2 Global Communications.com. Mr. Bech serves as a member of the
Compensation Committee of the Board of Directors of the Managing
General Partner.
Clark Johnson. Mr. Johnson became a director of the Managing
General Partner in 1993. He is President and CEO of Orion Refining
Corporation, an independent refining and marketing company. Prior to
his position with Orion Refining Corporation, he held the positions of
President and CEO of Frontier Refining and Marketing, Executive Vice
President and Chief Operations Officer of Kerr-McGee Refining
Corporation, and senior management positions with Coastal Corporation
and Tenneco Oil Company. Mr. Johnson serves as a member of the Audit
and Conflicts Committee and as Chairman of the Compensation Committee
of the Managing General Partner.
Robert Rice. Mr. Rice became a director of the Managing General
Partner in 1990. He is an independent investor. Mr. Rice serves as
Chairman of the Audit and Conflicts Committee and as a member of the
Compensation Committee of the Board of Directors of the Managing
General Partner.
Craig Sincock. Mr. Sincock became a director of the Managing
General Partner in February, 1994. He is President and a director of
Avfuel Corporation, a privately held corporation and independent
supplier of aviation fuel headquartered in Ann Arbor, Michigan. He
has been associated with Avfuel Corporation since the early 1980's and
is an active real estate investor. Mr. Sincock serves as a member of
the Audit and Conflicts Committee of the Board of Directors of the
Managing General Partner.
Dave Caddell. Mr. Caddell is Vice President and General Counsel.
He practiced general corporate law as a sole practitioner from
November 1992 to March 1994. Previously, he served as Vice President
and General Counsel of the Predecessor Companies and the Partnership
from 1985 to October 1992.
George Percival. Mr. Percival, a Certified Public Accountant,
came to the Partnership in June 1990, and has served as Chief
Financial Officer since August of 1994. Prior to joining the
Partnership, he was with Computer Language Research (d.b.a. Fast-Tax),
where he had been the Senior Tax Manager since 1987. Prior to that he
was employed by the accounting firms of Coopers & Lybrand (1984 to
1987), and Fox and Company (1981 to 1984).
During 2002, one officer of the Managing General Partner did not
file on a timely basis all reports required pursuant to Section 16(a)
of the Securities Exchange Act of 1934. Mr. Stephens filed Form 4 for
February of 2002 1 day late.
Item 11. Executive Compensation
(a) Compensation of the General Partners. In respect of their
general partner interests in the Partnership, the General Partners are
allocated an aggregate of 2% of the income, gains, losses and
deductions arising from the Partnership's operations and receive an
aggregate of 2% of any distributions. For the year ended December 31,
2002, the General Partners did not receive any distributions in
respect of their 2% general partner interest in the Partnership. The
compensation set forth below under Officers' Compensation is in
addition to any 2% distribution to the General Partners. The General
Partners are not required to make any contributions to the capital of
the Partnership, beyond those made upon formation of the Partnership,
to maintain such 2% interest in allocations and distributions of the
Partnership. The General Partners do not receive, as general partners
of the Partnership, any compensation other than amounts attributable
to their 2% general partner interest in the Partnership.
Additionally, the Special General Partner is allocated a portion of
the income, gains, losses and deductions arising from the
Partnership's operations in respect of its Common Units. The Managing
General Partner did receive a $1,989,000 bonus from the DESC Proceeds
in 2000 (See "Item 3. Legal Proceedings" and "Benefit Plans").
For the year ended December 31, 2002, the Special General Partner
did not receive any distributions in respect of the G Preferred Units;
however, the Partnership did redeem $2,630,000 in G Preferred Units
owned by Pride SGP and the Departing Shareholders of Pride SGP for
$1,275,000 during the year ended December 31, 2002. The Partnership
reimburses the General Partners for all their direct and indirect
costs (including general and administrative costs) allocable to the
Partnership. See "Item 13. Certain Relationships and Related
Transactions."
(b) Summary Officers' Compensation Table. The following table
sets forth certain compensation paid during fiscal 2002, 2001 and 2000
by the Partnership to the executive officers of the Managing General
Partner:
(The following table should be printed on 11" x 8.5" paper)
SUMMARY COMPENSATION TABLE
All Other
Year Salary Bonus Compensation
---- -------- ---------- ------------
Brad Stephens 2002 $242,000 $ 46,800 $ 51,000
Chief Executive Officer 2001 225,000 0 44,500
2000 225,000 2,218,400 15,700
D. Wayne Malone 2002 242,000 46,800 51,100
Chief Operating Officer 2001 225,000 0 44,000
2000 225,000 2,218,400 15,900
Dave Caddell 2002 177,000 26,900 42,400
Vice President/General 2001 165,000 0 35,300
Counsel 2000 165,000 1,293,200 11,900
George Percival 2002 124,000 13,600 4,500
Chief Financial Officer 2001 115,000 0 4,600
2000 115,000 686,600 8,000
In this column is the Partnership's contribution to the Section 401(k) Plan for each officer,
reimbursement of income taxes on certain perquisites. See "Benefit Plans - Section 401(k)
Plan" and "Compensation of Directors" below. For 2002 and 2001, it also includes directors and
advisor fees, country club dues, car allowance, company physical and airplane usage to the
extent these other perquisites exceeded the lower of $50,000 or 10% of the officer's salary and
bonus for Messrs. Stephens, Malone and Caddell.
For Mr. Stephens in 2002 and 2001, the column included other perquisites of $44,000 and
$37,200, respectively. The directors fees and the car allowance Mr. Stephens received both
exceeded 25% of the other perquisites in both years. Mr. Stephens received directors fees of
$20,000 for both 2002 and 2001 and a car allowance of $11,300 and $10,200 for 2002 and 2001,
respectively.
For Mr. Malone in 2002 and 2001, the column included other perquisites of $43,600 and $36,400,
respectively. The directors fees Mr. Malone received exceeded 25% of the other perquisites in
both years and the car allowance exceeded 25% of the other perquisites in 2001. Mr. Malone
received directors fees of $20,000 for both 2002 and 2001 and a car allowance of $11,200 for
2001.
For Mr. Caddell in 2002 and 2001, the column included other perquisites of $35,600 and $28,400,
respectively. The advisory fees Mr. Caddell received exceeded 25% of the other perquisites in
both years and the car allowance exceeded 25% of the other perquisites in 2002. Mr. Caddell
received advisory fees of $20,000 for both 2002 and 2001 and a car allowance of $9,900 for
2001.
Under the management bonus plan, which bases such bonuses on cash flow of the Partnership
including litigation proceeds, Messrs. Stephens, Malone, Caddell and Percival were paid bonuses
of $46,800, $46,800, $26,900 and $13,600, respectively, for the year ended December 31, 2001 on
July 23, 2002 (see "Benefit Plans").
Under the management bonus plan, which bases such bonuses on cash flow of the Partnership
including litigation proceeds, Messrs. Stephens, Malone, Caddell and Percival and the Managing
General Partner were paid bonuses of $1,716,800, $1,716,800, $981,100, $490,500 and $1,989,600,
respectively, during the year ended December 31, 2000 (see "Benefit Plans"). The Partnership
also paid payroll taxes of $71,600 on such bonuses. The total bonus paid by the Partnership
including taxes was $6,967,000. Subsequently, the Managing General Partner paid Messrs.
Stephens, Malone, Caddell and Percival bonuses in the amount of $97,300, $97,300, $150,400 and
$196,100 respectively, plus payroll taxes of $7,800 also in the year ended December 31, 2000.
The Managing General Partner also paid a cash distribution to Messrs. Corcoran, Stephens,
Malone and Caddell in the amount of $67,400, $404,300, $404,300 and $161,700, respectively. In
May 2001, Messrs. Stephens, Malone, Caddell and Percival repaid $6,900, $6,900, $4,000 and
$2,000 of the bonus paid in 2000 since the actual cash flow used in computing the bonuses was
slightly lower than the original estimate the Partnership used for cash flow at the time the
bonuses were paid.
(c) Benefit Plans. In order to attract, retain and motivate
officers and other employees who provide administrative and managerial
services, the Partnership provides incentives for key executives
employed by the Partnership through an Annual Incentive Plan. The
Annual Incentive Plan was originally proposed in 1996 by the
Compensation Committee, which is comprised of outside directors, and
was approved by the Board in 1996. The Plan now provides for certain
key executives to share in a bonus pool which varies in size with the
Partnership's operating income plus depreciation, calculated after
bonus accrual, after payments under the Partnership's unit
appreciation plan, and after proceeds of litigation, to the extent not
otherwise included in operating income ("Cash Flow"). Provided that
Cash Flow exceeds $2 million, the key executive bonus pool includes 8%
of an amount equal to the Partnership's first $2 million of Cash Flow
in excess of $2 million, plus 12% of the next $4 million of Cash Flow,
plus 15% of any Cash Flow in excess of $8 million. The Partnership
paid bonuses of $134,000 and $6,967,000 under this plan for the years
ended December 31, 2001 and 2000. The bonuses for the year ended
December 31, 2001 were actually paid on July 23, 2002.
Unit Appreciation Rights. During 1996, the Partnership
implemented a Unit Appreciation Rights Plan for officers and key
employees. Under the plan, individual employees can be granted Unit
Appreciation Rights ("Rights") whereby a holder of the Rights is
entitled to receive in cash or in Common Units the increase, if any,
between the exercise price, as determined by the board of directors of
the Managing General Partner at the date of grant, and the fair market
value on the exercise date. The employees awarded and the number of
Rights awarded to the employees are subject to the discretion of the
board of directors of the Managing General Partner. The term of all
awards is ten years from the grant date. It is anticipated that
Rights aggregating approximately 10% of the total Common Units will be
reserved for issuance to key employees. However, no Common Units are
expected to be issued under this plan.
On December 9, 1996, four officers and twelve employees were
awarded a total of 292,760 Rights at an exercise price of $3.75 per
unit. Because the fair market value of the Rights did not exceed the
exercise price at December 9, 1996, no compensation expense was
accrued. Effective December 31, 1997, the number of Rights was
increased to 299,996, reallocated among four officers and eleven
employees, and the exercise price was reduced to $1.94 per unit. The
Rights of the eleven employees were terminated in 1999, 2000 and 2001
thus reducing the total outstanding Rights to 160,000 at December 31,
2001 and 2002 all of which had been awarded to the officers. A one-
time award of 70,000 Rights was made in 1996 to five non-employee
directors at an exercise price of $3.75 which were fully vested on
December 31, 1997. Effective December 31, 1997, the exercise price
was amended and reduced to $1.94 per unit. The Rights were fully
vested on December 31, 1998; however, none have been exercised as of
December 31, 2002.
Section 401(k) Plan. The Pride Employees' 401(k) Retirement Plan
and Trust ("Retirement Plan") is a defined contribution plan covering
substantially all full-time employees. Under the Retirement Plan, the
Partnership must make a mandatory contribution each year equal to 3%
of a participant's compensation and may make discretionary matching
contributions of up to an additional 3% of a participant's
compensation depending on the Partnership's cash flow for such year.
The participant's contribution to the plan may not exceed the
limitation as outlined under Internal Revenue Code Section 402(g).
Beginning January 1, 2002, matching contributions vest over a six year
period while mandatory contributions continue to vest over a seven
year period (prior to January 1, 2002, matching contributions also
vested over a seven year period), subject to immediate vesting upon
retirement. The Summary Compensation Table above includes amounts
contributed to the plan by the Partnership on behalf of the four most
highly compensated executive officers in the column titled "All Other
Compensation."
The Partnership also has in effect, for the benefit of its
employees, a Long-term Disability Plan, a Safety Incentive Plan,
Accidental Death and Dismemberment Insurance, Life Insurance, Group
Hospitalization Insurance, Dental Plan, Cancer Plan, Medical
Reimbursement Plan and Dependent Care Plan.
(d) Compensation of Directors. The Chairman of the Managing
General Partner receives an annual retainer of $42,000, $2,000 for
each board meeting attended and is reimbursed for travel and lodging
expenses incurred to attend board meetings. Members of the board of
directors of the Managing General Partner receive an annual retainer
of $12,000, $2,000 for each board meeting attended and are reimbursed
for travel and lodging expenses incurred to attend board meetings.
Dave Caddell, an advisor to the Board of Directors of the Managing
General Partner, receives an annual retainer of $12,000, $2,000 for
each board meeting attended and is reimbursed for travel and lodging
expenses to attend board meetings. On July 23, 2002, Messrs.
Corcoran, Bech, Johnson, Rice and Sincock also received bonuses of
$40,000, $40,000, $35,000, $30,000 and $30,000, respectively.
Directors have also received Rights as discussed under Benefit Plans.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
a) Security Ownership of Certain Beneficial Owners as of March 11,
2003.
The following table sets forth certain information with respect
to each person known by the Partnership to own beneficially 5% or more
of the Common Units as of March 11, 2003.
Percent
of
Title of Class Name and Address Amount Class
______________ ________________ ______ _______
Common Units Brad Stephens 1,034,529 20.9%
1209 North Fourth Street
Abilene, TX 79601
Common Units Wayne Malone 690,085 13.9%
1209 North Fourth Street
Abilene, TX 79601
Common Units Pride SGP, Inc. 250,000 5.1%
1209 North Fourth Street
Abilene, TX 79601
The percentages for Messrs. Stephens and Malone represent the
securities they hold directly. In addition, they have an interest in
the Common Units held by Pride SGP (see "Item 13. Certain
Relationships and Related Transactions").
<\FN>
b) Security Ownership of Management
The following table sets forth certain information, as of March
11, 2003, concerning the beneficial ownership of (i) Common Units and
(ii) shares of Common Stock of the Managing General Partner by each
director and officer of the Managing General Partner and by all
directors and officers of the Managing General Partner as a group (see
"Item 13. Certain Relationships and Related Transactions").
Number of
Common Shares
Number of Percentage of Managing Percentage
Common of General of
Name Units Class Partner Class
- ---- ------------- ---------- ------------- ----------
E. Peter Corcoran - - 41.67 6.5%
Brad Stephens 1,034,529 20.9% 250.00 39.0%
D. Wayne Malone 690,085 13.9% 250.00 39.0%
Douglas Y. Bech 300 - -
Clark Johnson - - - -
Robert Rice - - - -
Craig Sincock - - - -
Dave Caddell 186,000 3.8% 100.00 15.5%
George Percival 93,000 1.9% - -
----------- -------- ----------- --------
All directors and
officers as a group
(9 persons) 2,003,914 40.5% 641.67 100.0%
=========== ======== =========== ========
Unless otherwise indicated, the persons named above have sole voting
and investment power over the Common Units reported.
This director of the Managing General Partner owned beneficially, as
of March 11, 2003, less than 1% of the Common Units outstanding on
such date.
<\FN>
Item 13. Certain Relationships and Related Transactions
The Partnership is managed by the Managing General Partner
pursuant to the Partnership Agreement. See "Items 1. and 2. Business
and Properties - General" and "Item 11. Executive Compensation -
Compensation of the General Partners" for certain information related
to compensation and reimbursement of the General Partners. As of
December 31, 2002, Messrs. Malone, Stephens and Caddell own 47%, 41%
and 12%, respectively, of Pride SGP (see "Item 3. Legal Proceedings"
and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity").
The Partnership utilizes an airplane from time to time, as
needed, on a per hour market rate basis from an entity controlled by
two officers of the Managing General Partner. Payments to this entity
totaled $47,000, $66,000 and $79,000 during 2002, 2001 and 2000,
respectively.
The Partnership leases property from a relative of one of the
officers of the Managing General Partner. Lease payments were
approximately $44,000, $42,000 and $41,000 in 2002, 2001 and 2000,
respectively.
The Managing General Partner has a 1.9% interest in the income
and cash distributions of the Partnership, subject to certain
adjustments. Members of Management of the Managing General Partner
collectively own a 39.7% interest in the Partnership, as of March 11,
2003, through their ownership of Common Units (see "Items 1. and 2.
Business and Properties - General"). Pride SGP has a 0.1% general
partner interest, $514,000 in Series G Preferred Units, as of December
31, 2002, and has a 4.9% interest in the Partnership through its
ownership of Common Units. Compensation of directors and officers of
the Managing General Partner and any other expenses incurred on behalf
of the Partnership by the Managing General Partner and Pride SGP are
paid by the Partnership.
As a result of the temporary restraining order imposed by the New
York Court on September 7, 2000, Management agreed to extend the
Management Revolver of $4,200,000 from the Bonuses paid to Management
as a result of the successful litigation of the DESC Claim. The note
was executed September 18, 2000. During the third and fourth quarters
of 2000, Management made advances under this facility. Although the
note accrued interest at prime plus 1.75%, Management waived such
interest for the period it was outstanding. The facility was
subsequently cancelled and the amounts outstanding thereunder were
repaid (see "Item 3. Legal Proceedings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and
Liquidity").
On December 1, 2000, the Managing General Partner of the
Partnership exercised a call option and purchased 930,000 Common Units
of the Partnership for $251,000. The Managing General Partner of the
Partnership paid $150,000 on July 25, 2000 to J-Hawk Corporation for
the call option. In January, 2001, the Managing General Partner sold
95,000 of those Common Units to certain members of Management and
distributed the remaining 835,000 Common Units it held to its
shareholders.
The Common Units underlying the call option were acquired by J-
Hawk Corporation in a separate transaction that also closed on July
25, 2000. The Managing General Partner was paid a $50,000 finder's
fee by the Seller.
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. 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 for its one-third interest in the C Term Loan,
Subordinate Note A and Redeemable Preferred Equity (see "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity").
On January 8, 2002, 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. 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 remaining G Preferred Units owned
by Pride SGP are expected to be redeemed in April 2003 (see "Item 3.
Legal Proceedings" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition
- - Financial Resources and Liquidity").
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.
Lease payments were approximately $145,000 in 2002.
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.
PART IV
Item 14. Controls and Procedures
The Partnership maintains controls and procedures designed to
ensure that information required to be disclosed in the reports that
the Partnership files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. Within 90 days
prior to the filing date of this report, an evaluation was performed
under the supervision and with the participation of the Partnership's
management, including the Chief Executive Officer and the Chief
Financial Officer of the Managing General Partner of the Partnership,
of the effectiveness of the design and operation of the Partnership's
disclosure controls and procedures. Based upon that evaluation,
management, including the Chief Executive Officer and the Chief
Financial Officer of the Managing General Partner of the Partnership,
concluded that the Partnership's disclosure controls and procedures
were adequate and effective as of December 31, 2002. No significant
changes in the Partnership's internal controls or in other factors
have occurred that could significantly affect controls subsequent to
December 31, 2002.
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements and (2) Financial Statement
Schedules: See Index to Financial Statements after the signatures
pages for financial statements filed as a part of this Report.
(3) Exhibits: See Index to Exhibits after the Financial
Statement for a description of the exhibits filed as a part of this
Report.
(b) Reports on Form 8-K filed during the quarter ended
December 31, 2002:
None
All schedules are omitted because they are not applicable or the
required information is shown elsewhere in this report.
SIGNATURES
Pride Companies, L.P., pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRIDE COMPANIES, L.P.
(Registrant)
By: Pride Refining, Inc.
as Managing General Partner
By: /s/Brad Stephens
Chief Executive Officer, Treasurer, and Director
DATED: March 31, 2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brad Stephens and D. Wayne
Malone and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign
any or all amendments in connection herewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report and power of attorney has been signed below by the
following persons on behalf of the Partnership and in the capacities
and on the date indicated.
PRIDE REFINING, INC.
Signature Title Date
_________ _____ ____
/s/E. Peter Corcoran Chairman and Director March 31, 2003
/s/Brad Stephens Chief Executive Officer, March 31, 2003
Treasurer, and Director
/s/D. Wayne Malone President, Chief Operating March 31, 2003
Officer, and Director
/s/Douglas Y. Bech Director March 31, 2003
/s/Clark Johnson Director March 31, 2003
/s/Robert Rice Director March 31, 2003
/s/Craig Sincock Director March 31, 2003
/s/Dave Caddell Vice President and March 31, 2003
General Counsel
/s/George Percival Chief Financial Officer March 31, 2003
(Principal Financial Officer
and Accounting Officer)
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
I, Brad Stephens, certify that:
1. I have reviewed this annual report on Form 10-K of Pride
Companies, L. P.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the Audit Committee of registrant's board of directors
(or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/Brad Stephens
Brad Stephens
Chief Executive Officer
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, George Percival, certify that:
1. I have reviewed this annual report on Form 10-K of Pride
Companies, L. P.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the Audit Committee of registrant's board of directors
(or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/George Percival
George Percival
Principal Financial Officer
INDEX TO FINANCIAL STATEMENTS
Report of Davis, Kinard & Co., P.C., Independent Auditors
Balance Sheets at December 31, 2002 and 2001
Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
Statements of Changes in Partners' Capital (Deficiency)
for the years ended December 31, 2002, 2001 and 2000
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Notes to Financial Statements
INDEPENDENT AUDITORS REPORT
The Board of Directors of the
Managing General Partner
We have audited the accompanying balance sheet of Pride Companies,
L.P. (the "Partnership") as of December 31, 2002 and 2001, and the
related statements of operations, changes in partners' capital
(deficiency), and cash flows for the years ended December 31, 2002,
2001 and 2000. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pride
Companies, L.P. as of December 31, 2002 and 2001, and the results of
its operations and its cash flows for the years ended December 31,
2002, 2001 and 2000, in conformity with U.S. generally accepted
accounting principles.
DAVIS, KINARD & CO., P.C.
Abilene, Texas
February 7, 2003
BALANCE SHEETS
PRIDE COMPANIES, L.P.
At December 31, 2002 and 2001
(In thousands, except unit amounts)
2002 2001
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents--Note 2 $ 12,158 $ 13,294
Restricted cash--Note 2 1,002 909
Accounts receivable, less allowance
for doubtful accounts of $319 and
$315 for 2002 and 2001, respectively
--Note 6 13,437 14,464
Inventories--Note 2 117 963
Prepaid expenses 326 364
-------- --------
TOTAL CURRENT ASSETS 27,040 29,994
PROPERTY, PLANT AND EQUIPMENT, net
--Notes 2 and 3 13,013 13,963
ASSETS NO LONGER USED IN THE
BUSINESS--Notes 2 and 3 - 4,235
OTHER ASSETS 5 105
-------- --------
$ 40,058 $ 48,297
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current liabilities not subject
to compromise:
Accounts payable $ 6,779 $ 1,619
Accrued payroll and related
benefits 183 250
Accrued taxes 3,460 2,534
Other accrued liabilities 258 687
Current portion of long-term debt--Note 4 - 2,055
-------- --------
Subtotal 10,680 7,145
Current liabilities subject to
compromise--Note 13 - 8,568
-------- --------
TOTAL CURRENT LIABILITIES 10,680 15,713
LONG-TERM DEBT--Note 4 - -
LONG-TERM LIABILITIES SUBJECT TO
COMPROMISE--Note 13 - 15,680
COMMITMENTS AND CONTINGENCIES--Note 5 - -
REDEEMABLE PREFERRED EQUITY--Note 8 11,500 5,693
PARTNERS' CAPITAL
Preferred Units to the Special
General Partner (3,145 and 3,145, units
authorized and 514 and 3,144, units
outstanding at December 31, 2002 and
2001, respectively)--Notes 1, 5, 7, 9
and 13 514 3,144
Common Units (5,275,000 units
authorized and 4,950,000 units
outstanding)--Notes 5 and 9 7,925 8,374
General partners' interest--Note 1 9,439 (307)
-------- --------
$ 40,058 $ 48,297
======== ========
See accompanying notes.
STATEMENTS OF OPERATIONS
PRIDE COMPANIES, L.P.
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per unit amounts)
2002 2001 2000
-------- -------- --------
Revenues:
Refinery and Products Marketing
Business--Note 6 $ 234,234 $ 236,510 $ 234,929
Net DESC proceeds--Note 5 - - 36,257
Cost of sales and operating expenses,
excluding depreciation--Note 7 228,282 229,280 230,144
Marketing, general and administrative
expenses--Note 7 4,081 3,434 3,406
Depreciation 1,490 1,444 1,467
--------- --------- ---------
OPERATING INCOME 381 2,352 36,169
Other income (expense):
Interest income--Note 4 135 944 1,062
Net interest income from DESC--Note 5 - - 12,389
Interest expense (including interest
paid in kind of $2, $134 and $1,673
in 2002, 2001 and 2000, respectively
and increasing rate accrued interest
of ($1,345) in 2000, respectively)
--Note 4 (40) 222 (1,244)
Credit and loan fees (including
amortization and write-off of
$3,546 in 2000)--Notes 1 and 4 131 (907) (4,921)
Gain on sale of assets
--Notes 1, 2 and 10 1,240 - -
Other - net (79) 103 (46)
--------- --------- ---------
1,387 362 7,240
--------- --------- ---------
NET INCOME FROM CONTINUING
OPERATIONS BEFORE REORGANIZATION
ITEMS 1,768 2,714 43,409
Reorganization items--Notes 5 and 13:
Professional fees and administrative
expenses 386 1,111 -
Premium (discount)on retirement of Debt
and Redeemable Preferred Equity (21) 183 -
--------- --------- ---------
NET INCOME FROM CONTINUING
OPERATIONS 1,403 1,420 43,409
Discontinued operations:
Loss on disposal of the Crude
Gathering System--Notes 1, 12 and 13 (555) - -
--------- --------- ---------
NET INCOME FROM OPERATIONS 848 1,420 43,409
Extraordinary gain - Income from
cancellation of indebtedness
--Notes 5, 9, 10 and 13 9,754 - -
--------- --------- ---------
NET INCOME $ 10,602 $ 1,420 $ 43,409
========= ========= =========
Basic net income (loss) per Common Unit:
Net income from continuing operations
less preferred distributions $ 0.11 $ (0.27) $ 8.26
Net loss from discontinued operations (0.11) - -
Extraordinary gain - - -
--------- --------- ---------
Basic net income (loss) per
Common Unit $ - $ (0.27) $ 8.26
========= ========= =========
Diluted net income (loss) per Common Unit:
Net income from continuing operations
less preferred distributions $ 0.11 $ (0.27) $ 5.82
Net loss from discontinued operations (0.11) - -
Extraordinary gain - - -
--------- --------- ---------
Diluted net income (loss) per
Common Unit $ - $ (0.27) $ 5.82
========= ========= =========
Numerator for basic net income (loss)
per Common Unit:
Net income from continuing operations $ 1,403 $ 1,420 $ 43,409
Preferred distributions (827) (2,806) (1,683)
--------- --------- ---------
Net income from continuing operations
less preferred distributions 576 (1,386) 41,726
Net income from continuing operations
less preferred distributions
allocable to 2% general partners'
interest 12 (28) 835
--------- --------- ---------
Numerator for basic net income from
continuing operations less
preferred distributions per
Common Unit $ 564 $ (1,358) $ 40,891
========= ========= =========
Net loss from discontinued operations $ (555) $ - $ -
Net loss from discontinued operations
allocable to 2% general partners'
interest (11) - -
--------- --------- ---------
Numerator for basic net loss from
discontinued operations per
Common Unit $ (544) $ - $ -
========= ========= =========
Extraordinary gain $ 9,754 $ - $ -
Extraordinary gain allocable 100%
to general partners' interest 9,754 - -
--------- --------- ---------
Numerator for basic extraordinary
gain per Common Unit $ - $ - $ -
========= ========= =========
Numerator for basic net income (loss)
per Common Unit $ 20 $ (1,358) $ 40,891
========= ========= =========
Numerator for diluted net income (loss)
per Common Unit:
Net income from continuing operations $ 1,403 $ 1,420 $ 43,409
Preferred distributions (827) (2,806) (1,683)
Adjustments to compute diluted
net income:
Subordinate Note A interest
expense - - 186
B Preferred Unit distributions - - 795
C Preferred Unit distributions - - 427
--------- --------- ---------
Net income from continuing operations
less preferred distributions 576 (1,386) 43,134
Net income from continuing operations
less preferred distributions
allocable to 2% general partners'
interest 12 (28) 863
--------- --------- ---------
Numerator for diluted net income from
continuing operations less
preferred distributions per Common
Unit $ 564 $ (1,358) $ 42,271
========= ========= =========
Net loss from discontinued operations $ (555) $ - $ -
Net loss from discontinued operations
allocable to 2% general partners'
interest (11) - -
--------- --------- ---------
Numerator for diluted net loss from
discontinued operations per Common
Unit $ (544) $ - $ -
========= ========= =========
Extraordinary gain $ 9,754 $ - $ -
Extraordinary gain allocable 100%
to general partners' interest 9,754 - -
--------- --------- ---------
Numerator for diluted extraordinary
gain per Common Unit $ - $ - $ -
========= ========= =========
Numerator for diluted net income
(loss) per Common Unit $ 20 $ (1,358) $ 42,271
========= ========= =========
Denominator:
Denominator for basic net income
(loss) per Common Unit 4,950 4,950 4,950
========= ========= =========
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A - - 292
B Preferred Units - - 1,315
C Preferred Units - - 705
--------- --------- ---------
Total adjustments - - 2,312
--------- --------- ---------
Denominator for diluted net income
(loss) per Common Unit 4,950 4,950 7,262
========= ========= =========
See accompanying notes.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIENCY)
PRIDE COMPANIES, L.P.
Years ended December 31, 2002, 2001 and 2000
(In thousands)
General
Preferred Common Partners'
Units Units Interest Total
--------- --------- --------- ---------
Balance at December 31, 1999 $ 3,144 $ (30,557) $ (1,101) $ (28,514)
Net income - 42,541 868 43,409
--------- --------- --------- ---------
Balance at December 31, 2000 3,144 11,984 (233) 14,895
Net income - 1,392 28 1,420
Distributions on Redeemable
Preferred Equity - (5,002) (102) (5,104)
--------- --------- --------- ---------
Balance at December 31, 2001 3,144 8,374 (307) 11,211
Net income - 831 9,771 10,602
Distributions on Redeemable
Preferred Equity - (2,608) (52) (2,660)
Redemption of G Preferred Units (2,630) 1,328 27 (1,275)
--------- --------- --------- ---------
Balance at December 31, 2002 $ 514 $ 7,925 $ 9,439 $ 17,878
========= ========= ========= =========
See accompanying notes.
STATEMENTS OF CASH FLOWS
PRIDE COMPANIES, L.P.
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations
before reorganization items $ 1,768 $ 2,714 $ 43,409
Net loss from discontinued operations (555) - -
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 1,490 1,444 1,467
Amortization and write-off
of loan costs - - 3,546
Gain on sale of property,
plant and equipment (1,240) (32) (49)
Paid in kind interest and
credit and loan fees 2 134 1,673
Increasing rate accrued interest - - (1,345)
Net effect of changes in:
Restricted cash (93) 16,725 (17,399)
Accounts receivable 1,027 (2,459) (5,229)
Inventories 846 (856) 73
Prepaid expenses 38 136 (342)
Accounts payable and other
long-term liabilities 5,160 1,736 (16,989)
Accrued liabilities 430 717 (378)
-------- -------- --------
Total adjustments 7,660 17,545 (34,972)
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES BEFORE REORGANIZATION ITEMS 8,873 20,259 8,437
Reorganization items:
Professional fees and administrative
expenses (386) (1,111) -
Extraordinary gain - Income from
cancellation of indebtedness 9,754 - -
Net effect of changes in:
Accounts payable and other
long-term liabilities (10,886) - -
Accrued liabilities (1,251) - -
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES
DUE TO REORGANIZATION ITEMS (2,769) (1,111) -
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 6,104 19,148 8,437
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (791) (106) (202)
Proceeds from asset disposals 5,726 32 104
Other 100 42 (66)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,035 (32) (164)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt and credit
facilities - - 2,014
Payments on debt and credit
facilities - - (20,127)
Redemption of G Preferred Units (1,275) - -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES
BEFORE REORGANIZATION ITEMS (1,275) - (18,113)
Payments on debt and credit
facilities - (6,327) -
Redemption of Redeemable Preferred
Equity - (4,023) -
Distributions paid on Redeemable
Preferred Equity - (1,650) -
Payments on pre-petition debt (11,000) - -
-------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES FROM REORGANIZATION ITEMS (11,000) (12,000) -
-------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES (12,275) (12,000) (18,113)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,136) 7,116 (9,840)
Cash and cash equivalents at
beginning of the period 13,294 6,178 16,018
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 12,158 $ 13,294 $ 6,178
======== ======== ========
See accompanying notes.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Organization and Nature of Operations: Pride Companies, L. P. (the
"Partnership") was formed as a limited partnership under the laws of
the State of Delaware in January 1990. The Partnership owns and
operates 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 (see Notes 2, 3 and 10).
Prior to October 1, 1999, the Partnership also owned and operated
a crude oil gathering business that gathered, transported, resold and
redelivered crude oil in the Texas market (the "Crude Gathering
System"). On October 1, 1999, the Partnership sold the operating
assets utilized by the Crude Gathering System to Sun Pipe Line
Services, Inc. ("Sun") for $29,595,000 in cash proceeds and the
assumption by Sun of certain indebtedness in the amount of $5,334,000.
Certain liabilities associated with the Crude Gathering System were
retained and have been presented in accounts payable and liabilities
subject to compromise at December 31, 2002 and 2001, respectively (see
Notes 12 and 13). The Partnership also accrued an additional loss of
$555,000 on disposal of the discontinued operations for the year ended
December 31, 2002, associated with the claims of five former employees
since the former employees worked for the Crude Gathering System (see
below and Notes 12 and 13).
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in, and serves as the
managing general partner of, the Partnership. The Partnership
succeeded in January 1990 to the businesses of Pride SGP, Inc.
("Special General Partner" or "Pride SGP") which owns a 0.1% general
partner interest in, and serves as the special general partner of, the
Partnership. The Managing General Partner and Pride SGP (collectively
the "General Partners") collectively own a 2% general partner
interest. In addition to its general partner interest, Pride SGP
owned the G Preferred Units of the Partnership with a stated value of
$514,000, as of December 31, 2002 (see below and Notes 5, 7 and 9),
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 7 and 9). Management, which is
comprised of the officers of the Managing General Partner (the
"Management"), collectively own a 39.7% interest as of March 11, 2003
in the Partnership through their ownership of Common Units. The
remaining Common Units, representing an aggregate 53.4% 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.
The financial statements of the Partnership include Pride
Marketing of Texas (Cedar Wind), Inc. (a wholly-owned subsidiary of
the Partnership) ("Pride Marketing") prior to its liquidation on July
17, 2002. All significant intercompany transactions have been
eliminated (see below and Note 13).
Operating Environment: Certain key events beginning in 1997 are key
to evaluating the Partnership's current operating environment.
1997 Restructuring and Recapitalization: Effective December 31, 1997,
Varde Partners, Inc. ("Varde") purchased and assumed the then existing
lenders' rights and obligations under the Partnership's outstanding
bank debt. In conjunction with Varde's purchase and assumption of the
lenders' rights and obligations under such bank debt, BankBoston, N.A.
("BankBoston") refinanced the Partnership's letter of credit facility
and provided a new revolver facility on December 31, 1997. Pride SGP
converted two notes into the Series E Cumulative Convertible Preferred
Units ("E Preferred Units") with a stated value of $2,000,000 and the
Series F Cumulative Preferred Units ("F Preferred Units") with a
stated value of $450,000 (see below). The Partnership incurred costs
of $60,000 and $6,570,000 in 1998 and 1997, respectively (including
$3,257,000 in noncash fees in 1997), related to the restructuring and
recapitalization, which were included in deferred financing costs.
During 2000, the Partnership expensed $3,546,000 (of which $990,000
was amortization of deferred financing costs and $2,556,000 of
deferred financing costs were written off as a result of retiring or
tendering payment on Varde's debt) related to the restructuring and
recapitalization.
In addition to the assumption by Varde of the outstanding bank
debt at December 31, 1997, Varde loaned the Partnership an additional
$4,693,000 for working capital purposes, including fees and costs
associated with the restructuring and recapitalization. After
completion of the restructuring and recapitalization, Varde held the
following securities, in order of seniority:
(i) Series A Term Loan ("A Term Loan") maturing December 31,
2002 in the original amount of $20,000,000;
(ii) Series B Term Loan ("B Term Loan") maturing December 31,
2002 in the original amount of $9,500,000;
(iii) Series C Term Loan ("C Term Loan") maturing December 31,
2002 in the original amount of $4,689,000;
(iv) Series A Unsecured Loan ("Subordinate Note A") in the
original amount of $2,500,000 maturing December 31, 2002;
(v) Series B Cumulative Convertible Preferred Units ("B
Preferred Units") in the amount of $9,322,000, which were
subject to mandatory redemption at December 31, 2002;
(vi) Series C Cumulative Convertible Preferred Units ("C
Preferred Units") in the amount of $5,000,000, which were
subject to mandatory redemption at December 31, 2002, and
(vii) Series D Cumulative Preferred Units ("D Preferred Units")
in the amount of $2,757,000 which were subject to
mandatory redemption at December 31, 2002.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
are collectively referred to herein as the debt ("Debt") (see Note 4).
The B Preferred Units, C Preferred Units and D Preferred Units
are collectively referred to herein as redeemable preferred equity
("Redeemable Preferred Equity") (see Note 8).
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.
The Partnership or Management had a three-year call on Varde's
position for an amount equal to a 40% annual return to Varde, subject
to a minimum payment of $7,500,000 over Varde's cost. Such call
lapsed December 31, 2000. The securities held by Varde had certain
antidilution provisions and registration rights.
1999 Sale of Operating Assets Utilized by the Crude Gathering System:
As previously discussed, the Partnership sold the operating assets of
the Crude Gathering System to Sun on October 1, 1999 (also see Note
12). The net proceeds were applied as follows: $15,000,000 principal
payment on the A Term Loan (see above and Note 4), $2,000,000 was paid
to Pride SGP as part of the exchange described in the following
paragraph and Note 7, and $10,007,000, net of transaction and exit
costs of $2,588,000, was retained for working capital. This sale
resulted in a taxable loss allocable to the Common Unitholders. None
of the proceeds were distributed to Common Unitholders.
In connection with the Crude Gathering Sale on October 1, 1999,
Pride SGP exchanged (a) certain trunklines and related pumping
facilities owned by Pride SGP, (b) interest payable to Pride SGP from
the Partnership in the amount of $548,000, (c) rentals payable to
Pride SGP from the Partnership in the amount of $2,146,000, (d) the E
Preferred Units with a stated value of $2,000,000 (see above) and (e)
F Preferred Units with a stated value of $450,000 (see above) for (i)
$2,000,000 in cash and (ii) the Series G Preferred Units ("G Preferred
Units") with a stated value of $3,144,000 (see below and Notes 7, 9
and 13 for subsequent events).
Net Losses: Excluding the income resulting from the DESC Claim (see
below and Note 5), the Partnership had continually incurred net losses
prior to the year ended December 31, 2000. Operating results prior to
the year ended December 31, 2000 suffered as a result of increasing
competition, depressed operating margins and higher financing costs.
For the year ended December 31, 2002, net income from operations which
excludes extraordinary gain of $9,754,000 was $848,000. Net income
for the year ended December 31, 2001 was $1,420,000. For the year
ended December 31, 2000, net income was $43,409,000 as a result of
DESC Income (see below) of $48,646,000. Excluding the DESC Income and
the write-off of deferred financing costs of $2,556,000 (see above),
the Partnership would have had a net loss of $2,681,000 for the year
ended December 31, 2000. The deferred financing costs were written
off as a result of retiring part of the Debt with the Net DESC
Proceeds (see below) and tendering payment on the remaining Debt (see
below).
2000 Collection on Judgment from the Government: In the year ended
December 31, 2000, the Partnership collected an award of $61,521,000
("DESC Proceeds") from the United States of America (the
"Government"), also referred to as the Defense Energy Support Center
("DESC"), related to underpayments for jet fuel purchased from the
Partnership and from that paid legal fees of $5,908,000 to the
Partnership's attorneys ("Legal Fees") and bonuses of $6,967,000
("Bonuses") to Management (see Note 5). The DESC Proceeds less the
Legal Fees and Bonuses were $48,646,000 ("DESC Income" or "Net DESC
Proceeds") of which $36,257,000 was included in operating income and
$12,389,000 was included in other income (see Note 5).
The Partnership planned on using the Net DESC Proceeds to retire
the Debt and the Redeemable Preferred Equity and provide working
capital. Out of the Net DESC Proceeds, the Partnership paid
$16,606,000 on the Debt and deposited $16,360,000 with the District
Court of Taylor County, Texas (the "Texas Court") pending resolution
of the Partnership's dispute with Varde (see below). The remaining
$15,680,000 of the Net DESC Proceeds, as permitted by the Bankruptcy
Court, was used for working capital. None of the Net DESC Proceeds
was available for distribution to Common Unitholders.
2000 Dispute with Varde: The Partnership had planned on using the
DESC Proceeds to completely pay off all of the Debt and Redeemable
Preferred Equity. However, after the Partnership paid $16,606,000
towards the Debt on July 25, 2000 and July 26, 2000, Varde claimed for
the first time it was entitled to an additional $17,621,000 as a
transaction fee. The Partnership ceased making any further payments
after Varde demanded the transaction fee and pursued legal remedies
(see Notes 4 and 5).
Due to the dispute with Varde, and rather than making additional
payments to Varde which Varde indicated that it would not apply in
accordance with the Partnership's interpretation of the loan
documents, the Partnership deposited $16,360,000 of the Net DESC
Proceeds with the Texas Court (see above).
2001 Bankruptcy Filing: On January 17, 2001, the Partnership filed a
voluntary petition under Chapter 11 of the Federal Bankruptcy Code
(the "Bankruptcy") in the Northern District of Texas, Abilene Division
(the "Bankruptcy Court"), and was authorized to continue managing and
operating its business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court (see Note 13). The
filing was necessitated by the above mentioned actions taken by Varde
which was the Partnership's primary lender and also owned two-thirds
of the Redeemable Preferred Equity (see above and Notes 4, 5 and 8).
On January 18, 2001, the Managing General Partner, the Special
General Partner and 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.
2001 Court Ruling and Settlement with Varde: On September 4, 2001, the
Bankruptcy Court issued initial findings of fact and conclusions of
law in the adversary proceeding between Varde and the Partnership in
April 2001 (the "Initial Ruling"). The Bankruptcy Court held, among
other things, that Varde was not owed $17,621,000 as a transaction fee
and therefore all payments to Varde had to be applied against the Debt
and Redeemable Preferred Equity; the Tender was effective and, as a
result, interest ceased accruing on the Debt to the extent of the
Tender; and the Deposits were not an effective tender and, therefore,
the Debt and Redeemable Preferred Equity expected to be retired with
such Deposits continued to accrue interest and accumulate arrearages
at the contractual rates (see Notes 4, 5, and 8).
On October 18, 2001, Varde, the Partnership and Management
entered into a settlement agreement ("Varde Settlement Agreement")
that ended the litigation between them. The Varde Settlement
Agreement was subsequently approved by the Bankruptcy Court on
November 15, 2001. Under the Varde Settlement Agreement, Varde
received $12,000,000 on November 21, 2001 and an allowed unsecured
claim of $11,000,000 (net of a $2,000,000 discount) ("Allowed
Unsecured Claim") or a total of $23,000,000 for its two-thirds
interest in the remaining Debt and Redeemable Preferred Equity (see
Notes 5 and 13). The Partnership paid Varde the $11,000,000 Allowed
Unsecured Claim on January 22, 2002 and received the $2,000,000
discount mentioned above. Management received $11,500,000 of New
Redeemable Preferred Equity for its one-third interest in the
remaining Debt and Redeemable Preferred Equity on the Effective Date
(see Notes 4, 5, 7 and 8).
Under the Varde Settlement Agreement, the Partnership owed
approximately the same amount as it did prior to the settlement;
however, the distribution rates on the New Redeemable Preferred Equity
are substantially lower, the maturity dates were extended and the
Partnership avoided having to further litigate these issues.
2001 Proof of Claims Filed by Former Employees and Pride SGP: In
connection with the Bankruptcy, certain former employees and Pride SGP
filed proofs of claim with the Bankruptcy Court that the Partnership
disputed (see Note 13). 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 loss of $555,000 on disposal of the discontinued
operations for the year ended December 31, 2002 since the former
employees worked for the Crude Gathering System (see above and Notes
12 and 13). The Partnership paid the $625,000 to the five former
employees on November 22, 2002.
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
proofs of claim.
On January 8, 2002, the Partnership, the Managing General Partner
and Management entered into a settlement agreement with Pride SGP and
the Departing Shareholders of Pride SGP ("Pride SGP Settlement
Agreement"). 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' interest in Pride SGP, all of the outstanding
stock of Pride SGP is now owned by Messrs. Stephens, Malone and
Caddell.
2002 Confirmation of Plan and the Partnership's Emergence from
Bankruptcy: 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 (see above); 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 Joint 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").
Pride SGP's bankruptcy petition was dismissed on May 2, 2002.
Pride Marketing, which was inactive, was liquidated on July 17,
2002.
2002 Final Decree: The Bankruptcy Court issued a final decree closing
the Bankruptcy case of the Partnership and Managing General Partner on
October 31, 2002.
Future Outlook: The Partnership's ability to improve its profits is
principally dependent upon increased volumes and/or improved profit
margins, as well as continued cost control initiatives. Under a new
military aviation fuel contract with the Government that begins April
1, 2003 and ends March 31, 2004, the Partnership will supply
approximately 20,450,000 gallons, which is a 40% decline from the
volumes that it supplied under the previous contract with the
Government, that began April 1, 2002 and ends March 31, 2003. The
Partnership believes that its profit margins under the new contract
will be approximately $626,000 less 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, in January 2002, 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 (see
above). The Partnership expects that, for the foreseeable future, it
will be able to fund its working capital requirements, its planned
capital expenditures and required amortization of the New Redeemable
Preferred Equity from cash on hand and cash generated from operations.
The Partnership was expected to retire the New Redeemable Preferred
Equity over 15 years by making ten annual payments of $1,406,000 for
the next ten years beginning January 15, 2003 (for years eleven
through fifteen, the payments decrease to $940,000 annually) (see
Notes 5 and 8). On January 15, 2003, the Partnership paid $1,025,000
on the New Redeemable Preferred and asked Messrs. Stephens and Malone
to defer principal payments of $381,000 until July 15, 2003 in order
to conserve cash, to which they agreed.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition: Revenue is recognized from the sale of refined
products at the time of delivery to the customer. Transportation fees
are recognized when the refined products are delivered to the
contracted destination.
Net Income (Loss) Per 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 conversion of the Subordinate Note A,
B Preferred Units and C Preferred Units (collectively the "Convertible
Securities") outstanding during the period and the elimination of the
related interest and distributions and the potential effect of the
exercise of officers and employees' unit appreciation rights (see
Notes 4, 8 and 11). When the effect of including the conversion of
the Convertible Securities on diluted net income (loss) per Common
Unit is antidilutive, as was the case for the years ended December 31,
2002 and 2001, such Convertible Securities are not included in the
calculation of dilutive net income (loss) per Common Unit. The unit
appreciation rights were considered antidilutive for the years ended
December 31, 2002, 2001 and 2000.
Inventories: Inventories are stated at the lower of average cost or
market value.
Property, Plant and Equipment and Assets No Longer Used In The
Business: Property, plant and equipment is stated at cost.
Depreciation is computed by the straight-line method based upon the
estimated useful lives of the various assets (see Note 3).
Maintenance, repairs, minor renewals and replacements are charged
to expense when incurred. Betterments, major renewals and
replacements are capitalized. Repairs and maintenance expense for the
years ended December 31, 2002, 2001 and 2000 was $205,000, $284,000
and $230,000, respectively.
Assets no longer used in the business were stated at estimated
fair value at the time of impairment. On March 22, 1998, the
Partnership idled the Aledo Pipeline and the Refinery; however, some
of the tanks and the rack facility also referred to as the Abilene
Terminal are still being used in connection with the Shell Agreement
(see Note 1). Accordingly, the Partnership evaluated the ongoing
value of the refinery assets that would no longer be used in the
business in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Based on
this evaluation, the Partnership determined that assets with a
carrying amount of $47,353,000 were impaired and wrote them down by
$40,000,000 to their estimated fair value. Fair value was based on
independent appraisals discounted at a market rate of interest. As
discussed in Notes 1 and 3, the remaining assets no longer used in the
business of $4,235,000 as of December 31, 2001 were sold to Alon on
January 18, 2002 for $5,400,000 (see Note 10).
Income Taxes: As a limited partnership, the Partnership is not a
taxable entity for federal income tax purposes and any federal income
taxes are the direct responsibility of the individual partners of the
Partnership (see Note 10). Accordingly, no federal income tax
provision is made in the accompanying statement of operations related
to the operations of the Partnership itself.
Retirement Plan: The Pride Employees' 401(k) Retirement Plan and
Trust ("Retirement Plan") is a defined contribution plan covering
substantially all full-time employees. Under the Retirement Plan, the
Partnership must make a mandatory contribution each year equal to 3%
of a participant's compensation and may make discretionary matching
contributions of up to an additional 3% of a participant's
compensation depending on the Partnership's cash flow for such year.
The participant's contribution to the plan may not exceed the
limitation as outlined under Internal Revenue Code Section 402(g).
Beginning January 1, 2002, matching contributions vest over a six year
period while mandatory contributions continue to vest over a seven
year period (prior to January 1, 2002, matching contributions also
vested over a seven year period), subject to immediate vesting upon
retirement. Retirement plan expense for the years ended December 31,
2002, 2001 and 2000 was $41,000, $53,000 and $102,000, respectively.
Incentive Compensation Plan: The Partnership has elected to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in
accounting for its Unit Appreciation Rights ("Rights"). Under APB 25,
if the exercise price of the Rights equals or exceeds the market of
the underlying units on the date of grant, no compensation expense is
recognized at the date of grant. To the extent the price of the
Partnership's units increase above that at the grant date, such excess
value to be paid upon exercise is charged to operations over the
respective vesting period (see Note 11).
Fair Value of Financial Instruments: The carrying amount of cash and
cash equivalents, receivables, and accounts payable approximates fair
value. Currently, the Partnership does not have any loans
outstanding.
Statements of Cash Flows: For purposes of the statements of cash
flows, Management considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Restrictions on Certain Cash Balances: At December 31, 2002 and 2001,
the Partnership invested $765,000 and $778,000, respectively, in
certificates of deposit to secure a $721,000 letter of credit and to
secure credit card payments. At December 31, 2002, the Partnership
also had $237,000 that was held in escrow related to the sale of an
airplane. At December 31, 2001, the Partnership also had a restricted
money market account with Alexander Insurance Group with a balance of
$61,000 and an escrow account of $70,000 with American International
Recovery as a condition of its insurance policies.
Recent Accounting Standard: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), was issued. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that all
derivatives be recognized as either assets or liabilities in the
statement of financial position and that those instruments be measured
at fair value. The Company adopted SFAS 133 on January 1, 2001. The
statement did not have a significant impact on its financial position
or results of operation.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT AND ASSETS NO LONGER USED IN
THE BUSINESS
A summary of property, plant and equipment at December 31 follows
(in thousands):
Estimated
Useful
2002 2001 Lives
-------- -------- -----------
Terminal and storage facilities $ 7,158 $ 7,253 4-30 years
Pipelines and related facilities 11,526 11,525 5-30 years
Transportation and terminal equipment 8,668 8,710 3-5 years
Marketing facilities and equipment 803 803 3-5 years
Administrative facilities and equipment 3,070 2,481 2-5 years
-------- --------
31,225 30,772
Less accumulated depreciation 18,212 16,809
-------- --------
$ 13,013 $ 13,963
======== ========
As previously discussed, the assets no longer used in the
business of $4,235,000 as of December 31, 2001 were sold to Alon on
January 18, 2002 for $5,400,000 (see Notes 1, 2 and 10).
NOTE 4--DEBT AND CREDIT FACILITIES
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 (see Note 1). Varde concurrently made
additional loans to the Partnership. As a result of Varde's
assumption of the Partnership's bank debt and additional loans by it,
Varde owned the A Term Loan, B Term Loan, C Term Loan, Subordinate
Note A, B Preferred Units, C Preferred Units and D Preferred Units.
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 (see Notes 1 and 8).
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 1, 7 and 8).
Prior to the Initial Ruling by the Bankruptcy Court (see Notes 1
and 13), 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 Texas Court (see Note
1) 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
$222,000 for the year ended December 31, 2001. In addition, the
Partnership recorded paid in kind interest of $134,000 on the
Subordinate Note A for the period August 23, 2000 to December 31, 2001
as a result of the Initial Ruling. From January 1, 2002 through
January 22, 2002, the Partnership recorded paid in kind interest of
$2,000 on the Subordinate Note A.
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 Notes 1 and 8). The
First Deposit and Second Deposit are collectively referred to as the
deposits (the "Deposits"). For the years ended December 31, 2001 and
2000, the Deposits with the Texas Court accrued interest income of
$646,000 and $391,000, 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 8). 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 Notes 1 and 13) and the Partnership recorded paid in kind
interest of $134,000 for the period August 23, 2000 to December 31,
2001 based on the contractual rates on the Subordinate Note A. From
January 1, 2002 through January 22, 2002, the Partnership recorded
paid in kind interest of $2,000 on 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.
Because a portion of the Debt was subject to increasing rates of
interest in 2000 and before, the Partnership was accruing interest at
the effective rate over the term of the Debt. Interest expense for
the year ended December 31, 2000 reflects the reversal of an accrual
of $1,345,000 which is based on the difference between the effective
interest rates and the stated rates accrued in prior years.
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 (see Note
8). From November 22, 2001 through December 31, 2001, the
distributions continued accumulating in arrears on the Redeemable
Preferred Equity owned by Management.
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) 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)(see Notes
1 and 8). 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
(see Note 13).
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 1, 7 and 8).
The Supreme Court of New York, County of New York ("New York
Court") issued a temporary restraining order on September 7, 2000,
which imposed restrictions on the Partnership's use of DESC Proceeds
(see Note 5). Because of those constraints, Management agreed to
extend a revolving loan to the Partnership of $4,200,000 ("Management
Revolver") from the Bonuses paid to Management as a result of the
successful litigation of the DESC Claim (see Notes 1, 5 and 7). A
note evidencing the Management Revolver was executed September 18,
2000. During the third and fourth quarters of 2000, Management made
advances under this facility. Although the note accrued interest at
prime plus 1.75%, Management waived such interest for the period it
was outstanding. The facility was subsequently cancelled and the
amounts outstanding thereunder were repaid.
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.
Amounts outstanding under these credit facilities at December 31,
2001 included in long-term debt included (in thousands):
2001
--------
C Term Loan $ 2,055
Subordinate Note A -
--------
2,055
Less current portion 2,055
--------
$ -
========
Amounts outstanding under these credit facilities at December 31,
2001 included in liabilities subject to compromise (see Note 13 for
other items included in liabilities subject to compromise) included
(in thousands):
2001
--------
Subordinate Note A $ 1,111
Allowed Unsecured Claim 11,000
--------
12,111
Less current portion 5,111
--------
$ 7,000
========
Interest paid (excluding paid in kind interest subsequently paid
on retirement of the Debt) for the years ended December 31, 2002, 2001
and 2000 was $19,000, $19,000 and $697,000, respectively.
NOTE 5--COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Partnership was committed to operating
leases which require fixed monthly rentals for transportation
equipment, computers and related equipment and other miscellaneous
equipment, some of which contain residual value guarantees. Rental
expense for the years ended December 31, 2002, 2001 and 2000 was
$289,000, $108,000 and $163,000, respectively. The minimum future
rentals under noncancellable operating leases at December 31, 2002 are
as follows (in thousands):
2003 $ 350
2004 325
2005 281
2006 236
2007 235
Thereafter 314
-------
$ 1,741
=======
At December 31, 2002, Pride SGP held the Series G Preferred Units
with a stated value of $514,000 (see Note 9). During the year ended
December 31, 2002, the Partnership redeemed G Preferred Units with a
stated value of $2,630,000 for $1,275,000 (see Note 1, 7, and 9). 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. The remaining G Preferred Units held by
Pride SGP are expected to be redeemed in April 2003 (see Note 10).
At December 31, 2002 and 2001, 4,950,000 Common Units were
outstanding, representing a 98% limited partner interest. As of March
11, 2003, Pride SGP, Management and the public owned 250,000,
2,004,000 and 2,696,000 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.
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 $15,000 and had accrued for this amount at
December 31, 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 December 31, 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 Notes 1 and 12).
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.
On September 5, 1995, the Partnership filed a substantial claim
in the United States Court of Federal Claims against the United States
of America, also referred to as the DESC (see Note 1), relating to
erroneous pricing of jet fuel purchased over a period of several years
from the Partnership and its predecessors (the "DESC Claim"). The
Partnership had sued the DESC based on an illegal economic price
adjustment ("EPA") provision present in 12 jet fuel contracts between
the Partnership and the DESC. Although the DESC acknowledged the
illegality of the EPA provision, the parties disagreed on whether the
Partnership had incurred damages.
On May 10, 2000, the presiding judge in the Partnership's lawsuit
against the DESC rendered a judgment in favor of the Partnership in
the amount of $45,706,000 (comprised of an additional long-term
contract premium of $23.4 million and a transportation premium of
$22.3 million), plus statutory interest of $15,815,000 under the
Contract Disputes Act. The DESC Proceeds were $61,521,000 from which
the Partnership paid Legal Fees of $5,908,000 and Bonuses of
$6,967,000 (see Note 1). The DESC Proceeds less the Legal Fees and
Bonuses were $48,646,000.
Out of the Net DESC Proceeds, the Partnership paid $16,606,000 on
the Debt and made the Deposits of $16,360,000 with the Texas Court
pending resolution of the Partnership's dispute with Varde (see Notes
1 and 4). The remaining $15,680,000 of the Net DESC Proceeds, as
permitted by the Bankruptcy Court, was used for working capital.
Before the dispute with Varde, the Partnership had planned on
retiring the Redeemable Preferred Equity with the DESC Proceeds in
conjunction with a new working capital facility, which would have
reduced the income allocated to the Common Unitholders as a result of
the payment of accumulated arrearages on such Redeemable Preferred
Equity. As a result of the DESC Claim being paid in two installments,
such net income was reported to Common Unitholders in two different
months (see below).
As a result of the expected retirement of the Debt with the
Payments and the Deposits, the Partnership wrote-off $2,556,000 of
deferred financing costs that were being amortized over the life of
the loans in the third quarter of 2000 (see Note 1).
For the years ended December 31, 2001 and 2000, the Partnership
incurred legal fees and other expenses of $900,000 and $1,172,000,
respectively, in connection with the dispute with Varde. For the year
ended December 31, 2002, the Partnership received a credit for legal
fees of $138,000 in connection with the dispute with Varde.
For the years ended December 31, 2002, 2001 and 2000, the
Partnership incurred $365,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management),
$1,294,000 (includes a premium of $183,000 related to the Varde
Settlement Agreement) and $55,000, respectively, in bankruptcy related
expenses.
See Note 10 for a discussion of certain tax issues related to
ownership of Common Units.
NOTE 6--MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Two of the Partnership's major customers are the DESC (see Notes
1 and 5) and ChevronTexaco, Corp. ("Chevron"). Revenues from the DESC
comprised 11.2%, 12.8% and 17.2% of total revenues from the Products
Marketing Business in 2002, 2001 and 2000, respectively. Revenues
from Chevron comprised 4.3%, 7.5% and 8.1% of total revenues from the
Products Marketing Business in 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, the Partnership had $1,906,000 and
$537,000, respectively, in receivables from the DESC and $1,015,000
and $971,000, respectively, in receivables from Chevron. In some
cases, the Partnership requires letters of credit from customers.
Historically, the Partnership's credit losses have been insignificant.
NOTE 7--RELATED PARTY TRANSACTIONS
The Partnership utilizes an airplane from time to time, as
needed, on a per hour market rate basis from an entity controlled by
two officers of the Managing General Partner. Payments to this entity
totaled $47,000, $66,000 and $79,000 during 2002, 2001 and 2000,
respectively.
The Partnership leases property from a relative of one of the
officers of the Managing General Partner. Lease payments were
approximately $44,000, $42,000 and $41,000 in 2002, 2001 and 2000,
respectively.
The Managing General Partner has a 1.9% interest in the income
and cash distributions of the Partnership, subject to certain
adjustments. Members of Management of the Managing General Partner
collectively own a 39.7% interest in the Partnership, as of March 11,
2003, through their ownership of Common Units. Pride SGP has a 0.1%
general partner interest, $514,000 in Series G Preferred Units, as of
December 31, 2002, and has a 4.9% interest in the Partnership through
its ownership of Common Units (see Notes 1, 9 and 13).
As a result of the temporary restraining order imposed by the New
York Court on September 7, 2000, Management agreed to extend the
Management Revolver of $4,200,000 from the Bonuses paid to Management
as a result of the successful litigation of the DESC Claim (see Notes
1, 4 and 5). The note was executed September 18, 2000. During the
third and fourth quarters of 2000, Management made advances under this
facility. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding.
The facility was subsequently cancelled and the amounts outstanding
thereunder were repaid.
On December 1, 2000, the Managing General Partner of the
Partnership exercised a call option and purchased 930,000 Common Units
of the Partnership for $251,000. The Managing General Partner of the
Partnership paid $150,000 on July 25, 2000 to J-Hawk Corporation for
the call option. In January, 2001, the Managing General Partner sold
95,000 of those Common Units to certain members of Management and
distributed the remaining 835,000 Common Units it held to its
shareholders.
The Common Units underlying the call option were acquired by J-
Hawk Corporation in a separate transaction that also closed on July
25, 2000. The Managing General Partner was paid a $50,000 finder's
fee by the Seller.
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. 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 for its one-third interest in the C Term Loan,
Subordinate Note A and Redeemable Preferred Equity (see Notes 1, 4 and
8).
On January 8, 2002, 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 (see Notes 1, 9
and 13). 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
remaining G Preferred Units owned by Pride SGP are expected to be
redeemed in April 2003 (see Note 10).
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.
Lease payments were approximately $145,000 in 2002.
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.
NOTE 8--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 1). 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 4) 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 4 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 1, 4 and 13).
As a result of the Bankruptcy Court's Initial Ruling, the accrual was
reversed resulting in a credit to interest expense of $348,000 for the
year ended December 31, 2001 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 years ended
December 31, 2001 and 2000, the Partnership accumulated arrearages of
$2,806,000 (which includes the adjustment of $626,000 mentioned above
for the period August 31, 2000 to June 30, 2001) and $1,683,000,
respectively, on the Redeemable Preferred Equity. No arrearages
accumulated on the Redeemable Preferred Equity for the year ended
December 31, 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.
As discussed in Notes 1 and 4, 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 on
January 22, 2002. 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 15, 2012 and is redeemable in ten equal annual installments
which began on January 15, 2003 and Management's Redeemable Preferred
Equity was converted into $8,300,000 of New Redeemable Preferred
Equity which matures January 15, 2017 and is redeemable in fifteen
equal annual installments which began on January 15, 2003. For the
year ended December 31, 2002, the New Redeemable Preferred Equity
accrued distributions of $827,000. Under the terms of the New
Redeemable Preferred Equity, the Partnership was to redeem the New
Redeemable Preferred Equity in ten annual installments of $1,406,000
and then five annual installments of $940,000 beginning January 15,
2003. The Partnership is required to redeem the New Redeemable
Preferred Equity upon a change in control or a change in financial
condition. On January 15, 2003, the Partnership paid $1,025,000 on
the New Redeemable Preferred and asked Messrs. Stephens and Malone to
defer principal payments of $381,000 until July 15, 2003 in order to
conserve cash, to which they agreed.
NOTE 9--PARTNERS' CAPITAL (DEFICIENCY)
At December 31, 2002 and 2001, Pride SGP held the G Preferred
Units with a stated value of $514,000 and $3,144,000, respectively
(see Notes 1, 5, 7 and 13). 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. 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. The remaining
G Preferred Units owned by Pride SGP are expected to be redeemed in
April 2003 (see Note 10).
At December 31, 2002 and 2001, 4,950,000 Common Units were
outstanding, representing a 98% limited partner interest. As of March
11, 2003, Pride SGP, Management and the public owned 250,000,
2,004,000 and 2,696,000 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 December 31, 2002, the Common Units ranked 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 (see Note 10).
NOTE 10--INCOME ALLOCATIONS TO PARTNERS FOR FEDERAL TAXES
As a limited partnership, the Partnership is not a taxable entity
for federal income tax purposes and any federal income taxes are the
direct responsibility of the individual partners of the Partnership.
Accordingly, no federal income tax provision is made in the
accompanying statement of operations related to the operations of the
Partnership itself.
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 year ended December 31, 2000, in accordance with the
Partnership Agreement, the Managing General Partner determined that
for tax purposes it was necessary to establish a convention for the
Partnership under which the income and certain expenses attributable
to the DESC judgment would be allocated to the Common Unitholders (see
Note 5). Under that convention, Common Unitholders as of July 31,
2000 and August 31, 2000 were allocated the income attributable to the
portion of the proceeds from the judgment actually received by the
Partnership during those months. The Partnership also took the
position that suspended losses would be available to Common
Unitholders to offset net income attributable to the judgment;
however, it is not certain the Internal Revenue Service will agree
with that position. 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. The Partnership suggested
that Common Unitholders should consult with their own tax advisors
regarding the use of suspended losses.
As of December 31, 2002, the Partnership's tax bases in its
assets and liabilities were greater than its bases therein for
financial reporting purposes by approximately $5,893,000. The taxable
income reported by the Partnership for the year ended December 31,
2002 was $138,000, of which $3,454,000 of taxable income was allocated
to the Redeemable Preferred Units and a taxable loss of $3,619,000 and
$74,000 was allocated to Common Unitholders and the General Partners,
respectively. The major reconciling items between the net income for
financial purposes and tax purposes for the 2002 fiscal year are as
follows: extraordinary gain for tax purposes is $9,754,000 less than
for financial purposes, loss on loan to subsidiary for tax purposes is
$2,108,000 more than for financial purposes, gain on sale of assets
for tax purposes is $1,984,000 more than for financial purposes and
depreciation for tax purposes is $605,000 greater than for financial
purposes.
The Partnership previously disclosed that it estimated taxable
income of approximately $9,800,000 would be required to be recognized
and reported for the year ended December 31, 2002 as a result of what
was assumed to be cancellation of debt as a result of the holders of
certain of the Partnership's debt not filing timely proofs of claim in
the Bankruptcy. The Partnership reported that 98% of such income would
be allocated to Common Unitholders. Based upon independent legal
advice, the Partnership has determined that the situation should not
be deemed to result in cancellation of debt of the Partnership, and
that it is not appropriate to report any income therefrom for tax
purposes. The Partnership also believes, based upon the independent
legal advice it has received, that if a challenge to this treatment by
the Internal Revenue Service ("IRS") were successful and cancellation
of indebtedness income were found to exist in 2002, then such income
should be allocated solely to the general partners of the Partnership
and not to the Common Unitholders. There are, however, significant
uncertainties regarding the Partnership's tax position and no
assurance can be given that the Partnership's position will be
sustained if challenged by the IRS. If the Partnership's tax position
on both of these issues were successfully challenged, as previously
disclosed by the Partnership, the Common Unitholders would be
allocated 98% of an estimated $9,754,000 of income based on the number
of months each Common Unitholder held his Units during calendar year
2002, without a corresponding distribution of cash to offset the
potential tax liability. In that event, the Common Unitholders would
also be liable for interest on any unpaid tax, plus possible
penalties. No letter ruling has been or will be obtained from the IRS
by the Partnership regarding this issue. If the Partnership's tax
position on this matter prevails and the Partnership is subsequently
liquidated and its net assets distributed to the Common Unitholders
and the general partners, the amount distributable to Pride SGP or the
general partners (depending on whether the first position or second
position prevails) of the Partnership potentially will increase, and
the aggregate amount distributable to the Common Unitholders
potentially will decrease, by up to 98% of $9,754,000; however, Pride
SGP has agreed to subordinate the increase in its capital account that
would result in it receiving the increased distribution on liquidation
in exchange for the redemption of the remaining G Preferred Units held
by Pride SGP for their stated value of $514,000. The redemption is
expected to occur in April 2003. The Managing General Partner has not
agreed to subordination should the second position prevail.
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
(see Notes 1, 2 and 3). The gain from the sale of those assets for
tax purposes was $3,224,000 of which 98% was allocated to Common
Unitholders before any basis adjustment attributable to specific
Common Unitholders. Common Unitholders who purchased Common Units
after July of 2000 did not have any basis in these assets based on the
trading price of the Common Units after such date. Therefore, those
Common Unitholders recognized gain to the extent of their allocable
share of the proceeds of $5,400,000. Such gain was 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 was allocated $3,454,000 of gross income, thus
decreasing the amount of gross income allocable to Common Unitholders
by 98% of that amount (see Notes 1, 4 and 8). The reduction in gross
income allocated to Common Unitholders was 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 were also allocated 98% of a loss of
$2,108,000 on a loan to a subsidiary that is now considered worthless
(see Note 1). The deduction was 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 was 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 any
allocation of income for the year ended December 31, 2002. Each
Common Unitholder should consult with their own tax advisor regarding
the use of suspended losses.
NOTE 11--UNIT APPRECIATION RIGHTS
During 1996, the Partnership implemented an incentive
compensation plan for officers and key employees. Under the plan,
individual employees can be granted unit appreciation rights
("Rights") whereby a holder of the Rights is entitled to receive in
cash or in Common Units the increase, if any, between the exercise
price, as determined by the board of directors of the Managing General
Partner at the date of grant, and the fair market value on the
exercise date. The employees awarded and the number of Rights awarded
to the employees are subject to the discretion of the board of
directors of the Managing General Partner. The term of all awards is
ten years from the grant date.
Rights transactions from December 31, 1999 are as follows:
Officers/
Employees Directors Total
--------- --------- ---------
Outstanding at December 31, 1999 277,648 70,000 347,648
Granted - - -
Exercised - - -
Terminated (70,044) - (70,044)
-------- -------- --------
Outstanding at December 31, 2000 207,604 70,000 277,604
Granted - - -
Exercised - - -
Terminated (47,604) - (47,604)
-------- -------- --------
Outstanding at December 31, 2001 160,000 70,000 230,000
Granted - - -
Exercised - - -
Terminated - - -
-------- -------- --------
Outstanding at December 31, 2002 160,000 70,000 230,000
======== ======== ========
On December 9, 1996, four officers and twelve employees were
awarded a total of 292,760 Rights at an exercise price of $3.75 per
unit. Because the fair market value of the Rights did not exceed the
exercise price at December 9, 1996, no compensation was accrued.
Effective December 31, 1997, the number of Rights was increased to
299,996, reallocated among four officers and eleven employees and the
exercise price was reduced to $1.94 per unit. The Rights of the
eleven employees were terminated in 1999, 2000 and 2001 thus reducing
the total outstanding Rights to 160,000 at December 31, 2001 and 2002
all of which had been awarded to the officers. A one-time award of
70,000 Rights was made in 1996 to five non-employee directors at an
exercise price of $3.75 which fully vested on December 31, 1998.
Effective December 31, 1997, the exercise price was amended and
reduced to $1.94 per unit.
The Rights fully vested on December 31, 1998; however, none have
been exercised. Rights exercisable under the plan were 230,000,
230,000, 277,604 and 347,648 at December 31, 2002, 2001, 2000 and
1999, respectively. Since the fair market value of the Rights did not
exceed the exercise price at the grant date nor at the repricing date,
no compensation expense has been accrued in accordance with APB 25.
The weighted average fair value of the Rights granted is
approximately $1.40 per Right and the pro forma effect (as required by
Statement 123) is not material to the operations of the Partnership.
NOTE 12--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. Accordingly, the operating results of the Crude
Gathering System have been segregated from the continuing operations
and are reported as discontinued operations (see Note 1).
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 addition, the Partnership accrued an additional loss of
$555,000 on disposal of the discontinued operations for the year ended
December 31, 2002, associated with the claims of five former employees
since the former employees worked for the Crude Gathering System (see
Notes 1, 5 and 13).
As a result of the Bankruptcy, the liabilities of the
discontinued operation were included in liabilities subject to
compromise along with other prepetition liabilities of the continuing
operations at December 31, 2001 (see Note 13).
NOTE 13--BANKRUPTCY
As previously discussed in Note 1, 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, 4 and 8). 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
(see Notes 1, 4, 5, 7 and 8). 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 on September 4, 2001 (see Note 1).
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
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 each filed Bankruptcy under
Chapter 11 of the Federal Bankruptcy Code, 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 (see Note 1).
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 (see Notes 1 and 4); 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 Joint 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 December 31, 2001, current liabilities subject to compromise
included liabilities of the Products Marketing Business (continuing
operations) of $7,707,000 and liabilities of the Crude Gathering
System (discontinued operations) of $861,000, whereas long-term
liabilities subject to compromise included $7,000,000 of liabilities
from the Products Marketing Business (continuing operations) and
$8,680,000 of liabilities from the Crude Gathering System
(discontinued operations) (see Notes 1, 4 and 12).
For the years ended December 31, 2002, 2001 and 2000, the
Partnership incurred $365,000 (includes a discount of $21,000 in
connection with the issuance of the new securities to Management),
$1,294,000 (includes a premium of $183,000 related to the Varde
Settlement Agreement) and $55,000, respectively, in bankruptcy related
expenses.
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 (see Notes 1, 5 and 7).
On January 8, 2002, 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 (see Note 1).
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 loss of $555,000 on disposal of the discontinued operations
for the year ended December 31, 2002 since the former employees worked
for the Crude Gathering System. The Partnership paid the $625,000 to
the five former employees on November 22, 2002 (see above and Note
12).
Pride SGP's bankruptcy petition was dismissed on May 2, 2002.
Pride Marketing, which was inactive, was liquidated on July 17,
2002.
Current liabilities subject to compromise at December 31, 2001
included the following components (in thousands):
2001
--------
Continuing Operations:
Subordinate Note A $ 1,111
Allowed Unsecured Claim (Current) 4,000
Accounts payable 1,415
Accrued liabilities 1,181
Discontinued Operations:
Accounts payable 430
Crude suspense liability 361
Accrued payroll and related benefits 70
--------
$ 8,568
========
Long-term liabilities subject to compromise at December 31, 2001
included the following components (in thousands):
2001
--------
Continuing Operations:
Allowed Unsecured Claim (Long-term) $ 7,000
Discontinued Operations:
Crude suspense liability 8,680
--------
$ 15,680
========
NOTE 14--PLAN OF REORGANIZATION
On January 17, 2001, the Partnership filed Bankruptcy with the
Bankruptcy Court in Abilene, Texas (see Notes 1 and 13). 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 were not disputed or who filed proofs of claim
that were 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.
(This page should be printed on 11" x 8.5" paper)
NOTE 14--QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Net income
(loss) after
preferred
Net income distributions Basic Diluted
Operating Net (loss) after allocable to Income Income
Net Income Income preferred Common (Loss) (Loss)
Quarter Ended Revenues (Loss) (Loss) distributions Unitholders per Unit per Unit
- ------------- -------- --------- -------- ------------- ------------- -------- --------
March 31, 2001 $ 56,894 $ (59) $ (334) $ (796) $ (780) $ (0.16) $ (0.16)
June 30, 2001 74,987 1,511 826 351 344 0.07 0.07
September 30, 2001 63,364 1,229 1,940 595 583 0.12 0.12
December 31, 2001 41,265 (329) (1,012) (1,536) (1,505) (0.30) (0.30)
March 31, 2002 47 684 (513) 10,049 9,884 334 0.07 0.07
June 30, 2002 54,031 (268) (890) (1,106) (1,084) (0.22) (0.22)
September 30, 2002 65,941 293 459 243 31 0.01 0.01
December 31, 2002 66,578 869 984 754 739 0.14 0.14
INDEX TO EXHIBITS TO REPORT ON FORM 10-K
Exhibit Number
(Reference to
Item 601 of
Regulation S-K) Description
_______________ ___________
3.1 Third Amended and Restated Agreement of Limited Partnership
of the Partnership (incorporated by reference to Exhibit 3.3
of the Partnership's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1999 (Commission File No.
1-10473)).
4.1 Deposit Agreement among the Partnership and the Depository
(incorporated by reference to Exhibit 4.1 of the Partnership's
Annual Report on Form 10-K for the fiscal year ended December
31, 1990 (Commission File No. 1-10473)).
4.2 Transfer Application (included as Exhibit A to the Deposit
Agreement, which is incorporated by reference to Exhibit 4.2
of the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-10473)).
4.3 Form of Depositary Receipt for Common Units of Pride
Companies, L.P. (incorporated by reference to Exhibit
4.5 of the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (Commission
File No. 1-10473)).
10.1 Registration Rights Agreement dated March 30, 1990, by and
between the Partnership and Pride SGP, Inc. (incorporated by
reference to Exhibit 10.5 of the Partnership's Registration
Statement on Form S-1 (Commission File No. 33-42115), as
amended).
10.2 Unit Appreciation Rights Plan (incorporated by reference to
Exhibit 10.26 of the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (Commission File
No. 1-10473)).
10.3 Sixth Restated and Amended Credit Agreement, dated as of
December 30, 1997, by and among Pride Companies, L.P.
("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and
Pride Borger, Inc., as Guarantors, and Varde Partners, Inc. as
Lender (incorporated by reference to Exhibit 10.29 of the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (Commission File No. 1-10473)).
10.4 Seventh Amendment to the Fifth Restated and Amended Credit
Agreement, dated as of December 30, 1997, by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc., as Guarantors, and Varde
Partners, Inc. as Lender (incorporated by reference to Exhibit
10.30 of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No. 1-
10473)).
10.5 Restructuring and Override Agreement, dated as of December 30,
1997, by and among Varde Partners, Inc., Pride Companies, L.P.,
Pride Refining, Inc., and Pride SGP, Inc. (Commission File No.
1-10473).
10.6 First Amendment to Sixth Restated and Amended Credit Agreement
dated as of April 15, 1998, by and among Pride Companies, L.P.
("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and
Pride Borger, Inc. (collectively Guarantors) and Varde
Partners, Inc. as Lender (incorporated by reference to Exhibit
28.1 of the Partnership's Quarterly Report on Form 10Q for the
quarter ended June 30, 1998 (Commission File No. 1-10473)).
10.7 Waiver dated as of October 29, 1998 to the First Amendment to
Sixth Restated and Amended Credit Agreement among Pride
Companies, L.P. as borrower, Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc. and Pride Borger, Inc., as guarantors, and Varde
Partners, Inc., as lender (incorporated by reference to
Exhibit 28.1 of the Partnership's Quarterly Report on Form 10Q
for the quarter ended September 30, 1998 (Commission File No.
1-10473)).
10.8 Second Amendment to the Sixth Restated and Amended Credit
Agreement dated as of November 20, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc. (collectively Guarantors)
and Varde Partners, Inc. as Lender (incorporated by reference
to Exhibit 10.33 of the Partnership's Annual Report on Form 10K
for the year ended December 31, 1998 (Commission File No.
1-10473)).
10.9 Third Amendment to the Sixth Restated and Amended Credit
Agreement dated as of December 1, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP,
Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar
Wind), Inc., and Pride Borger, Inc. (collectively Guarantors)
and Varde Partners, Inc. as Lender (incorporated by reference
to Exhibit 10.34 of the Partnership's Annual Report on Form
10K for the year ended December 31, 1998 (Commission File
No. 1-10473)).
10.10 Fourth Amendment to the Sixth Restated and Amended Credit
Agreement dated as of December 31, 1998 by and among Pride
Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride
SGP, Inc., Desulfur Partnership, Pride Marketing of Texas
(Cedar Wind), Inc., and Pride Borger, Inc. (collectively
Guarantors) and Varde Partners, Inc. as Lender (incorporated by
reference to Exhibit 10.35 of the Partnership's Annual Report
on Form 10K for the year ended December 31, 1998 Commission
File No. 1-10473)).
10.11 Fifth Amendment to the Sixth Restated and Amended Credit
Agreement dated as of March 1999 by and among Pride Companies,
L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc.,
Desulfur Partnership, Pride Marketing of Texas (Cedar Wind),
Inc., and Pride Borger, Inc. (collectively Guarantors) and
Varde Partners, Inc. as Lender (incorporated by reference to
Exhibit 10.36 of the Partnership's Annual Report on Form 10K
for the year ended December 31, 1998 (Commission File No.
1-10473)).
10.12 The Sixth Amendment to the Sixth Restated and Amended Credit
Agreement as of April 15, 1999 among Pride Companies, L.P. (the
"Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur
Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and
Pride Borger, Inc. (collectively, the "Guarantors"), and Varde
Partners, Inc. (incorporated by reference to Exhibit 10.1 of
the Partnership's Quarterly Report on Form 10Q for the quarter
ending June 30, 1999 (Commission File No. 1-10473)).
10.13 Amended and Restated Certificates of Designation of Series B,
C, D, E and F Cumulative Convertible Preferred Units of Pride
Companies, L.P. pursuant to the Third Amended and Restated
Agreement of Limited Partnership effective as of April 15,
1999 (incorporated by reference to Exhibit 10.2 of the
Partnership's Quarterly Report on Form 10Q for the quarter
ending June 30 1999 (Commission File No. 1-10473)).
10.14 Purchase and Sale Agreement dated August 4, 1999 by and among
Pride Companies, L.P. and Pride SGP, Inc., as Sellers, and Sun
Pipe Line Services Co., as Buyer (incorporated by reference to
Exhibit 10.3 of the Partnership's Quarterly Report on Form 10Q
for the quarter ending June 30, 1999 (Commission File No. 1-
10473)).
10.15 Waiver and Consent dated as of October 1, 1999 among Pride
Companies, L.P. (the "Borrower"), Pride Refining, Inc., Pride
SGP, Inc., Pride Marketing of Texas (Cedar Wind), Inc. and
Pride Borger, Inc. (collectively, the "Guarantors"), and Varde
Partners, Inc., ("Lender") (incorporated by reference to
Exhibit 10.1 of the Partnership's Quarterly Report on Form 10Q
for the quarter ending September 30, 1999 (Commission File No.
1-10473)).
10.16 Certificates of Designation of Series G Subordinate Preferred
Units of Pride Companies, L.P. pursuant to the Third Amended
and Restated Agreement of Limited Partnership effective as of
October 1, 1999 (incorporated by reference to Exhibit 10.46 of
the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (Commission File No. 1-10473)).
10.17 Promissory Note dated September 18, 2000, between Pride
Companies, L.P., as borrower, and Dave Caddell, in his
individual capacity and as trustee for Brad Stephens, Wayne
Malone, and George Percival, as lenders (incorporated by
reference to Exhibit 10.47 of the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000
(Commission File No. 1-10473)).
10.18 Compromise and Settlement Agreement executed October 18, 2001,
by and among Varde Partners, Inc., Pride Companies, L.P. and
Pride Refining, Inc. and Brad Stephens, Wayne Malone, Dave
Caddell and George Percival (incorporated by reference to
Exhibit 10.1 of the Partnership's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 (Commission File No.
1-10473)).
10.19 Third Amended and Restated Debtors' Joint Plan of
Reorganization, dated November 19, 2001; Modification to Third
Amended and Restated Debtors' Joint Plan of Reorganization
dated January 8, 2002; and Second Modification to Third Amended
and Restated Debtors' Joint Plan of Reorganization dated
January 11, 2002 (incorporated by reference to Exhibit 2.1 of
the Partnership's Current Report on Form 8-K dated January 11,
2002 (Commission File No. 1-10473)).
10.20 Findings of Fact, Conclusions of Law and Order Confirming the
Debtors' Third Amended and Restated Joint Plan of
Reorganization dated January 11, 2002, (incorporated by
reference to Exhibit 2.2 of the Partnership's Current Report on
Form 8-K dated January 11, 2002 (Commission File No. 1-10473)).
10.21 Certificate of Designation for Senior Preferred Units executed
as of January 22, 2002 (incorporated by reference to Exhibit
10.42 of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Commission File No. 1-
10473)).
10.22 Promissory Note dated January 22, 2002, in the principal amount
of $9,000,000, executed by the Partnership and Pride Refining
and payable to Varde Partners, Inc (incorporated by reference
to Exhibit 10.43 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (Commission
File No. 1-10473)).
10.23 Settlement Agreement and Release of Claims executed January 8,
2002 by and among the Partnership, Brad Stephens, C. David
Caddell, D. Wayne Malone, George Percival, Pride SGP, Inc. and
those persons identified as the "Departing SGP Shareholders"
therein (incorporated by reference to Exhibit 10.44 of the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 (Commission File No. 1-10473)).
10.24 Full and Final Mutual Release Agreement by and among the
Partnership, Pride SGP, and the Managing General Partner, the
Plaintiffs, and David C. Johnson, Daniel M. Belf, David D.
Bonds, Michael H. Chase and William F. Yocum, the Defendants
effective as of September 30, 2002.
25.1 Power of Attorney (included on the signature page of this
Report).
EXHIBIT 24
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
ABILENE DIVISION
In re: )(
)(
PRIDE COMPANIES L.P., )( Case No. 01-10041-RLJ-11
)(
Debtor. )(
)(
)(
PRIDE COMPANIES L.P., )(
PRIDE SGP, INC., and )(
PRIDE REFINING, INC., )(
)(
Plaintiffs, )(
)(
vs. )( ADVERSARY NO. 01-1011-RLJ
)(
DAVID C. JOHNSON, DANIEL M. BELF, )(
DAVID D. BONDS, MICHAEL H. CHASE, )(
and WILLIAM F. YOCUM, )(
)(
Defendants. )(
FULL AND FINAL MUTUAL RELEASE AGREEMENT
This Full and Final Mutual Release Agreement is made by and among
Pride Companies, L.P., Pride SGP, Inc. and Pride Refining, Inc.
(hereafter, "Plaintiffs") and David C. Johnson, Daniel M. Belf, David D.
Bonds, Michael H. Chase, and William F. Yocum (hereafter, "Defendants").
Plaintiffs and Defendants recognize that there have been numerous
bona fide disputes among them which were made the subject of the
above-styled and numbered adversary proceeding and which were reflected
in proofs of claim filed by Defendants in the above-styled and numbered
bankruptcy case, including but not limited to disputes regarding
bonuses, severance payments, and other compensation that Defendants
claimed to be due from Plaintiffs during and after their employment by
Plaintiffs pursuant to their December 1, 1998 employment agreements.
For and in consideration of the mutual promises, covenants and
undertakings of Plaintiffs and Defendants as set forth in that certain
letter-settlement agreement between counsel for Plaintiffs and
Defendants dated September 30, 2002, a true copy of which is attached
hereto as Exhibit "A" and incorporated herein by this reference (which
is ratified and adopted by all signatories to this agreement) and for
other good and valuable consideration, including but not limited to the
rescission and cancellation of the employment agreements between
Defendants and Plaintiffs, the receipt and sufficiency of which are
hereby specifically acknowledged, Plaintiffs and Defendants have agreed
to resolve as hereinafter provided the numerous matters of controversy
among them that are evidenced, in part, by the adversary proceeding
referenced above and the proofs of claim filed by Defendants in the
bankruptcy case referenced above.
It is understood and agreed that this is a release of disputes and
nothing within this release or within the Exhibit "A" letter-settlement
agreement between counsel for Plaintiffs and Defendants shall be
construed as an admission of the validity of any party's claims or any
party's liability and any such admission is expressly denied by
Plaintiffs and Defendants. Plaintiffs and Defendants have agreed to
compromise and settle their differences regarding the disputes
referenced above and any other matters that have arisen or which could
have arisen between them in the past in order to avoid expensive and
time-consuming litigation over such matters.
By their signatures below, Plaintiffs warrant, agree and covenant
not to sue Defendants and release, quitclaim, and forever discharge
Defendants and their respective heirs, attorneys, agents, executors,
administrators, personal representatives, successors and assigns of and
from any liabilities, claims, controversies, causes of action, or
demands of every kind and character whatsoever that Plaintiffs may now
have against Defendants whether known or unknown (including but not
limited to any claims or causes of action asserted or that could have
been asserted in the above-styled and numbered adversary proceeding and
bankruptcy case), and whether grounded in contract, tort, fraud,
negligence or some other grounds, on account of, related to, arising
from or in any manner connected with or concerning Defendants' prior
employment with Plaintiffs or any business or other dealings or contacts
between Plaintiffs and Defendants.
By their signatures below, Defendants warrant, agree, and covenant
not to sue Plaintiffs and release, quitclaim, and forever discharge
Plaintiffs, Brad Stephens, Dave Caddell, George Percival, and Wayne
Malone, and their respective heirs, attorneys, agents, executors,
administrators, personal representatives, successors and assigns of and
from any liabilities, claims, controversies, causes of action, or
demands of every kind and character whatsoever that each of Defendants
may now have against them whether known or unknown (including but not
limited to any claims or causes of action asserted or that could have
been asserted in the above-styled and numbered adversary proceeding and
bankruptcy case), and whether grounded in contract, tort, fraud,
negligence or some other grounds, on account of, related to, arising
from or in any manner connected with or concerning Defendants' prior
employment with Plaintiffs and any business or other dealings or
contacts between Plaintiffs and Defendants.
Plaintiffs and Defendants further recognize and agree that the
consideration that they are designated to receive under the terms of
their settlement agreement is all that they may ever receive or be
entitled to receive from each other.
Notwithstanding the foregoing, it is expressly acknowledged and
agreed by Plaintiffs and Defendants that this release agreement shall
not include the performance by Plaintiffs and Defendants of their
respective obligations under this release or the Exhibit "A" September
30, 2002 letter-settlement agreement between counsel for Plaintiffs and
Defendants or any claim, liability or cause of action arising from the
breach of this release agreement or such settlement agreement. Further,
notwithstanding the foregoing, nothing in this release shall be
construed to affect any 401(k) plan of any of Defendants.
This release agreement may be enforced by a suit at law or in
equity. If it is necessary to engage an attorney to enforce this
agreement through court action, the prevailing party(ies) shall be
entitled to also recover reasonable attorneys' fees and all litigation
expenses and court costs.
Plaintiffs and Defendants each warrant and represent that they have
the capacity to execute this release and that they are fully and
completely informed as to the facts relating to the subject matter of
this release and as to the rights and liabilities of Plaintiffs and
Defendants. Plaintiffs and Defendants have each voluntarily entered
into this agreement after receiving advice of independent counsel.
This release agreement may be executed in one or more counterpart
originals or copies, each of which shall be deemed, considered and
construed to be an original for all purposes; and a signature thereon
transmitted by fax transmission, telecopy, e-mail, courier or mail shall
be as effective as if signed and delivered personally to each party on
the original hereof.
This agreement shall be governed by the laws of the state of Texas.
EXECUTED by each party on the date set forth next to the signature
of such party below, but effective for all purposes as of September 30,
2002.
PRIDE COMPANIES, L.P.
By: Pride Refining, Inc., Its Managing Partner
By: /s/ Ollie Bradford Stephens, III Date:11/13/02
O. Bradford Stephens
Its Chief Executive Officer
PRIDE REFINING, INC.
By: /s/ Ollie Bradford Stephens, III Date: 11/13/02
O. Bradford Stephens
Its Chief Executive Officer
PRIDE SGP, INC.
By: /s/ Dave Caddell Date: 11/13/02
C. David Caddell
Its Officer
/s/ David Johnson Date: 11/1/02
DAVID C. JOHNSON
/s/ Daniel M. Belf Date: 11/1/02
DANIEL M. BELF
/s/ David D. Bonds Date: 11/1/02
DAVID D. BONDS
/s/ Michael H. Chase Date: 10/31/02
MICHAEL H. CHASE
/s/ William F. Yocum Date: 11/1/02
WILLIAM F. YOCUM
APPROVED AS TO FORM BY THE
ATTORNEYS FOR THE PARTIES:
/s/ Michael A. Barragan
MICHAEL A. BARRAGAN
Attorney for Plaintiffs
/s/ Weldon L. Moore, III /s/ Sam J. Chase
WELDON L. MOORE, III SAM J. CHASE
Attorney for Defendants Attorney for Defendants
/s/ R. Byrn Bass, Jr. /s/ Jerry K. Sawyer
R. BYRN BASS, JR. JERRY K. SAWYER, P.C.
Attorney for Defendants Attorney for Defendants
STATE OF TEXAS )(
)(
COUNTY OF TAYLOR )(
This instrument was acknowledged before me on the 13th day of
October, 2002 by O. BRADFORD STEPHENS, Chief Executive Officer of Pride
Refining, Inc., on behalf of Pride Companies, L.P. and Pride Refining,
Inc.
/s/ Kim Watson
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF TAYLOR )(
This instrument was acknowledged before me on the 13th day of
October, 2002 by C. DAVID CADDELL, duly authorized officer of Pride SGP,
Inc., on its behalf.
/s/ Kim Watson
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF TAYLOR )(
This instrument was acknowledged before me on the 1st day of
November, 2002 by DAVID C. JOHNSON.
/s/ Misty S. King
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF YOUNG )(
This instrument was acknowledged before me on the 1st day of
November, 2002 by DANIEL M. BELF.
/s/ Lisa Brooks
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF MIDLAND )(
This instrument was acknowledged before me on the 1st day of
November, 2002 by DAVID D. BONDS.
/s/ Chris Whitney
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF TAYLOR )(
This instrument was acknowledged before me on the 31st day of
October, 2002 by MICHAEL H. CHASE.
Cheryl K. Harvey
Notary Public in and for the
State of Texas
STATE OF TEXAS )(
)(
COUNTY OF DENTON )(
This instrument was acknowledged before me on the 1st day of
November, 2002 by WILLIAM F. YOCUM.
/s/ Alicia Cagle
Notary Public in and for the
State of Texas
FULL AND FINAL MUTUAL RELEASE AGREEMENT
DALLAS 1196000v1
EXHIBIT "A"
CREEL, SUSSMAN AND MOORE, L.L.P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP
INCLUDING PROFESSIONAL CORPORATIONS
ATTORNEYS AND COUNSELORS
8235 DOUGLAS AVENUE
SUITE 1100
DALLAS, TEXAS 75225
Telephone: (214) 378-8270
Facsimile: (214) 378-8290
September 30, 2002
VIA FACSIMILE:(214) 999-3514
Michael A. Barragan, Esq.
Gardere Wynne Sewell, LLP
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Re: Pride Companies, L.P.; Case No, 01-1004-RLJ-11 and
Pride Companies, L.P., et al, Plaintiffs vs. David C.
Johnson, et al, Defendants, Adversary Case No. 01-1011
Dear Michael:
The purpose of this lettcr is to set out the essential terms of the
agreement that we have reached to compromise and settle all of the issues
arising out of the above-referenced adversary proceeding and the issues
relating to the proofs of claims filed by the Defendants in the above-
referenced bankruptcy proceeding.
We have agreed to settle these disputes according to the following
terms:
1. Pride Companies, L.P. will pay the former district managers
$624,831.46 by wire transfer into the trust account of Creel, Sussman and
Moore, L.L.P., within fifteen (15) days of the date of dismissal of the
above-referenced adversary proceeding as set out in paragraph 4 below.
2. The Defendants waive any other recovery or payment of prepetition
or other interest on the sums awarded by the bankruptcy court.
3. Pursuant to an agreed order to be signed by all attorneys of
record for Plaintiffs and Defendants in the adversary proceeding, the
bankruptcy court will vacate and set aside its July 8, 2002 order in the
above-styled and numbered adversary proceeding, and all claims, causes of
action, and theories of recovery that were filed therein, or which could
have been filed therein, by the Plaintiffs and the Defendants will be
dismissed with prejudice to the refiling of same in whole or in part at a
later date in any forum, with all court costs taxed against the party which
incurred the same. Neither Plaintiffs nor Defendants will appeal the
bankruptcy court s July 8, 2002 order.
4. The parties will execute a full and complete mutual release
agreement to be drafted by counsel for Pride, and subject to approval by
Plaintiffs, pursuant to which the parties will release any and all claims
that they have or ever had against each other (including any claims against
certain designated officers of Pride Refining, Inc.) except claims arising
out of the breach of this settlement agreement.
5. Plaintiffs and Defendants agree that, in consideration of the
payments being made herein to Defendants, the employment contracts between
Defendants and Pride Companies, L.P. are rescinded and canceled. Pride
represents that no derogatory changes have been made to any of the
Defendant s Employee Termination Reports since their termination and that
no derogatory changes will be made to such Reports or to such employee s
personal files.
Our signatures below shall consummate this settlement agreement. I
warrant and represent that I have been authorized by co-counsel and our
clients to settle pursuant to these terms. You warrant and represent that
you have the authority to bind Plaintiffs to the terms of this agreement.
Please sign the blank below on behalf of all Plaintiffs and fax this letter
back to me.
Very truly yours,
/s/ Weldon L. Moore, III
Weldon L. Moore, III
For Defendants and Counsel
ACCEPTED AND AGREED:
/s/ Michael A. Barragan
MICHAEL A. BARRAGAN
Attorney for Pride Companies, L.P.