-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPFRXqV4iZNDEOq7y9hONB1szFVAusro2u0Ir5IEB5qnRUiOF5f9fGwjxkTvnraU FURbjoew725uB6/nnpImEw== 0000859636-99-000002.txt : 19990420 0000859636-99-000002.hdr.sgml : 19990420 ACCESSION NUMBER: 0000859636-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIDE COMPANIES LP CENTRAL INDEX KEY: 0000859636 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 752313597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10473 FILM NUMBER: 99596360 BUSINESS ADDRESS: STREET 1: 1209 N FOURTH ST CITY: ABILENE STATE: TX ZIP: 79601 BUSINESS PHONE: 9156748000 MAIL ADDRESS: STREET 1: PO BOX 3237 CITY: ABILENE STATE: TX ZIP: 79604 10-K 1 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, 1998 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) 674-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of Each Title of Each Class: Exchange on Which Registered: - ------------------- ---------------------------- Common Units NASDAQ OTC Bulletin Board Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Number of Common Units outstanding as of March 26, 1999:4,950,000 The aggregate market value of the 4,690,465 Common Units held by non-affiliates of the Partnership as of March 26, 1999 was approximately $704,000.00, which was computed using the closing sales price of the Common Units on March 30, 1999. PAGE 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 Price Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Partnership Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K PART I Items 1 and 2. Business and Properties General Pride Companies, L.P. (the "Partnership") was formed as a limited partnership under the laws of the State of Delaware in January 1990. The Partnership owns and operates (i) a crude oil gathering business that gathers, transports, resells and redelivers crude oil in the Texas market (the "Crude Gathering System") and (ii) one common carrier products pipeline system and three products terminals in Abilene, Texas (the "Abilene Terminal"); San Angelo, Texas (the "San Angelo Terminal"); and Aledo, Texas (the "Aledo Terminal") (collectively the "Products Terminals") that are used to market conventional gasoline, low sulfur diesel fuel, and military aviation fuel (the "Products Marketing Business"). The Partnership also owns a modern simplex petroleum refinery facility (the "Refinery") which was mothballed on March 22, 1998. In April 1998, the Partnership began purchasing refined products from Equilon, a refining and marketing joint venture between Royal Dutch/Shell Group and Texaco, Inc. (formerly Texaco Trading and Transportation, Inc.) (the "Equilon Agreement") to market through its products pipeline and Products Terminals. Prior to mothballing the Refinery, the Partnership's operations were considered a single industry segment, the refining of crude oil and the sale of the resulting petroleum products. The primary purpose of the Crude Gathering System was to purchase and sell crude oil in order to provide a supply of the appropriate grade of crude oil at strategic locations to be used as feedstock for the Refinery. As a result of the Equilon Agreement and the mothballing of the Refinery, the Crude Gathering System now markets crude oil to other refineries and the Partnership now operates two separate and distinct industry segments, the Crude Gathering System segment and the Products Marketing Business segment. For financial information regarding these segments, see Note 11 to the consolidated financial statements included herein. The Crude Gathering System consists of pipeline gathering systems and a fleet of trucks which transport crude oil into third party pipelines and into the system's primary asset, a common carrier pipeline. The Products Marketing Business operates one products pipeline, that originates at the Abilene Terminal and terminates at the San Angelo Terminal (the "San Angelo Pipeline"), and the Products Terminals. In connection with the mothballing of the Refinery, another products pipeline owned by the Partnership that extends from the Abilene Terminal to the Aledo Terminal (the "Aledo Pipeline") was idled, since Equilon's pipeline is connected to the Aledo Terminal. The Partnership's operations are conducted primarily in the State of Texas. Pride Refining, Inc., a Texas corporation (the "Managing General Partner"), owns a 1.9% general partner interest in and serves as the managing general partner of the Partnership. The Partnership succeeded in January 1990 to the businesses of Pride SGP, Inc. ("Special General Partner" or "Pride SGP") which owns a 0.1% general partner interest in and serves as the special general partner of the Partnership. The Managing General Partner and the Special General Partner (collectively the "General Partners") collectively own a 2% general partner interest. In addition to its general partner interest, the Special General Partner owns a 4.9% interest in the Partnership through ownership of common limited partner units ("Common Units"). Public ownership represented by the remaining Common Units is 93.1%. 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 perform services for the Partnership in this capacity. The Partnership's principal business consists of marketing crude oil, military aviation fuel, conventional gasoline and low sulfur diesel fuel. The Partnership operates over 900 miles of crude oil pipelines, one common carrier products pipeline system, and three products terminals . The common carrier products pipeline system transports products from the Abilene Terminal to Dyess Air Force Base ("Dyess") in Abilene and to the San Angelo Terminal. Prior to mothballing the Refinery, the Partnership operated the Aledo Pipeline which transported product from the Abilene Terminal to the Aledo Terminal (southwest of Fort Worth, Texas). The Partnership's primary market area for refined products includes Central and West Texas and is a region that is not significantly served by the major refining centers of the Gulf Coast. Fina, Inc. ("Fina"), a competitor of the Partnership, currently has products pipeline access into Abilene, while the Partnership is the only supplier with a products pipeline into San Angelo. In April 1998, Equilon converted an existing crude pipeline into a products pipeline that delivers conventional gasoline, low sulfur diesel fuel and military aviation fuel to the Abilene Terminal and Aledo Terminal for distribution to the Partnership's existing customers. In the Partnership's primary market area, product prices reflect a premium due to transportation costs required to import refined products from supply points outside of the market area. Joint Reserve - Fort Worth, Dyess, and certain other military installations have been long-time customers for 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 awarded under the recently awarded contract have been significantly reduced from prior years due to increasing competition and since the Partnership no longer receives preferential treatment under the small business set-aside program. See "- Partnership Operations and Products" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors and Trends Affecting Operating Results." Gasoline and diesel tankage and sales facilities at the Aledo Terminal allow the Partnership access to the smaller communities west of the Dallas-Fort Worth ("DFW") market along Interstate 20 for conventional gasoline and the DFW market for low sulfur diesel fuel. See "- Markets and Competition" below. Partnership Operations and Products Products Marketing Business. The Partnership receives refined products from Equilon at the Abilene Terminal and Aledo Terminal to market through its Products Terminals in Abilene, San Angelo, and Aledo. The Partnership transports refined products from the Abilene Terminal to Dyess in Abilene and to the Partnership's San Angelo Terminal through the San Angelo Pipeline. Prior to mothballing the Refinery, the Partnership operated the Aledo Pipeline that transported refined products from the Abilene Terminal to the Aledo Terminal. The Aledo Pipeline was idled in April, 1998, since Equilon's pipeline is connected to the Aledo Terminal. The Partnership delivers military aviation fuel to Dyess by pipeline and trucks military aviation fuel from both the Abilene Terminal and Aledo Terminal to other military installations supplied by the Partnership. Conventional gasoline is marketed through the Partnership's Products Terminals to non-military customers in the Abilene area, San Angelo area, and in the communities west of the Dallas-Fort Worth ("DFW") metropolitan area along Interstate 20. Low sulfur diesel fuel is also marketed through the Products Terminals to non-military customers in the Abilene area, the San Angelo area, and in the DFW metropolitan area. Military aviation fuel delivered by the San Angelo Pipeline to Dyess is sold f.o.b. the Refinery with title passing to the purchaser as the product enters the pipeline. Prior to 1998, the Partnership had the only pipeline capable of delivering jet fuel directly into Dyess. In late 1997, Fina purchased Conoco's products terminal in Abilene and built its own pipeline from its terminal to Dyess that enables Fina to also deliver military aviation fuel into Dyess. Sales of military aviation fuel constitute a significant portion of the Partnership's revenues. See "- Markets and Competition" below. Such sales are under annual contracts awarded by the Defense Energy Support Center after a bidding process. The bidding process is conducted on a base-by-base basis and is subject to the small business set-aside program. When the bids are received, the Defense Energy Support Center determines both the lowest overall bid and the lowest bid submitted by a small business (defined as a refinery with a throughput capacity of less than 75,000 BPD and fewer than 1,500 employees). If the lowest bid is not submitted by a small business, the lowest small business bidder is offered the opportunity to obtain a contract for a set percentage of the base's requirements by matching the lowest overall bid. Prior to the contract that began April 1, 1998 and ends March 31, 1999, the Partnership was considered a small business. Since the Partnership is purchasing the military aviation fuel from Equilon, the Partnership could not bid as a small business for the contract that began April 1, 1998, nor will the Partnership be able to bid on any future contracts as a small business. Since the Partnership cannot match the price of the lowest large business under the small business set-aside program and due to increased competition, the volumes under the recently awarded contract were 25,250,000 gallons compared to 52,510,000 gallons under last year's contract. Margins under the new contract will be 1.5 cents per gallon lower than the prior contract. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors and Trends Affecting Operating Results." The Partnership and its predecessors have been supplying products to Joint Reserve - Fort Worth and Dyess since the early 1960s. Management believes that there will continue to be strong demand for military aviation fuel in the Partnership's market area into the foreseeable future; however, due to increased competition, the amount of military aviation fuel supplied by the Partnership under the new contract and future contracts will likely be at reduced volumes from previous contracts. Dyess is an Air Combat Command facility, formerly a strategic air command facility, and the primary training base for the B-1 bomber crews. In addition, Dyess also has two worldwide deployable airlift squadrons which fly the C-130 Hercules. Under the contract that is effective from April 1, 1998 through March 31, 1999, the Partnership contracted to sell military aviation fuel to Dyess, Sheppard Air Force Base in Wichita Falls, Texas, Fort Hood Military Installation in Killeen, Texas, E-Systems, Inc. in Greenville, Texas, and Joint Reserve - Fort Worth. Under the new contract that is effective from April 1, 1999 through March 31, 2000, the Partnership will supply military aviation fuel to Dyess, AASF in Dallas, Texas, Joint Reserve - Fort Worth, and E-Systems, Inc. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors and Trends Affecting Operating Results - Other Factors." Crude Gathering System. The Partnership's Crude Gathering System is divided into two distinct areas: (i) truck-based crude oil gathering and (ii) pipeline operations. The trucking operations comprise five district offices located in the Abilene, Dallas, Graham, Midland, and San Angelo, Texas areas. These districts utilize a fleet of 103 trucks to transport crude oil from individual leases or small gathering systems to injection stations owned and operated by the Partnership along common carrier pipeline systems. As of December 31, 1998, the Crude Gathering System operated 32 crude oil injection stations located on various common carrier pipeline systems including the Amoco, Arco, Chevron, Comyn, Conoco, Mobil, Texaco, Texas Plains System and other Texas-New Mexico pipeline systems. The Partnership maintains 17 trucking locations throughout the area for operation of its truck fleet. In December 1998, the average length of travel for the Partnership's trucks in its gathering operations was approximately 76 miles round trip. As of December 31, 1998, the pipeline assets utilized in the Crude Gathering System consisted of in excess of 900 miles of active pipeline, the major portion of which is the Comyn pipeline system ("Comyn System") with approximately 417 miles of trunkline and 190 miles of gathering lines and the Texas Plains Pipeline System ("Texas Plains System") consisting of an additional 242 miles of trunkline and 29 miles of gathering lines. Ownership of the trunkline segments of the Comyn System from Hawley to Comyn, Texas (90 miles), from Hearne to Comyn, Texas (143 miles), and from Comyn to Ranger, Texas (37 miles) along with certain related pumping facilities, was retained by Pride SGP when the Partnership was formed, and the Partnership leases these assets from Pride SGP. For the year ended December 31, 1998, the Partnership transported 9,729 barrels per day ("BPD") of high quality crude oil from the eastern portion of the Austin Chalk formation through this pipeline. The Partnership has an agreement with Pride SGP to lease defined segments of the Crude Gathering System pipeline until 2000, with an option to extend the lease through March 2013, as long as certain minimum throughput levels are maintained. If such throughput levels are not maintained during the extended term, the lease is cancelable by Pride SGP with ninety days' notice. As consideration for this lease, the Partnership has agreed to perform all routine and emergency maintenance and repair operations to the pipeline. The value of such services is currently estimated to be approximately $300,000 annually. In addition, the Partnership pays the taxes, insurance, and other costs. In conjunction with the refinancing that occurred December 31, 1997 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition"), the lease was amended to reduce the rentals to a maximum of $400,000 annually provided certain debt is outstanding. Prior to December 31, 1997, the Partnership accrued rentals to Pride SGP of $0.20 per barrel for all crude oil transported by the Partnership or third parties with contractual relationships with it, through the 143-mile section from Hearne to Comyn. Rentals accruing to Pride SGP from the Partnership for the years ended December 31, 1998, 1997, and 1996 totaled approximately $400,000, $788,000, and $919,000, respectively, for the lease of the pipeline. The Partnership has the option to purchase these pipeline segments for $10 million. See "Certain Relationships and Related Transactions." The Partnership owns the Texas Plains System, a crude oil pipeline system that prior to the mothballing of the Refinery also transported vacuum gas oil. It consists of 271 miles of pipeline extending from Hawley, Texas, which is located near the Partnership's mothballed Refinery, to Borger, Texas. The system has a total capacity of approximately 38,000 BPD, and an average of 33,016 BPD of crude oil and vacuum gas oil was shipped on the pipeline for the year ended December 31, 1998. After the mothballing of the Refinery, the Partnership began shipping a portion of the crude oil that previously would have gone to the Refinery to Ultramar Diamond Shamrock's ("UDS") refinery in McKee, Texas, in place of the vacuum gas oil. Prior to the mothballing of the Refinery, the Partnership had sold all the vacuum gas oil and a small portion of the crude oil transported on the pipeline to UDS. The Comyn System and Texas Plains System are common carrier pipelines that charge a transportation fee in accordance with a published tariff schedule filed with the Texas Railroad Commission. The Comyn System and Texas Plains System are also allowed to charge each customer's account with a line loss allowance of 0.25% and 0.125%, respectively, for each barrel transported in the system. In addition to the Comyn System and Texas Plains System, the Partnership owns and operates a small pipeline system in Tom Green County. Crude oil from the Crude Gathering System pipelines can be delivered to a variety of locations, including storage tanks located at the Abilene Terminal, tank storage areas which facilitate trucking to injection stations, and several different common carrier crude oil pipelines. The Crude Gathering System is the first purchaser of a portion of the crude oil it gathers. These first purchase barrels have traditionally been either resold to other companies or shipped to the Refinery prior to the mothballing of the Refinery. The Partnership also gathers crude oil for custom gathering customers and charges gathering fees depending on several factors (including the transportation distance involved) and delivers these barrels to an agreed upon location by contract. The Crude Gathering System assumes title to both first purchase and custom gathered barrels and the total of the two categories is considered to be total gathered barrels. While first purchase barrels have declined from 39,000 BPD in 1986 to 27,000 BPD for the year ended December 31, 1998, custom gathered barrels have grown from 5,000 BPD to 17,000 BPD for the same period. However, the custom gathered barrels have declined over the last three years as the Partnership has eliminated some of the marginal custom gathered contracts. Both first purchase barrels and custom gathered barrels are subject to decline if drilling activity slows down as a result of recent declines in crude oil prices. The Partnership has engaged an investment advisor to assist the Partnership in considering and analyzing various potential business opportunities involving the Crude Gathering System, including possible strategic alliances and joint ventures and a possible sale of the Crude Gathering System. Although the Partnership has been and continues to be in discussions with various third parties regarding possible transactions, the Partnership (as of April 15, 1999) has not entered into any binding agreements involving a business combination or sale involving the Crude Gathering System and is unable to predict the certainty of entering into or consummating any such transaction. Refining. Prior to March 22, 1998, the principal business of the Partnership was crude oil refining at its Refinery located approximately ten miles north of Abilene, Texas. The Refinery had a throughput capacity of 49,500 barrels per day ("BPD") and was permitted to process 44,500 BPD. For the first three months of 1998, the Refinery processed crude oil into refined products at an average rate of approximately 28,090 BPD. As a result of the mothballing of the Refinery, the Partnership wrote down such assets $40.0 million at December 31, 1997. In December 1998, the Partnership sold its diesel desulfurization unit for $3.1 million. Markets and Competition Fina, the Partnership's principal competitor in its primary market area, operates a products pipeline in the Abilene area. This competitor's pipeline originates in Big Spring, Texas (105 miles west of Abilene) and supplies Abilene, Midland, and Wichita Falls, Texas and the Midcontinent. However, the Partnership currently has the only products pipeline access to the San Angelo area. Retailers and jobbers who are not supplied by the Partnership or one of its exchange partners must truck their products into San Angelo from locations as far away as 90 to 200 miles. Equilon recently converted an existing crude pipeline into a products pipeline that delivers conventional gasoline, low sulfur diesel fuel and military aviation fuel from the Gulf Coast to the Partnership's Abilene Terminal and Aledo Terminal, and the Partnership ships product from the Abilene Terminal to the San Angelo Terminal through the San Angelo Pipeline. Other Gulf Coast refiners ship their products primarily throughout the southeast and central United States. Total petroleum product demand for the Partnership's market area is determined by demand for conventional gasoline, low sulfur diesel fuel, and military aviation fuel. In the case of each product, however, demand tends to vary by locality and season. Aviation fuel consumption is from regional military and civilian air facilities. In February 1997, Fina and Holly Corp. ("Holly") announced a plan to convert existing crude oil and natural gas pipelines and lay 110 miles of new pipeline to bring additional gasoline and diesel products to West Texas, New Mexico and Arizona. The system will be supplied by Fina's refineries in Big Spring and Port Arthur, Texas, a pipeline terminal in Duncan, Oklahoma, and Holly's refinery in Artesia, New Mexico. Fina has indicated that it believes Gulf Coast petroleum products will not be needed for another five years. Other companies are also considering projects to bring petroleum products into West Texas, New Mexico and Arizona from the Gulf Coast. These proposals, if implemented, would increase competition in the Partnership's primary market areas. In addition to its primary market areas in Abilene and San Angelo for conventional gasoline and low sulfur diesel fuel, the Partnership has access to a secondary market in the small communities west of Dallas-Fort Worth along Interstate 20 for conventional gasoline and the Dallas-Fort Worth metropolitan area for low sulfur diesel fuel. As a result of the reformulated gasoline requirement for the Dallas-Fort Worth metropolitan area effective January 1, 1995, most products terminals are supplying reformulated gasoline in the area with only a small number having the capability of supplying conventional gasoline, which is in more limited demand. The Aledo Terminal is strategically located to take advantage of this marketing opportunity, and the Partnership has entered into supply and exchange agreements with three major oil companies at that location. 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 does not generally sell its gasoline products through its own direct retail distribution system, but primarily sells to other branded product companies with some gasoline being sold directly 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 or exchange refined products include Chevron, Citgo, Conoco,UDS, Exxon, Fina, Phillips, Shell, Star Enterprise and Texaco. The Partnership has two exchange agreements and one sales agreement with these companies for product supplied out of the Abilene Terminal; five exchange agreements and two sales agreements with these companies for products supplied out of the San Angelo Terminal; and one exchange agreement and two sales agreements with these companies for product supplied out of the Aledo Terminal. The exchange agreements have enabled the Partnership to expand its marketing area to Amarillo, Texas, El Paso, Texas, Lubbock, Texas, Midland/Odessa, Texas, and Wichita Falls, Texas without incurring transportation costs to these cities. The Partnership also currently operates five retail fueling facilities. These facilities are located in Central and West Texas. Sales by such facilities accounted for less than 1% of the Partnership's revenues for the year ended December 31, 1998. As a result of the Refinery being mothballed on March 22, 1998, the Partnership now markets to third parties the crude oil it previously sold to the Refinery. These third parties include other refiners and companies that buy, sell and exchange crude oil. The Partnership entered into two two-year contracts to sell Gary-Williams Energy, Corporation (Gary-Williams) beginning in April 1998 and UDS beginning in August 1998, a portion of the crude oil previously sold to the Refinery. Generally, the Partnership competes primarily on the basis of price for the crude oil it gathers in a particular market area. Customers The Partnership entered into an agreement with UDS to supply it with crude oil through July 31, 2000 and shall continue for one year thereafter, unless canceled by either party upon six months' prior written notice, for use in UDS's refining operations. The Partnership's revenues pursuant to the UDS agreement and the prior vacuum gas oil agreement accounted for 23% of its total revenues for the year ended December 31, 1998. Long-Term Product Supply Agreement In 1997, the Partnership executed a long-term product supply agreement (the "Agreement") with Equilon to supply gasoline, diesel fuel and jet fuel to the Partnership. The Agreement has a 10-year primary term which began in April 1998, the date Equilon completed its system of pipelines and terminals. The Agreement also has two-year renewal provisions for up to an additional 10 years. After the initial five years of the initial ten-year term ("Primary Term"), if Equilon determines that shipment of products on its new products pipeline is no longer economical due to product prices, then Equilon may notify the Partnership of proposed redetermined prices. If the Partnership does not accept such redetermined prices, then Equilon may elect to terminate the Agreement by 18 months' written notice. After the Primary Term, if either party under the Agreement can demonstrate that the prices for delivered products under the 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 Agreement not less than one year prior to the end of the current term. The Agreement may furthermore be terminated upon any breach by the other party which continues beyond 30 days following notice of breach. Additionally, the Agreement provides that the Partnership will purchase all gasoline, diesel and jet fuel which it may desire to purchase, exclusively from Equilon. The Partnership's cost for such product is based primarily on the market price in the area in which the products are received less a discount. The Partnership will use Equilon products to supply its existing customer base, which includes wholesale customers, exchange partners, and military bases, primarily using the Products Terminals and San Angelo Pipeline. In connection with the Agreement, the Partnership mothballed its Refinery, but will continue to utilize part of the Refinery for a refined products and crude oil storage and terminalling facility (the Abilene Terminal). See also "Financial Condition - Financial Resources and Liquidity." The Partnership spent $1.3 million on closure cost and related severance costs for the year ended December 31, 1998, all of which was accrued as of December 31, 1997. The agreement with Equilon effectively makes the Crude Gathering System an independent operation. It is no longer responsible for supplying the Refinery with crude oil and is free to handle and trade grades of crude oil that would have previously been inconsistent with the Refinery's needs. The arrangement with Equilon also enables the Partnership to transport the crude oil it previously gathered and shipped to the Refinery to other attractive markets. A large portion of Pride Pipeline Company's gathered crude oil was restricted to use as feedstock for the Refinery. Based on recent results, the Partnership now anticipates that the new arrangement will produce lower operating cash flows than historical levels. However, the Partnership's cash flows would have likely been even lower had it continued to operate the Refinery and had to compete in its market area against other Gulf Coast refineries. The Partnership believes that cash flows will likely be less volatile since the Agreement will result in more stable product margins and eventually decrease the Partnership's exposure to volatility in refining margins. The Partnership also believes that the Agreement will better enable the Partnership to remain competitive as environmental standards change and the industry trends toward consolidation and realignments in the future. Employees As of December 31, 1998, the Partnership had 249 employees, of which 60 were employed in the Products Marketing Business and 189 were employed in the Crude Gathering System. Environmental Matters The Partnership's activities involve the transportation, storage, and handling of crude oil and 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors and Trends Affecting Operating Results" and "Legal Proceedings." Forward Looking Statements This Form 10-K contains certain forward looking statements. Such statements are typically punctuated by words or phrases such as "anticipate," "estimate," "projects," "should," "may," "management believes," and words or phrases of similar import. Such statements are subject to certain risks, uncertainties or assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the key factors that may have a direct bearing on the Partnership's results of operations and financial condition in the future are: (i) the margins between the revenue realized by the Partnership on the sale of refined products and the cost of those products purchased from Equilon and the availability of such products, (ii) the volume of throughput at the Products Terminals, (iii) the volume of throughput on and margins from the transportation and resale of crude oil from the Partnership's Crude Gathering System, (iv) the amount of crude oil produced in the areas the Partnership gathers, (v) the impact of current and future laws and governmental regulations affecting the petroleum industry in general and the Partnership's operations in particular, (vi) the ability of the Partnership to sustain cash flow from operations sufficient to realize its investment in operating assets of the Partnership and meet its debt obligations, and (vii) fluctuations in crude oil and refined product prices and their impact on working capital and the borrowing base under the Partnership's credit agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition." Item 3. Legal Proceedings On September 5, 1995, the Partnership filed a substantial claim in the United States Court of Federal Claims against the United States of America (Defense Energy Support Center) relating to erroneous pricing of fuel purchased over a period of several years from the Partnership and its predecessors (the "DESC Claim"). The Partnership seeks recovery of the difference between the market value of the jet fuel and the amount originally paid by the Defense Energy Support Center for such jet fuel. The ultimate outcome of this matter cannot presently be determined. 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. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during fiscal year 1998. PART II Item 5. Market for Partnership's Common Units and Related Unitholder Matters The Partnership's Common Units are currently traded on the NASDAQ OTC bulletin board under the symbol PRDE. Prior to August 17, 1998, the Partnership was listed on the New York Stock Exchange but was delisted for failing to meet certain listing requirements. The following tables set forth, for the periods indicated, the high and low closing prices of the Common Units in 1998 and 1997 as reported on the New York Stock Exchange Composite Tape and the high and low bid information of the Common Units in 1998 on the NASDAQ OTC bulletin board. Quotations on the NASDAQ OTC bulletin board reflect interdealer prices and may not necessarily represent actual transactions. No distributions were made on the Common Units during the past two fiscal years.
New York Stock Exchange Composite Tape - -------------------------------------- 1997 HIGH LOW ____ ____ ___ First Quarter $ 3-3/4 $ 3-1/4 Second Quarter 3-3/4 2-15/16 Third Quarter 3-3/16 2-7/16 Fourth Quarter 2-1/2 1-9/16 1998 ____ First Quarter $ 2 $ 1-5/16 Second Quarter 1-9/16 1 Third Quarter thru 8/14/98 1-1/8 7/16 NASDAQ OTC Bulletin Board - ------------------------- Third Quarter beginning 8/20/98 $ 1/2 $ 1/4 Fourth Quarter 13/16 1/8
The Unsecured Note A is convertible into 436,000 Common Units, and the Partnership's Series B Preferred Units, Series C Preferred Units, and Series E Preferred Units are convertible into 1,480,000, 794,000 and 317,000 Common Units, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition - Financial Resources and Liquidity." Since cash distributions were not paid on the preferred equity, the preferred equity accumulated arrearages of $1,763,000 for the year ended December 31, 1998. 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, 1998 to be approximately 3,800. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Financial Resources and Liquidity" for a discussion of certain restrictions imposed by the Partnership's lenders on the payment of distributions to unitholders throughout the term of the Partnership's credit facility with such lenders, which terminates on January 2, 2001. 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. The summary income statement data for each of the five years in the period ended December 31, 1998, as well as the summary balance sheet data for December 31, 1994, 1995, 1996, 1997 and 1998 are all extracted from the audited financial statements of the Partnership. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations." The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements beginning on page F-7. (The following table should be printed on 14" x 8.5" paper) SELECTED FINANCIAL DATA (In thousands, except per unit amounts and footnote amounts)
Year Ended December 31, ________________________________________________________________ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Income Statement Data: Revenues Products Marketing Business $ 220,610 $ 235,136 $ 294,328 $ 277,180 $ 121,189 Crude Gathering System 553,847 527,212 597,425 494,155 300,566 Intrasystem and other (184,551) (201,735) (276,550) (236,437) (41,128) ________ ________ ________ ________ ________ Total revenues 589,906 560,613 615,203 534,898 380,627 ________ ________ ________ ________ ________ Costs of sales and operating expenses, excluding depreciation 570,877 543,425 596,841 516,146 369,280 Refinery closure costs - - - 41,396 - Marketing, general and administrative expenses 11,059 10,274 10,111 8,955 8,001 Depreciation 6,546 7,006 6,976 6,872 3,438 ________ ________ ________ ________ ________ Operating income (loss) 1,424 (92) 1,275 (38,471) (92) ________ ________ ________ ________ ________ Other net 28 175 179 564 346 Interest expense (5,191) (6,575) (5,808) (5,316) (6,144) Credit and loan fees (1,651) (2,172) (2,109) (1,952) (2,753) ________ ________ ________ ________ ________ Loss before income taxes (5,390) (8,664) (6,463) (45,175) (8,643) Income tax benefit - 47 48 144 86 ________ ________ ________ ________ ________ Net loss $ (5,390) $ (8,617) $ (6,415) $ (45,031) $ (8,557) ======== ======== ======== ======== ======== Before conversion : Basic and diluted net loss per Unit: Preferred Unit $ (0.53) $ (0.85) $ (0.63) - - Old Common Unit $ (0.53) $ (0.85) $ (0.63) - - After conversion : Basic and diluted net loss per Common Unit $ (1.07) $ (1.71) $ (1.27) $ (8.92) $ (2.04) Numerator: Net loss $ (5,390) $ (8,617) $ (6,415) $ (45,031) $ (8,557) Preferred distributions in arrears - - - - (1,763) -------- -------- -------- -------- -------- Net loss less preferred distributions (5,390) (8,617) (6,415) (45,031) (10,320) Net loss allocable to 2% general partners' interest 108 172 128 901 206 -------- -------- -------- -------- -------- Numerator for basic and diluted earnings per unit $ (5,282) $ (8,445) $ (6,287) $ (44,130) $ (10,114) ======== ======== ======== ======== ======== Denominator: Denominator for basic and diluted earnings per unit before conversion : Preferred Units 4,700 4,700 4,700 - - Old Common Units 5,250 5,250 5,250 - - Denominator for basic and diluted earnings per unit after conversion : Common Units 4,950 4,950 4,950 4,950 4,950 Balance Sheet Data (at end of period): Net property, plant and equipment $ 110,884 $ 104,837 $ 99,554 $ 47,588 $ 45,534 Total assets 146,552 138,306 139,716 95,281 76,462 Long-term debt (including current maturities) 58,890 56,500 56,933 43,171 45,096 Redeemable preferred equity - - - 19,529 19,529 Partners' capital (deficiency) 44,630 36,013 29,598 (15,433) (23,990) Operating Data (BPD): Products Marketing Business Product sales 13,267 Refinery Crude oil throughput 30,483 29,806 32,555 31,449 28,090 Products refined 29,815 29,031 31,681 30,619 27,438 Products System Transportation volumes 13,722 15,585 13,509 11,415 7,335 Crude Gathering System Crude oil gathered 74,676 66,869 58,775 51,305 43,508 Prior to mothballing the Refinery on March 22, 1998, this data represents information for the Refinery and products pipelines and terminals. Cost of sales and operating expenses, excluding depreciation, included a $1,197,000 lower of cost or market inventory adjustment due to the decline in inventory values. Refinery closure costs for the year ended December 31, 1997 includes a $40,000,000 noncash charge for impairment of fixed assets, $1,750,000 related to closure of the Refinery and related severance costs, and $367,000 related to the writeoff of certain Refinery assets offset by $721,000 in accruals that were reversed as a result of the Refinery being mothballed. Since a portion of the debt is subject to increasing rates of interest, the Partnership is accruing interest at the effective rate over the term of the debt. Interest expense in 1998 reflects an accrual of $1,030,000 which is based on the difference between the effective interest rates and the stated rates. Credit and loan fees include costs associated with the restructuring and refinancing of the Partnership of $873,000, $1,064,000, $613,000 and $1,325,000 for 1995, 1996, 1997 and 1998, respectively. On December 31, 1996 after the market closed the convertible preferred limited partner units ("Preferred Units") were converted to Common Units on a one-for-one basis. At the same time, existing common limited partner units ("Old Common Units") were converted to Common Units on a one-for-twenty-one reverse unit split. The "Before Conversion" section reflects the per unit information based on both the outstanding Preferred Units and Old Common Units, whereas the "After Conversion" section reflects the pro forma per unit information based on the outstanding Common Units. Since cash distributions were not paid on the preferred equity, the preferred equity accumulated arrearages of $1,763,000 for the year ended December 31, 1998. In 1998, the calculations of diluted earnings per unit exclude 300,000 officer and employee unit appreciation rights and 3,027,000 units attributed to the convertible preferred equity and convertible debt because the effect would be antidilutive. Likewise, in 1997, the calculations of diluted earnings per unit exclude 300,000 officer and employee unit appreciation rights and 2,987,000 units attributed to the convertible preferred equity and convertible debt because the effect would also be antidilutive. Both years also exclude 70,000 director unit appreciation rights because the plan states they will be settled for cash. At December 31, 1994, 1995, 1996, 1997 and 1998 current maturities were $6,626,000, $3,447,000, $6,516,000, $2,084,000 and $237,000, respectively. Due to the Refinery being mothballed on March 22, 1998, the operating data in 1998 for the Products Marketing Business is for the period April 1, 1998 through December 31, 1998 and for the Refinery and Products System is for the period January 1, 1998 through March 31, 1998.
PAGE Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations General The following is a discussion of the financial condition and results of operations of the Partnership. This discussion should be read in conjunction with the financial statements included in this report. As a result of mothballing the Refinery at the end of the first quarter of 1998 and redirecting its business to focus on crude oil and products marketing and distribution, the Partnership's operating results now depend principally on (i) the margins between the revenue realized by the Partnership on the sale of refined products and the cost of those refined products purchased from Equilon and the availability of such products, (ii) the volume of throughput at the Products Terminals, (iii) the volume of throughput on and margins from the transportation and resale of crude oil from the Partnership's Crude Gathering System, and (iv) the amount of crude oil produced in the areas the Partnership gathers. The price the Partnership is able to realize on the resale of its petroleum products is influenced by the level of competition in the Partnership's markets. Due to the change in its core business, a comparison of the Products Marketing Business to the Refinery and the prior products pipeline business ("Products System") would not be meaningful and, therefore, is not included with this Form 10-K. Prior to mothballing the Refinery and entering into the Equilon Agreement, the Partnership's operating results depended principally on (i) the rate of utilization of the Refinery, (ii) the margins between the prices of its refined petroleum products and the cost of crude oil, (iii) the volume throughput on the Products System, and (iv) the volume throughput on and margins from the transportation and resale of crude oil from its Crude Gathering System. Margins from the Crude Gathering System are influenced by the level of competition and the price of crude oil. When prices are higher, crude oil can generally be resold at higher margins. Additionally, transportation charges trend upward when higher crude oil prices result in increased exploration and development. Conversely, when crude oil prices decrease, exploration and development decline and margins on the resale of crude oil as well as transportation charges tend to decrease. Beginning in April 1998, the Partnership began selling crude oil to third parties that in the past would have been refined at the Refinery. The gross margin per barrel from such sales are based in part on the sales price of crude oil above the Partnership's posted price for the purchase of such crude oil (the "Premium"). The Premium for crude oil is primarily based on the prompt NYMEX price of crude oil versus the posted price of crude oil. Prior to April 1998, a substantial portion of the crude gathered by the Crude Gathering System was sold to the Refinery. The intrasystem pricing of crude oil between the Refinery and the Crude Gathering System was based in part on an adjusted Midland spot price for crude oil above the Partnership's posted price for the purchase of such crude oil (the "Intracompany Premium"), which represented the approximate amount above posting that would be realized on the sale of such crude oil to an unrelated third party. The total intrasystem price for crude oil between the Refinery and the Crude Gathering System included the Intracompany Premium, the Partnership's posted price and transportation costs. An increase in the Intracompany Premium for crude oil had a negative impact on the Refinery and a positive impact on the Crude Gathering System. On the other hand, a decrease in the Intracompany Premium for crude oil had a positive impact on the Refinery and a negative impact on the Crude Gathering System. For the first three months of 1998 and the years ended December 31, 1997 and 1996, the average Intracompany Premium for crude oil was $1.72, $1.91, and $2.38, respectively. In evaluating the financial performance of the Partnership, management believes it is important to look at operating income, excluding depreciation, in addition to operating income which is after depreciation. Operating income, excluding depreciation, measures the Partnership's ability to generate and sustain working capital and ultimately cash flows from operations. However, such measure is before debt service, so it does not indicate the amount available for distribution, reinvestment or other discretionary uses. Gross revenues primarily reflect the level of crude oil prices and are not necessarily an accurate reflection of the Partnership's profitability. Also important to the evaluation of the Refinery's performance are barrels of crude oil refined, gross margin (revenue less cost of crude) per barrel, and operating expenses per barrel, excluding depreciation. Year ended December 31, 1998 compared with year ended December 31, 1997 General. Net loss for the year ended December 31, 1998 decreased to $8.6 million as compared to $45.0 million for the year ended December 31, 1997. The results for the year ended December 31, 1997 included $41.4 million of costs associated with ceasing Refinery operations. Excluding the $41.4 million of costs associated with ceasing Refinery operations, net loss was $3.6 million for the year ended December 31, 1997. The closure costs included a $40.0 million noncash charge for impairment of certain Refinery fixed assets, $1.8 million related to the closure of the Refinery and related severance costs and $367,000 related to the writeoff of certain Refinery assets offset by $721,000 in accruals that were reversed since the Refinery was mothballed. Non-operating expenses increased $1.8 million for the year ended December 31, 1998 as compared to the same period in 1997 due to increased interest expense and credit and loan fees. Interest expense increased $828,000 which is attributable to higher interest rates under the new credit facilities executed December 31, 1997. Credit and loan fees increased for the year as a result of the amortization of deferred financing costs associated with the refinancing that occurred on December 31, 1997. Operating loss for the year ended December 31, 1998 was $92,000 as compared to an operating loss of $38.5 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income was $2.9 million for the year ended December 31, 1997. Operating income decreased as a result of weaker results for the Crude Gathering System and Products Marketing Business for the year ended December 31, 1998 versus the Crude Gathering System and Refinery for the year ended December 31, 1997. Depreciation expense declined to $3.4 million for the year ended December 31, 1998 from $6.9 million for the year ended December 31, 1997 as a result of the reduction in property, plant and equipment at December 31, 1997 related to the noncash charge for impairment. Operating income, excluding depreciation, for the year ended December 31, 1998 was $3.3 million as compared to an operating loss of $31.6 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, was $9.8 million for the year ended December 31, 1997. Products Marketing Business. Operating income for the Products Marketing Business for the year ended December 31, 1998 was $552,000 which includes operating income of $1.0 million from the Refinery and Products System for the first three months of 1998. Depreciation expense for the Products Marketing Business was approximately $1.4 million for the year ended December 31, 1998 which includes depreciation expense of $368,000 from the Refinery and Products System for the first three months of 1998. Operating income, before depreciation, of the Products Marketing Business was $2.0 million for the year ended December 31, 1998 which includes operating income, before depreciation, of $1.4 million from the Refinery and Products System for the first three months of 1998. During the last nine months of 1998, the Partnership marketed 13,267 BPD of refined products through the Products Marketing Business. For the first three months of 1998, the Partnership marketed 28,669 BPD through the Refinery and Products System. The gross margin per barrel for the last nine months of 1998 for the Products Marketing Business was $1.82. The gross margin per barrel for the first three months of 1998 for the Refinery was $1.88. Management believes that the initial operating results of the Products Marketing Business were significantly impacted by product outages and other start-up problems associated with the supply agreement with Equilon. Further, management believes increased competition in the Partnership's operating area would have significantly hurt operating results had the Partnership continued to operate the Refinery. Refinery and Products System. Operating loss for the Refinery and Products System was $40.9 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income for the Refinery and Products System was $537,000 for the year ended December 31, 1997. Depreciation expense for the Refinery and Products System was approximately $5.0 million for the year ended December 31, 1997. Operating loss, before depreciation, for the Refinery and Products System was $35.9 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, for the Refinery and Products System was $5.5 million for the year ended December 31, 1997. Operating income, depreciation expense, and operating income, before depreciation, for the Products System was $655,000, $870,000 and $1.5 million, respectively, for the year ended December 31, 1997. Total transportation volumes were 11,415 for the year ended December 31, 1997. Operating loss for the Refinery was $41.5 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating loss for the Refinery was $118,000 for the year ended December 31, 1997. Depreciation expense for the Refinery was $4.1 million for the year ended December 31, 1997. Operating loss, excluding depreciation, for the Refinery was $37.4 million for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, for the Refinery was $4.0 million for the year ended December 31, 1997. Refinery gross margin per barrel was $1.76 for the year ended December 31, 1997. Refinery throughput averaged 31,449 BPD for the year ended December 31, 1997. Operating expenses per barrel, before depreciation, were $4.61 for the year ended December 31, 1997. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating expenses per barrel, excluding depreciation, were $1.00 for the year ended December 31, 1997. Crude Gathering System. Operating loss for the Crude Gathering System was $644,000 for the year ended December 31, 1998 compared to operating income of $2.4 million for the year ended December 31, 1997 due to a decline in crude gathering margins. For the year ended December 31, 1998, the Premium for crude oil sold to third parties was lower than the Intracompany Premium and transportation revenue received from the Refinery for the same period in 1997. In addition, operating income for the year ended December 31, 1998 included a $1.2 million lower of cost or market inventory adjustment due to the decline in inventory values. Depreciation expense for the Crude Gathering System increased to $2.0 million for the year ended December 31, 1998 from $1.9 million for the year ended December 31, 1997. Operating income, excluding depreciation, for the Crude Gathering System decreased to $1.4 million for the year ended December 31, 1998 from $4.3 million for the year ended December 31, 1997. Due to the elimination of several marginal contracts, the volume of crude oil gathered by the Crude Gathering System decreased to 43,508 BPD for the year ended December 31, 1998 from 51,305 BPD for the year ended December 31, 1997. For the year ended December 31, 1998, net margin was negative $0.04 per barrel compared to positive $0.13 per barrel for the year ended December 31, 1997. Excluding the $1.2 million inventory adjustment due to the decline in inventory values, net margin was positive $0.03 per barrel for the year ended December 31, 1998. Year ended December 31, 1997 compared with year ended December 31, 1996 General. Net loss for the year ended December 31, 1997 increased to $45.0 million as compared to $6.4 million for the year ended December 31, 1996. The results for the year ended December 31, 1997 included $41.4 million in costs associated with ceasing Refinery operations. Excluding the $41.4 million of costs associated with ceasing Refinery operations, net loss was $3.6 million for the year ended December 31, 1997. The closure costs included a $40.0 million noncash charge for impairment of certain Refinery fixed assets, $1.8 million related to the closure of the Refinery and related severance costs and $367,000 related to the writeoff of certain Refinery assets offset by $721,000 in accruals that were reversed when the Refinery was mothballed. Non-operating expenses decreased $1.0 million for the year ended December 31, 1997 as compared to the same period in 1996 due primarily to decreased interest expense and credit and loan fees and a gain on the sale of the Partnership's products trucks. Interest expense decreased $492,000 which is attributable to lower interest rates that became effective on December 31, 1996 as a result of the approval by the unitholders to certain amendments to the Partnership agreement. Credit and loan fees for the year ended December 31, 1996 were reduced by a one-time nonrecurring reversal of an accrual for facility fees of $534,000 for periods prior to 1996. Such fees were eliminated by the Partnership's prior principal creditors concurrent with the amendments to their credit agreements in November 1996. For the year ended December 31, 1997, the Partnership expensed $613,000 related to the restructuring compared to $1.1 million for the same period in 1996. Depreciation expense was $6.9 million for the year ended December 31, 1997 compared to $7.0 million for the year ended December 31, 1996. Operating loss for the year ended December 31, 1997 was $38.5 million as compared to operating income of $1.3 million for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income was $2.9 million for the year ended December 31, 1997. The results for the Refinery and Products System, excluding the costs associated with ceasing Refinery operations, improved due to strong refining margins. This was partially offset by weak crude gathering margins. Operating loss, excluding depreciation, for the year ended December 31, 1997 was $31.6 million as compared to operating income, excluding depreciation, of $8.3 million for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, was $9.8 million for the year ended December 31, 1997. Refinery and Products System. Operating loss for the Refinery and Products System was $40.9 million for the year ended December 31, 1997 compared to $7.7 million for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income for the Refinery and Products System was $537,000 for the year ended December 31, 1997. The results for the Refinery and Products System, excluding the costs associated with ceasing Refinery operations, improved due to stronger refining margins. Depreciation expense for the Refinery and Products System was $5.0 million for both the years ended December 31, 1997 and 1996. Operating loss, excluding depreciation, of the Refinery and Products System was $35.9 million for the year ended December 31, 1997 compared to $2.7 million for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, for the Refinery and Products System was $5.5 million for the year ended December 31, 1997. Operating income for the Products System decreased to $655,000 for the year ended December 31, 1997 from $1.2 million for the year ended December 31, 1996. Depreciation expense for the Products System decreased to $870,000 for the year ended December 31, 1997 from $880,000 for the year ended December 31, 1996. Operating income, excluding depreciation, for the Products System decreased to $1.5 million for the year ended December 31, 1997 from $2.1 million for the year ended December 31, 1996 as a result of decreased transportation volumes on the San Angelo Pipeline. Transportation volumes decreased to 11,415 BPD for the year ended December 31, 1997 from 13,509 BPD for the year ended December 31, 1996. Operating loss for the Refinery alone was $41.5 million for the year ended December 31, 1997 compared to an operating loss of $8.9 million for the same period in 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating loss for the Refinery was $118,000 for the year ended December 31, 1997. Depreciation expense for the Refinery was $4.1 million for both the years ended December 31, 1997 and 1996. Operating loss, excluding depreciation, of the Refinery alone was $37.4 million for the year ended December 31, 1997 compared to operating loss, excluding depreciation, of $4.8 million for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating income, excluding depreciation, for the Refinery was $4.0 million for the year ended December 31, 1997. Refinery gross margin per barrel was $1.76 for the year ended December 31, 1997 compared to $1.09 for the year ended December 31, 1996. The increase in the gross margin for the year ended December 31, 1997 reflects the decline in the Intracompany Premium for crude oil, the increased margin on the military aviation fuel sold to the government under the contract that began April 1, 1997, and the lower residuum yield experienced in 1997. The lower residuum yield positively affects the Partnership since the value of residuum was substantially lower than the other refined products that the Partnership sold. The residuum increased in 1996 as a result of the Refinery running a slightly heavier slate of crude. Towards the end of 1996, the Partnership began running a lighter slate of crude which resulted in a decreased residuum yield in 1997. Refinery throughput averaged 31,449 BPD during the year ended December 31, 1997 compared to 32,555 BPD for the year ended December 31, 1996. Operating expenses per barrel, excluding depreciation, increased to $4.61 for the year ended December 31, 1997 from $1.09 for the year ended December 31, 1996. Excluding the $41.4 million of costs associated with ceasing Refinery operations, operating expenses per barrel, excluding depreciation, were $1.00 for the year ended December 31, 1997. Crude Gathering System. Operating income for the Crude Gathering System was $2.4 million for the year ended December 31, 1997 compared to $8.9 million for the year ended December 31, 1996 due to the lower Intracompany Premium for crude oil sold to the Refinery for the year ended December 31, 1997 as compared to the Intracompany Premium for the same period in 1996. The amount paid by the Partnership above posting for such crude oil also increased for the year ended December 31, 1997. Depreciation expense for the Crude Gathering System decreased to $1.9 million for the year ended December 31, 1997 from $2.0 million for the year ended December 31, 1996. Operating income, excluding depreciation, for the Crude Gathering System decreased to $4.3 million for the year ended December 31, 1997 from $10.9 million for the year ended December 31, 1996. Due to the elimination of several marginal contracts, the volume of crude oil gathered by the Crude Gathering System decreased to 51,305 BPD for the year ended December 31, 1997 from 58,775 BPD for the year ended December 31, 1996. For the year ended December 31, 1997, net margin decreased to $0.13 per barrel from $0.42 per barrel for the year ended December 31, 1996 resulting from the lower Intracompany Premium and the higher acquisition cost above posting for crude oil during the year ended December 31, 1997. 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, inventory prices, and, with respect to certain products, seasonality and weather. The Managing General Partner expects that such conditions will continue to affect the Partnership's business to varying degrees in the future. The order in which these factors are discussed is not intended to represent their relative significance. Environmental Compliance. Increasing public and governmental concern about air quality is expected to result in continued regulation of air emissions. Regulations relating to carbon monoxide and regulations on oxygen content in gasoline and sulfur content in both diesel fuel and gasoline are expected to be increasingly important in urban areas. See "Business and Properties -- Environmental Matters." In addition, the Partnership plans to spend approximately $540,000 in 1999 and 2000 on several projects to maintain compliance with various other environmental requirements including $315,000 related to an investigative study by the Texas Natural Resource Conservation Commission. The remaining $225,000 is for various normal operating expenses to be incurred in the ordinary course of business. The Partnership is currently involved in Phase II of an investigative study by the Texas Natural Resource Conservation Commission. Management estimates the cost to comply with this study approximates $315,000 and has accrued for this amount at December 31, 1998. 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. Other Regulatory Requirements. The Partnership is subject to the rules and regulations of, among others, the Occupational Safety and Health Administration, Texas Railroad Commission, Texas Natural Resource Conservation Commission, and United States Environmental Protection Agency. Industry Trends and Price of Crude Oil. Industry trends and the price of crude oil will continue to affect the Partnership's business. In the last three years, the posting price for WTI crude oil has varied from approximately $8.25 to $25.00 per barrel. The general level of crude oil prices has a significant effect on the margins in the crude gathering business. Margins from the Crude Gathering System are influenced by the level of competition and the price of crude oil. When prices are higher, crude oil can generally be resold at higher margins. Additionally, transportation charges trend upward when higher crude oil prices result in increased exploration and development. Conversely, when oil prices decrease, exploration and development decline and margins on the resale of crude oil as well as transportation charges tend to decrease. Also, margins from the Crude Gathering System are influenced by the prompt NYMEX price of crude oil versus the posted price of crude oil. The Partnership is also impacted by fluctuations in the cost of products purchased from Equilon versus fluctuations in the price realized by the Partnership on the sale of such products and the amount of competition in its markets. Inventory Prices. The Partnership utilizes the last- in/first-out (LIFO) method of determining inventory values. LIFO minimizes the effect of fluctuations in inventory prices on earnings by matching current costs with current revenue. At December 31, 1998, prior to the $1.2 million lower of cost or market adjustment, petroleum inventories valued using the LIFO method were more than current cost determined using the FIFO method by $2.5 million and at December 31, 1997 were less than current costs using the FIFO method by $2.8 million. During 1998, the Partnership recorded a $1.2 million lower of cost or market inventory adjustment since the value of the crude oil owned by the Partnership was less than its LIFO value. 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 Partnership has entered into five exchange agreements and three sales agreements with major oil companies in the Abilene, San Angelo and Aledo markets. These exchange agreements have allowed Pride to expand into Amarillo, Texas, El Paso, Texas, Lubbock, Texas, Midland/Odessa, Texas, and Wichita Falls, Texas without incurring transportation costs to these cities. The United States Government awarded the Partnership the right to supply 25,250,000 gallons of military aviation fuel for the contract period that begins April 1, 1999 and ends March 31, 2000. The award is for deliveries to Dyess, AASF in Dallas, Texas, Joint Reserve - Fort Worth, Texas, and E-Systems in Greenville, Texas. The contract is for approximately 48% of the volumes under the prior contract. Margins under the new contract will be 1.5 cents per gallon lower than the prior contract. See "Business and Properties - Partnership Operations and Products." PAGE Financial Condition Inflation Although the Partnership's operating costs are generally impacted by inflation, the Managing General Partner does not expect general inflationary trends to have a material adverse impact on the Partnership's operations. Financial Resources and Liquidity 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 and by the 20th of the following month in the case of third-party crude oil sales and exchanges. The Partnership maintains crude inventory of approximately 10 to 15 days of sales. Effective on the close of business on September 30, 1998 and extending to December 31, 1999, Equilon maintains the refined products inventory on hand at the Partnership's marketing facilities. As a result, the Partnership purchases product inventory daily from Equilon, thereby eliminating most of the carrying costs, including interest costs. Further, this arrangement substantially reduces the lag between the time the Partnership must pay Equilon for the product, 10 days after the sale, and the time the Partnership receives payment from its customers. The Crude Gathering System generally pays for crude oil on the 20th of the month following the month in which it is received and also can experience a minor lag between the time it pays for and receives payment for crude oil transactions. Letters of credit are an integral part of the operations of the Crude Gathering System since the Partnership takes title to both first purchased barrels and custom gathered barrels. On December 31, 1997, Varde purchased and assumed the then existing lenders' rights and obligations under the Partnership's outstanding bank debt. In conjunction with Varde's purchase and assumption of the lenders' rights and obligations under such bank debt, BankBoston, N.A. ("BankBoston") refinanced the Partnership's letter of credit facility and provided a new revolver facility (the "BankBoston Revolver") on December 31, 1997. The BankBoston Revolver provides for the issuance of letters of credit to third parties to support the Partnership's purchase or exchange of crude oil and petroleum products and $10.0 million for direct cash borrowings for general working capital purposes. Amounts available under the BankBoston Revolver are subject to a borrowing base calculated as the sum of the Partnership's cash and cash equivalents, certain receivables, deposits, inventory and other amounts, reduced by a portion of crude oil royalties payable and certain other payables for crude oil and refined products. The amount available under the borrowing base net of outstanding letters of credit and advances under the BankBoston Revolver was $1.2 million as of December 31, 1998. As of April 15, 1999, BankBoston has agreed to amend the facility which will expire January 2, 2001. The total credit line available has been lowered from $65.0 million to $55.0 million. Though no advances had been drawn under the letter of credit facility at December 31, 1998, the Partnership did have approximately $33.4 million in outstanding letters of credit. The Partnership had $45,000 outstanding under the BankBoston Revolver for direct cash borrowings as of December 31, 1998 and has classified it in the current portion of long-term debt. The fee on outstanding letters of credit was 2.5% per annum as of December 31, 1998. There is also an issuance fee of 0.125% per annum on the face amount of each letter of credit. The fee for the unused portion of the BankBoston Revolver is 0.5% per annum. Under the terms agreed to by the parties, cash borrowings under the BankBoston Revolver will bear interest at prime plus 1.75%. The prime rate was 7.75% at December 31, 1998. The credit agreement evidencing the BankBoston Revolver also requires the Partnership to pay an agency fee of up to $70,000 per annum depending on the number of participants in the credit facility and restricts the payment of distributions to unitholders throughout the term of the credit agreement. BankBoston charged a $75,000 amendment fee related to an amendment that became effective April 15, 1998 and will be paid $100,000 for the revisions agreed to in April 1999. As a result of Varde's assumption of the outstanding bank debt, additional loans to the Partnership and subsequent interest being paid in kind, Varde now holds a term loan of $20.0 million ("A Term Loan"), a term loan of $10.1 million ("B Term Loan"), a term loan of $5.0 million ("C Term Loan") and an unsecured note of $2.7 million ("Subordinate Note A") as of December 31, 1998. Varde has also agreed to certain revisions to the credit agreement effective April 15, 1999. In 1999, cash interest payments on the Varde Revolver (see below), A Term Loan, B Term Loan, C Term Loan, Subordinate Note A and Varde's preferred securities are limited to $208,000 per month. Any excess will be paid in kind or accumulate in arrears. The A Term Loan, B Term Loan, and C Term Loan bear interest rates of 11%, 13%, 15%, 17% and 18% for the first, second, third, fourth and fifth years, respectively except for $3.6 million of the B Term Loan which is subject to interest rates of 18% through maturity. In addition, if the A Term Loan is repaid or refinanced, the B Term Loan and C Term Loan bear interest at 11% the first three years, 13% in the fourth year and 15% in the fifth year, except for $3.6 million of the B Term Loan which is subject to interest rates of 12% through maturity. The Subordinate Note A is convertible into 436,000 Common Units and bears interest at prime plus one percent. As consideration for the terms agreed to April 15, 1999, the principal amount of the B Term Loan will be increased by $100,000. Since a portion of the debt is subject to increasing rates of interest, the Partnership is accruing interest at the effective rate over the term of the debt. Interest expense in 1998 reflects an accrual of $1,030,000 which is based on the difference between the effective interest rates and the stated rates. In addition, the Partnership maintains a revolving credit facility with Varde ("Varde Revolver"). The original commitment was $2.0 million for the period April 15, 1998 through November 19, 1998 and was increased to $3.5 million for the period from November 20, 1998 through January 1, 1999. On January 1, 1999, the line was reduced to the original $2.0 million commitment. On April 15, 1999, Varde agreed to increase the commitment to $3.0 million. Advances under the Varde Revolver bear interest at 11% per annum, payable monthly. In the second quarter of 1998, the Partnership paid Varde in the form of additional Series B Term Loans fees totaling $150,000. Cash advances under the Varde Revolver mature January 2, 2001. Under the terms agreed to on April 15, 1999, payments to Varde are capped at $2.5 million per annum. To the extent the interest and distributions on the various Varde securities exceed the cap on cash payments, the excess will be paid in kind or increase accumulated arrearages, respectively. As a result of the cash cap, it is likely that all interest on the B Term Loan, C Term Loan and Subordinate Note A will be paid in kind and all preferred distributions will accumulate in arrears until such time as the Partnership can restructure its capital structure. The A Term Loan is due December 31, 2002. The B Term Loan, C Term Loan and Subordinate Note A are also due December 31, 2002 unless the A Term Loan has been refinanced. If the A Term Loan is refinanced, the B Term Loan, C Term Loan and Subordinate Note A mature 180 days after the maturity of the new term loan, but no later than June 30, 2003. The Partnership is required to make quarterly principal payments on the A Term Loan as set forth in the Varde credit agreement as well as make payments of excess cash flow for the preceding year. However, Varde has agreed to forego all principal payments in 1998 and 1999. The Partnership will not have to make principal payments prior to the scheduled maturity on the B Term Loan, C Term Loan and Subordinate Note A except in the case the Partnership receives litigation proceeds related to the DESC Claim and certain other transactions including asset sales. See "Legal Proceedings." During the year ended December 31, 1998, the Partnership had drawn up to approximately $9.8 million and $3.5 million on the BankBoston Revolver and Varde Revolver, respectively. The weighted average amount outstanding under the BankBoston Revolver and Varde Revolver was approximately $1.7 million and $739,000, respectively. The weighted average interest rate during the 1998 period for the BankBoston Revolver was approximately 10.2%. The Varde Revolver accrues interest at the rate of 11.0% per annum. During the year ended December 31, 1997, the Partnership had drawn up to approximately $8.5 million on the prior revolving facilities (collectively, the "Prior Revolvers"). The weighted average amount outstanding under the Prior Revolvers was approximately $3.8 million. The weighted average interest rate during the 1997 period for these facilities was approximately 10.0%. The Partnership or management has a three-year call on Varde's position for an amount equal to a 40% annual return to Varde, subject to a minimum payment of $7.5 million over Varde's cost. The securities held by Varde have certain antidilution provisions and registration rights. Any litigation proceeds received by the Partnership related to the DESC Claim will be used to retire up to $6.0 million of the A Term Loan, if then outstanding, and up to $5.0 million of the B Term Loan with any excess divided one-third to Varde to be used to retire Varde's most senior securities and two-thirds to the Partnership. On December 31, 1997, certain members of management invested an aggregate of $2.0 million in the form of a note payable to Varde and received a one-third economic non-directive interest in $6.0 million of the B Term Loan, C Term Loan, Subordinate Note A, Series B Cumulative Convertible Preferred Units (" Series B Preferred Units"), Series C Cumulative Convertible Preferred Units (" Series C Preferred Units") and Series D Cumulative Convertible Preferred Units ("Series D Preferred Units"). The note payable to Varde is secured by management's interest in such securities. Any cash yield on management's share of such securities is paid to Varde as interest, net of applicable federal income tax. Other installment loans include a $6.0 million nonrecourse note, due 2014, payable monthly with interest at 8% and a balance of $5.5 million at December 31, 1998. The note is supported by a minimum throughput agreement. The assets of Pride Borger, Inc., a wholly-owned subsidiary of the Partnership, are pledged as collateral. Monthly principal payments are based on the number of throughput barrels. The Partnership has classified $172,000 as current at December 31, 1998. As of April 15, 1999, the Partnership amended the terms of its Partnership Agreement and preferred equity securities retroactively to January 1, 1998. As a result of this amendment, the amounts previously reported in the 1998 interim quarterly balance sheets as distributions paid in kind are now treated as accumulated arrearages. This reduced the amount of preferred equity on the balance sheet at December 31, 1998 and also affects the tax treatment of the distributions to the partners and holders of the preferred securities. On December 31, 1997, Pride SGP converted (i) a $2.0 million note from the Partnership into Series E Cumulative Convertible Preferred Units ("Series E Preferred Units") which is convertible into 317,000 Common Units and (ii) a $450,000 note from the Partnership into Series F Cumulative Preferred Units ("Series F Preferred Units") which are both redeemable on December 31, 2002. The Series E Preferred Units and Series F Preferred Units are subordinated to the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units. The preferential quarterly payments on the Series E Preferred Units and Series F Preferred Units are 6% per annum in the first three years after issuance, 12% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 8% per annum in the first three years. Distributions are payable on the 5th day of the second month in each quarter; however, the Partnership may not make any cash distributions on the Series E Preferred Units or Series F Preferred Units if the Series B Preferred Units, Series C Preferred Units or Series D Preferred Units have accumulated arrearages outstanding. Accordingly, at December 31, 1998, the Partnership accumulated arrearages of $195,000 on the Series E Preferred Units and Series F Preferred Units. Management believes the amount in arrears will continue to increase until such time as the Partnership can restructure its capital structure. In conjunction with Varde's assumption of the outstanding bank debt, Varde received preferred equity securities. As a result of the assumption, Varde now holds preferred equity securities including $9.3 million of Series B Preferred Units, $5.0 million of Series C Preferred Units and $2.8 million of Series D Preferred Units which are all redeemable on December 31, 2002. The Series B Preferred Units and Series C Preferred Units are convertible into 1,480,000 and 794,000 Common Units, respectively. The preferential quarterly payments on the Series B Preferred Units and Series C Preferred Units are 6% per annum in the first three years after issuance, 12% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 8% per annum in the first three years. The preferential quarterly payments on the Series D Preferred Units are 11% per annum in the first three years after issuance, 13% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 13% per annum in the first three years. Distributions are payable on the 5th day of the second month in each quarter. Accordingly, the Partnership accumulated arrearages of $1.6 million at December 31, 1998 on these preferred equity securities. Management believes the amount in arrears will continue to increase until such time as the Partnership can restructure its capital structure. As previously mentioned, the cash interest and distribution payments on the debt and preferred equity held by Varde are limited to $2.5 million annually. Any payments of principal on the securities held by Varde shall be applied in the following order: Varde Revolver, A Term Loan, B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units. Cash flows have been and will continue to be significantly affected by fluctuations in the cost and volume of crude oil and refined products held in inventory and the timing of accounts receivable collections. For the year ended December 31, 1998, cash was provided by a decrease in accounts receivable (resulting from lower crude oil prices and refined product prices and lower sales due to mothballing the Refinery) and a decrease in inventories (resulting from Equilon taking title to the refined products). This was partially offset by a decrease in accounts payable (resulting from the lower crude oil prices). For the year ended December 31, 1997, cash was provided by a decrease in accounts receivable (resulting from lower crude oil prices and refined product prices) and a decrease in inventories (resulting from lower inventory levels). This was partially offset by a decrease in accounts payable (resulting from lower crude oil prices). The Partnership has not historically complied with its financial and performance covenants included in its various credit facilities with lenders. At December 31, 1998, the Partnership was not in compliance with certain financial covenants contained in the various credit agreements; however, waivers have been obtained. Based on the revised terms, as of April 15, 1999, agreed to by the principal creditors, management now believes the Partnership can maintain compliance with the covenants through December 31, 1999. The Partnership's operating results have declined as a result of increasing competition, depressed operating margins and higher financing costs. Crude gathering volumes have declined in each of the last five years. Gasoline, diesel and military aviation fuel sales have also declined. Excluding the $41.4 million in costs associated with ceasing refining operations, the loss for December 31, 1998 increased to $8.6 million from $3.6 million for the same period in 1997 as a result of increased interest and credit and loan fees and weaker results in 1998 for the Products Marketing Business and Crude Gathering System compared to the Refinery and Crude Gathering System in 1997. Under the new military aviation fuel contract with the U. S. Government which begins April 1, 1999 and ends March 31, 2000, the Partnership will supply approximately 48% of the volumes that it supplied under the contract which began April 1, 1998 and ends March 31, 1999. Margins under the new contract will be 1.5 cents per gallon lower than the prior contract. Declines in crude oil and refined product prices have had a negative impact on the borrowing base under the Partnership's credit agreement as well as working capital. Further declines could have a material adverse effect on the Partnership. The losses and capital expenditures incurred in the third and fourth quarter of 1998 were funded by additional borrowing which became available under the Varde Revolver and the sale of the diesel desulfurization unit for $3.1 million in December 1998. Product sales for April 1998 through June 1998 were below management's budgeted sales due to startup problems experienced by Equilon with its new products pipeline. As a result, delivery and corresponding sales of gasoline, diesel and military aviation fuel were substantially below expectations. Throughout the second quarter of 1998, the Partnership was unable to deliver contractual volumes, particularly to the government. The Partnership is currently delivering to the government contractual volumes and gasoline and diesel sales have also increased from the second quarter of 1998. Equilon performed an extensive pipeline cleaning operation and the situation has improved. However, there can be no assurance that further problems will not be encountered. As a result of the problems associated with the startup of the pipeline, Equilon has agreed to certain contract concessions. On October 1, 1998 the Partnership sold to Equilon the refined products held by it at the Products Terminals and in the San Angelo Pipeline. In addition, Equilon is leasing certain tankage from the Partnership and will sell refined products to the Partnership daily from such facilities through December 31, 1999, thus eliminating the need for the Partnership to maintain its own refined products inventory. On April 15, 1999, Equilon further agreed to extend the lease and maintain the inventory after December 31, 1999 provided the Partnership reimburses Equilon for its carrying costs beginning January 1, 2000. The Partnership's ability to generate profits is principally dependent upon increased volumes and/or improved profit margins, as well as continued cost control initiatives. Since 1993, the Partnership has been able to achieve continuous reductions in marketing, general and administrative expenses. The ability to generate profits could be adversely affected if other Gulf Coast refiners bring refined products into West Texas from the Gulf Coast via pipeline or significant declines in crude oil and petroleum prices occur. Though management has and will continue to pursue options regarding increasing volumes and margins and reducing costs, including limiting any significant capital expenditures, these improvements, if achieved, will be gradual and, in many cases, will take sustained periods of time to implement in order to achieve profitability. As a result, the Partnership has engaged an investment advisor to assist the Partnership in considering and analyzing various potential business opportunities involving the Crude Gathering System, including possible strategic alliances and joint ventures and a possible sale of the Crude Gathering System. Although the Partnership has been and continues to be in discussions with various third parties regarding possible transactions, the Partnership (as of April 15, 1999) has not entered into any binding agreement involving a business combination or sale involving the Crude Gathering System and is unable to predict the certainty of entering into or consummating any such transaction. As previously mentioned, the Partnership sold the diesel desulfurization unit for $3.1 million in December 1998. This sale resulted in a tax loss which was allocated to unitholders. Future sales could result in taxable income which likewise would be allocated to the unitholders without a corresponding cash distribution from the Partnership. If a unitholder's passive loss carryforwards are less than the unitholders share of such income, the unitholder will have to satisfy any resulting liability with cash from other sources. The Partnership's credit agreement restricts the payment of distributions through maturity. The Partnership was delisted from trading on the New York Stock Exchange effective August 17, 1998 for failing to meet certain listing requirements. The Partnership is now listed on the NASDAQ OTC bulletin board under the symbol PRDE. Capital Expenditures Capital expenditures totaled $1.5 million for the year ended December 31, 1998 compared to $2.1 million for the year ended December 31, 1997. Included in capital expenditures for the year ended December 31, 1998 was $675,000 and $222,000 for the reactivation of a crude oil pipeline and for the conversion to new accounting software, respectively. Management anticipates spending $315,000 in 1999 for environmental expenditures which are fully accrued for at December 31, 1998 and capital expenditures for 1999 are budgeted at $1.0 million. Year 2000 Compliance The year 2000 issue ("Year 2000 Issue") is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Partnership's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Partnership determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Partnership presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Partnership. The Partnership's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Partnership has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicated that most of the Partnership's significant information technology systems could be affected, particularly the general ledger, billing, and inventory systems. That assessment also indicated that software and hardware (embedded chips) used in monitoring the Partnership's pipelines and terminals are also at risk. The Partnership does not believe that the Year 2000 presents a material exposure as it relates to the Partnership's products, but there can be no assurances that the Partnership will not have unexpected problems or incur unexpected costs. In addition, the Partnership has gathered information about the Year 2000 compliance status of its significant suppliers and subcontractors and continues to monitor their compliance. For its information technology exposures, to date the Partnership is 90% complete on the remediation phase and expects to complete software reprogramming and replacement in the second quarter of 1999. Once software is reprogrammed or replaced for a system, the Partnership begins testing and implementation. These phases run concurrently for different systems. To date, the Partnership has completed 70% of its testing and has implemented 75% of its remediated systems. Completion of the testing phase for all significant systems is expected by September 30, 1999. There can be no assurances that the Partnership will complete implementation of its Year 2000 plan prior to year-end and contingency plans have not yet been developed. The Partnership has queried its significant suppliers and subcontractors that do not share information systems with the Partnership ("External Agents"). To date, the Partnership is not aware of any External Agent with a Year 2000 Issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that External Agents will be Year 2000 ready. The inability of External Agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Partnership. The effect of non-compliance by External Agents is not determinable. The Partnership expects to spend $837,000 related to the Year 2000 Issue. As of December 31, 1998, the Partnership had spent $545,000 on the Year 2000 Issue with the remainder scheduled to be incurred in 1999. Substantially all of the $837,000 is for newly purchased software or hardware with new features and enhancements in addition to being Year 2000 compliant. Accordingly, substantially all of the costs have been or will be capitalized. There is no guarantee that the Partnership will succeed in implementing its Year 2000 Plan. If the Partnership's replaced technology system fails the testing phase, delays in billing and/or collection could occur. If the computer systems of third party vendors that the Partnership exchanges data with fail, significant problems could occur in billing and/or collection. Although the Partnership doesn't yet have a formal contingency plan in place, one will be developed based on the outcome of the testing phase, which should be complete by the third quarter of 1999. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Partnership had petroleum inventory valued in the financial statements at December 31, 1998 of $6.9 million. The fair market value of such inventories are subject to market risks based on price changes in the commodities market. The Partnership generally does not hedge these market risks. The Partnership's debt is also subject to market risks based on changes in the prime rate. The Partnership does not hedge this market risk either. Approximate debt maturities for the next five years and applicable interest rates are as follows: (This page should be printed on 14" x 8.5" paper)
1999 2000 2001 ------------------ ----------------- ----------------- Amount Rate Amount Rate Amount Rate ----------- ---- ---------- ---- ---------- ---- Revolver (LIBOR+3% or Prime+1.75%) $ 45,110 - $ - - $ - - Varde Revolver - 11% - 11% 1,375,242 11% A Term Loan - 13% 5,412,792 15% 3,418,604 17% B Term Loan - 13% - 15% - 17% C Term Loan - 13% - 15% - 17% Subordinate Note A (Prime+1%) - - - - - - Other Installment Loans (8% to 9%) 192,347 - 490,965 - 172,365 - ---------- ---------- ---------- $ 237,457 $5,903,757 $4,966,211 ========== ========== ========== 2002 2003 Thereafter ------------------ ----------------- ----------------- Amount Rate Amount Rate Amount Rate Total ----------- ---- ---------- ---- ---------- ---- ----------- Revolver (LIBOR+3% or Prime+1.75%) $ - - $ - - $ - - $ 45,110 Varde Revolver - - - - - - 1,375,242 A Term Loan 11,168,604 18% - - - - 20,000,000 B Term Loan 10,111,337 18% - - - - 10,111,337 C Term Loan 4,978,874 18% - - - - 4,978,874 Subordinate Note A (Prime+1%) 2,744,851 - - - - - 2,744,851 Other Installment Loans (8% to 9%) 172,365 - 172,365 - 4,640,329 - 5,840,736 ----------- ---------- ---------- ----------- $29,176,031 $ 172,365 $4,640,329 $45,096,150 =========== ========== ========== ===========
Given the financial condition of the Partnership as discussed in Note 1 of Notes to Financial Statements, and because quoted prices are not readily obtainable, management believes it is not practicable to estimate the fair value of its debt and credit facilities. Item 8. Financial Statements and Supplementary Data The financial statements of the Partnership, together with the report thereon of Ernst & Young LLP, appear on pages F-2 through F-18 of this report. See the Index to Financial Statements on page F-1 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PAGE 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, 1998 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 70 Chairman of the Board Brad Stephens 48 Chief Executive Officer, Treasurer, and Director D. Wayne Malone 55 President, Chief Operating Officer and Director Douglas Y. Bech 53 Director Clark Johnson 53 Director Robert Rice 76 Director Craig Sincock 46 Director Dave Caddell 49 Vice President and General Counsel George Percival 39 Chief Financial Officer Judy Sharrow 39 Secretary 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 1997, 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 efax.com, Inc. 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 Frontier Refining and Marketing, Inc., a refining and marketing company which is a subsidiary of Frontier Oil Corporation. He also serves as Senior Vice President of Frontier Oil. Prior to those positions, he held the positions of 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 and corporate director. He is a director of First Olsen Tankers, Ltd., ATCO Ltd., and Hvide Marine Incorporated. 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 practioner 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). Judy Sharrow. Ms. Sharrow has served as Secretary of the Managing General Partner since October 1992. In addition, she is Manager of Investor Relations for the Partnership. Ms. Sharrow has been associated with the Predecessor Companies since 1983. 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, 1998, 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. Effective December 31, 1996, the special participation interest of the Special General Partner and the incentive interests of the Managing General Partner were eliminated as a result of the adoption of the Second Amended and Restated Agreement of Limited Partnership. For the year ended December 31, 1998, the Special General Partner did not receive any distributions in respect of the Common Units. The Partnership reimburses the General Partners for all their direct and indirect costs (including general and administrative costs) allocable to the Partnership. See "Certain Relationships and Related Transactions." (b) Summary Officers' Compensation Table. The following table sets forth certain compensation paid during fiscal 1998, 1997 and 1996 by the Partnership to the executive officers of the Managing General Partner: PAGE (The following table should be printed on 11" x 8.5" paper) SUMMARY COMPENSATION TABLE
Long-Term Compensation ------------ Securities Underlying Options/ All Other Year Salary Bonus UARs Compensation ---- -------- ------- ------------ ------------ Brad Stephens 1998 $225,000 $12,500 - $ 7,300 Chief Executive Officer 1997 225,000 - - 8,800 1996 225,000 - 56,000 8,500 D. Wayne Malone 1998 225,000 12,500 - 7,200 Chief Operating Officer 1997 225,000 - - 8,900 1996 225,000 - 56,000 8,500 Dave Caddell 1998 165,000 10,000 - 7,200 Vice President/General 1997 165,000 - - 7,300 Counsel 1996 165,000 - 32,000 7,300 George Percival 1998 115,000 20,000 - 4,900 Chief Financial Officer 1997 100,000 - - 4,000 1996 100,000 20,000 16,000 4,200 The Partnership implemented a Unit Appreciation Rights Plan under which certain key employees of the Partnership received unit appreciation rights ("UARs"). This column represents the number of UARs granted to each of the officers listed in the table. See "-(c) Benefit Plans - Unit Appreciation Rights." Effective December 31, 1997, the number of UARs previously granted to the officers was reduced retroactive to December 31, 1996. In this column is the Partnership's contribution to the Section 401(k) Plan for each officer and reimbursement of income taxes on certain perquisites. See "- Benefit Plans - Section 401(k) Plan" below.
PAGE (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 and middle managers employed by the Partnership through an Annual Incentive Plan. The Plan 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 $8 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 $8 million, plus 12% of the next $4 million of Cash Flow, plus 15% of any Cash Flow in excess of $14 million. The bonus pool for middle managers consists of up to 4% of Cash Flow, provided that Cash Flow exceeds $8 million. Unit Appreciation Rights. During 1996, the Partnership implemented a Unit Appreciation Rights Plan for officers and key employees. Under the plan, individual employees can be granted UARs whereby the holder of the UARs entitled to receive in cash or in Common Units the increase, if any, between the exercise price, as determined by the board of directors of the Managing General Partner at the date of grant, and the fair market value on the exercise date. The employees awarded and the number of UARs awarded to the employees are subject to the discretion of the board of directors of the Managing General Partner. The term of all awards is for ten years from the grant date. It is anticipated that UARs aggregating approximately 10% of the total units will be reserved for issuance to key employees. However, no Common Units are expected to be issued under this plan. On December 9, 1996, four officers and twelve employees were awarded a total of 292,760 UARs at an exercise price of $3.75 per unit. Since the fair market value of the UARs did not exceed the exercise price at December 9, 1996, no compensation expense was accrued. Effective December 31, 1997, the number of UARs was increased to 299,996, reallocated among four officers and eleven employees, and the exercise price was reduced to $1.94 per unit. The UARs were fully vested on December 31, 1998; however, none were exercised. A one-time award of 70,000 UARs was made in 1996 to five non-employee directors at an exercise price of $3.75 which were fully vested on December 31, 1997. Effective December 31, 1997, the exercise price was amended and reduced to $1.94 per unit. Section 401(k) Plan. The Pride Employees' 401(k) Retirement Plan and Trust ("Plan") is a defined contribution plan covering substantially all full-time employees. Under the Plan, the Partnership must make a mandatory contribution each year equal to 3% of a participant's compensation and may make discretionary matching contributions of up to an additional 3% of a participant's compensation depending on the Partnership's cash flow for such year. The participant's contribution to the plan may not exceed the limitation as outlined under Internal Revenue Code section 402(g). The Partnership's contributions vest over a seven-year period, subject to immediate vesting upon retirement. The Summary Compensation Table above includes amounts contributed to the plan by the Partnership on behalf of the four most highly compensated executive officers in the column titled "All Other Compensation." The Partnership also has in effect, for the benefit of its employees, a Long-term Disability Plan, a Safety Incentive Plan, Accidental Death and Dismemberment Insurance, Life Insurance, Group Hospitalization Insurance, Dental Plan, Cancer Plan, Medical Reimbursement Plan and Dependent Care Plan. (d) Compensation of Directors. The Chairman of the Managing General Partner receives an annual retainer of $42,000, $2,000 for each board meeting attended and is reimbursed for travel and lodging expenses incurred to attend board meetings. Members of the board of directors of the Managing General Partner receive an annual retainer of $12,000, $2,000 for each board meeting attended and are reimbursed for travel and lodging expenses incurred to attend board meetings. Dave Caddell, an advisor to the Board of Directors of the Managing General Partner, receives an annual retainer of $12,000, $2,000 for each board meeting attended and is reimbursed for travel and lodging expenses to attend board meetings. Directors have also received UARs as discussed under Benefit Plans. Item 12. Security Ownership of Certain Beneficial Owners and Management a) Security Ownership of Certain Beneficial Owners as of February 28, 1999. 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 February 28, 1999. Percent of Title of Class Name and Address Amount Class ______________ ________________ ______ _______ Common Units Estate of James B. Stovell 930,000 18.8% Mountain Lake Lake Wales, FL 33859 Common Units Pride SGP, Inc. 250,000 5.1% 1209 North Fourth Street Abilene, TX 79601 Common Units Pride SGP, Inc. 317,000 1209 North Fourth Street Abilene, TX 79601 Common Units Varde Partners, Inc. 2,710,000 3600 West 80th Street Suite 425 Minneapolis, MN 55431 [FN] On December 31, 1997, Pride SGP converted certain indebtedness into Series E Preferred Units which are convertible into 317,000 Common Units. If converted as of December 31, 1998, such 317,000 Common Units would represent 4.0% of the 7,977,000 potentially outstanding Common Units as a result of the conversion of all convertible securities. See "Financial Condition -Financial Resources and Liquidity." In conjunction with Varde's assumption of the outstanding bank debt on December 31, 1997, Varde holds preferred equity securities including $10.0 million of Series B Preferred Units and $5.3 million of Series C Preferred Units which are convertible into 1,480,000 and 794,000 Common Units, respectively. Additionally, Varde purchased and assumed a note from the previous lenders which was converted to the Subordinate Note A and is further convertible into 436,000 Common Units. If all such securities were converted as of December 31, 1998, such 2,710,000 Common Units would represent 34.0% of the 7,977,000 potentially outstanding Common Units as a result of the conversion of all convertible securities. See "Financial Condition - Financial Resources and Liquidity." b) Security Ownership of Management The following table sets forth certain information, as of February 28, 1999, concerning the beneficial ownership of Common Units by each director of the Managing General Partner and by all directors and officers of the Managing General Partner as a group. Percentage of Name Number of Common Units Class ____ ______________________ _____________ E. Peter Corcoran - - Brad Stephens 1,100 D. Wayne Malone 4,135 Douglas Y. Bech 300 Clark Johnson - - Robert Rice 3,000 Craig Sincock - - Dave Caddell 1,000 George Percival - - Judy Sharrow - - ------ ----- All directors and officers as a group 9,535 0.2% (10 persons) [FN] Unless otherwise indicated, the persons named above have sole voting and investment power over the Common Units reported. Each of these directors and officers of the Managing General Partners owned beneficially, as of February 28, 1999, less than 1% of the Common Units outstanding on such date. The foregoing does not include any Common Units which would be obtained by those members of management as a consequence of their purchase of an interest from Varde in the B Term Note, C Term Loan, Subordinate Note A, Series B Preferred Units, Series C Preferred Units and Series D Preferred Units. See "Financial Condition - Financial Resources and Liquidity. Item 13. Certain Relationships and Related Transactions The Partnership is managed by the Managing General Partner pursuant to the Third Amended and Restated Agreement of Limited Partnership of the Partnership. See "Business and Properties - General" and "Executive Compensation - Compensation of the General Partners" for certain information related to compensation and reimbursement of the General Partners. The Special General Partner is beneficially owned approximately 18% by Mr. Schumacher (a past officer and director of the Managing General Partner), 10% by Mr. W.E. Rector (a business partner of Mr. Schumacher), 9% by Mr. Malone, 7% by Mr. Stephens, 5% by Mr. T. M. Broyles (a past officer of the Managing General Partner), 4% by Mr. Corcoran, 2% by Mr. Caddell, 34% by trusts established for the relatives of certain deceased members of management, and 11% by relatives of certain deceased members of management. The Managing General Partner is beneficially owned approximately 39% by Mr. Malone, 39% by Mr. Stephens, 16% by Mr. Caddell, and 6% by Mr. Corcoran. The Partnership has an agreement with Pride SGP to lease defined segments of the Crude Gathering System pipeline until 2000, with an option to extend the lease through March 2013, as long as certain minimum throughput levels are maintained. If such throughput levels are not maintained during the extended term, the lease is cancelable by Pride SGP with ninety days' notice. As consideration for this lease, the Partnership has agreed to perform all routine and emergency maintenance and repair operations to the pipelines. The value of such services is currently estimated to be approximately $300,000 annually. In addition, the Partnership pays the taxes, insurance, and other costs. In conjunction with the refinancing that occurred on December 31, 1997, the lease was amended to reduce the rentals to a maximum of $400,000 annually provided certain debt is outstanding. Prior to December 31, 1997, the Partnership accrued rentals to Pride SGP of $0.20 per barrel for all crude oil transported by the Partnership or third parties with contractual relationships with it, through the 143-mile section from Hearne to Comyn. Rentals accruing to Pride SGP from the Partnership for the years ended December 31, 1998, 1997 and 1996 totaled approximately $400,000, $788,000 and $919,000, respectively, for the lease of the pipeline. For certain periods between August 1995 and December 1997, payments to Pride SGP were suspended pursuant to the terms of an amendment to the then existing credit agreement. Beginning January 1, 1999, rental payments to Pride SGP were suspended again and are not expected to resume in the foreseeable future. Approximately $1,846,000 is included in other long-term liabilities at both December 31, 1998 and December 31, 1997 related to unpaid rentals. The lease agreement with Pride SGP was not entered into on an arm's-length basis. The original rent under the lease was determined based on the revenue generated from an expected throughput of 20,000 BPD. While management is not able to determine whether the terms of the agreement are comparable to those which could have been obtained by unaffiliated parties, management believes such terms are fair and reasonable given the importance to the Partnership of the Hearne to Comyn pipeline segment which, as discussed under "Business and Properties -- Partnership Operations and Products -- Crude Oil Gathering Operations," currently enables the Partnership to gather and transport a greater supply of high quality crude oil for sale to other refiners. In addition, management believes the value of the leased segment of the Comyn System has increased with the development of the Austin Chalk formation in South Central Texas and the increasing need for crude oil transportation in that area. For the year ended December 31, 1998, the Partnership transported 9,729 BPD of high quality crude oil from the eastern portion of the Austin Chalk formation through this pipeline. The Partnership has the option to purchase these pipeline segments for $10 million. During the period from January 1, 1996 through July 19, 1996, the Partnership sold $3.8 million of refined product to Dunigan Fuels. Mike Dunigan was a minority shareholder of Dunigan Fuels and is also a beneficiary of two trusts that own stock in Pride SGP. On July 19, 1996, Dunigan Fuels was sold to a third party; therefore, Dunigan Fuels is no longer considered to be a related party to the Partnership. The Partnership utilizes a plane from time to time, as needed, on a per hour market rate basis from an entity controlled by Messrs. Malone and Stephens, officers of the Managing General Partner. Payments to this entity totaled $70,000, $83,000 and $62,000 during 1998, 1997 and 1996, respectively. The Partnership leases property from a relative of Mr. Stephens. Lease payments related to this property were approximately $40,000, $38,000 and $36,000 in 1998, 1997 and 1996, respectively. Firms associated with Mr. Bech, a current director of the Managing General Partner, were paid $55,000 and $208,000 for legal services during 1997 and 1996, respectively. Pride SGP made two unsecured loans to the Partnership on March 26, 1993 and September 7, 1995 in the aggregate principal amount of $2.5 million and required the Partnership to pay interest only during the term of such loans. The loans were used to fund working capital. Beginning in the latter part of 1995, the Partnership ceased making interest payments on the loans to Pride SGP in accordance with an amendment to the then existing credit agreement. Accrued interest payable at both December 31, 1998 and 1997 was $548,000. On December 31, 1997, the two unsecured loans were converted into the Series E Preferred Units of $2.0 million and the Series F Preferred Units of $450,000. For the year ended December 31, 1998, the Partnership had accumulated arrearages of $195,000 on the Series E Preferred Units and Series F Preferred Units. The Series E Preferred Units are convertible into 317,000 Common Units. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Financial Resources and Liquidity." On December 31, 1997, certain members of management invested an aggregate of $2.0 million in the form of a note payable to Varde and received a one-third economic non-directive interest in $6.0 million of the B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred Units, Series C Preferred Units and Series D Preferred Units. The note payable to Varde is secured by management's interest in such securities. Any cash yield on management's share of such securities is paid to Varde as interest, net of applicable federal income tax. Varde and management of the Managing General Partner have the right to receive a total of up to 34.0% of the Partnership's Common Units, through the conversion of redeemable preferred equity and convertible debt as described in the Partnership's 1996 consent solicitation. See "Management's Discussion and Analysis of Operations and Financial Condition - Financial Resources and Liquidity." PAGE PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this Report: (1) Financial Statements and (2) Financial Statement Schedules: See Index to Financial Statements on page F-1 for financial statements and financial statement schedules filed as a part of this Report. (3) Exhibits: See Index to Exhibits on page E-1 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, 1998: None. 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, 1999 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, 1999 /s/Brad Stephens Chief Executive Officer, March 31, 1999 Treasurer, and Director /s/D. Wayne Malone President, Chief Operating March 31, 1999 Officer, and Director /s/Douglas Y. Bech Director March 31, 1999 /s/Clark Johnson Director March 31, 1999 /s/Robert Rice Director March 31, 1999 /s/Craig Sincock Director March 31, 1999 /s/Dave Caddell Vice President and March 31, 1999 General Counsel /s/George Percival Chief Financial Officer March 31, 1999 (Principal Financial Officer) /s/Judy Sharrow Secretary March 31, 1999 /s/Bob Lee Controller (Principal March 31, 1999 Accounting Officer) PAGE INDEX TO FINANCIAL STATEMENTS Report of Ernst and Young LLP, Independent Auditors Balance Sheets at December 31, 1998 and 1997 Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Statements of Changes in Partners' Capital(Deficiency) for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements All schedules are omitted because they are not applicable or the required information is shown elsewhere in this report. PAGE REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors of the Managing General Partner We have audited the accompanying balance sheets of Pride Companies, L.P. as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital (deficiency), and cash flows for each of the three years in the period ended December 31, 1998. 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 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. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Fort Worth, Texas February 12, 1999, except for Notes 1, 4 and 8, as to which the date is April 15, 1999 BALANCE SHEETS PRIDE COMPANIES, L.P. At December 31, 1998 and 1997 (In thousands, except unit amounts)
1998 1997 ____ ____ ASSETS CURRENT ASSETS Cash and cash equivalents--Note 1 $ 2,592 $ 5,008 Accounts receivable, less allowance for doubtful accounts of $99 and $59, respectively--Note 6 10,052 14,543 Inventories--Notes 1 and 2 7,582 13,036 Prepaid expenses 704 780 -------- ------- TOTAL CURRENT ASSETS 20,930 33,367 PROPERTY, PLANT AND EQUIPMENT, net--Note 3 45,534 47,588 ASSETS NO LONGER USED IN THE BUSINESS--Note 3 4,301 7,353 DEFERRED FINANCING COSTS--Note 1 5,307 6,570 OTHER ASSETS 390 403 -------- ------- $ 76,462 $95,281 ======== ======= LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) CURRENT LIABILITIES Accounts payable $ 16,573 $26,670 Accrued payroll and related benefits--Note 1 903 1,870 Accrued taxes 2,972 3,323 Other accrued liabilities--Note 1 924 2,811 Current portion long-term debt--Note 4 237 2,084 -------- ------- TOTAL CURRENT LIABILITIES 21,609 36,758 LONG-TERM DEBT--Note 4 44,859 41,087 DEFERRED INCOME TAXES--Note 1 2,295 2,405 OTHER LONG-TERM LIABILITIES--Note 1 12,160 10,935 COMMITMENTS AND CONTINGENCIES--Note 5 REDEEMABLE PREFERRED EQUITY, including $2,450 at December 31, 1998 and 1997 to the special general partner --Notes 7 and 8 19,529 19,529 PARTNERS' CAPITAL (DEFICIENCY) Common Units (5,275,000 units authorized and 4,950,000 units outstanding)--Notes 4 and 9 (23,042) (14,656) General partners' interest (948) (777) -------- -------- $ 76,462 $ 95,281 ======== ======== See accompanying notes. /TABLE STATEMENTS OF OPERATIONS PRIDE COMPANIES, L.P. Years ended December 31, 1998, 1997 and 1996 (In thousands, except per unit amounts)
1998 1997 1996 ____ ____ ____ Revenues--Note 6: Refinery and Products Marketing Business $ 121,189 $ 277,179 $294,328 Crude Gathering System 300,566 494,155 597,425 Intrasystem and other (41,128) (236,437) (276,550) -------- -------- -------- 380,627 534,897 615,203 Cost of sales and operating expenses, excluding depreciation--Note 7 369,280 516,145 596,841 Refinery closure costs--Note 1 - 41,396 - Marketing, general and administrative expenses--Note 7 8,001 8,955 10,111 Depreciation 3,438 6,872 6,976 -------- -------- -------- OPERATING INCOME (LOSS) (92) (38,471) 1,275 Other income (expense): Interest expense (including interest paid in kind of $1,344 and increasing rate accrued interest of $1,030 in 1998) (6,144) (5,316) (5,808) Credit and loan fees (including amortization of $1,323 and credit and loan fees paid in kind of $150 in 1998) (2,753) (1,952) (2,109) Other - net 346 564 179 -------- -------- -------- (8,551) (6,704) (7,738) -------- -------- -------- LOSS BEFORE INCOME TAXES (8,643) (45,175) (6,463) Income tax benefit 86 144 48 -------- -------- -------- NET LOSS $ (8,557) $ (45,031) $ (6,415) ======== ======== ======== Before Conversion--Note 9: Basic and diluted net loss per Unit: Preferred Unit - - $ (0.63) Old Common Unit - - (0.63) After Conversion--Note 9: Basic and diluted net loss per Common Unit $ (2.04) $ (8.92) $ (1.27) Numerator: Net loss $ (8,557) $ (45,031) $ (6,415) Preferred distributions in arrears (1,763) - - -------- -------- -------- Net loss less preferred distributions (10,320) (45,031) (6,415) Less net loss allocable to 2% general partner interest 206 901 128 -------- -------- -------- Numerator for basic and diluted earnings per unit $ (10,114) $ (44,130) $ (6,287) ======== ======== ======== Denominator: Denominator for basic and diluted earnings per unit before conversion: Preferred Units - - 4,700 Old Common Units - - 5,250 Denominator for basic and diluted earnings per unit after conversion: Common Units 4,950 4,950 4,950 See accompanying notes. /TABLE STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIENCY) PRIDE COMPANIES, L.P. Years ended December 31, 1998, 1997 and 1996 (In thousands)
General Preferred Common Partners' Units Units Interest Total --------- --------- --------- ------- Balance at December 31, 1995 $ 17,739 $ 18,022 $ 252 $36,013 Net loss (2,970) (3,317) (128) (6,415) Conversion of Preferred Units into Common Units (14,769) 14,769 - - --------- --------- -------- ------- Balance at December 31, 1996 $ - 29,474 124 29,598 ========= Net loss (44,130) (901) (45,031) --------- -------- ------- Balance at December 31, 1997 (14,656) (777) (15,433) Net loss (8,386) (171) (8,557) --------- -------- -------- Balance at December 31, 1998 $ (23,042) $ (948) $ (23,990) ========= ======== ======== See accompanying notes. /TABLE STATEMENTS OF CASH FLOWS PRIDE COMPANIES, L.P. Years ended December 31, 1998, 1997 and 1996 (In thousands)
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,557) $(45,031) $ (6,415) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 3,438 6,872 6,976 Amortization of loan costs 1,323 - - Retirement of property, plant and equipment - 220 - Deferred tax benefit (110) (185) (128) (Gain)loss on sale of property, plant and equipment (223) (319) (40) Asset impairment - 40,000 - Paid in kind interest and credit and loan fees 1,494 - - Increasing rate accrued interest 1,030 - - Lower of cost or market adj. 1,197 - - Net effect of changes in: Accounts receivable 4,491 3,620 (1,958) Inventories 4,257 6,135 (4,923) Prepaid expenses 76 506 320 Accounts payable and other long-term liabilities (9,902) (5,667) 7,566 Accrued liabilities (3,205) (73) 226 ------- ------- ------- Total adjustments 3,866 51,109 8,039 ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,691) 6,078 1,624 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,541) (2,087) (1,944) Proceeds from asset disposals 3,453 450 61 Other (8) 144 13 ------- ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,904 (1,493) (1,870) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt and credit facilities 87,247 134,919 47,799 Payments on debt and credit facilities (86,816) (132,452) (47,366) Deferred financing costs (60) (2,516) - Other - - (3) ------- ------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 371 (49) 430 ------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,416) 4,536 184 Cash and cash equivalents at beginning of the period 5,008 472 288 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,592 $ 5,008 $ 472 ======== ======== ======== See accompanying notes.
PAGE NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 (i) a crude oil gathering business that gathers, transports, resells and redelivers crude oil in the Texas market (the "Crude Gathering System") and (ii) one common carrier products pipeline system and three products terminals in Abilene, Texas (the "Abilene Terminal"); San Angelo, Texas (the "San Angelo Terminal"); and Aledo, Texas (the "Aledo Terminal") (collectively the "Products Terminals") that are used to market conventional gasoline, low sulfur diesel fuel, and military aviation fuel (the "Products Marketing Business"). The Partnership also owns a modern simplex petroleum refinery facility (the "Refinery") which was mothballed on March 22, 1998. In April 1998, the Partnership began purchasing refined products from Equilon, a refining and marketing joint venture between Royal Dutch/Shell Group and Texaco, Inc. (formerly, Texaco Trading and Transportation, Inc.) (the "Equilon Agreement") to market through its products pipeline and Products Terminals. Prior to mothballing the Refinery, the Partnership's operations were considered a single industry segment, the refining of crude oil and the sale of the resulting petroleum products. The primary purpose of the Crude Gathering System was to purchase and sell crude oil in order to provide a supply of the appropriate grade of crude oil at strategic locations to be used as feedstock for the Refinery. As a result of the Equilon Agreement and the mothballing of the Refinery, the Crude Gathering System now markets crude oil to other refineries and the Partnership now operates two separate and distinct industry segments, the Crude Gathering System segment and the Products Marketing Business segment. The Crude Gathering System consists of pipeline gathering systems and a fleet of trucks which transport crude oil into third party pipelines and into the system's primary asset, a common carrier pipeline. The Products Marketing Business operates one products pipeline, that originates at the Abilene Terminal and terminates at the San Angelo Terminal (the "San Angelo Pipeline"), and the Products Terminals. In connection with the mothballing of the Refinery, another products pipeline owned by the Partnership that extends from the Abilene Terminal to the Aledo Terminal was idled, since Equilon's pipeline is connected to the Aledo Terminal. The Partnership's operations are conducted primarily in the State of Texas. Pride Refining, Inc., a Texas corporation, (the "Managing General Partner") owns a 1.9% general partner interest in and serves as the managing general partner of the Partnership. Pride SGP, Inc. ("Pride SGP") owns a 0.1% general partner interest in and serves as the special general partner of the Partnership. The Managing General Partner and Special General Partner (collectively the "General Partners") collectively own a 2% general partner interest. In addition to its general partner interest, Pride SGP owns a 4.9% interest in the Partnership through ownership of common limited partner units ("Common Units"). Public ownership represented by the remaining Common Units is 93.1%. In accordance with the 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 perform services for the Partnership in this capacity. The financial statements of the Partnership include all of its wholly owned subsidiaries including partnership interests. All significant intercompany transactions have been eliminated. 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. Operating Environment and Adverse Financial Condition: The Partnership has not historically complied with its financial and performance covenants included in its various credit facilities with lenders. At December 31, 1998, the Partnership was not in compliance with certain financial covenants contained in the various credit agreements; however, waivers have been obtained. Based on the revised terms, as of April 15, 1999, agreed to by the principal creditors, management now believes the Partnership can maintain compliance with the covenants through December 31, 1999. The Partnership's operating results have declined as a result of increasing competition, depressed operating margins and higher financing costs. Crude gathering volumes have decreased in each of the last five years. Gasoline, diesel and military aviation fuel sales have also declined. Excluding the $41,396,000 in "refinery closure costs" (see Statement of Operations), the loss in 1998 increased to $8,557,000 from $3,635,000 in 1997 as a result of increased interest and credit and loan fees and weaker results in 1998 for the Products Marketing Business and Crude Gathering System compared to the Refinery and Crude Gathering System in 1997. The $41,396,000 in refinery closure costs included a $40,000,000 noncash charge for impairment of certain refinery fixed assets, $1,750,000 related to the closure of the refinery and related severance costs, and $367,000 related to the writeoff of certain refinery assets offset by $721,000 in accruals that were reversed since the refinery was mothballed. Of the $1,750,000, $1,200,000 and $550,000 was included in the balance sheet under the captions other accrued liabilities and accrued payroll and related benefits, respectively, as of December 31, 1997. The remaining amount accrued at December 31, 1998 is $60,000 and management expects to incur the remainder in 1999. Under the new military aviation fuel contract with the U. S. Government which begins April 1, 1999 and ends March 31, 2000, the Partnership will supply approximately 48% of the volumes that it supplied under the contract which began April 1, 1998 and ends March 31, 1999. Margins under the new contract will be 1.5 cents per gallon lower than the prior contract. Declines in crude oil and refined product prices have had a negative impact on the borrowing base under the Partnership's credit agreement as well as working capital. Further declines could have a material adverse effect on the Partnership. Product sales for April 1998 through June 1998 were below management's budgeted sales due to startup problems experienced by Equilon with its new products pipeline. As a result, delivery and corresponding sales of gasoline, diesel and military aviation fuel were substantially below expectations. Throughout the second quarter of 1998, the Partnership was unable to deliver contractual volumes, particularly to the government. The Partnership is currently delivering to the government contractual volumes and gasoline and diesel sales have also increased from the second quarter of 1998. Equilon performed an extensive pipeline cleaning operation and the situation has improved. However, there can be no assurance that further problems will not be encountered. As a result of the problems associated with the startup of the pipeline, Equilon has agreed to certain contract concessions.On October 1, 1998 the Partnership sold to Equilon the refined products held by it at the Products Terminals and in the San Angelo Pipeline. In addition, Equilon is leasing certain tankage from the Partnership and will sell refined products to the Partnership daily from such facilities through December 31, 1999, thus eliminating the need for the Partnership to maintain its own inventory. On April 15, 1999, Equilon further agreed to extend the lease and maintain the inventory after December 31, 1999 provided the Partnership reimburses Equilon for its carrying costs beginning January 1, 2000. The Partnership's ability to generate profits is principally dependent upon increased volumes and/or improved profit margins, as well as continued cost control initiatives. Since 1993, the Partnership has been able to achieve continuous reductions in marketing, general and administrative expenses. The ability to generate profits could be adversely affected if other Gulf Coast refiners bring refined products into West Texas from the Gulf Coast via pipeline or significant declines in crude oil and petroleum prices occur. Though management has and will continue to pursue options regarding increasing volumes and margins and reducing costs, including limiting any significant capital expenditures, these improvements, if achieved, will be gradual, in many cases, will take sustained periods of time to implement in order to achieve profitability and cannot be assured. As a result, the Partnership has engaged an investment advisor to assist the Partnership in considering and analyzing various potential business opportunities involving the Crude Gathering System, including possible strategic alliances and joint ventures and a possible sale of the Crude Gathering System. Although the Partnership has been and continues to be in discussions with various third parties regarding possible transactions, the Partnership (as of April 15, 1999) has not entered into any binding agreement involving a business combination or sale involving the Crude Gathering System and is unable to predict the certainty of entering into or consummating any such transaction. In December 1998, the Partnership sold the diesel desulfurization unit for $3,100,000. This sale resulted in a tax loss which was allocated to the unitholders. Future sales could result in taxable income which likewise would be allocated to unitholders without a corresponding cash distribution from the Partnership. If a unitholder's passive loss carryforwards are less than the unitholder's share of such income, the unitholder will have to satisfy any resulting liability with cash from other sources. The Partnership's credit agreement restricts the payment of distributions through maturity. 1997 Restructuring and Recapitalization: On December 31, 1997, the Partnership completed a multiphase restructuring and recapitalization of the Partnership's debt and equity as described in the Partnership's 1996 consent solicitation dated October 7, 1996. The initial phase called for the execution of documents with the Partnership's previous bank lenders and was completed on August 13, 1996. Effective December 31, 1996, the Unitholders adopted amendments to the Partnership Agreement which included conversion of the outstanding preferred units into common units and the cancellation of all previous preferred and common unit arrearages. As part of the 1996 restructuring plan, the previous lenders converted a portion of their term loan into notes, lowered certain interest rates and credit and loan fees and extended the maturity. Effective December 31, 1997, Varde Partners, Inc. ("Varde") purchased and assumed the then existing lenders' rights and obligations under the Partnership's outstanding bank debt ("Old Bank Debt"). In conjunction with Varde's purchase and assumption of the lenders' rights and obligations under such bank debt, BankBoston, N.A. ("BankBoston") refinanced the Partnership's letter of credit facility and provided a new revolver facility on December 31, 1997. Pride SGP converted two notes into redeemable preferred equity securities (see Note 8). The Partnership incurred cost of $60,000 in 1998 and $6,570,000 in 1997 (including $3,257,000 in noncash fees) related to the restructuring and recapitalization which are included in deferred financing costs. During 1998, 1997 and 1996, the Partnership expensed $1,325,000 ($1,323,000 related to the amortization of the deferred financing costs), $613,000 and $1,064,000, respectively, related to the restructuring and recapitalization. Varde Transaction: In addition to the assumption by Varde of the Old Bank Debt, Varde loaned the Partnership an additional $4,693,000 for working capital purposes (the "New Loan"), 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, representing the first $20,000,000 of Varde's investment. (ii) Series B Term Loan ("B Term Loan") maturing December 31, 2002 in the amount of $9,500,000, which represents certain of the amounts paid to the banks to purchase the Old Bank Debt plus the amount of the New Loan and a transaction fee of $500,000 for bridging the A Term Loan, (iii) Series C Term Loan ("C Term Loan") maturing December 31, 2002 in the amount of $4,689,000 which represents Old Bank Debt, (iv) Series A Unsecured Loan ("Subordinate Note A") in the amount of $2,500,000 maturing December 31, 2002, representing the conversion of the Old Series A Note (see Note 4), (v) Series B Cumulative Convertible Preferred Units ("Series B Preferred Units") in the amount of $9,322,000, representing the conversion of the Old Series B Note (see Note 4), which Series B Preferred Units are subject to mandatory redemption at December 31, 2002, (vi) Series C Cumulative Convertible Preferred Units ("Series C Preferred Units") in the amount of $5,000,000, representing the conversion of the Old Series C Note (see Note 4), which Series C Preferred Units are subject to mandatory redemption at December 31, 2002, and (vii) Series D Cumulative Preferred Units ("Series D Preferred Units") in the amount of $2,757,000 issued as a result of the increase in the purchase price of the Old Bank Debt, which Series D Preferred Units are subject to mandatory redemption at December 31, 2002. On December 31, 1997, certain members of management invested an aggregate of $2,000,000 in the form of a note payable to Varde and received a one-third economic non-directive interest in $6,000,000 of the B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred Units, Series C Preferred Units and Series D Preferred Units. The note payable to Varde is secured by Management's interest in such securities. Any cash yield on Management's share of such securities is paid to Varde as interest, net of applicable federal income tax. The Partnership or management has a three-year call on Varde's position for an amount equal to a 40% annual return to Varde, subject to a minimum payment of $7,500,000 over Varde's cost. The securities held by Varde have certain antidilution provisions and registration rights. Any litigation proceeds received by the Partnership related to the claim against the Defense Energy Support Center will be used to retire up to $6,000,000 of the A Term Loan, if then outstanding, and up to $5,000,000 of B Term Loan with any excess divided one-third to Varde to be used to retire Varde's most senior securities and two-thirds to the Partnership (see Note 5). Revenue Recognition: Revenue is recognized from the sale of crude oil and refined products at the time of delivery to the customer. Transportation fees are recognized when the crude oil or products are delivered to the contracted destination. Net Loss Per Unit: Basic net loss per common unit is computed using the weighted average number of common units outstanding. Diluted net loss per unit is computed by adjusting the units outstanding and net loss for the potential dilutive effect of the convertible securities and unit appreciation rights (see Note 10). However, the effect of these securities was antidilutive in 1998, 1997 and 1996. Inventories: Inventories are stated at the lower of cost or market value. Crude oil and refined product exchanges are accounted for on the inventory method. Cost is determined using the last-in, first-out (LIFO) method. Management believes that the LIFO method better matches current costs with current revenues and minimizes the effects of price changes on inventories. In 1998, the cost of sales and operating expenses, excluding depreciation, included a $1,197,000 lower of cost or market inventory adjustment due to the decline in inventory values. 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 for financial reporting purposes 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, 1998, 1997 and 1996 was $3,423,000, $4,058,000 and $4,115,000, respectively. Assets no longer used in the business are stated at fair market value. On March 22, 1998, the Partnership mothballed the refinery; however, some refinery assets are still used in connection with the Equilon Supply Agreement. Accordingly, the Partnership evaluated the ongoing value of the refinery assets that would no longer be used in the business in accordance with Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). Based on this evaluation, the Partnership determined that assets with a carrying amount of $47,353,000 were impaired and wrote them down by $40,000,000 to their fair value. Fair value was based on independent appraisals discounted at a market rate of interest. As a result of the sale of the diesel desulfurization unit for $3,052,000 in December 1998, assets no longer used in the business has been reduced by the sales proceeds. Other Long-Term Liabilities: In connection with its crude gathering system operations, as first purchaser of crude oil the Partnership makes distributions of payments to the various revenue and royalty interest owners. Often, the legal rights of the interest owners are unclear or the owners cannot be located for long periods of time. When such is the case, the Partnership retains the liability for the payments until the ownership interest is clarified or the owners located, at which time payment is made. When an owner cannot be located, state statutes generally require that the unpaid amounts be escheated to the state after the passage of a specified number of years. Because such liabilities take years to be resolved and paid, an estimate has been made of the amounts expected to be paid during the next year and classified as current accounts payable, with the remainder classified as other long-term liabilities. At December 31, 1998 and 1997, other long-term liabilities included $8,736,000 and $8,541,000, respectively, related to these interest owners. Also included in other long-term liabilities are payables to Pride SGP of $2,394,000 at December 31, 1998 and 1997 for accrued interest and accrued pipeline rentals and payables to Varde of $1,030,000 for increasing rate accrued interest at December 31, 1998 (see Note 4). Income Taxes and Deferred Income Taxes: As a limited partnership, the Partnership is not a taxable entity for federal income tax purposes and any federal income taxes are the direct responsibility of the individual partners. Accordingly, no federal income tax provision is made in the accompanying statement of operations related to the operations of the Partnership itself. The Partnership's tax bases in assets and liabilities (other than Pride Borger, Inc. ("Pride Borger")) are greater than the bases for financial reporting purposes by approximately $6,963,000 at December 31, 1998. The taxable loss reported by the Partnership for the year ended December 31, 1998 is $19,348,000. The major reconciling items between financial income and taxable income reported are the difference in cost of goods sold due to inventory methods of $4,155,000, the difference in depreciation of $3,848,000 and the difference on loss from the sale of the diesel desulfurization unit of $3,936,000. The Partnership has two corporate subsidiaries, Pride Borger and Pride Marketing of Texas, Inc., which are separate taxable entities. As separate taxable entities, Pride Borger's and Pride Marketing of Texas' operating results are subject to federal income taxes. The carryover tax bases of certain pipeline assets acquired by Pride Borger in 1994 were significantly less than the purchase price. As a result, a deferred tax liability was established in the accounting records of Pride Borger as part of the purchase price allocation. At December 31, 1998 and 1997, deferred income taxes were $2,295,000 and $2,405,000, respectively. Retirement Plan: The Pride Employees' 401(k) Retirement Plan and Trust ("Plan") is a defined contribution plan covering substantially all full-time employees. Under the Plan, the Partnership must make a mandatory contribution equal to 3% of a participant's compensation and may make discretionary matching contributions of up to an additional 3% of a participant's compensation depending on the Partnership's cash flow for such year. The Partnership's contributions vest over a seven year period, subject to immediate vesting upon retirement. Retirement plan expense for the years ended December 31, 1998, 1997 and 1996 was $253,000, $209,000 and $217,000, respectively. Incentive Compensation Plan: The Partnership has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its Unit Appreciation Rights ("Rights"). Under APB 25, if the exercise price of the Rights equals or exceeds the market of the underlying units on the date of grant, no compensation expense is recognized at the date of grant. To the extent the price of the Partnership's units increase above that at the grant date, such excess value to be paid upon exercise is charged to operations over the respective vesting period. Fair Value of Financial Instruments: The carrying amount of cash and cash equivalents, receivables, and accounts payable approximates fair value. Given the financial condition of the Partnership as discussed in Note 1, and because quoted prices are not readily obtainable, management believes it is not practicable to estimate the fair value of its debt and credit facilities. Statements of Cash Flows: For purposes of the statements of cash flows, management considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Restrictions on Certain Cash Balances: The Partnership is required to maintain a restricted money market account with Alexander Insurance Group with a balance of $583,000 at December 31, 1998, and $70,000 in escrow with American International Recovery at December 31, 1998 as a condition of its insurance policies. Changes in Presentation: Certain prior year amounts have been reclassified to conform to the 1998 presentation. NOTE 2--INVENTORIES At December 31, inventories consist of (in thousands): 1998 1997 ------- ------- Crude oil $ 5,433 $ 8,388 Refined products and blending materials 133 6,473 ------- ------- 5,566 14,861 Market valuation (1,197) - LIFO reserve 2,515 (2,837) ------- ------- Petroleum inventories 6,884 12,024 Spare parts and supplies 698 1,012 ------- ------- $ 7,582 $ 13,036 ======= ======= At December 31, 1998, petroleum inventories valued using the LIFO method were more than current cost determined using the FIFO method by $1,318,000 and less than current cost determined using the FIFO method by $2,837,000 at December 31, 1997. During 1998, the Partnership amended its agreement with Equilon whereby Equilon has assumed title to all of the refined products inventory on hand at the Abilene, San Angelo and Aledo Terminals as of the close of business on September 30, 1998. While this agreement is in place, the Partnership will purchase refined products from Equilon. 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 1998 1997 Lives -------- ------- ---------- Terminal and storage facilities $ 6,712 $ 6,602 4-30 years Pipelines and related facilities 48,211 46,668 5-30 years Transportation and terminal equipment 9,878 9,913 3-5 years Marketing facilities and equipment 1,019 1,202 3-5 years Administrative facilities and equipment 2,314 1,908 2-5 years Construction-in-progress 169 960 ------- ------- 68,303 67,253 Less accumulated depreciation 22,769 19,665 _______ _______ $ 45,534 $ 47,588 ======= ======= In connection with the mothballing of the refinery on March 22, 1998, certain assets, net of accumulated depreciation, were written down to fair value (see Note 1) and reclassified in the balance sheet from property, plant and equipment to assets no longer used in the business at December 31, 1997. These assets are no longer being depreciated since they have been idled and are included in the Products Marketing Business segment. As a result of the sale of the diesel desulfurization unit in December 1998, assets no longer used in the business has been reduced by $3,052,000. NOTE 4--DEBT AND CREDIT FACILITIES As previously mentioned (see Note 1), Varde purchased and assumed the then existing lenders' rights and obligations under the Partnership's Old Bank Debt. In conjunction with Varde's purchase and assumption of the lenders' rights and obligations under the Old Bank Debt, BankBoston refinanced the Partnership's letter of credit facility and provided a new revolver facility (the "BankBoston Revolver") on December 31, 1997. The BankBoston Revolver provides for the issuance of letters of credit to third parties to support the Partnership's purchase or exchange of crude oil and petroleum products and $10,000,000 for direct cash borrowings for general working capital purposes. Amounts available under the BankBoston Revolver are subject to a borrowing base calculated as the sum of the Partnership's cash and cash equivalents, certain receivables, deposits, inventory and other amounts, reduced by a portion of crude oil royalties payable and certain other payables for crude oil and refined products. The amount available under the borrowing base net of outstanding letters of credit and advances under the BankBoston Revolver was $1,216,000 as of December 31, 1998. As of April 15, 1999, BankBoston has agreed to amend the facility which will expire January 2, 2001. The total credit line available has been lowered from $65,000,000 to $55,000,000. Though no advances had been drawn under the letter of credit facility at December 31, 1998, the Partnership did have approximately $33,377,000 in outstanding letters of credit. The Partnership had $45,000 in advances under the BankBoston Revolver for direct cash borrowings as of December 31, 1998 and has classified it in the current portion of long-term debt. The fee on outstanding letters of credit was 2.5% per annum as of December 31, 1998. There is also an issuance fee of 0.125% per annum on the face amount of each letter of credit. The fee for the unused portion of the BankBoston Revolver is 0.5% per annum. Under the terms agreed to by the parties, cash borrowings under the BankBoston Revolver will bear interest at prime plus 1.75%. The prime rate was 7.75% at December 31, 1998. The credit agreement evidencing the BankBoston Revolver also requires the Partnership to pay an agency fee of up to $70,000 per annum depending on the number of participants in the credit facility and restricts the payment of distributions to unitholders throughout the term of the credit agreement. BankBoston also charged a $75,000 amendment fee related to an amendment that became effective April 15, 1998 and will be paid $100,000 for the revisions agreed to in April 1999. As a result of Varde's assumption of the outstanding bank debt, additional loans to the Partnership and subsequent interest being paid in kind, Varde now holds the A Term Loan of $20,000,000, B Term Loan of $10,111,000, C Term Loan of $4,979,000 and Subordinate Note A of $2,745,000 as of December 31, 1998. Varde has also agreed to certain revisions to the credit agreement effective April 15, 1999. In 1999, cash interest payments on the Varde Revolver (see below), A Term Loan, B Term Loan,C Term Loan,Subordinate Note A and Varde's preferred securities are limited to $208,000 per month. Any excess will be paid in kind or accumulate in arrears. The A Term Loan, B Term Loan, and C Term Loan bear interest rates of 11%, 13%, 15%, 17% and 18% for the first, second, third, fourth and fifth years, respectively except for $3.6 million of the B Term Loan which is subject to interest rates of 18% through maturity. In addition, if the A Term Loan is repaid or refinanced, the B Term Loan and C Term Loan bear interest at 11% the first three years, 13% in the fourth year and 15% in the fifth year, except for $3.6 million of the B Term Loan which is subject to interest rates of 12% through maturity. The Subordinate Note A is convertible into 436,000 Common Units and bears interest at prime plus one percent. As consideration for the terms agreed to April 15, 1999, the principal amount of the B Term Loan will be increased by $100,000. Since a portion of the debt is subject to increasing rates of interest, the Partnership is accruing interest at the effective rate over the term of the debt. Interest expense in 1998 reflects an accrual of $1,030,000 which is based on the difference between the effective interest rates and the stated rates. In addition, the Partnership maintains a revolving credit facility with Varde ("Varde Revolver"). The original commitment was $2,000,000 for the period April 15, 1998 through November 19, 1998 and was increased to $3,500,000 for the period from November 20, 1998 through January 1, 1999. On January 1, 1999, the line was reduced to the original $2,000,000 commitment. On April 15, 1999, Varde agreed to increase the commitment to $3,000,000. Advances under the Varde Revolver bear interest at 11% per annum, payable monthly. In the second quarter of 1998, the Partnership paid Varde in the form of additional Series B Term Loans fees totaling $150,000. Cash advances under the Varde Revolver mature January 2, 2001. Under the terms agreed to on April 15, 1999, payments to Varde are capped at $2,500,000 per annum. To the extent the interest and distributions on the various Varde securities exceed the cap on cash payments, the excess will be paid in kind or increase accumulated arrearages, respectively. As a result of the cash cap, it is likely that all interest on the B Term Loan, C Term Loan, and Subordinate Note A will be paid in kind and all preferred distributions will accumulate in arrears until such time as the Partnership can restructure its capital structure. The A Term Loan is due December 31, 2002. The B Term Loan, C Term Loan and Subordinate Note A are also due December 31, 2002 if the A Term Loan has not been refinanced. If the A Term Loan is refinanced, the B Term Loan, C Term Loan and Subordinate Note A mature 180 days after the maturity of the new term loan, but no later than June 30, 2003. The Partnership is required to make quarterly principal payments on the A Term Loan as set forth in the Varde Agreement as well as make payments of excess cash flow for the preceding year. However, Varde has agreed to forego all principal payments in 1998 and 1999. The Partnership will not have to make principal payments prior to the scheduled maturity on the B Term Loan, C Term Loan and Subordinate Note A except in the case the Partnership receives litigation proceeds related to the DESC Claim (see Note 5) and certain other transactions including asset sales. The Partnership must maintain compliance with certain financial and other covenants, as defined in the credit agreements with the lenders. In addition, the agreements contain restrictive covenants including, among other things, provisions concerning additional indebtedness and commitments, restriction on payments, sale of assets, and certain affiliate transactions. At December 31, 1998, the Partnership was in violation of certain financial covenants of the credit agreements; however, waivers have been obtained. Based on the terms agreed to by the principal lenders on April 15, 1999 which include revised covenants, management now believes the Partnership can maintain compliance with the covenants through December 31, 1999. Substantially, all of the Partnership's assets are pledged as collateral to Varde and BankBoston in connection with the credit agreements. Additionally, Pride SGP has pledged its assets as additional collateral at no cost to the Partnership. Other installment loans include a $6,000,000 nonrecourse note, due 2014, payable monthly with interest at 8% and a balance of $5,502,000 at December 31, 1998 ($5,707,000 at December 31, 1997). The note is supported by a minimum throughput agreement. The assets of Pride Borger are pledged as collateral. Monthly principal payments are based on the number of throughput barrels. The Partnership has classified $172,000 as current at December 31, 1998. Amounts outstanding under these credit facilities at December 31 (in thousands): 1998 1997 ------ ------- Revolver $ 45 $ - Varde Revolver 1,375 - A Term Loan 20,000 20,000 B Term Loan 10,111 9,500 C Term Loan 4,979 4,689 Subordinate Note A 2,745 2,500 Other Installment Loans 5,841 6,482 ------ ------- 45,096 43,171 Less current portion 237 2,084 ------ ------ $44,859 $41,087 ====== ====== Approximate debt maturities for the next five years are expected as follows: 1999-$237,000; 2000-$5,904,000; 2001-$4,966,000; 2002- $29,176,000; 2003-$172,000. Interest paid for the years ended December 31, 1998, 1997 and 1996 was $3,770,000, $5,142,000 and $5,944,000, respectively. NOTE 5--COMMITMENTS AND CONTINGENCIES At December 31, 1998, the Partnership is committed to operating leases which require fixed monthly rentals for administrative office space, transportation equipment, computers and related equipment and other miscellaneous equipment, some of which contain residual value guarantees. Excluding rentals paid to Pride SGP (see Note 7) for certain pipeline segments, rental expense for the years ended December 31, 1998, 1997 and 1996 was $1,918,000, $2,658,000 and $3,187,000, respectively. The minimum future rentals under noncancelable operating leases at December 31, 1998, excluding Pride SGP, are as follows (in thousands): 1999 $ 1,404 2000 557 2001 284 2002 200 2003 169 Thereafter 2 ------ $ 2,616 ====== 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 is currently involved in Phase II of an investigative study by the Texas Natural Resource Conservation Commission. Management estimates the cost to comply with this study approximates $315,000 and has accrued for this amount at December 31, 1998. 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 October 1, 1998 the Partnership sold to Equilon the refined products held by it at the Products Terminals and in the San Angelo Pipeline. In addition, Equilon is leasing certain tankage from the Partnership and will sell refined products to the Partnership daily from such facilities through December 31, 1999, thus eliminating the need for the Partnership to maintain its own inventory. On April 15, 1999, Equilon further agreed to extend the lease and maintain the inventory after December 31, 1999 provided the Partnership reimburses Equilon for its carrying costs beginning January 1, 2000. The Partnership has filed a substantial claim against the U. S. Government Defense Energy Support Center (DESC) relating to erroneous pricing of fuel purchased over a period of several years from the Partnership. The ultimate outcome of this matter cannot presently be determined. NOTE 6--MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK One of the Partnership's major customers is the DESC. Revenues from the DESC comprised 8% of total revenues in 1998, and 11% in 1997 and 1996. Substantially all other customers are engaged in various aspects of the petroleum industry, one of which accounted for 23% of total revenues in 1998, 21% in 1997, and 19% in 1996. At December 31, 1998, the Partnership had no receivables from the DESC and the one petroleum industry customer referred to above owed $4,254,000. 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 has an agreement with Pride SGP to lease defined segments of the Crude Gathering System pipeline until 2000, with an option to extend the lease through March 2013, as long as certain minimum throughput levels are maintained. If such throughput levels are not maintained during the extended term, the lease is cancelable by Pride SGP with ninety days' notice. As consideration for this lease, the Partnership has agreed to perform all routine and emergency maintenance and repair operations to the pipelines. The value of such services is currently estimated to be approximately $300,000 annually. In addition, the Partnership pays the taxes, insurance, and other costs. In conjunction with the refinancing that occurred on December 31, 1997, the lease was amended to reduce the rentals to a maximum of $400,000 annually provided certain debt is outstanding. Prior to December 31, 1997, the Partnership accrued rentals to Pride SGP of $0.20 per barrel for all crude oil transported by the Partnership or third parties with contractual relationships with it, through the 143-mile section from Hearne to Comyn. Rentals accruing to Pride SGP from the Partnership for the years ended December 31, 1998, 1997 and 1996 totaled approximately $400,000, $788,000 and $919,000, respectively, for the lease of the pipeline. For certain periods between August 1995 and December 1997, payments to Pride SGP were suspended pursuant to the terms of an amendment to the then existing credit agreement. Beginning January 1, 1999, rental payments to Pride SGP were suspended again and are not expected to resume in the foreseeable future. Approximately $1,846,000 is included in other long-term liabilities at both December 31, 1998 and 1997 related to unpaid rentals. The lease agreement with Pride SGP was not entered into on an arm's-length basis. The original rent under the lease was determined based on the revenue generated from an expected throughput of 20,000 BPD. While management is not able to determine whether the terms of the lease are comparable to those which could have been obtained by unaffiliated parties, management believes such terms are fair and reasonable given the importance to the Partnership of the Hearne to Comyn pipeline segment which currently enables the Partnership to gather and transport a greater supply of high quality crude oil for sale to other refiners. In addition, management believes the value of the leased segment of the Comyn pipeline system has increased with the development of the Austin Chalk formation in South Central Texas and the increasing need for crude oil transportation in that area. For the year ended December 31, 1998, the Partnership transported 9,729 BPD of high quality crude oil from the eastern portion of the Austin Chalk formation through this pipeline. The Partnership has the option to purchase these pipeline segments for $10,000,000. During the period from January 1, 1996 through July 19, 1996, the Partnership sold $3,800,000 of refined product to a company in which a stockholder of Pride SGP had a minority interest. On July 19, 1996, the company was sold to a third party; therefore, the company is no longer considered to be a related party to the Partnership. 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 $70,000, $83,000 and $62,000, during 1998, 1997 and 1996, respectively. The Partnership leases property from a relative of one of the officers of the Managing General Partner. Lease payments were approximately $40,000, $38,000 and $36,000 in 1998, 1997 and 1996, respectively. Firms associated with a director of the Managing General Partner were paid $55,000 and $208,000 for legal services during 1997 and 1996, respectively. Pride SGP made two unsecured loans to the Partnership on March 26, 1993 and September 7, 1995 in the aggregate principal amount of $2,450,000 and required the Partnership to pay interest only during the term of such loans. The loans were used to fund working capital. Beginning the latter part of 1995, the Partnership ceased interest payments on the loans to Pride SGP in accordance with an amendment to the then existing credit agreement. Accrued interest payable at both December 31, 1998 and 1997 was $548,000 and has been included in other long-term liabilities. On December 31, 1997, the two unsecured loans were converted into the Series E Preferred Units of $2,000,000 and the Series F Preferred Units of $450,000. In 1998, the Partnership accumulated arrearages of $195,000 on the Series E Preferred Units and Series F Preferred Units. The Series E Preferred Units are convertible into 317,000 common units (see Note 8). The Managing General Partner has a 1.9% interest in the income and cash distributions of the Partnership, subject to certain adjustments. Certain members of the management of the Managing General Partner are also members of the management of Pride SGP, which has a 0.1% general partner interest and 4.9% limited partner interest in the Partnership as discussed in Note 9. Compensation of directors and officers of the Managing General Partner and any other expenses incurred on behalf of the Partnership by the Managing General Partner and Pride SGP are paid by the Partnership. Varde and management of the Managing General Partner ("Management") have the right to receive a total of up to approximately 34.0% of the Partnership's Common Units, through the conversion of redeemable preferred equity and convertible debt as described in the Partnership's 1996 consent solicitation. Certain conflicts of interest, including potential non-arm's-length transactions, could arise as a result of the relationships described above. The Board of Directors and management of the Managing General Partner have a duty to manage the Partnership in the best interests of the Unitholders and, consequently, must exercise good faith and integrity in handling the assets and affairs of the Partnership. NOTE 8--REDEEMABLE PREFERRED EQUITY As of April 15, 1999, the Partnership amended the terms of its Partnership Agreement and preferred equity securities retroactively to January 1, 1998. As a result of this amendment, the amounts previously reported in the 1998 interim quarterly balance sheets as distributions paid in kind are now treated as accumulated arrearages. This reduced the amount of preferred equity on the balance sheet at December 31, 1998 and also affects the tax treatment of the distributions to the partners and holders of the preferred securities. In conjunction with Varde's assumption of the Old Bank Debt, Varde received preferred equity securities. As a result of the assumption, Varde now holds preferred equity securities including $9,322,000 of Series B Preferred Units, $5,000,000 of Series C Preferred Units and $2,757,000 of Series D Preferred Units which are all redeemable on December 31, 2002. The Series B Preferred Units and Series C Preferred Units are convertible into 1,480,000 and 794,000 Common Units, respectively. The preferential quarterly payments on the Series B Preferred Units and Series C Preferred Units are 6% per annum in the first three years after issuance, 12% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 8% per annum in the first three years. The preferential quarterly payments on the Series D Preferred Units are 11% per annum in the first three years after issuance, 13% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 13% per annum in the first three years. Distributions are payable on the 5th day of the second month in each quarter. Accordingly, the Partnership accumulated arrearages of $1,568,000 at December 31, 1998 on these preferred equity securities. As previously mentioned, in 1999, cash interest payments on the Varde Revolver, A Term Loan, B Term Loan, C Term Loan, Subordinate Note A and Varde's preferred equity securities are limited to $208,000 per month. As a result, it is likely that all preferred distributions will accumulate in arrears until such time as the Partnership can restructure its capital structure. Any payments of principal on the securities held by Varde shall be applied in the following order: Varde Revolver, A Term Loan, B Term Loan, C Term Loan, Subordinate Note A, Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units. On December 31, 1997, Pride SGP converted (i) a $2,000,000 note from the Partnership into Series E Cumulative Convertible Preferred Units ("Series E Preferred Units") which is convertible into 317,000 Common Units and (ii) a $450,000 note from the Partnership into Series F Cumulative Preferred Units ("Series F Preferred Units") which are both redeemable on December 31, 2002. The Series E Preferred Units and Series F Preferred Units are subordinated to the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units. The preferential quarterly payments on the Series E Preferred Units and Series F Preferred Units are 6% per annum in the first three years after issuance, 12% per annum in the fourth and fifth years and 15% per annum thereafter or at the Partnership's option may accumulate in arrears at 8% per annum in the first three years. Distributions are payable on the 5th day of the second month in each quarter; however, the Partnership may not make any cash distributions on the Series E Preferred Units or Series F Preferred Units if the Series B Preferred Units, Series C Preferred Units or Series D Preferred Units have accumulated arrearages outstanding. Accordingly, at December 31, 1998, the Partnership accumulated arrearages of $195,000 on the Series E Preferred Units and Series F Preferred Units. Redeemable preferred equity outstanding at December 31 (in thousands): 1998 1997 ------- ------ Series B Preferred Units $ 9,322 $ 9,322 Series C Preferred Units 5,000 5,000 Series D Preferred Units 2,757 2,757 Series E Preferred Units 2,000 2,000 Series F Preferred Units 450 450 ------- ------- $ 19,529 $ 19,529 ======= ======= NOTE 9--PARTNERS' CAPITAL (DEFICIENCY) Effective December 31, 1996, the previously outstanding Preferred Units were converted into newly issued common units ("Common Units") on a one-to-one basis pursuant to the Amendments to the limited partnership agreement. The 4,700,000 of Common Units held by the previously existing preferred unitholders represent an approximate 93.1% limited partner interest in the Partnership. The previously outstanding common units were converted to 250,000 Common Units in a reverse 21-for-1 stock split. Prior to the Amendments to the limited partnership agreement, the units were cumulative and entitled to a minimum quarterly distribution of $0.65 per unit. However, all arrearages were canceled under the Amendments as of December 31, 1996. The general partners are entitled to 2% of all distributions. Both Varde and Pride SGP hold debt and equity securities which are convertible into 3,027,000 Common Units. Varde holds the Series B Preferred Units, Series C Preferred Units and Subordinate Note A which are convertible into 2,710,000 Common Units. Pride SGP holds Series E Preferred Units which are convertible into 317,000 Common Units. If both Varde and Pride SGP converted all their securities into Common Units, the number of Common Units outstanding would increase from 4,950,000 Common Units to 7,977,000 Common Units. NOTE 10--UNIT APPRECIATION RIGHTS During 1996, the Partnership implemented an incentive compensation plan for officers and key employees. Under the plan, individual employees can be granted unit appreciation rights ("Rights") whereby the 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 for ten years from the grant date. Rights transactions from December 6, 1996 are as follows:
Officers/ Employees Directors Total --------- --------- ----- Granted December 6, 1996 and outstanding at December 31, 1996 292,760 70,000 362,760 Granted 7,236 - 7,236 Exercised - - - Terminated - - - ------- ------ ------- Outstanding at December 31, 1997 and 1998 299,996 70,000 369,996 ======= ====== =======
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. Since 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 were fully vested on December 31, 1998; however, none were exercised. Rights exercisable under the plan were 369,996 and 195,000 at December 31, 1998 and 1997. 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. 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. Pro forma information regarding net income and earnings per unit required by Statement 123 was determined as if the Partnership had accounted for its Rights under the fair value method of the Statement. The fair value for these Rights was estimated at the date of grant using a Black-Scholes option pricing model. The effect of applying the fair value method to the Rights results in net income and earnings per unit that are not materially different from amounts reported. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected unit price volatility. Because the Partnership's Rights have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employees' Rights. For purposes of pro forma disclosures, the estimated fair value of the Rights is amortized to expense over the Rights' vesting period. The proforma effect of the Rights granted is not material to the operations of the Partnership for 1997 and 1998. The weighted average fair value of the Rights granted is approximately $1.40 per Right. NOTE 11--BUSINESS SEGMENTS The Partnership adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Partnership has two segments: (i) the Products Marketing Business, and (ii) the Crude Gathering System. The Products Marketing Business has one products pipeline, that originates at the Abilene Terminal and terminates at the San Angelo Terminal, and the Products Terminals that are used to market conventional gasoline, low sulfur diesel fuel and military aviation fuel. Assets no longer used in the business and corporate assets are considered part of the Products Marketing Business. The Crude Gathering System consists of pipeline gathering systems and a fleet of trucks which transport crude oil into third party pipelines and into the system's primary asset, a common carrier pipeline. As discussed in Note 1, prior to March 22, 1998, the Partnership operated as a single segment. The segments follow the same accounting policies as described in the Summary of Significant Accounting Policies (see Note 1). Information on the Partnership's operations by business segment (stated in thousands) is summarized as follows: Revenues Products Marketing Business $121,189 Crude Gathering System 300,566 Intrasystem and other (41,128) ------- Total Revenues $380,627 ======= Operating Income (Loss) Products Marketing Business $ 552 Crude Gathering System (644) ------- Total Operating Income(Loss) $ (92) ======= Depreciation Products Marketing Business $ 1,422 Crude Gathering System 2,016 ------- Total Depreciation $ 3,438 ======= Assets Products Marketing Business $ 46,512 Crude Gathering System 29,950 ------- Total Assets $ 76,462 ======= Capital Expenditures Products Marketing Business $ 440 Crude Gathering System 1,101 ------- Total Capital Expenditures $ 1,541 ======= PAGE (This page should be printed on 11" x 8.5" paper) NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Net income Basic Diluted Operating Net (loss) after Income Income Net Income Income preferred (Loss) (Loss) Quarter Ended Revenues (Loss) (Loss) distributions per Unit per Unit - ------------- -------- --------- -------- ------------- -------- -------- March 31, 1997 $142,455 $(1,025) $(2,913) $ (2,913) $(0.58) $(0.58) June 30, 1997 127,624 557 (602) (602) (0.12) (0.12) September 30, 1997 134,734 2,604 771 771 0.15 0.14 December 31, 1997 130,085 (364) (42,287) (42,287) (8.37) (8.37) March 31, 1998 106,219 1,284 (780) (1,208) (0.24) (0.24) June 30, 1998 102,986 (1,069) (3,473) (3,911) (0.77) (0.77) September 30, 1998 92,167 816 (1,127) (1,572) (0.31) (0.31) December 31, 1998 79,255 (1,123) (3,177) (3,629) (0.72) (0.72)
The first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share. The net income (loss) and net income (loss) after preferred distributions for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 have been restated to reflect the quarterly impact for the year-end adjustment to record increasing rate accrued interest expense using the effective interest rate method by $247, $256, and $257, respectively (see Note 4). Additionally, the per unit amounts have been restated for the increasing rate accrued interest expense. PAGE INDEX TO EXHIBITS TO REPORT ON FORM 10-K Exhibit Number (Reference to Item 601 of Regulation S-K) Description _______________ ___________ 3.1 Certificate of Limited Partnership of the Partnership (incorporated by reference to Exhibit 3.1 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-10473)). 3.2 Second Amended and Restated Agreement of Limited Partnership of the Partnership (incorporated by reference to Exhibit 3.2 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 1-10473)). 4.1 Deposit Agreement among the Partnership and the Depository (incorporated by reference to Exhibit 4.1 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-10473)). 4.2 Transfer Application (included as Exhibit A to the Deposit Agreement, which is incorporated by reference to Exhibit 4.2 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-10473)). 4.4 Form of Depositary Receipt for Old Common Units of Pride Companies, L.P. (included as Exhibit B to the Deposit Agreement, which is incorporated by reference to Exhibit 4.1 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-10473)). 4.5 Form of Depositary Receipt for Common Units of Pride Companies, L.P. (incorporated by reference to Exhibit 4.5 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 1-10473)). 10.1 Pipeline Lease Agreement by and between the Partnership and Pride SGP, Inc. (incorporated by reference to Exhibit 10.2 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-10473)). 10.2 Amendment 1 to Pipeline Lease Agreement by and between the Partnership and Pride SGP, Inc. (incorporated by reference to Exhibit 10.3 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Commission File No. 1-10473)). 10.3 Registration Rights Agreement dated March 30, 1990, by and between the Partnership and Pride SGP, Inc. (incorporated by reference to Exhibit 10.5 of the Partnership's Registration Statement on Form S-1 (Commission File No. 33-42115), as amended). 10.5 Promissory Note between Pride SGP, Inc. ("Lender") and the Partnership ("Borrower") dated March 26, 1993 (incorporated by reference to Exhibit 10.14 of the Partnership's Annual Report on Form 10K for the fiscal year ended December 31, 1992 (Commission File No. 1-10473)). 10.6 Amendment 2 to Pipeline Lease Agreement by and between the Partnership and Pride SGP, Inc. (incorporated by reference to Exhibit 10.16 of the Partnership's Annual Report on Form 10K for the fiscal year ended December 31, 1992 (Commission File No. 1- 10473)). 10.7 Partnership Agreement for Desulfur Partnership, dated as of August 10, 1993, which is 99% owned by the Partnership and 1% owned by Pride Marketing of Texas, a wholly-owned subsidiary of the Partnership (incorporated by reference to Exhibit 28.1 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1993 (Commission File No. 1-10473)). 10.8 Bill of Sale, dated as of August 10, 1993, for the sale of the desulfurization unit by the Partnership to the Desulfur Partnership, a subsidiary of the Partnership (incorporated by reference to Exhibit 28.2 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1993 (Commission File No. 1-10473)). 10.9 Promissory Note, dated as of August 10, 1993, related to the sale of the desulfurization unit by the Partnership ("Payee") to the Desulfur Partnership ("Maker") (incorporated by reference to Exhibit 28.3 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1993 (Commission File No. 1- 10473)). 10.10 Master Lease Agreement, dated as of August 10, 1993, between the Partnership (Lessee) and the Desulfur Partnership (a subsidiary partnership) (Lessor), for the lease of the desulfurization unit (incorporated by reference to Exhibit 28.4 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1993 (Commission File No. 1-10473)). 10.11 Letter, dated November 10, 1993, from Ernst & Young (the Partnership's independent auditors) to the Partnership concerning the change to the LIFO method of accounting for inventories (incorporated by reference to Exhibit 28.7 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1993 (Commission File No. 1-10473)). 10.12 Stock Purchase Agreement, dated as of September 1, 1994, between Pride Refining, Inc. (Purchaser), Diamond Shamrock Refining and Marketing Company (Seller), and D-S Pipeline Corporation (Acquired Company) (incorporated by reference to Exhibit 10.15 of the Partnership's Annual Report on Form 10K for the fiscal year ended December 31, 1994 (Commission File No. 1-10473)). 10.13 First Amendment to Stock Purchase Agreement between Pride Refining, Inc. (Purchaser), Diamond Shamrock Refining and Marketing Company (Seller), and D-S Pipeline Corporation (Acquired Company) (incorporated by reference to Exhibit 10.16 of the Partnership's Annual Report on Form 10K for the fiscal year ended December 31, 1994 (Commission File No. 1-10473)). 10.14 Promissory Note dated as of January 9, 1995, between United Bank & Trust ("Lender") and the Partnership ("Borrower") related to the renovation and refinancing of the Partnership's administrative offices (incorporated by reference to Exhibit 28.1 of the Partnership's Quarterly Report on Form 10Q for the quarter ended June 30, 1995 (Commission File No. 1-10473)). 10.15 Promissory Note between Pride SGP, Inc. ("Lender") and the Partnership ("Borrower") dated September 7, 1995 (incorporated by reference to Exhibit 28.2 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1995 (Commission File No. 1-10473)). 10.16 Note Agreement dated August 13, 1996, among the Partnership ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors), and NationsBank of Texas, N.A. as Agent, and NationsBank of Texas, N.A. and Bank One Texas, N.A. as Lenders (incorporated by reference to Exhibit 28.2 of the Partnership's Quarterly Report on Form 10Q for the quarter ended June 30, 1996 (Commission File No. 1-10473)). 10.17 Unit Appreciation Rights Plan (incorporated by reference to Exhibit 10.26 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 1- 10473)). 10.18 Sixth Restated and Amended Credit Agreement, dated as of December 30, 1997, by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc., as Guarantors, and Varde Partners, Inc. as Lender (incorporated by reference to Exhibit 10.29 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-10473)). 10.19 Seventh Amendment to the Fifth Restated and Amended Credit Agreement, dated as of December 30, 1997, by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc., as Guarantors, and Varde Partners, Inc. as Lender (incorporated by reference to Exhibit 10.30 of the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1- 10473)). 10.20 Restructuring and Override Agreement, dated as of December 30, 1997, by and among Varde Partners, Inc., Pride Companies, L.P., Pride Refining, Inc., and Pride SGP, Inc. (Commission File No. 1- 10473). 10.21 Certificates of Designation - Series B and Series C Cumulative Convertible Preferred Units of Pride Companies, L.P., pursuant to the Second Amended and Restated Agreement of Limited Partners, effective as of December 30, 1997 (Commission File No. 1-10473). 10.22 Revolving Credit and Term Loan Agreement, dated as of December 30, 1997, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc. and Pride Marketing of Texas (Cedar Wind), Inc., BankBoston, N.A., as an Agent and as a Lender, Lehman Commercial Paper Inc., as a Lender and as Documentation Agent (Commission File No. 1-10473). 10.23 Guarantee and Security Agreement, dated as of December 30, 1997, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., Pride Borger, Inc. and BankBoston, N.A., as Agent. (Commission File No. 1-10473). 10.24 Intercreditor and Agency Agreement, dated as of December 30, 1997, among BankBoston, N.A., as Agent and Collateral Agent, Varde Partners, Inc., as Term Lender, and acknowledged and consented to by Pride Companies, L.P., as Company, and Pride SGP, Inc., Pride Refining, Inc., Pride Borger, Inc., Desulfur Partnership, and Pride Marketing of Texas (Cedar Wind), Inc., as Guarantors (Commission File No. 1-10473). 10.25 Pride SGP Subordination Agreement, dated December 30, 1997, among Pride Companies, L.P., Pride Refining, Inc., Pride Borger, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., as the Obligors, Pride SGP, Inc., and BankBoston, N.A., as Agent (Commission File No. 1-10473). 10.26 Varde Subordination Agreement, dated as of December 30, 1997, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Pride Borger, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., as Obligors, Varde Partners, Inc., and BankBoston, N.A., as Agent (Commission File No. 1-10473). 10.27 Equity Conversion Agreement, dated December 31, 1997, between Pride SGP, Inc., Pride Companies, L.P., and Varde Partners, Inc. (Commission File No. 1-10473). 10.28 Amendment No. 3 to Pipeline Lease Agreement, effective as of December 31, 1997, between Pride SGP, Inc. and Pride Companies, L.P.(Commission File No. 1-10473). 10.29 First Amendment to Sixth Restated and Amended Credit Agreement dated as of April 15, 1998, by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors) and Varde Partners, Inc. as Lender (incorporated by reference to Exhibit 28.1 of the Partnership's Quarterly Report on Form 10Q for the quarter ended June 30, 1998 (Commission File No. 1-10473)). 10.30 Amendment No. 1 to the Revolving Credit and Term Loan Agreement, dated as of April 15, 1998, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc., Pride Marketing of Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent and as a Lender, Lehman Brothers Commercial Paper, Inc. as a Lender and as a Documentation Agent (incorporated by reference to Exhibit 28.2 on Form 10Q for the quarter ended June 30, 1998 (Commission File No. 1-10473)). 10.31 Waiver dated as of October 29, 1998 to the First Amendment to Sixth Restated and Amended Credit Agreement among Pride Companies, L.P. as borrower, Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride Borger, Inc., as guarantors, and Varde Partners, Inc., as lender (incorporated by reference to Exhibit 28.1 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1998 (Commission File No. 1-10473)). 10.32 Waiver dated as of August 1, 1998 to the Revolving Credit and Term Loan Agreement dated December 30, 1997, as amended, among Pride Companies, L.P., as borrower, Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc. and Pride Marketing of Texas (Cedar Wind), Inc., BankBoston, N.A., as Agent, Lehman Commercial Paper, Inc., as Documentation Agent, and BankBoston, N.A., Lehman Commercial Paper Inc. and Union Bank of California, N.A. (incorporated by reference to Exhibit 28.2 of the Partnership's Quarterly Report on Form 10Q for the quarter ended September 30, 1998 (Commission File No. 1-10473)). 10.33 Second Amendment to the Sixth Restated and Amended Credit Agreement dated as of November 20, 1998 by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors) and Varde Partners, Inc. as Lender. 10.34 Third Amendment to the Sixth Restated and Amended Credit Agreement dated as of December 1, 1998 by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors) and Varde Partners, Inc. as Lender. 10.35 Fourth Amendment to the Sixth Restated and Amended Credit Agreement dated as of December 31, 1998 by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors) and Varde Partners, Inc. as Lender. 10.36 Fifth Amendment to the Sixth Restated and Amended Credit Agreement dated as of March 1999 by and among Pride Companies, L.P. ("Borrower"), Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., and Pride Borger, Inc. (collectively Guarantors) and Varde Partners, Inc. as Lender. 10.37 Amendment No. 2 to the Revolving Credit and Term Loan Agreement, dated as of November 20, 1998, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc., Pride Marketing of Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent and as a Lender, Lehman Brothers Commercial Paper, Inc. as a Lender and as a Documentation Agent. 10.38 Amendment No. 3 to the Revolving Credit and Term Loan Agreement, dated as of December 31, 1998, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc., Pride Marketing of Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent and as a Lender, Lehman Brothers Commercial Paper, Inc. as a Lender and as a Documentation Agent. 10.39 Amendment No. 4 to the Revolving Credit and Term Loan Agreement, dated as of March 1999, among Pride Companies, L.P., Pride SGP, Inc., Pride Refining, Inc., Desulfur Partnership, Pride Borger, Inc., Pride Marketing of Texas (Cedar Wind), Inc., and BankBoston, N.A., as an Agent and as a Lender, Lehman Brothers Commercial Paper, Inc. as a Lender and as a Documentation Agent. 11.1 Statement regarding computation of per unit earnings (included on page F-9 of this Report). 25.1 Power of Attorney (included on the signature page of this Report). 27.1 Financial Data Schedule. EX-27 2 ART. 5 FDS FOR YEAR 1998
5 YEAR DEC-31-1998 DEC-31-1998 2,592 0 10,052 0 7,582 20,930 68,303 22,769 76,462 21,609 44,859 19,529 0 (23,042) (948) 76,462 380,627 380,627 369,280 369,280 3,438 0 6,144 (8,643) 86 (8,557) 0 0 0 (8,557) (2.04) (2.04)
EX-99 3 PRIDE COMPANIES, L.P. REVOLVING CREDIT AND TERM LOAN AGREEMENT Amendment No. 2 This Agreement, dated as of November 20, 1998, is among Pride Companies, L.P., a Delaware limited partnership (the "Company"), Pride SGP, Inc., a Texas corporation, Pride Refining, Inc., a Texas corporation, Desulfur Partnership, a Texas general partnership, Pride Borger, Inc., a Delaware corporation, and Pride Marketing of Texas (Cedar Wind), Inc., a Texas corporation (collectively, the "Pride Entities"), BankBoston, N.A., Lehman Commercial Paper Inc. and Union Bank of California (collectively, the "Lenders"), BankBoston, N.A., as agent (the "Agent") for itself and the other Lenders, and Lehman Brothers Commercial Paper Inc., as Documentation Agent (the "Documentation Agent") for itself and the other Lenders. The parties agree as follows: 1. Reference to Credit Agreement; Background. 1.1. Reference to Credit Agreement; Definitions. Reference is made to the Revolving Credit and Term Loan Agreement dated as of December 30, 1997, as amended by Amendment No. 1 thereto dated as of April 15, 1998 (the "Credit Agreement"), among the Pride Entities, the Lenders, the Agent and the Documentation Agent. The Credit Agreement, as amended by the amendments set forth in Section 2 hereof (the "Amendment"), is referred to as the "Amended Credit Agreement." Terms defined in the Amended Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. 1.2. Background. The Company has requested that the Credit Agreement be amended to cure certain existing and prospective Defaults and for other purposes. The Lenders have agreed to such amendments on the conditions that BankBoston be released from any obligation to provide the Term Loan and on the other conditions set forth herein. 2. Amendments to Credit Agreement. Subject to all of the terms and conditions hereof and in reliance upon the representations and warranties set forth or incorporated by reference in Section 3 hereof, the Credit Agreement is amended as follows, effective as of the date hereof (the "Amendment Closing Date"). 2.1. The definition of "Varde Credit Agreement" set forth in Section 1.1 of the Credit Agreement is amended to read in its entirety as follows: "Varde Credit Agreement" means that certain Sixth Restated and Amended Credit Agreement dated as of December 30, 1997, among the Company, the General Partners, Pride Borger, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Varde, as amended by Amendment No. 1 thereto dated as of April 15, 1998 and by Amendment No. 2 thereto dated as of November 20, 1998. 2.2. Section 6.6.15 of the Credit Agreement is amended to read in its entirety as follows: 6.6.15. Indebtedness of the Obligors to Varde in respect of the Varde Revolving Loan, so long as the principal amount thereof at any time outstanding does not exceed $2,000,000, the per annum rate of interest thereon does not exceed 11% per annum and the stated maturity thereof is not earlier than January 1, 1999; provided, however, that with respect to the period commencing November 20, 1998 through and including December 1, 1998, the maximum principal amount of such Indebtedness permitted under this Section 6.6.15 shall be increased from $2,000,000 to $3,500,000. 3. Representations and Warranties. In order to induce the Lenders to enter into this Agreement, each of the Pride Entities jointly and severally represents and warrants to each of the Lenders that: 3.1. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowing under the Amended Credit Agreement, nor the guaranteeing of the Credit Obligations, nor the securing of the Credit Obligations with the Credit Security, nor the consummation of any transaction referred to in or contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed or lease contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, has constituted or resulted in or will constitute or result in: (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which any of the Pride Entities is a party or by which it is bound, or of the Charter or By-laws of any of the Pride Entities; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to any of the Pride Entities; (c) the creation under any agreement, instrument, deed or lease of any Lien (other than Liens on the Credit Security which secure the Credit Obligations and Liens permitted by Section 6.8 of the Amended Credit Agreement) upon any of the assets of any of the Pride Entities; or (d) any redemption, retirement or other repurchase obligation of any of the Pride Entities under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by any of the Pride Entities in connection with the execution and delivery of this Agreement, the performance of this Agreement, the Amended Credit Agreement or any other Credit Document, the transactions contemplated hereby or thereby, the making of any borrowing under the Amended Credit Agreement, the guaranteeing of the Credit Obligations or the securing of the Credit Obligations with the Credit Security. 3.2. Defaults. Immediately after giving effect to the Amendment, no Default shall exist. 3.3. Incorporation of Representations and Warranties of Company. Immediately after giving effect to the Amendment, the representations and warranties set forth in Section 7 of the Amended Credit Agreement will be true and correct as if originally made on and as of the Amendment Closing Date (except to the extent of any representation or warranty which refers to a specific earlier date). 4. Conditions. The effectiveness of each of the amendments set forth in Section 2 hereof shall be subject to the satisfaction of the following conditions: 4.1. Officer's Certificate. The representations and warranties contained in Section 3 hereof shall be true and correct on and as of the Amendment Closing Date with the same force and effect as though originally made on and as of the Amendment Closing Date; immediately after giving effect to such amendments, no Default shall exist; no Material Adverse Change shall have occurred since December 30, 1997 except as previously disclosed by the Company in writing to the Lenders; and the Company shall have furnished to the Lenders on or before the Amendment Closing Date a certificate to these effects signed by a Financial Officer of the Company. 4.2. Proper Proceedings. All proper proceedings shall have been taken by each of the Pride Entities to authorize this Agreement, the Amended Credit Agreement and the transactions contemplated hereby and thereby. On or before the Amendment Closing Date, the Agent shall have received copies of all documents, including legal opinions of counsel and records of corporate proceedings which the Agent may have requested in connection therewith, such documents, where appropriate, to be certified by proper corporate or governmental authorities. 4.3. Varde. Varde shall have consented to the terms and conditions of this Agreement and the Amended Credit Agreement, and the Varde Credit Agreement shall have been amended in a manner satisfactory in form and substance to the Required Revolving Lenders which provides, in documentation satisfactory in form and substance to the Required Revolving Lenders, for the temporary increase of the Varde Revolving Loan. 4.4. Execution and Delivery. Each of the Pride Entities, the Lenders, the Agent and the Documentation Agent shall have executed and delivered this Agreement. 4.5. Expenses. The Company shall have paid to the Agent all reasonable expenses, fees and charges payable to the Agent's counsel, Ropes & Gray. 5. Further Assurances. The Company will, promptly upon the request of the Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments and notices, and take all such action, as the Agent deems necessary or advisable to carry out the intent and purposes of this Agreement. In addition, the parties confirm their agreement to enter into a restatement of the Credit Agreement incorporating the amendments set forth in Section 2 hereof and containing such additional provisions as shall be appropriate to reflect fully the termination of the commitment of the Term Lender to make the Term Loan. Such restatement shall be effected as soon as reasonably possible. 6. General. The Amended Credit Agreement and all of the other Credit Documents are each confirmed as being in full force and effect. This Agreement, the Amended Credit Agreement and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. The invalidity or unenforceability of any provision hereof shall not affect the validity and enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Amended Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of law rules) of The Commonwealth of Massachusetts. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. . . . . . . . . . . PRIDE COMPANIES, L.P. by Pride Refining, Inc., its Managing General Partner By_________________________________ Title: PRIDE REFINING, INC. By_________________________________ Title: PRIDE SGP, INC. By_________________________________ Title: PRIDE BORGER, INC. By_________________________________ Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By_________________________________ Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Managing General Partner By_________________________________ Title: and by Pride Marketing of Texas (Cedar Wind), Inc., its General Partner By_________________________________ Title: BANKBOSTON, N.A., for Itself and as Agent By_________________________________ Authorized Officer LEHMAN COMMERCIAL PAPER INC., for Itself and as Documentation Agent By_________________________________ Authorized Officer UNION BANK OF CALIFORNIA, N.A. By_________________________________ Authorized Officer Consented to: VARDE PARTNERS, INC. By _________________________________ Authorized Officer PRIDE COMPANIES, L.P. REVOLVING CREDIT AND TERM LOAN AGREEMENT Amendment No. 3 This Agreement, dated as of December 31, 1998, is among Pride Companies, L.P., a Delaware limited partnership (the "Company"), Pride SGP, Inc., a Texas corporation, Pride Refining, Inc., a Texas corporation, Desulfur Partnership, a Texas general partnership, Pride Borger, Inc., a Delaware corporation, and Pride Marketing of Texas (Cedar Wind), Inc., a Texas corporation (collectively, the "Pride Entities"), BankBoston, N.A., Lehman Commercial Paper Inc. and Union Bank of California (collectively, the "Lenders"), BankBoston, N.A., as agent (the "Agent") for itself and the other Lenders, and Lehman Commercial Paper Inc., as Documentation Agent (the "Documentation Agent") for itself and the other Lenders. The parties agree as follows: 7. Reference to Credit Agreement; Background. 7.1. Reference to Credit Agreement; Definitions. Reference is made to the Revolving Credit and Term Loan Agreement dated as of December 30, 1997, as amended by Amendment No. 1 thereto dated as of April 15, 1998 and Amendment No. 2 thereto dated as of November 20, 1998 (the "Credit Agreement"), among the Pride Entities, the Lenders, the Agent and the Documentation Agent. The Credit Agreement, as amended by the amendments set forth in Section 2 hereof (the "Amendment"), is referred to as the "Amended Credit Agreement." Terms defined in the Amended Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. 7.2. Background. The Company has requested that the Credit Agreement be amended to cure certain existing and prospective Defaults and for other purposes. The Lenders have agreed to such amendments on the conditions that BankBoston be released from any obligation to provide the Term Loan and on the other conditions set forth herein. 8. Amendments to Credit Agreement. Subject to all of the terms and conditions hereof and in reliance upon the representations and warranties set forth or incorporated by reference in Section 3 hereof, the Credit Agreement is amended as follows, effective as of the date hereof (the "Amendment Closing Date"). 8.1. The definition of "Varde Credit Agreement" set forth in Section 1.1 of the Credit Agreement is amended to read in its entirety as follows: "Varde Credit Agreement" means that certain Sixth Restated and Amended Credit Agreement dated as of December 30, 1997, among the Company, the General Partners, Pride Borger, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Varde, as amended by the First Amendment thereto dated as of April 15, 1998, the Second Amendment thereto dated as of November 20, 1998, and the Third Amendment thereto dated as of December 1, 1998 and the Fourth Amendment thereto dated as of December 31, 1998. 8.2. Section 6.6.15 of the Credit Agreement is amended to read in its entirety as follows: 6.6.15. Indebtedness of the Obligors to Varde in respect of the Varde Revolving Loan, so long as the principal amount thereof at any time outstanding does not exceed $2,000,000, the per annum rate of interest thereon does not exceed 11% per annum and the stated maturity thereof is not earlier than January 31, 1999 with the possibility of an extension up to July 31, 1999; provided, however, that with respect to the period commencing November 20, 1998 through and including January 1, 1999, the maximum principal amount of such Indebtedness permitted under this Section 6.6.15 shall be increased from $2,000,000 to $3,500,000. 9. Representations and Warranties. In order to induce the Lenders to enter into this Agreement, each of the Pride Entities jointly and severally represents and warrants to each of the Lenders that: 9.1. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowing under the Amended Credit Agreement, nor the guaranteeing of the Credit Obligations, nor the securing of the Credit Obligations with the Credit Security, nor the consummation of any transaction referred to in or contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed or lease contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, has constituted or resulted in or will constitute or result in: (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which any of the Pride Entities is a party or by which it is bound, or of the Charter or By-laws of any of the Pride Entities; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to any of the Pride Entities; (c) the creation under any agreement, instrument, deed or lease of any Lien (other than Liens on the Credit Security which secure the Credit Obligations and Liens permitted by Section 6.8 of the Amended Credit Agreement) upon any of the assets of any of the Pride Entities; or (d) any redemption, retirement or other repurchase obligation of any of the Pride Entities under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by any of the Pride Entities in connection with the execution and delivery of this Agreement, the performance of this Agreement, the Amended Credit Agreement or any other Credit Document, the transactions contemplated hereby or thereby, the making of any borrowing under the Amended Credit Agreement, the guaranteeing of the Credit Obligations or the securing of the Credit Obligations with the Credit Security. 9.2. Defaults. Immediately after giving effect to the Amendment, no Default shall exist. 9.3. Incorporation of Representations and Warranties of Company. Immediately after giving effect to the Amendment, the representations and warranties set forth in Section 7 of the Amended Credit Agreement will be true and correct as if originally made on and as of the Amendment Closing Date (except to the extent of any representation or warranty which refers to a specific earlier date). 10. Conditions. The effectiveness of each of the amendments set forth in Section 2 hereof shall be subject to the satisfaction of the following conditions: 10.1. Officer's Certificate. The representations and warranties contained in Section 3 hereof shall be true and correct on and as of the Amendment Closing Date with the same force and effect as though originally made on and as of the Amendment Closing Date; immediately after giving effect to such amendments, no Default shall exist; no Material Adverse Change shall have occurred since December 30, 1997 except as previously disclosed by the Company in writing to the Lenders; and the Company shall have furnished to the Lenders on or before the Amendment Closing Date a certificate to these effects signed by a Financial Officer of the Company. 10.2. Proper Proceedings. All proper proceedings shall have been taken by each of the Pride Entities to authorize this Agreement, the Amended Credit Agreement and the transactions contemplated hereby and thereby. On or before the Amendment Closing Date, the Agent shall have received copies of all documents, including legal opinions of counsel and records of corporate proceedings which the Agent may have requested in connection therewith, such documents, where appropriate, to be certified by proper corporate or governmental authorities. 10.3. Varde. Varde shall have consented to the terms and conditions of this Agreement and the Amended Credit Agreement, and the Varde Credit Agreement shall have been amended in a manner satisfactory in form and substance to the Required Revolving Lenders which provides, in documentation satisfactory in form and substance to the Required Revolving Lenders, for the temporary increase of the Varde Revolving Loan. 10.4. Execution and Delivery. Each of the Pride Entities, the Lenders, the Agent and the Documentation Agent shall have executed and delivered this Agreement. 10.5. Expenses. The Company shall have paid to the Agent all reasonable expenses, fees and charges payable to the Agent's counsel, Ropes & Gray. 11. Further Assurances. The Company will, promptly upon the request of the Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments and notices, and take all such action, as the Agent deems necessary or advisable to carry out the intent and purposes of this Agreement. In addition, the parties confirm their agreement to enter into a restatement of the Credit Agreement incorporating the amendments set forth in Section 2 hereof and containing such additional provisions as shall be appropriate to reflect fully the termination of the commitment of the Term Lender to make the Term Loan. Such restatement shall be effected as soon as reasonably possible. 12. General. The Amended Credit Agreement and all of the other Credit Documents are each confirmed as being in full force and effect. This Agreement, the Amended Credit Agreement and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. The invalidity or unenforceability of any provision hereof shall not affect the validity and enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Amended Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of law rules) of The Commonwealth of Massachusetts. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. PRIDE COMPANIES, L.P. by Pride Refining, Inc., its Managing General Partner By_________________________________ Title: PRIDE REFINING, INC. By_________________________________ Title: PRIDE SGP, INC. By ________________________________ Title: PRIDE BORGER, INC. By ________________________________ Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By ________________________________ Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Managing General Partner By ________________________________ Title: and by Pride Marketing of Texas (Cedar Wind),Inc., its General Partner By _______________________________ Title: BANKBOSTON, N.A., for Itself and as Agent By ________________________________ Authorized Officer LEHMAN COMMERCIAL PAPER INC., for Itself and as Documentation Agent By ________________________________ Authorized Officer UNION BANK OF CALIFORNIA, N.A. By_________________________________ Authorized Officer Consented to: VARDE PARTNERS, INC. By _________________________________ Authorized Officer PRIDE COMPANIES, L.P. REVOLVING CREDIT AND TERM LOAN AGREEMENT Amendment No. 4 This Agreement, dated as of March __, 1999, is among Pride Companies, L.P., a Delaware limited partnership (the "Company"), Pride SGP, Inc., a Texas corporation, Pride Refining, Inc., a Texas corporation, Pride Borger, Inc., a Delaware corporation, and Pride Marketing of Texas (Cedar Wind), Inc., a Texas corporation (collectively, the "Pride Entities"), BankBoston, N.A., Lehman Commercial Paper Inc. and Union Bank of California (collectively, the "Lenders"), BankBoston, N.A., as agent (the "Agent") for itself and the other Lenders, and Lehman Commercial Paper Inc., as Documentation Agent (the "Documentation Agent") for itself and the other Lenders. The parties agree as follows: 13. Reference to Credit Agreement; Background. 13.1. Reference to Credit Agreement; Definitions. Reference is made to the Revolving Credit and Term Loan Agreement dated as of December 30, 1997, as amended by Amendment No. 1 thereto dated as of April 15, 1998, Amendment No. 2 thereto dated as of November 20, 1998 and Amendment No. 3 thereto dated as of December 31, 1998 (the "Credit Agreement"), among the Pride Entities, the Lenders, the Agent and the Documentation Agent. The Credit Agreement, as amended by the amendments set forth in Section 2 hereof (the "Amendment"), is referred to as the "Amended Credit Agreement." Terms defined in the Amended Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. 13.2. Background. The Company has requested that the Credit Agreement be amended to cure certain existing and prospective Defaults and for other purposes. The Lenders have agreed to such amendments on the conditions that BankBoston be released from any obligation to provide the Term Loan and on the other conditions set forth herein. 14. Amendments to Credit Agreement. Subject to all of the terms and conditions hereof and in reliance upon the representations and warranties set forth or incorporated by reference in Section 3 hereof, the Credit Agreement is amended as follows, effective as of the date hereof (the "Amendment Closing Date"). 14.1. The definition of "Varde Credit Agreement" set forth in Section 1.1 of the Credit Agreement is amended to read in its entirety as follows: "Varde Credit Agreement" means that certain Sixth Restated and Amended Credit Agreement dated as of December 30, 1997, among the Company, the General Partners, Pride Borger, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Varde, as amended by the First Amendment thereto dated as of April 15, 1998, the Second Amendment thereto dated as of November 20, 1998, and the Third Amendment thereto dated as of December 1, 1998, the Fourth Amendment thereto dated as of December 31, 1998 and the Fifth Amendment thereto dated as of March __, 1999. 14.2. Section 6.6.15 of the Credit Agreement is amended to read in its entirety as follows: 6.6.15. Indebtedness of the Obligors to Varde in respect of the Varde Revolving Loan, so long as the principal amount thereof at any time outstanding does not exceed $2,000,000, the per annum rate of interest thereon does not exceed 11% per annum and the stated maturity thereof is not earlier than January 31, 1999 with the possibility of an extension up to July 31, 1999; provided, however, that with respect to the period commencing March __, 1999 through and including March 31, 1999, the maximum principal amount of such Indebtedness permitted under this Section 6.6.15 shall be increased from $2,000,000 to $2,500,000. 15. Representations and Warranties. In order to induce the Lenders to enter into this Agreement, each of the Pride Entities jointly and severally represents and warrants to each of the Lenders that: 15.1. No Legal Obstacle to Agreements. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowing under the Amended Credit Agreement, nor the guaranteeing of the Credit Obligations, nor the securing of the Credit Obligations with the Credit Security, nor the consummation of any transaction referred to in or contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, nor the fulfillment of the terms hereof or thereof or of any other agreement, instrument, deed or lease contemplated by this Agreement, the Amended Credit Agreement or any other Credit Document, has constituted or resulted in or will constitute or result in: (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which any of the Pride Entities is a party or by which it is bound, or of the Charter or By-laws of any of the Pride Entities; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to any of the Pride Entities; (c) the creation under any agreement, instrument, deed or lease of any Lien (other than Liens on the Credit Security which secure the Credit Obligations and Liens permitted by Section 6.8 of the Amended Credit Agreement) upon any of the assets of any of the Pride Entities; or (d) any redemption, retirement or other repurchase obligation of any of the Pride Entities under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by any of the Pride Entities in connection with the execution and delivery of this Agreement, the performance of this Agreement, the Amended Credit Agreement or any other Credit Document, the transactions contemplated hereby or thereby, the making of any borrowing under the Amended Credit Agreement, the guaranteeing of the Credit Obligations or the securing of the Credit Obligations with the Credit Security. 15.2. Defaults. Immediately after giving effect to the Amendment, no Default shall exist. 15.3. Incorporation of Representations and Warranties of Company. Immediately after giving effect to the Amendment, the representations and warranties set forth in Section 7 of the Amended Credit Agreement will be true and correct as if originally made on and as of the Amendment Closing Date (except to the extent of any representation or warranty which refers to a specific earlier date). 16. Conditions. The effectiveness of each of the amendments set forth in Section 2 hereof shall be subject to the satisfaction of the following conditions: 16.1. Officer's Certificate. The representations and warranties contained in Section 3 hereof shall be true and correct on and as of the Amendment Closing Date with the same force and effect as though originally made on and as of the Amendment Closing Date; immediately after giving effect to such amendments, no Default shall exist; no Material Adverse Change shall have occurred since December 30, 1997 except as previously disclosed by the Company in writing to the Lenders; and the Company shall have furnished to the Lenders on or before the Amendment Closing Date a certificate to these effects signed by a Financial Officer of the Company. 16.2. Proper Proceedings. All proper proceedings shall have been taken by each of the Pride Entities to authorize this Agreement, the Amended Credit Agreement and the transactions contemplated hereby and thereby. On or before the Amendment Closing Date, the Agent shall have received copies of all documents, including legal opinions of counsel and records of corporate proceedings which the Agent may have requested in connection therewith, such documents, where appropriate, to be certified by proper corporate or governmental authorities. 16.3. Varde Varde shall have consented to the terms and conditions of this Agreement and the Amended Credit Agreement, and the Varde Credit Agreement shall have been amended in a manner satisfactory in form and substance to the Required Revolving Lenders which provides, in documentation satisfactory in form and substance to the Required Revolving Lenders, for the temporary increase of the Varde Revolving Loan. 16.4. Execution and Delivery. Each of the Pride Entities, the Lenders, the Agent and the Documentation Agent shall have executed and delivered this Agreement. 16.5. Expenses. The Company shall have paid to the Agent all reasonable expenses, fees and charges payable to the Agent's counsel, Ropes & Gray. 17. Further Assurances. The Company will, promptly upon the request of the Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments and notices, and take all such action, as the Agent deems necessary or advisable to carry out the intent and purposes of this Agreement. In addition, the parties confirm their agreement to enter into a restatement of the Credit Agreement incorporating the amendments set forth in Section 2 hereof and containing such additional provisions as shall be appropriate to reflect fully the termination of the commitment of the Term Lender to make the Term Loan. Such restatement shall be effected as soon as reasonably possible. 18. General. The Amended Credit Agreement and all of the other Credit Documents are each confirmed as being in full force and effect. This Agreement, the Amended Credit Agreement and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. The invalidity or unenforceability of any provision hereof shall not affect the validity and enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Amended Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of law rules) of The Commonwealth of Massachusetts. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. PRIDE COMPANIES, L.P. by Pride Refining, Inc., its Managing General Partner By______________________________ Title: PRIDE REFINING, INC. By______________________________ Title: PRIDE SGP, INC. By_______________________________ Title: PRIDE BORGER, INC. By_______________________________ Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By_______________________________ Title: BANKBOSTON, N.A., for Itself and as Agent By _______________________________ Authorized Officer LEHMAN COMMERCIAL PAPER INC., for Itself and as Documentation Agent By________________________________ Authorized Officer UNION BANK OF CALIFORNIA, N.A. By________________________________ Authorized Officer Consented to: VARDE PARTNERS, INC. By _________________________________ Authorized Officer SECOND AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT THIS SECOND AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT, dated as of November 20, 1998 (this "Second Amendment"), amends the Sixth Restated and Amended Credit Agreement dated as of December 30, 1997 (the "Credit Agreement") by and 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., as Lender (the "Lender"). Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. WHEREAS, the Borrower, the Guarantors and the Lender have entered into the Credit Agreement; and WHEREAS, the parties desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Effective on (and subject to the occurrence of) the Second Amendment Effective Date (as defined in Section 3 below), the Credit Agreement shall be amended as set forth below: 1.1 Section 1.1 of the Credit Agreement is hereby amended by amending and restating the definition of "Revolving Credit Commitment" in its entirety as follows: "Revolving Credit Commitment" shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Two Million Dollars ($2,000,000)as such amount may be reduced from time to time in accordance with the terms of this Agreement; provided, however, that with respect to the period from the Second Amendment Effective Date through and including December 1, 1998, the Revolving Credit Commitment shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000) as such amount may be reduced from time to time in accordance with the terms of this Agreement. 1.2 Section 1.1 of the Credit Agreement is hereby further amended by adding the following new definition in the appropriate alphabetical position: "Second Amendment Effective Date" shall mean November 20, 1998. 1.3 Section 2.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 2.3 Revolving Credit Notes. The Revolving Credit Loans made by the Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-6, with appropriate insertions as to payee, date and principal amount (a "Revolving Credit Note"), payable to the order of the Lender and in a principal amount equal to the lesser of (a) the amount of the Revolving Credit Commitment and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender. The Revolving Credit Note shall (x) be dated the Second Amendment Effective Date, (y) be stated to mature on the Revolving Credit Termination Date and (z) provide for the payment of interest in accordance with Section 2.6. 1.4 Exhibit A to the Credit Agreement is hereby amended by deleting Exhibit A-6 thereto and inserting a new Exhibit A-6 in the form of Exhibit A hereto. SECTION 2 Representations and Warranties. The Borrower and each of the Guarantors represents and warrants to the Lender that (a) each representation and warranty set forth in Article V of the Credit Agreement is true and correct in all material respects (except for any such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true and correct in all respects) as of the date of the execution and delivery of this Second Amendment by the Borrower and the Guarantors (and assuming the effectiveness hereof), with the same effect as if made on such date (except for any such representations and warranties which are made with respect to a specified date, which representations and warranties shall only be required to be true and correct as of such date); and (b) the execution and delivery by the Borrower and the Guarantors of this Second Amendment and the performance by the Borrower and the Guarantors of their respective obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the corporate powers of the Borrower and Guarantors, (ii) have been duly authorized by all necessary corporate action on the part of the Borrower and the Guarantors, (iii) have received all necessary approvals and consents from any governmental authority and (iv) do not and will not contravene or conflict with, or result in or require the creation or imposition of any Lien under, any provision or requirements of law or of the certificate of incorporation or by-laws (or equivalent organizational or governing document) of the Borrower or any Guarantor or of any agreement, instrument, order or decree which is binding upon the Borrower of any Guarantor. SECTION 3 Effectiveness. The amendments set forth in Section 1 hereof shall become effective on such date (the "Second Amendment Effective Date") when the Lender shall have received all of the following: (i) Counterparts of this Second Amendment executed by a duly authorized officer of the Borrower and each of the Guarantors. (ii) An executed Revolving Credit Note in the form of Exhibit A hereto. (iii) An opinion of Andrews & Kurth, LLP, counsel to the Borrower and the Guarantors, substantially in the form of Attachment I hereto. (iv) Confirmation that the Borrower has paid to the Lender all reasonable expenses, fees and charges payable to the Lender's counsel, Paul, Weiss, Rifkind, Wharton & Garrison. (v) All documents the Lender may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Second Amendment, and any other matters relevant hereto, all in form and substance satisfactory to the Lender. (vi) Counterparts of the Consent and Agreement, substantially in the form of Attachment II hereto, executed by a duly authorized officer of each of the Guarantors. (vii) A duly executed copy of Amendment No. 2 to the BankBoston Credit Agreement in form and substance satisfactory to the Lender. SECTION 4 Miscellaneous. 4.1 Continuing Effectiveness, etc. The Credit Agreement as hereby amended and all other Loan Documents are hereby ratified and confirmed in all respects. After the Second Amendment Effective Date, all references in the Credit Agreement and the other Loan Documents to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. The execution, delivery and effectiveness of this Second Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any Default or Event of Default. 4.2 Counterparts. This Second Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Second Amendment. 4.3 Governing Law. This Second Amendment shall be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of laws provisions thereof). 4.4 Successors and Assigns. This Second Amendment shall be binding upon the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns, and shall inure to the benefit of the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns. 4.5 Further Assurances. Each of the Borrower and the Guarantors will, promptly upon the request of the Lender, from time to time execute, acknowledge and deliver, and file and record, all such agreements, documents, instruments and notices, and take all such action, as the Lender deems necessary or advisable to carry out the intent and purposes of this Second Amendment and the Credit Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed by their respective authorized officers as of the day and year first above written. PRIDE COMPANIES, L.P. By Pride Refining, Inc., its Managing General Partner By:____________________________ Name: Title: PRIDE REFINING, INC. By:____________________________ Name: Title: PRIDE SGP, INC. By:____________________________ Name: Title: PRIDE BORGER, INC. By:____________________________ Name: Title: PRIDE MARKETING OF TEXAS CEDAR WIND By:____________________________ Name: Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Managing General Partner By:____________________________ Name: Title: and by Pride Marketing of Texas (Cedar Wind), Inc., its General Partner By:____________________________ Name: Title: VARDE PARTNERS, INC., as lender By:____________________________ Name: Title: Attachment I Form of Opinion Attachment II CONSENT AND AGREEMENT Each of Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride Borger, Inc. hereby consents to the provisions of this Second Amendment and the transactions contemplated herein, and hereby ratifies and confirms the respective Third Restated Guaranty Agreements, each dated as of December 30, 1997, made by it for the benefit of Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. Dated: November 20, 1998 PRIDE REFINING, INC. By:______________________________ Name: Title: PRIDE SGP, INC. By:______________________________ Name: Title: DESULFER PARTNERSHIP By:______________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:______________________________ Name: Title: PRIDE BORGER, INC. By:______________________________ Name: Title: EXHIBIT A REVOLVING CREDIT NOTE $3,500,000 New York, New York November 20, 1998 FOR VALUE RECEIVED, the undersigned, PRIDE COMPANIES, L.P., a Delaware limited partnership (the "Borrower"), unconditionally promises to pay on the Revolving Credit Termination Date (as defined in the Credit Agreement defined below) to the order of VARDE PARTNERS, INC. (the "Lender"), on the dates and in the manner set forth in sections 2.6 and 2.8 of the Credit Agreement, the lesser of (a) the principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender to the Borrower pursuant to section 2.2 of the Credit Agreement. The Borrower further agrees to pay interest on the unpaid principal amount hereof on the dates and at the applicable rates per annum as provided in section 2.6(b) of the Credit Agreement until any such amount shall be due and payable (whether at the stated maturity, by acceleration or otherwise). The holder of this Note is authorized to endorse on the schedule annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date and amount of each Revolving Credit Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed; provided, however, that the failure of the lender to make any such endorsement shall not affect the obligations of the Borrower in respect of such Revolving Credit Loans. This Note (a) is the Revolving Credit Note referred to in the Sixth Restated and Amended Credit Agreement, dated as of December 30, 1997 (as the same may from time to time be amended, modified or supplemented, the "Credit Agreement"), among the Borrower, Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., Pride Borger, Inc. and the Lender, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured and guaranteed as provided in the Collateral Documents. Reference is hereby made to the Collateral Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note may become, or be declared to be, immediately due and payable as provided in the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Borrower hereby waives presentment, demand, protest and all other notices of any kind. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICTS OF LAWS PROVISIONS THEREOF). PRIDE COMPANIES, L.P., a Delaware limited partnership By: PRIDE REFINING, INC., a Texas corporation, Managing General Partner By: ___________________________________ Dave Caddell Vice President SCHEDULE A to Revolving Credit Note LOAN REPAYMENTS OF REVOLVING CREDIT LOAN THIRD AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT THIS THIRD AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT, dated as of December 1, 1998 (this "Third Amendment"), amends the Sixth Restated and Amended Credit Agreement dated as of December 30, 1997 (as amended, supplemented or modified from time to time, the "Credit Agreement") by and 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., as Lender (the "Lender"). Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. WHEREAS, the Borrower, the Guarantors and the Lender have entered into the Credit Agreement; and WHEREAS, the parties desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Effective on (and subject to the occurrence of) the Third Amendment Effective Date (as defined in Section 3 below), the Credit Agreement shall be amended as set forth below: 1.1 Section 1.1 of the Credit Agreement is hereby amended by amending and restating the definition of "Revolving Credit Commitment" in its entirety as follows: "Revolving Credit Commitment" shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Two Million Dollars ($2,000,000) as such amount may be reduced from time to time in accordance with the terms of this Agreement; provided, however, that with respect to the period from the Second Amendment Effective Date through and including January 1, 1999, the Revolving Credit Commitment shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000) as such amount may be reduced from time to time in accordance with the terms of this Agreement. SECTION 2 Representations and Warranties. The Borrower and each of the Guarantors represents and warrants to the Lender that (a) each representation and warranty set forth in Article V of the Credit Agreement is true and correct in all material respects (except for any such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true and correct in all respects) as of the date of the execution and delivery of this Third Amendment by the Borrower and the Guarantors (and assuming the effectiveness hereof), with the same effect as if made on such date (except for any such representations and warranties which are made with respect to a specified date, which representations and warranties shall only be required to be true and correct as of such date); and (b) the execution and delivery by the Borrower and the Guarantors of this Third Amendment and the performance by the Borrower and the Guarantors of their respective obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the corporate powers of the Borrower and Guarantors, (ii) have been duly authorized by all necessary corporate action on the part of the Borrower and the Guarantors, (iii) have received all necessary approvals and consents from any governmental authority and (iv) do not and will not contravene or conflict with, or result in or require the creation or imposition of any Lien under, any provision or requirements of law or of the certificate of incorporation or by-laws (or equivalent organizational or governing document) of the Borrower or any Guarantor or of any agreement, instrument, order or decree which is binding upon the Borrower of any Guarantor. SECTION 3 Effectiveness. The amendments set forth in Section 1 hereof shall become effective on such date (the "Third Amendment Effective Date") when the Lender shall have received all of the following: (i) Counterparts of this Third Amendment executed by a duly authorized officer of the Borrower and each of the Guarantors. (ii) Confirmation that the Borrower has paid to the Lender all reasonable expenses, fees and charges payable to the Lender's counsel, Paul, Weiss, Rifkind, Wharton & Garrison. (iii) All documents the Lender may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Third Amendment, and any other matters relevant hereto, all in form and substance satisfactory to the Lender. (iv) Counterparts of the Consent and Agreement, substantially in the form of Attachment I hereto, executed by a duly authorized officer of each of the Guarantors. (v) A duly executed copy of Amendment No. 3 to the BankBoston Credit Agreement in form and substance satisfactory to the Lender. SECTION 4 Miscellaneous. 4.1 Continuing Effectiveness, etc. The Credit Agreement as hereby amended and all other Loan Documents are hereby ratified and confirmed in all respects. After the Third Amendment Effective Date, all references in the Credit Agreement and the other Loan Documents to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. The execution, delivery and effectiveness of this Third Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any Default or Event of Default. 4.2 Counterparts. This Third Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Third Amendment. 4.3 Governing Law. This Third Amendment shall be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of laws provisions thereof). 4.4 Successors and Assigns. This Third Amendment shall be binding upon the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns, and shall inure to the benefit of the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns. 4.5 Further Assurances. Each of the Borrower and the Guarantors will, promptly upon the request of the Lender, from time to time execute, acknowledge and deliver, and file and record, all such agreements, documents, instruments and notices, and take all such action, as the Lender deems necessary or advisable to carry out the intent and purposes of this Third Amendment and the Credit Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed by their respective authorized officers as of the day and year first above written. PRIDE COMPANIES, L.P. By Pride Refining, Inc., its Managing General Partner By:____________________________ Name: Title: PRIDE REFINING, INC. By:____________________________ Name: Title: PRIDE SGP, INC. By:____________________________ Name: Title: PRIDE BORGER, INC. By:____________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:____________________________ Name: Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Manager General Partner By:____________________________ Name: Title: and by Pride Marketing of Texas (Cedar Wind), Inc., its General Partner By:____________________________ Name: Title: VARDE PARTNERS, INC., as Lender By:____________________________ Name: Title: Attachment I CONSENT AND AGREEMENT Each of Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride Borger, Inc. hereby consents to the provisions of this Third Amendment and the transactions contemplated herein, and hereby ratifies and confirms the respective Third Restated Guaranty Agreements, each dated as of December 30, 1997, made by it for the benefit of Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. Dated: December 1, 1998 PRIDE REFINING, INC. By:______________________________ Name: Title: PRIDE SGP, INC. By:______________________________ Name: Title: DESULFER PARTNERSHIP By:______________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:______________________________ Name: Title: PRIDE BORGER, INC. By:______________________________ Name: Title: FOURTH AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT THIS FOURTH AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT, dated as of December 31, 1998 (this "Third Amendment"), amends the Sixth Restated and Amended Credit Agreement dated as of December 30, 1997 (as amended, supplemented or modified from time to time, the "Credit Agreement") by and 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., as Lender (the "Lender"). Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. WHEREAS, the Borrower, the Guarantors and the Lender have entered into the Credit Agreement; and WHEREAS, the parties desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Effective on (and subject to the occurrence of) the Fourth Amendment Effective Date (as defined in Section 3 below), the Credit Agreement shall be amended as set forth below: 1.1 Section 1.1 of the Credit Agreement is hereby amended by amending and restating the definitions of "Available Commitment" and "Revolving Credit Commitment Termination Date" in their entirety as follows: "Available Commitment" shall mean, at any time, an amount equal to the excess, if any, of (a) the amount of the Revolving Credit Commitment over (b) the aggregate principal amount of all Revolving Credit Loans then outstanding. "Revolving Credit Commitment Termination Date" shall mean "January 31, 1999," provided, however, that (i) upon at least five (5) Business Days written notice to the Lender the Borrower may request that such date be extended for an additional six month period commencing on February 1, 1999, and (ii) the "Revolving Credit Commitment Termination Date" shall be the date so requested if the Lender shall have agreed (in its sole and absolute discretion) in writing to such date on or prior to January 31, 1999. SECTION 2 Representations and Warranties. The Borrower and each of the Guarantors represents and warrants to the Lender that (a) each representation and warranty set forth in Article V of the Credit Agreement is true and correct in all material respects (except for any such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true and correct in all respects) as of the date of the execution and delivery of this Fourth Amendment by the Borrower and the Guarantors (and assuming the effectiveness hereof), with the same effect as if made on such date (except for any such representations and warranties which are made with respect to a specified date, which representations and warranties shall only be required to be true and correct as of such date); and (b) the execution and delivery by the Borrower and the Guarantors of this Fourth Amendment and the performance by the Borrower and the Guarantors of their respective obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the corporate powers of the Borrower and Guarantors, (ii) have been duly authorized by all necessary corporate action on the part of the Borrower and the Guarantors, (iii) have received all necessary approvals and consents from any governmental authority and (iv) do not and will not contravene or conflict with, or result in or require the creation or imposition of any Lien under, any provision or requirements of law or of the certificate of incorporation or by-laws (or equivalent organizational or governing document) of the Borrower or any Guarantor or of any agreement, instrument, order or decree which is binding upon the Borrower of any Guarantor. SECTION 3 Effectiveness. The amendments set forth in Section 1 hereof shall become effective on such date (the "Fourth Amendment Effective Date") when the Lender shall have received all of the following: (i) Counterparts of this Fourth Amendment executed by a duly authorized officer of the Borrower and each of the Guarantors. (ii) All documents the Lender may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Fourth Amendment, and any other matters relevant hereto, all in form and substance satisfactory to the Lender. (iii) Counterparts of the Consent and Agreement, substantially in the form of Attachment I hereto, executed by a duly authorized officer of each of the Guarantors. SECTION 4 Miscellaneous. 4.1 Continuing Effectiveness, etc. The Credit Agreement as hereby amended and all other Loan Documents are hereby ratified and confirmed in all respects. After the Fourth Amendment Effective Date, all references in the Credit Agreement and the other Loan Documents to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. The execution, delivery and effectiveness of this Fourth Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any Default or Event of Default. 4.2 Counterparts. This Fourth Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Fourth Amendment. 4.3 Governing Law. This Fourth Amendment shall be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of laws provisions thereof). 4.4 Successors and Assigns. This Fourth Amendment shall be binding upon the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns, and shall inure to the benefit of the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns. 4.5 Further Assurances. Each of the Borrower and the Guarantors will, promptly upon the request of the Lender, from time to time execute, acknowledge and deliver, and file and record, all such agreements, documents, instruments and notices, and take all such action, as the Lender deems necessary or advisable to carry out the intent and purposes of this Fourth Amendment and the Credit Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be duly executed by their respective authorized officers as of the day and year first above written. PRIDE COMPANIES, L.P. By Pride Refining, Inc., its Managing General Partner By:___________________________ Name: Title: PRIDE REFINING, INC. By:___________________________ Name: Title: PRIDE SGP, INC. By:___________________________ Name: Title: PRIDE BORGER, INC. By:___________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:___________________________ Name: Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Manager General Partner By:___________________________ Name: Title: and by Pride Marketing of Texas (Cedar Wind), Inc., its General Partner By:___________________________ Name: Title: VARDE PARTNERS, INC., as Lender By:____________________________ Name: Title: Attachment I CONSENT AND AGREEMENT Each of Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride Borger, Inc. hereby consents to the provisions of this Fourth Amendment and the transactions contemplated herein, and hereby ratifies and confirms the respective Third Restated Guaranty Agreements, each dated as of December 30, 1997, made by it for the benefit of Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. Dated: December 31, 1998 PRIDE REFINING, INC. By:______________________________ Name: Title: PRIDE SGP, INC. By:______________________________ Name: Title: DESULFER PARTNERSHIP By:______________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:______________________________ Name: Title: PRIDE BORGER, INC. By:______________________________ Name: Title: FIFTH AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT THIS FIFTH AMENDMENT TO SIXTH RESTATED AND AMENDED CREDIT AGREEMENT, dated as of March __, 1999 (this "Fifth Amendment"), amends the Sixth Restated and Amended Credit Agreement dated as of December 30, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement") by and 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., as Lender (the "Lender"). Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. WHEREAS, the Borrower, the Guarantors and the Lender have entered into the Credit Agreement; and WHEREAS, the parties desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Effective on (and subject to the occurrence of) the Fifth Amendment Effective Date (as defined in Section 3 below), the Credit Agreement shall be amended as set forth below: 1.1 Section 1.1 of the Credit Agreement is hereby amended by amending and restating the definition of "Revolving Credit Commitment" in its entirety as follows: "Revolving Credit Commitment" shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Two Million Dollars ($2,000,000) as such amount may be reduced from time to time in accordance with the terms of this Agreement; provided, however, that with respect to the period from the Fifth Amendment Effective Date through and including March 31, 1999, the Revolving Credit Commitment shall mean the obligation of the Lender to make Revolving Credit Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed Two Million Five Hundred Thousand Dollars ($2,500,000) as such amount may be reduced from time to time in accordance with the terms of this Agreement. 1.2 Section 1.1 of the Credit Agreement is hereby further amended by adding the following new definition in the appropriate alphabetical position: "Fifth Amendment Effective Date" shall mean March __, 1999. 1.3 Section 2.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 2.3 Revolving Credit Notes. The Revolving Credit Loans made by the Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-6, with appropriate insertions as to payee, date and principal amount (a "Revolving Credit Note"), payable to the order of the Lender and in a principal amount equal to the lesser of (a) the amount of the Revolving Credit Commitment and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender. The Revolving Credit Note shall (x) be dated the Fifth Amendment Effective Date, (y) be stated to mature on the Revolving Credit Termination Date and (z) provide for the payment of interest in accordance with Section 2.6. 1.4 Exhibit A to the Credit Agreement is hereby amended by deleting Exhibit A-6 thereto and inserting a new Exhibit A-6 in the form of Exhibit A hereto. SECTION 2 Representations and Warranties. The Borrower and each of the Guarantors represents and warrants to the Lender that (a) each representation and warranty set forth in Article V of the Credit Agreement is true and correct in all material respects (except for any such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true and correct in all respects) as of the date of the execution and delivery of this Fifth Amendment by the Borrower and the Guarantors (and assuming the effectiveness hereof), with the same effect as if made on such date (except for any such representations and warranties which are made with respect to a specified date, which representations and warranties shall only be required to be true and correct as of such date); and (b) the execution and delivery by the Borrower and the Guarantors of this Fifth Amendment and the performance by the Borrower and the Guarantors of their respective obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the corporate powers of the Borrower and Guarantors, (ii) have been duly authorized by all necessary corporate action on the part of the Borrower and the Guarantors, (iii) have received all necessary approvals and consents from any governmental authority and (iv) do not and will not contravene or conflict with, or result in or require the creation or imposition of any Lien under, any provision or requirements of law or of the certificate of incorporation or by-laws (or equivalent organizational or governing document) of the Borrower or any Guarantor or of any agreement, instrument, order or decree which is binding upon the Borrower of any Guarantor. SECTION 3 Effectiveness. The amendments set forth in Section 1 hereof shall become effective on such date (the "Fifth Amendment Effective Date") when the Lender shall have received all of the following: (i) Counterparts of this Fifth Amendment executed by a duly authorized officer of the Borrower and each of the Guarantors. (ii) An executed Revolving Credit Note in the form of Exhibit A hereto. (iii) An opinion of Andrews & Kurth, LLP, counsel to the Borrower and the Guarantors, substantially in the form of Attachment I hereto. (iv) Confirmation that the Borrower has paid to the Lender all reasonable expenses, fees and charges payable to the Lender's counsel, Paul, Weiss, Rifkind, Wharton & Garrison. (v) All documents the Lender may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Fifth Amendment, and any other matters relevant hereto, all in form and substance satisfactory to the Lender. (vi) Counterparts of the Consent and Agreement, substantially in the form of Attachment II hereto, executed by a duly authorized officer of each of the Guarantors. (vii) A duly executed copy of Amendment No. 5 to the BankBoston Credit Agreement in form and substance satisfactory to the Lender. SECTION 4 Miscellaneous. 4.1 Continuing Effectiveness, etc. The Credit Agreement as hereby amended and all other Loan Documents are hereby ratified and confirmed in all respects. After the Fifth Amendment Effective Date, all references in the Credit Agreement and the other Loan Documents to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. The execution, delivery and effectiveness of this Fifth Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any Default or Event of Default. 4.2 Counterparts. This Fifth Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Fifth Amendment. 4.3 Governing Law. This Fifth Amendment shall be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of laws provisions thereof). 4.4 Successors and Assigns. This Fifth Amendment shall be binding upon the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns, and shall inure to the benefit of the Borrower, the Guarantors, the Lender and their respective permitted successors and assigns. 4.5 Further Assurances. Each of the Borrower and the Guarantors will, promptly upon the request of the Lender, from time to time execute, acknowledge and deliver, and file and record, all such agreements, documents, instruments and notices, and take all such action, as the Lender deems necessary or advisable to carry out the intent and purposes of this Fifth Amendment and the Credit Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be duly executed by their respective authorized officers as of the day and year first above written. PRIDE COMPANIES, L.P. By Pride Refining, Inc., its Managing General Partner By:___________________________ Name: Title: PRIDE REFINING, INC. By:___________________________ Name: Title: PRIDE SGP, INC. By:___________________________ Name: Title: PRIDE BORGER, INC. By:___________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:___________________________ Name: Title: DESULFUR PARTNERSHIP by Pride Companies, L.P., its General Partner, by Pride Refining, Inc., its Manager General Partner By:___________________________ Name: Title: and by Pride Marketing of Texas (Cedar Wind), Inc., its General Partner By:___________________________ Name: Title: VARDE PARTNERS, INC., as Lender By:___________________________ Name: Title: Attachment I Form of Opinion Attachment II CONSENT AND AGREEMENT Each of Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc. and Pride Borger, Inc. hereby consents to the provisions of this Fifth Amendment and the transactions contemplated herein, and hereby ratifies and confirms the respective Third Restated Guaranty Agreements, each dated as of December 30, 1997, made by it for the benefit of Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. Dated: March __, 1999 PRIDE REFINING, INC. By:______________________________ Name: Title: PRIDE SGP, INC. By:______________________________ Name: Title: DESULFER PARTNERSHIP By:______________________________ Name: Title: PRIDE MARKETING OF TEXAS (CEDAR WIND), INC. By:______________________________ Name: Title: PRIDE BORGER, INC. By:______________________________ Name: Title: EXHIBIT A REVOLVING CREDIT NOTE $2,500,000 New York, New York March __, 1999 FOR VALUE RECEIVED, the undersigned, PRIDE COMPANIES, L.P., a Delaware limited partnership (the "Borrower"), unconditionally promises to pay on the Revolving Credit Termination Date (as defined in the Credit Agreement defined below) to the order of VARDE PARTNERS, INC. (the "Lender"), on the dates and in the manner set forth in sections 2.6 and 2.8 of the Credit Agreement, the lesser of (a) the principal amount of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender to the Borrower pursuant to section 2.2 of the Credit Agreement. The Borrower further agrees to pay interest on the unpaid principal amount hereof on the dates and at the applicable rates per annum as provided in section 2.6(b) of the Credit Agreement until any such amount shall be due and payable (whether at the stated maturity, by acceleration or otherwise). The holder of this Note is authorized to endorse on the schedule annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date and amount of each Revolving Credit Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof. Each such endorsement shall constitute prima facie evidence of the accuracy of the information endorsed; provided, however, that the failure of the Lender to make any such endorsement shall not affect the obligations of the Borrower in respect of such Revolving Credit Loans. This Note (a) is the Revolving Credit Note referred to in the Sixth Restated and Amended Credit Agreement, dated as of December 30, 1997 (as the same may from time to time be amended, modified or supplemented, the "Credit Agreement"), among the Borrower, Pride Refining, Inc., Pride SGP, Inc., Desulfur Partnership, Pride Marketing of Texas (Cedar Wind), Inc., Pride Borger, Inc. and the Lender, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is secured and guaranteed as provided in the Collateral Documents. Reference is hereby made to the Collateral Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note may become, or be declared to be, immediately due and payable as provided in the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Borrower hereby waives presentment, demand, protest and all other notices of any kind. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICTS OF LAWS PROVISIONS THEREOF). PRIDE COMPANIES, L.P., a Delaware limited partnership By: PRIDE REFINING, INC., a Texas corporation, Managing General Partner By:____________________________________ Dave Caddell Vice President -----END PRIVACY-ENHANCED MESSAGE-----