-------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ........... TO ...............
REGISTRATION NUMBER 333-37811
----------
TEXAS PETROCHEMICAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0504002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
THREE RIVERWAY, SUITE 1500
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 627-7474
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------
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 requirement for the past 90 days. Yes [ ] No [X]
The number of shares of common stock of the registrant outstanding as of May
13, 1998 is 527,778.
-------------------------------------------------------------
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of March 31, 1998 and June 30, 1997 1
Consolidated Statement of Operations for the three and nine
months ended March 31, 1998 and 1997 2
Consolidated Statement of Cash Flows for the nine months ended
March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, JUNE 30,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 99 $ 101
Accounts receivable - trade ...................... 37,520 44,662
Inventories ...................................... 24,522 17,926
Other current assets ............................. 15,542 21,157
--------- ---------
Total current assets .......................... 77,683 83,846
Property, plant and equipment, net ................... 229,985 239,959
Investments in land held for sale .................... 2,579 3,886
Investment in and advances to limited partnership .... 3,005 2,969
Goodwill, net ........................................ 176,299 179,598
Other assets, net of accumulated amortization ........ 13,757 12,748
--------- ---------
Total assets .................................. $ 503,308 $ 523,006
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................... $ 5,247 $ 10,157
Accounts payable - trade ......................... 23,017 29,942
Accrued expenses ................................. 10,496 16,917
Current portion of cash bonus plan ............... 7,811 7,811
Current portion of long-term debt ................ 7,042 6,438
--------- ---------
Total current liabilities ..................... 53,613 71,265
Revolving line of credit ............................. 22,400 12,000
Long-term debt ....................................... 331,408 333,423
Cash bonus plan ...................................... 11,723 17,573
Deferred income taxes ................................ 63,323 65,959
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000
voting shares and 100,000 non-voting
shares authorized, 527,778 voting
shares issued and outstanding .............. 5 5
Additional paid in capital ....................... 46,264 46,264
Accumulated deficit .............................. (18,528) (15,483)
Treasury stock, 4000 shares ...................... (400) --
Note receivable from ESOP ........................ (6,500) (8,000)
--------- ---------
Total stockholders' equity .................... 20,841 22,786
Total liabilities and stockholders'
equity .................................... $ 503,308 $ 523,006
========= =========
See accompanying notes to consolidated financial statements.
1
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................... $ 113,369 $ 120,529 $ 389,917 $ 367,265
Cost of goods sold ......................... 98,430 109,667 334,270 327,559
Depreciation and amortization .............. 7,757 7,635 23,220 23,529
--------- --------- --------- ---------
Gross profit ............................. 7,182 3,227 32,427 16,177
Selling, general and administrative expenses 1,897 1,373 5,080 4,216
--------- --------- --------- ---------
Income from operations ............... 5,285 1,854 27,347 11,961
Interest expense ........................... 10,041 9,745 30,208 29,159
Other income (expense):
Loss on disposal of non-plant assets . (436)
Other, net ........................... 308 547 740 2,035
--------- --------- --------- ---------
308 547 304 2,035
Loss before income taxes
and extraordinary loss ............. (4,448) (7,344) (2,557) (15,163)
Provision (benefit) for income taxes ....... (1,128) (2,451) 488 (4,090)
--------- --------- --------- ---------
Loss before
extraordinary loss ................. (3,320) (4,893) (3,045) (11,073)
Extraordinary loss from early extinguishment
of debt, net of tax benefit of $784 ...... -- 1,456 -- 1,456
Net loss ............................. $ (3,320) $ (6,349) $ (3,045) $ (12,529)
========= ========= ========= =========
Loss per common share:
Before extraordinary loss .......... $ (6.29) $ (9.27) $ (5.77) $ (20.98)
Extraordinary loss ................. -- (2.76) -- (2.76)
--------- --------- --------- ---------
$ (6.29) $ (12.03) $ (5.77) $ (23.74)
========= ========= ========= =========
Weighted average shares outstanding ........ 527,778 527,778 527,778 527,778
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TEXAS PETROCHEMICAL HOLDDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- ---------
Cash flows from operating activities:
Net loss ........................................ $ (3,045) $ (12,529)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss .............................. -- 1,456
Depreciation of fixed assets .................... 18,881 19,097
Amortization of goodwill and other assets ....... 4,339 4,432
Amortization of debt issue costs, debt
discount and deferred premium ................. 4,386 4,241
Loss on sale of non-plant assets ................ 436 --
Earnings from limited partnership ............... (446) (584)
Deferred income taxes ........................... (3,264) (1,710)
Change in:
Accounts receivable ........................... 7,142 (2,712)
Inventories ................................... (6,596) (11,630)
Other assets .................................. 2,398 (6,075)
Accounts payable .............................. (6,414) (9,700)
Accrued expenses .............................. (6,057) 6,140
-------- ---------
Net cash provided by (used in)
operating activities ..................... 11,760 (9,574)
Cash flows from investing activities:
Capital expenditures ............................ (8,907) (6,552)
Proceeds from the sale of non-plant assets ...... 871 3,132
Distribution from limited partnership ........... 410 450
Acquisition of the Company ...................... -- (366,277)
Proceeds from sale of Predecessor assets ........ -- 16,288
-------- ---------
Net cash used in investing activities ...... (7,626) (352,959)
Cash flows from financing activities:
Change in bank overdraft ........................ (4,910) 10,661
Net borrowings under revolver ................... 10,400 3,180
Proceeds from issuance of long-term debt ........ 3,192 398,000
Payments on long-term debt ...................... (7,900) (60,609)
Payment of cash bonus plan ...................... (5,850) (7,438)
Debt issuance costs ............................. (568) (15,538)
Reduction in note receivable from ESOP .......... 1,500 1,500
Proceeds from the sale of common stock, net ..... -- 33,425
Organizational costs ............................ -- (521)
-------- ---------
Net cash provided by (used in)
financing activities ..................... (4,136) 362,660
Net increase (decrease) in cash and cash
equivalents ....................................... (2) 127
Cash and cash equivalents, at beginning of period ... 101 --
-------- ---------
Cash and cash equivalents, at end of period ......... $ 99 $ 127
======== =========
See accompanying notes to consolidated financial statements.
3
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Texas
Petrochemical Holdings, Inc. and its wholly owned subsidiary, TPC Holding Corp.,
collectively referred to as (the "Company"). The Company through its facility in
Houston, Texas is the largest producer of butadiene and butene-1, and the third
largest producer of methyl tertiary-butyl ether ("MTBE"), in North America, in
terms of production capacity. In addition, the Company is the sole producer of
diisobutylene and isobutylene concentrate in the United States and is the
largest domestic merchant supplier of high purity isobutylene to the chemical
market. The Company's products include: (i) butadiene, primarily used to produce
synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer in
gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture of
plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. The Company purchases a significant portion of its crude butadiene
requirements at prices which are adjusted based on the Company's selling price
of butadiene as well as the cost of natural gas used to produce butadiene,
thereby providing the Company with a fixed profit on such sales. Methanol and
isobutane are purchased at prices linked to prevailing market prices.
GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, have been made which are necessary to
fairly present the financial position of the Company as of March 31, 1998 and
the results of its operations and cash flows for the interim period ended March
31, 1998. The results of the interim period should not be regarded as
necessarily indicative of results that may be expected for the entire year. The
financial information presented herein should be read in conjunction with the
audited financial statements and notes included in the Company's Annual Report
for the year ended June 30, 1997. The June 30, 1997 balance sheet was derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles. Certain amounts from prior periods
have been reclassified to conform to current period presentation.
4
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
MARCH 31, JUNE 30,
1998 1997
-------- --------
Finished goods ............................. $ 13,921 $ 8,500
Raw materials .............................. 8,533 7,504
Chemicals and supplies ..................... 2,068 1,922
-------- --------
$ 24,522 $ 17,926
======== ========
PROPERTY, PLANT AND EQUIPMENT:
MARCH 31, JUNE 30,
1998 1997
-------- --------
Chemical plants ............................ $260,230 $259,293
Construction in progress ................... 10,764 3,047
Other ...................................... 2,187 1,934
-------- --------
273,181 264,274
Less accumulated depreciation, depletion
and amortization ....................... 43,196 24,315
-------- --------
$229,985 $239,959
======== ========
OTHER ASSETS:
MARCH 31, JUNE 30,
1998 1997
-------- --------
Debt issue costs ........................... $ 14,112 $ 13,491
Organizational costs ....................... 573 573
Prepaid insurance costs .................... 1,710 --
Intangibles and other ...................... 2,000 2,000
-------- --------
18,395 16,064
Less accumulated amortization .............. 4,638 3,316
-------- --------
$ 13,757 $ 12,748
======== ========
ACCRUED EXPENSES:
MARCH 31, JUNE 30,
1998 1997
-------- --------
Accrued interest ........................... $ 8,300 $ 13,203
Property and sales taxes ................... 1,455 2,866
Federal and state taxes .................... 80 135
Other ...................................... 661 713
-------- --------
$ 10,496 $ 16,917
======== ========
5
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
LONG TERM DEBT:
MARCH 31, JUNE 30,
1998 1997
-------- --------
Bank Credit Agreement:
Term A Loan .................................... $ 21,753 $ 25,781
Term B Loan .................................... 42,639 44,000
ESOP Loan ...................................... 6,500 8,000
Revolving Credit Loans ......................... 22,400 12,000
Senior Subordinated Notes ......................... 225,000 225,000
Deferred premium on Senior Subordinated Notes ..... 2,652 2,893
Discount Notes .................................... 37,726 34,187
Long-term financing ............................... 2,180 --
-------- --------
360,850 351,861
Less current maturities ........................... 7,042 6,438
-------- --------
Long-term debt .................................... $353,808 $345,423
======== ========
The Bank Credit Agreement provided for term loans in the amount of $130
million, an ESOP loan of $10 million, and a revolving credit facility of up to
$40 million. Quarterly principal and interest payments are made under the Bank
Credit Agreement. The final payments under the ESOP Loan, Term A Loan and Term B
Loan are due on June 30, 2001, December 31, 2002 and June 30, 2004,
respectively. The Revolving Credit Loan facility is currently scheduled to
expire on December 31, 2002. The debt under the Bank Credit Agreement bears
interest, at the option of the borrower, based on the LIBOR rate plus a margin
(2.5% and 3% for Term A and Term B, respectively at March 31, 1998) or the
greater of the prime rate and the federal funds rate plus 1/2% plus a margin
(1.5% at March 31, 1998). Substantially all assets of the Company are pledged as
collateral under the Bank Credit Agreement. The Senior Subordinated Notes are
due 2006 and bear interest at 11 1/8% payable semiannually on January 1 and July
1. The Discount Notes are due 2007 and bear interest at 13 1/2% payable
semiannually on January 1 and July 1 beginninG 2002. The Bank Credit Agreement,
the Senior Subordinated Notes and the Discount Notes include certain restrictive
covenants, which include but are not limited to, limitations on capital
expenditures, indebtedness, investments and sales of assets and subsidiary
stock. Additionally, the Bank Credit Agreement requires the Company to maintain
certain financial ratios. On July 31, 1997 the Company obtained an amendment to
the Bank Credit Agreement to waive the debt to EBITDA ratio at June 30, 1997 and
to update the financial ratios relating to fixed charge coverage and debt to
EBITDA for fiscal 1998.
4. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has purchase commitments incident to the ordinary conduct of
business. The prices of such purchase commitments are based on formulas, which
are determined from the prevailing market rate for such products. These
commitments generally have cancellation provisions given proper notification.
6
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
LITIGATION
The Company is involved in various routine legal proceedings which are
incidental to the business. Management of the Company is vigorously defending
such matters and is of the opinion that their ultimate resolution will not have
a material impact on the Company.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency, the U.S.
Coast Guard, the Army Corps of engineers, the Texas Natural Resource
Conservation Commission, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect the cost of compliance
with existing environmental laws will have a material adverse effect on the
Company's financial condition, results of operations or cash flows, there can be
no assurance that future legislation, regulation or judicial or administrative
decisions will not have such an effect.
YEAR 2000 CONVERSION
The Company has recognized the need to ensure that its systems, equipment
and operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company has taken steps to identify areas of risk and has
begun addressing these issues. The total cost of converting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected have a material impact on the Company's
financial position, results of operations or cash flows. However, no estimates
can be made as to the potential adverse impact resulting from the failure of a
third party to prepare for the year 2000.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," SFAS No.
129 "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company has adopted the
provisions of SFAS No. 128 and SFAS No. 129 with no material revisions to the
disclosure in the financial statements. SFAS No. 130 and SFAS 131 are effective
for fiscal years beginning after December 15, 1997. The Company will analyze
these pronouncements to determine what, if any, additional disclosures will be
required thereunder.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto of the Company included
elsewhere in this report.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials) and from time
to time, other external factors, such as the implementation of the Clean Air Act
Amendments of 1990, which has significantly increased the demand for MTBE.
Historically, the Company has successfully mitigated the cyclicality of the
markets for certain of its end products by entering into contracts with pricing
which allows for a fixed profit by linking prices directly or indirectly to raw
material costs. In addition, the Company has attempted to optimize the use of
isobutylene, an intermediate feedstock produced by the Company, to produce MTBE
or higher margin specialty products depending on prevailing market conditions.
REVENUES
The Company's revenues are a function of the volume of products sold by the
Company and the prices for such products. The following tables set forth the
Company's historical revenues and the percentages of historical revenues by
product and volume of products sold, for the three and nine months ended March
31, 1998 and 1997.
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Butadiene ............ $ 31.6 28% $ 34.7 29% $104.2 27% $ 97.3 26%
MTBE ................. 49.9 44 52.1 43 175.7 45 180.2
49
n-Butylenes .......... 10.7 10 12.1 10 43.2 11 33.6 9
Specialty Isobutylenes 17.5 15 16.7 14 54.9 14 42.6 12
Other(1) ............. 3.7 3 4.9 4 11.9 3 13.5 4
------ --- ------ --- ------ --- ------ ---
Total ................ $113.4 100% $120.5 100% $389.9 100% $367.2 100%
====== === ====== === ====== === ====== ===
</TABLE>
- ----------
(1) Includes utility revenues and revenues realized from the Company's
terminalling facilities.
8
<PAGE>
SALES VOLUMES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(MILLION OF POUNDS, EXCEPT WHERE NOTED)
Butadiene ...................... 202.4 190.6 604.7 547.1
MTBE(1) ........................ 70.3 61.9 211.6 212.3
n-Butylenes .................... 62.0 59.5 240.3 175.0
Specialty Isobutylenes ......... 90.3 75.7 269.0 176.5
- --------------
(1) Volumes in million of gallons.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $113.4 100% $120.5 100% $389.9 100% $367.2 100%
Cost of goods sold ................ 98.4 87 109.7 91 334.3 86 327.5 89
Depreciation and amortization ..... 7.8 7 7.6 6 23.2 6 23.5 6
------ --- ------ --- ------ --- ------ ---
Gross profit .................. 7.2 6 3.2 3 32.4 8 16.2 5
Selling, general and administrative 1.9 1 1.4 1 5.1 1 4.2 1
------ --- ------ --- ------ --- ------ ---
Income from operations ........ $ 5.3 5% $ 1.8 2% $ 27.3 7% $ 12.0 4%
====== === ====== === ====== === ====== ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997
REVENUES
The Company's revenues decreased by approximately 6%, or $7.1 million, to
$113.4 million for the three months ended March 31, 1998 from $120.5 million for
the three months ended March 31, 1997. Overall sales revenue was down due to
lower product sales prices. Butadiene contract sales prices dropped as imported
butadiene supply increased. Butadiene sales volumes, however, increased as a
result of strong market demand and higher production levels. MTBE sales revenue
decreased due to lower average MTBE sales prices, which fell along with crude
oil and gasoline prices. MTBE volumes were significantly higher due to higher
production rates in the current period. N-butylene sales revenue dropped
slightly during the period with volumes remaining stable. Specialty isobutylene
sales revenues increased despite lower sales prices due to significantly higher
sales volumes of isobutylene concentrate, high-purity isobutylene and
diisobutylene.
GROSS PROFIT
Despite the drop in sales revenue, gross profit increased by approximately
125%, or $4.0 million, to $7.2 million for the three months ended March 31, 1998
from $3.2 million for the three months ended March 31, 1997. Gross margin during
this period increased to 6.3% from 2.7%. This increase was primarily
attributable to higher MTBE margins and increased sales volumes of butadiene and
specialty isobutylenes. MTBE margins improved as a result of higher sales
volumes and lower isobutane and methanol costs.
9
<PAGE>
INCOME FROM OPERATIONS
Income from operations increased by approximately 194%, or $3.5 million, to
$5.3 million for the three months ended March 31, 1998 from $1.8 million for the
three months ended March 31, 1997. Operating margin during this period increased
to 4.7% from 1.5%. This increase in income from operations and operating margin
was primarily due to the same factors contributing to the increase in gross
profit and gross margin described above.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 1997
REVENUES
The Company's revenues increased by approximately 6%, or $22.7 million, to
$389.9 million for the nine months ended March 31, 1998 from $367.2 million for
the nine months ended March 31, 1997. Despite significantly lower butadiene
prices, sales revenues increased approximately 7% as a result of higher sales
volumes. Butadiene sales volumes continue to remain strong as a result of market
demand and increased production levels. MTBE sales revenues were lower as a
result of lower sales prices, which were impacted significantly during the most
recent quarter. N-butylene sales revenue increased significantly due to higher
sales volumes particularly during the first half of the fiscal year. Sales
volumes of butene-1 increased due to an unplanned shutdown of a major competitor
in the market. The Company was able to successfully increase its butene-1
production rates to meet this demand from customers. Sales volumes of butene-2
to the chemical market also increased during the current year. Sales volumes of
isobutylene concentrate have returned to more historical levels due to
improvements in market fundamentals. Sales of high-purity isobutylene and
diisobutylene improved as a result of higher customer demand.
GROSS PROFIT
Gross profit increased by approximately 100%, or $16.2 million, to $32.4
million for the nine months ended March 31, 1998 from $16.2 million for the nine
months ended March 31, 1997. Gross margin during this period increased to 8.3%
from 4.4%. This increase was primarily attributable to higher MTBE margins and
increased sales volumes of butadiene, n-butylenes and specialty isobutylenes.
MTBE margins improved primarily due to lower isobutane costs. This improvement
was partially offset by slightly lower average MTBE sales prices and higher
average methanol costs.
INCOME FROM OPERATIONS
Income from operations increased by approximately 128%, or $15.3 million, to
$27.3 million for the nine months ended March 31, 1998 from $12.0 million for
the nine months ended March 31, 1997. Operating margin during this period
increased to 7.0% from 3.3%. This increase in income from operations and
operating margin was primarily due to the same factors contributing to the
increase in gross profit and gross margin described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately $0.9
million, to $5.1 million for the nine months ended March 31, 1998 from $4.2
million for the nine months ended March 31, 1997. The increase in selling,
general and administrative expenses was associated with increased business
development activity in the current period.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 1997
Net cash provided by (used in) operating activities was $11.8 million for
the nine months ended March 31, 1998 compared to $(9.6) million for the nine
months ended March 31, 1997. The change of $21.4 million was attributable to
increased profitability offset by changes in working capital as a result of
timing differences in receipts and disbursements of cash. Net cash used in
investing activities was $7.6 million for the nine months ended March 31, 1998
compared to $353.0 million for the nine months ended March 31, 1997. The
decrease of $345.4 million was attributable to the Acquisition of the Company
during the prior year. Net cash provided by (used in) financing activities was
$(4.1) million for the nine months ended March 31, 1998 compared to $362.7
million for the nine months ended March 31, 1997. The change of $366.8 million
was attributable to the financing of the Acquisition of the Company during the
prior year.
LIQUIDITY
The Company's liquidity needs arise primarily from principal and interest
payments under the Bank Credit Agreement and the Subordinated Notes. The
Company's primary source of funds to meet debt service requirements is net cash
flow provided by operating activities. Operating cash flow is significantly
impacted by raw materials cost as well as the selling price and volume variances
of finished goods. The Company enters into supply contracts for certain of its
products in order to mitigate the impact of changing prices. Additionally, the
Company has a $40 million Revolving Credit Facility, of which $22.4 million was
in use at March 31, 1998, to provide adequate funds for ongoing operations,
working capital and planned capital expenditures. The Company believes that the
availability of funds under the Revolving Credit Facility are sufficient to
cover any current liquidity needs which could arise as a result of negative
working capital. The Company's ability to borrow is limited by the terms of the
Bank Credit Agreement, the Subordinated Notes and the Discount Notes. The Bank
Credit Agreement, the Subordinated Notes and the Discount Notes include certain
restrictive covenants, which include but are not limited to, the maintenance of
certain financial ratios and limitations on capital expenditures, indebtedness,
investments and sales of assets and subsidiary stock. On July 31, 1997 the
Company obtained an amendment to the Bank Credit Agreement to waive the debt to
EBITDA ratio at June 30, 1997 and to update the financial ratios relating to
fixed charge coverage and debt to EBITDA for fiscal 1998.
CASH BONUS PLAN
In connection with the Acquisition, the Predecessor established a $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering certain third-party
contractors who have contributed to the past success of the Predecessor. During
the nine months ended March 31, 1998, $5.9 million of this amount was paid to
eligible participants and the remaining $19.5 million will be made in 10 equal
future quarterly installments.
CAPITAL EXPENDITURES
The Company's capital expenditures relate principally to improving operating
efficiencies and maintaining environmental compliance. Capital expenditures for
the nine months ended March 31, 1998 were $8.9 million. The Company expenses
approximately $20 million annually for plant maintenance. These maintenance
costs are not treated as capital expenditures.
11
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," SFAS No.
129 "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company has adopted the
provisions of SFAS No. 128 and SFAS No. 129 with no material revisions to the
disclosure in the financial statements. SFAS No. 130 and SFAS 131 are effective
for fiscal years beginning after December 15, 1997. The Company will analyze
these pronouncements to determine what, if any, additional disclosures will be
required thereunder.
YEAR 2000 CONVERSION
The Company has recognized the need to ensure that its systems, equipment
and operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company has taken steps to identify areas of risk and has
begun addressing these issues. The total cost of converting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected have a material impact on the Company's
financial position, results of operations or cash flows. However, no estimates
can be made as to the potential adverse impact resulting from the failure of a
third party to prepare for the year 2000.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This document may include forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
conjunction with the forward looking statements included herein ("Cautionary
Disclosures"). Subsequent written oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Disclosures.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the Company's legal
proceedings previously reported in the Company's Form S-1 for the period ended
December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 1998.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS PETROCHEMICAL HOLDINGS, INC.
(Registrant)
Dated: May 13, 1998 By: CARL S. STUTTS
(Signature)
Carl S. Stutts
Chief Financial Officer
14
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