- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 1999
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 333-11569
---------------------
TEXAS PETROCHEMICAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 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 [X] No [ ]
The number of shares of common stock of the registrant outstanding as of
November 12, 1999 is 528,445.
- --------------------------------------------------------------------------------
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of September 30, 1999 and June 30, 1999 .. 1
Consolidated Statement of Operations for the three months ended
September 30, 1999 and 1998 ......................................... 2
Consolidated Statement of Cash Flows for the three months ended
September 30, 1999 and 1998 ......................................... 3
Notes to Consolidated Financial Statements ............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 19
Signature ................................................................. 20
i
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1999 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .................. $ 223 $ 103
Accounts receivable - trade ................ 48,042 40,220
Inventories ................................ 20,626 19,973
Other current assets ....................... 18,532 18,576
--------- ---------
Total current assets .................... 87,423 78,872
Property, plant and equipment, net ............. 215,914 219,706
Investments in land held for sale .............. 2,058 2,058
Investment in and advances to limited
partnership ................................. 2,944 2,820
Goodwill, net .................................. 168,415 169,560
Other assets, net of accumulated amortization .. 9,607 9,833
--------- ---------
Total assets ............................ $ 486,361 $ 482,849
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ............................. $ -- $ 874
Accounts payable - trade ................... 50,684 38,992
Accrued expenses ........................... 14,615 19,215
Current portion of cash bonus plan ......... 7,811 7,811
Current portion of long-term debt .......... 7,201 7,465
--------- ---------
Total current liabilities ............... 80,311 74,357
Revolving line of credit ....................... -- 2,000
Long-term debt ................................. 328,239 328,467
Cash bonus plan ................................ 10 1,959
Deferred income taxes .......................... 54,757 55,494
Commitments and contingencies (Note 3)
Common stock held by the ESOP .................. 12,600 12,600
Less: unearned compensation .................... (4,410) (5,040)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000
voting and 100,000 shares non-voting
authorized, 528,445 voting shares
issued and outstanding .................. 5 5
Additional paid in capital ................. 36,868 36,738
Treasury stock ............................. (126) --
Accumulated deficit ........................ (21,893) (23,731)
--------- ---------
Total stockholders' equity .............. 14,854 13,012
--------- ---------
Total liabilities and
stockholders' equity ............... $ 486,361 $ 482,849
========= =========
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)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
Revenues ........................................ $ 154,002 $ 100,026
Cost of goods sold .............................. 132,049 80,276
Non-cash ESOP compensation ...................... 130 --
Depreciation and amortization ................... 5,864 7,692
--------- ---------
Gross profit ................................ 15,959 12,058
Selling, general and
administrative expenses ...................... 1,990 2,318
--------- ---------
Income from operations .................. 13,969 9,740
Interest expense ................................ 9,767 9,744
Other income, net ............................... 102 687
--------- ---------
Income before income taxes .............. 4,304 683
Provision for income taxes ...................... 2,336 900
--------- ---------
Net income (loss) ....................... $ 1,968 $ (217)
========= =========
Basic income (loss) per share ................... $ 4.01 $ (0.46)
========= =========
Weighted average shares outstanding - basic ..... 490,678 470,278
========= =========
Diluted income (loss) per share ................. $ 3.95 $ (0.46)
========= =========
Weighted average shares outstanding - diluted ... 497,339 470,278
========= =========
See accompanying note to consolidated financial statements.
2
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income ................................... $ 1,968 $ (217)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of fixed assets ................. 4,668 6,463
Amortization of goodwill and other
assets .................................... 1,193 1,229
Amortization of debt issue costs and
deferred premium .......................... 1,812 1,617
Earnings from limited partnership ............ (124) (208)
Deferred income taxes ........................ (966) (1,276)
Non-cash ESOP compensation ................... 130 --
Change in:
Accounts receivable ........................ (7,822) 14,008
Inventories ................................ (653) (7,931)
Other assets ............................... 79 (914)
Accounts payable ........................... 11,692 (2,678)
Accrued expenses ........................... (4,596) (4,600)
-------- --------
Net cash provided by
operating activities ................. 7,381 5,493
Cash flows from investing activities:
Capital expenditures ......................... (876) (4,019)
Distribution from limited partnership ........ -- 330
-------- --------
Net cash used in investing activities ... (876) (3,689)
Cash flows from financing activities:
Change in bank overdraft ..................... (874) 201
Net borrowings (repayments) under revolver ... (2,000) 500
Payments on long-term debt ................... (1,910) (1,744)
Payment of cash bonus plan ................... (1,949) (1,957)
Debt issuance costs .......................... (152) (163)
Reduction in note receivable from ESOP ....... 500 500
-------- --------
Net cash used in financing activities ........ (6,385) (2,663)
-------- --------
Net increase (decrease) in cash and cash
equivalents ................................... 120 (859)
Cash and cash equivalents, at beginning
of period ..................................... 103 956
-------- --------
Cash and cash equivalents, at end of period ...... $ 223 $ 97
======== ========
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 third largest producer of butadiene, the largest
producer of 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 10-Q 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 September 30, 1999
and the results of its operations and cash flows for the interim period ended
September 30, 1999. 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 Form 10-K
thereto, for the year ended June 30, 1999. The June 30, 1999 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.
EARNINGS PER SHARE
The basic and diluted weighted average shares outstanding used in the
computation of earnings (loss) per share are net of 35,000 and 55,000 shares
held by the Employee Stock Ownership Plan that are not allocated to employees as
of September 30, 1999 and 1998, respectively. The diluted weighted average
shares outstanding for the three months ended September 30, 1999 includes the
dilutive effect of stock options outstanding of 6,661 shares. The effect of
options was antidilutive for the three months ended September 30, 1998 and
therefore was excluded from the earning/loss per share calculation.
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:
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ----------
Finished goods $ 9,431 $10,594
Raw materials 10,251 8,053
Chemicals and supplies 944 1,326
------- -------
$20,626 $19,973
======= =======
OTHER CURRENT ASSETS:
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
Catalyst inventory $ 9,141 $7,463
Deferred turnaround costs 1,933 2,585
Prepaid and other 7,458 8,528
------- -------
$18,532 $18,576
======= =======
PROPERTY, PLANT AND EQUIPMENT:
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
Chemical plants $281,392 $277,117
Construction in progress 5,435 8,834
Other 5,202 5,202
------- --------
292,029 291,153
Less accumulated depreciation, depletion
and amortization 76,115 71,447
-------- --------
$215,914 $219,706
======== ========
5
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
ACCRUED EXPENSES:
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
Accrued interest $ 6,541 $13,893
Property and sales taxes 2,934 1,995
Federal and state taxes 3,869 2,731
Other 1,271 596
------- -------
$14,615 $19,215
======= =======
LONG TERM DEBT:
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
Bank Credit Agreement:
Term A Loan $17,103 $18,002
Term B Loan 41,161 41,407
ESOP Loan 3,500 4,000
Revolving Credit Loans - 2,000
Senior Subordinated Notes 225,000 225,000
Discount Notes 45,893 44,394
Deferred premium on Senior Subordinated Notes 2,170 2,250
Long-term financing 613 879
------- -------
335,440 337,932
Less current maturities 7,201 7,465
-------- --------
Long-term debt $328,239 $330,467
======== ========
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
(2.0% and 3% for Term A and Term B, respectively at September 30, 1999) or the
greater of the prime rate and the federal funds rate plus 1/2% plus a margin
(1.0% at September 30, 1999). 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 in 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. As of June 30, 1999 the Company obtained
an amendment to the Bank Credit Agreement to update the financial ratios
relating to fixed charge coverage and debt to EBITDA for fiscal 2000.
6
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. 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.
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.
4. SUPPLEMENTAL GUARANTOR INFORMATION
TPC Holding Corp. a wholly owned subsidiary of Texas Petrochemical Holdings,
Inc. has fully and unconditionally guaranteed, on a joint and several basis,
Texas Petrochemical Holdings, Inc's. obligations relative to the Discount Notes
due 2007 in an Event of Default. TPC Holding Corp. conducts its operations
through its subsidiaries and is dependent upon distribution from these
subsidiaries as its source of cash flow. Management has determined that
separate, full financial statements of TPC Holding Corp. ("Guarantor") would not
be material to investors and such financial statements are not provided.
Supplemental combining financial information of Texas Petrochemical Holdings,
Inc. is presented below:
7
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ - $ - $ 223 $ - $ 223
Accounts receivable - trade ................... 48,042 48,042
Inventories ................................... 20,626 20,626
Other current assets .......................... (177) 18,709 18,532
--------- --------- --------- --------- ---------
Total current assets ....................... (177) 87,600 87,423
Property, plant and equipment, net ................ 215,914 215,914
Investments in land held for sale ................. 2,058 2,058
Investment in and advances to
limited partnership ............................ 2,944 2,944
Goodwill, net ..................................... 168,415 168,415
Other assets, net of accumulated
amortization ................................... 445 - 9,162 9,607
Consolidated subsidiaries ......................... 63,108 63,108 -- (126,216)
--------- --------- --------- --------- ---------
Total assets ............................... $ 63,376 $ 63,108 $ 486,093 $(126,216) $ 482,361
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................ $ - $ - $ - $ - $ -
Accounts payable - trade ...................... 50,684 50,684
Payable to Parent ............................. 2,750 (2,750)
Accrued expenses .............................. 11,865 2,750 14,615
Current portion of cash bonus plan ............ 7,811 7,811
Current portion of long-term debt ............. 7,201 7,201
--------- --------- --------- --------- ---------
Total current liabilities .................. 80,311 80,311
Revolving line of credit .......................... - -
Long-term debt .................................... 45,893 282,346 328,239
Cash bonus plan ................................... 10 10
Deferred income taxes ............................. (5,561) 60,318 54,757
Common stock held by the ESOP ..................... 12,600 12,600
Less: unearned compensation ....................... (4,410) (4,410)
Stockholders' equity:
Common Stock .................................. 5 4,162 (4,162) 5
Additional paid in capital .................... 36,868 72,842 72,180 (145,022) 36,868
Treasury stock ................................ (126) (126)
Accumulated deficit ........................... (21,893) (9,734) (9,734) 19,468 (21,893)
Note receivable from ESOP ..................... (3,500) 3,500
--------- --------- --------- --------- ---------
Total stockholders' equity ................. 14,854 63,108 63,108 (126,216) 14,854
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 63,376 $ 63,108 $ 486,093 $(126,216) $ 486,361
========= ========= ========= ========= =========
</TABLE>
8
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ - $ - $ 103 $ - $ 103
Accounts receivable - trade ....................... 40,220 40,220
Inventories ....................................... 19,973 19,973
Other current assets .............................. (48) 18,624 18,576
--------- --------- --------- --------- ---------
Total current assets ........................... (48) 78,920 78,872
Property, plant and equipment, net .................... 219,706 219,706
Investments in land held for sale ..................... 2,058 2,058
Investment in and advances to
limited partnership ................................ 2,820 2,820
Goodwill, net ......................................... 169,560 169,560
Other assets, net of accumulated
amortization ....................................... 459 9,374 9,833
Consolidated subsidiaries ............................. 59,518 59,518 (119,036) -
--------- --------- --------- --------- ---------
Total assets ................................... $ 59,929 $ 59,518 $ 482,438 $(119,036) $ 482,849
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Bank overdraft .................................... $ - $ - $ 874 $ - $ 874
Accounts payable - trade .......................... 38,992 38,992
Payable to Parent ................................. 1,987 (1,987)
Accrued expenses .................................. 17,228 1,987 19,215
Current portion of cash bonus plan ................ 7,811 7,811
Current portion of long-term debt ................. 7,465 7,465
--------- --------- --------- --------- ---------
Total current liabilities ...................... 74,357 74,357
Revolving line of credit .............................. 2,000 2,000
Long-term debt ........................................ 44,394 284,073 328,467
Cash bonus plan ....................................... 1,959 1,959
Deferred income taxes ................................. (5,037) 60,531 55,494
Common stock held by the ESOP ......................... 12,600 12,600
Less: unearned compensation ........................... (5,040) (5,040)
Stockholders' equity:
Common Stock ...................................... 5 4,162 (4,162) 5
Additional paid in capital ........................ 36,738 72,212 72,050 (144,262) 36,738
Accumulated deficit ............................... (23,731) (12,694) (12,694) 25,388 (23,731)
Note receivable from ESOP ......................... (4,000) 4,000
--------- --------- --------- --------- ---------
Total stockholders' equity ..................... 13,012 59,518 59,518 (119,036) 13,012
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ... $ 59,929 $ 59,518 $ 482,438 (119,036) $ 482,849
========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Three Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $154,002 $ - $154,002
Cost of goods sold ......................... 132,049 132,049
Non-cash ESOP compensation ................. 130 130
Depreciation and amortization .............. 5,864 5,864
-------- -------- -------- -------- --------
Gross profit ........................... 15,959 15,959
Selling, general and administrative expenses 1 1,989 1,990
-------- -------- -------- -------- --------
Income (loss) from operations ...... (1) 13,970 13,969
Interest expense ........................... 1,512 8,255 9,767
Other income (expense) ..................... 102 102
-------- -------- -------- -------- --------
Income (loss) before income taxes .. (1,513) 5,817 4,304
Provision (benefit) for income taxes ....... (521) 2,857 2,336
Equity in net income of subsidiaries ....... 2,960 2,960 (5,920)
-------- -------- -------- -------- --------
Net income ......................... $ 1,968 $ 2,960 $ 2,960 $ (5,920) $ 1,968
======== ======== ======== ======== ========
</TABLE>
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Three Months Ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................ $ - $ - $ 100,026 $ - $ 100,026
Cost of goods sold ...................... 80,276 80,276
Depreciation and amortization ........... 7,692 7,692
--------- --------- --------- --------- ---------
Gross profit ........................ 12,058 12,058
Selling, general and administrative
expenses ............................. 3 2,315 2,318
Income (loss) from operations ... (3) 9,743 9,740
Interest expense ........................ 1,329 8,415 9,744
Other income (expense) .................. 687 687
--------- --------- --------- --------- ---------
Income (loss) before income taxes (1,332) 2,015 683
Provision (benefit) for income taxes (460) 1,360 900
Equity in net income of subsidiaries .... 655 655 (1,310)
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (217) $ 655 $ 655 $ (1,310) $ (217)
========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Three Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ 1,968 $ 2,960 $ 2,960 $(5,920) $1,968
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets ...................... 4,668 4,668
Amortization of goodwill and other assets ......... 1,193 1,193
Amortization of debt issue costs .................. 1,512 300 1,812
Earnings from limited partnership ................. (124) (124)
Deferred income taxes ............................. (524) (442) (966)
Non-cash ESOP compensation ........................ 130 130
Change in:
Accounts receivable ............................. (7,822) (7,822)
Inventories ..................................... (653) (653)
Other assets .................................... 79 79
Accounts payable, accrueds and other ............ 4 7,092 7,096
------- ------- ------- ------- -------
Net cash provided by operating activities .... 2,960 2,960 7,381 (5,920) 7,381
Cash flows from investing activities:
Capital expenditures .............................. (876) (876)
------- ------- ------- ------- -------
Net cash used in investing activities ........ (876) (876)
Cash flows from financing activities:
Change in bank overdraft .......................... (874) (874)
Net repayments under revolver ..................... (2,000) (2,000)
Payments on long-term debt ........................ (1,910) (1,910)
Payment of cash bonus plan ........................ (1,949) (1,949)
Debt issuance costs ............................... (152) (152)
Reduction in note receivable from ESOP ............ 500 500
------- ------- ------- ------- -------
Net cash used in financing activities ........ (6,385) (6,385)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents .. 2,960 2,960 120 (5,920) 120
Cash and cash equivalents, at beginning of period ..... 103 103
------- ------- ------- ------- -------
Cash and cash equivalents, at end of period ........... $ 2,960 $ 2,960 $ 223 $(5,920) $ 223
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Three Months Ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................ $ (217) $ 655 $ 655 $ (1,310) $ (217)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets ............. 6,463 6,463
Amortization of goodwill and other assets 1,229 1,229
Amortization of debt issue costs ......... 1,329 288 1,617
Earnings from limited partnership ........ (208) (208)
Deferred income taxes .................... (460) (816) (1,276)
Change in:
Accounts receivable .................... 14,008 14,008
Inventories ............................ (7,931) (7,931)
Other assets ........................... (914) (914)
Accounts payable, accrueds and other ... 3 (7,281) (7,278)
-------- -------- -------- -------- --------
Net cash provided by operating
activities ....................... 655 655 5,493 (1,310) 5,493
Cash flows from investing activities:
Capital expenditures ..................... (4,019) (4,019)
Distribution from limited partnership .... 330 330
-------- -------- -------- -------- --------
Net cash used in investing activities (3,689) (3,689)
Cash flows from financing activities:
Change in bank overdraft ................. 201 201
Net repayments under revolver ............ 500 500
Payments on long-term debt ............... (1,744) (1,744)
Payment of cash bonus plan ............... (1,957) (1,957)
Debt issuance costs ...................... (163) (163)
Reduction in note receivable from ESOP ... 500 500
-------- -------- -------- -------- --------
Net cash used in financing activities (2,663) (2,663)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents ............................... 655 655 (859) (1,310) (859)
Cash and cash equivalents, at beginning
of period ................................. 956 956
-------- -------- -------- -------- --------
Cash and cash equivalents, at end of period .. $ 655 $ 655 $ 97 $ (1,310) $ 97
======== ======== ======== ======== ========
</TABLE>
12
<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.
MTBE ENVIRONMENTAL AND MARKET ISSUES
The possibly adverse effects of MTBE on health and the environment has become
a statewide concern in California because MTBE has appeared in certain drinking
water wells. It is believed that this is the result of leaks from older
underground gasoline storage tanks and pipelines.
In addition, certain bodies of water have shown the presence of MTBE. A
typical source of MTBE in these bodies is the operation of two-cycle outboard
motors, which do not fully combust gasoline. Certain regulatory bodies are
considering imposing limitations on the use of two-cycle outboard motors in
bodies of water that are also used as sources of drinking water.
In California, the legislature required the state Department of Health
Services (DHS) to assess MTBE and to set the maximum permissible levels of MTBE
in drinking water in 1999. The levels are referred to as the primary and
secondary maximum contaminant levels (MCLs). Secondary MCLs or secondary
drinking water standards apply to chemicals in public drinking water that may
adversely affect the taste, odor, or appearance of the water, and may cause
people served by the public water system to discontinue its use. In January
1999, the DHS adopted 5 parts per billion (ppb) as the California secondary MCL
for MTBE based upon the aesthetic factors alone.
The primary MCL for MTBE in California is pending in the regulatory process
at this time. The DHS has proposed 13 ppb as the primary MCL for MTBE. It will
accept public comments on the proposal through November 1, 1999. It is unknown
at this time whether the proposed primary MCL would be adopted as the applicable
standard in California or when it would become effective. The DHS is authorized
to modify the proposed primary MCL for MTBE in response to public comments. The
primary MCL for MTBE is based upon the public health goal (PHG) for MTBE, and
the technical feasibility and costs associated with compliance. Notably,
however, a public health goal of 13 ppb for MTBE was set by the California
Office of Environmental Health Hazard Assessment
13
<PAGE>
(OEHHA) in March 1999 based exclusively on public health considerations. PHGs
represent the level of chemicals in drinking water that would pose no
significant health risks to individuals, and are non-mandatory goals. Until a
primary MCL is adopted, the DHS will enforce the action level of 13 ppb for MTBE
in lieu of the former level of 35 ppb set in 1991. If MTBE is found in a
drinking water supply at levels exceeding 13 ppb, it is expected that the DHS
will require treatment for the removal of MTBE from the water system to attain
compliance.
On March 25, 1999, California Governor Gray Davis declared that, "on balance,
there is a significant risk to the environment from using (MTBE) in gasoline in
California," and issued an executive order calling for the removal of MTBE from
gasoline at the earliest possible date and no later than December 31, 2002.
Governor Davis also mandated state agencies to conduct an environmental analysis
and evaluation of ethanol as a possible substitute for MTBE and to seek relief
from the requirement of the CAA to use oxygenates in gasoline in certain areas
of the state. In September 1999, several bills codifying the Executive Order
were before the California legislature. Senate Bill 192 would prohibit the sale
of gasoline containing MTBE on or after January 1, 2003. The bill would also
require the State Energy Resources Conservation and Development Commission to
report to the legislature the amount of MTBE used in gasoline in California by
refineries on a quarterly basis. Senate Bill 989 would require various state
agencies to develop guidelines for the investigation, remediation, and clean up
of MTBE in ground water. The bill would authorize the California Environmental
Protection Agency to prohibit the use of MTBE in motor vehicle fuel before
December 31, 2002, on a sub-regional basis in the Bay Area Air Basin, or in any
other air basin in the state.
Although the EPA continues to require oxygenates to be added to gasoline in
certain regions of the country either year-round or during the winter months,
and MTBE continues to be the predominate oxygenate used, a panel appointed by
the EPA has issued a report calling for the reduction in the use of MTBE in
gasoline. No assurance can be given that actions will not be taken to restrict
or prohibit the use of MTBE in certain areas of the country or to remove the
oxygenate requirement from the CAA. Any restriction on or prohibition of the use
of MTBE could have a material adverse effect on the Company's financial
condition or results of operations.
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 months ended September 30,
1999 and 1998.
REVENUES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------------ -------------
(DOLLARS IN MILLIONS)
Butadiene $ 26.1 17% $ 26.4 27%
MTBE 93.3 61 44.2 44
n-Butylenes 16.7 11 11.2 11
Specialty Isobutylenes 14.5 9 14.8 15
Other(1) 3.4 2 3.4 3
------ --- ------ ---
Total $154.0 100% $100.0 100%
====== === ====== ===
- ---------------
(1) Includes utility revenues and revenues realized from the Company's
terminalling facilities.
14
<PAGE>
SALES VOLUMES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------------ -------------
(MILLION OF POUNDS, EXCEPT WHERE NOTED)
Butadiene 206.9 195.9
MTBE(1) 116.8 65.6
n-Butylenes 118.0 82.9
Specialty Isobutylenes 66.6 74.9
- ----------
(1) Volumes in millions of gallons. Includes 32.3 million and 3.6 million
gallons of finished MTBE purchased for resale for the three months ended
September 30, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
------------- --------------
(DOLLARS IN MLLIONS)
Revenues $154.0 100% $100.0 100%
Cost of goods sold 132.0 86 80.3 80
Non-cash ESOP compensation 0.1 - - -
Depreciation and amortization 5.9 4 7.7 8
------ --- ------ ---
Gross profit 16.0 10 12.0 12
Selling, general and administrative expenses 2.0 1 2.3 2
------ --- ------ ---
Income from operations $ 14.0 9% $ 9.7 10%
====== === ====== ===
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
The Company's revenues increased by approximately 54%, or $54.0 million, to
$154.0 million for the three months ended September 30, 1999 from $100.0 million
for the three months ended September 30, 1998. Butadiene sales revenues remained
flat as increased sales volumes were offset by lower sales prices. MTBE sales
revenues increased approximately 111% as a result of higher sales volumes and
sales prices as compared to the prior year quarter. MTBE prices are
significantly higher as a result of increases in gasoline and crude oil prices.
MTBE sales volumes were higher due to increase resale of purchased product,
higher production rates and timing of product deliveries. N-butylene sale
revenues increased over the prior year quarter due to higher sales volumes.
Specialty isobutylene sales revenues remained flat as lower sales volumes were
offset by higher sales prices. Sales volumes of isobutylene concentrate were
lower due to high inventory levels at one of the Company's primary customers.
Sales volumes of high purity isobutylene were lower due to lower customer demand
largely attributable to temporary downtime at customer facilities. Diisobutylene
sales volumes were up slightly as compared to the prior year quarter.
15
<PAGE>
GROSS PROFIT
Gross profit increased by approximately 33%, or $4.0 million, to $16.0
million for the three months ended September 30, 1999 from $12.0 million for the
three months ended September 30, 1998. Gross margin during this period decreased
to 10.4% from 12.0% due to the higher sales volumes of MTBE purchased for
resale. Gross profit during the period increased due to higher sales volumes of
MTBE and lower depreciation and amortization charges during the current quarter.
MTBE sales volumes were higher due to increase resale of purchased product,
higher production rates and timing of product deliveries. Depreciation and
amortization was lower by $1.8 million due to the change in depreciable lives of
certain plant assets from 10 years to 15 years beginning in January 1999.
INCOME FROM OPERATIONS
Income from operations increased by approximately 44%, or $4.3 million, to
$14.0 million for the three months ended September 30, 1999 from $9.7 million
for the three months ended September 30, 1998. Operating margin during this
period decreased to 9.1% from 9.7%. This increase in income from operations was
primarily due to the same factors contributing to the decrease in gross profit
described above. The decrease in selling, general and administrative costs
associated with our system implementation in the prior year contributed to the
increase in income from operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net cash provided by operating activities was $7.4 million for the three
months ended September 30, 1999 compared to $5.5 million for the three months
ended September 30, 1998. The increase of $1.9 million was attributable to
increased net income. Net cash used in investing activities was $0.9 million for
the three months ended September 30, 1999 compared to $3.7 million for the three
months ended September 30, 1998. The decrease of $2.8 million was attributable
to lower capital expenditures. Net cash used in financing activities was $6.4
million for the three months ended September 30, 1999 compared to $2.7 million
for the three months ended September 30, 1998. The increase of $3.7 million was
attributable to repayments of borrowing under the revolver and the change in
bank overdraft.
16
<PAGE>
LIQUIDITY
The Company's liquidity needs arise primarily from principal and interest
payments under the Bank Credit Agreement and the Subordinated Notes. Interest
payments are not made on the Discount Notes until 2002. 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 all of which was available at September
30, 1999, 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. As of June 30, 1999 the
Company obtained an amendment to the Bank Credit Agreement to update the
financial ratios relating to fixed charge coverage and debt to EBITDA for fiscal
2000.
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 quarter ended September 30, 1999, $2.0 million of this amount was paid to
eligible participants and the remaining $7.8 million will be made in four equal
future quarterly installments.
CAPITAL EXPENDITURES
The Company's capital expenditures relate principally to improving operating
efficiencies and maintaining environmental compliance. Capital expenditures for
three months ended September 30, 1999 were $0.9 million. The Company expenses
approximately $20 million annually for plant maintenance. These maintenance
costs are not treated as capital expenditures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company has entered into interest rate
swap and cap agreements, and may have entered into other types of contracts,
which are included in the scope of SFAS No. 133. The Company will analyze SFAS
No. 133 to determine what effect it will have on the Company's future financial
statements and disclosures. In June 1999, SFAS No. 137 was issued to delay the
required effective date of SFAS No. 133 from fiscal years beginning after June
15, 1999 to fiscal years beginning after June 15, 2000.
17
<PAGE>
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. The issues arise from computer programs, computer equipment and other
equipment with embedded chips or processors that use two digits rather than four
to designate the year. Date-sensitive computer operations may recognize a date
using "00" as the year 1900 rather than the year 2000, resulting in system
failures or miscalculations, which could potentially cause operational
disruptions.
In preparation the Company has established a Steering Committee composed of
members all functional groups of organization to address these issues. This
committee is responsible for prioritizing the Company's efforts and ensuring
that the appropriate resources both internal and external have been dedicated to
the project. The committee's assessment was focused on those areas, which were
considered high-risk critical business processes. The assessment and future
progress has been based on the following categories including plant automation
and process control, client server, desktop, communications, enterprise
infrastructure and overall readiness. The Company's overall readiness expressed
as a percentage of completion as of October 30, 1999 is approximately 95%. The
total estimated spending for all categories is expected to range from $15 to $16
million. The majority of these costs relate to capital investments made in
automating our plant production processes and in upgrading our financial
accounting systems.
The Company believes that all significant systems controlled by the Company
will be Year 2000 ready in the last half of calendar 1999. The Company's
operations are dependent upon third parties for continuous supply of raw
materials, natural gas, transportation and storage. While the Company has
attempted to obtain an assessment of the readiness of these third parties, there
can be no assurance that all third parties will have their systems ready. The
Company is developing contingency plans to be implemented prior to end of
calendar 1999. These contingency plans are being developed to avoid any material
interruption of our core business operations. These plans include alternative
operating procedures and appropriate staffing on critical dates.
The Company believes that it has taken all of the appropriate steps to
prevent any year 2000 issues from arising. However, there can be no assurances
that all internal and third party systems will operate as expected into calendar
year 2000 and beyond. The failure of any such systems could have a material
impact on the operations of the Company's production facilities and cause a
general business interruption. The Company is unable to determine what the
impact on the financial results of the Company could be from such failure.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THE QUARTERLY REPORT ON
FORM 10-Q ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
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.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant quantitative or qualitative changes during
the first fiscal quarter of 1999 in the Company's risk sensitive instruments.
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 10-K for the year ended
June 30, 1999.
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
September 30, 1999.
19
<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: November 12, 1999 By: /s/ CARL S. STUTTS
Carl S. Stutts
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TEXAS PETROCHEMICAL HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 223
<SECURITIES> 0
<RECEIVABLES> 48,042
<ALLOWANCES> 0
<INVENTORY> 20,626
<CURRENT-ASSETS> 87,423
<PP&E> 215,914
<DEPRECIATION> 76,115
<TOTAL-ASSETS> 486,361
<CURRENT-LIABILITIES> 80,311
<BONDS> 270,893
0
0
<COMMON> 5
<OTHER-SE> 14,849
<TOTAL-LIABILITY-AND-EQUITY> 486,361
<SALES> 154,002
<TOTAL-REVENUES> 154,002
<CGS> 132,049
<TOTAL-COSTS> 140,033
<OTHER-EXPENSES> (102)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,767
<INCOME-PRETAX> 4,304
<INCOME-TAX> 2,336
<INCOME-CONTINUING> 1,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,968
<EPS-BASIC> 4.01
<EPS-DILUTED> 3.95
</TABLE>
