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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 DECEMBER 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 333-11569
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TEXAS PETROCHEMICALS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-1778313
(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
February 12, 1999 is 4,162,000.
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TEXAS PETROCHEMICALS CORPORATION
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of December 31, 1998
and June 30, 1998 1
Consolidated Statement of Operations for the
three and six months ended December 31, 1998 and 1997 2
Consolidated Statement of Cash Flows for the six
months ended December 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
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS PETROCHEMICALS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, JUNE 30,
1998 1998
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 204 $ 956
Accounts receivable - trade ............................. 45,003 45,298
Inventories ............................................. 18,144 17,210
Other current assets .................................... 19,080 13,636
--------- ---------
Total current assets ................................. 82,431 77,100
Property, plant and equipment, net .......................... 225,028 227,217
Investments in land held for sale ........................... 2,058 2,579
Investment in and advances to limited partnership ........... 2,928 3,035
Goodwill, net ............................................... 171,852 174,143
Other assets, net of accumulated amortization ............... 10,297 12,679
--------- ---------
Total assets ......................................... $ 494,594 $ 496,753
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft .......................................... $ 3,955 $ --
Accounts payable - trade ................................ 30,809 28,000
Payable to Parent ....................................... -- 2,850
Accrued expenses ........................................ 21,878 18,868
Current portion of cash bonus plan ...................... 7,810 7,811
Current portion of long-term debt ....................... 6,999 6,982
--------- ---------
Total current liabilities ............................ 71,451 64,511
Revolving line of credit .................................... 12,600 12,000
Long-term debt .............................................. 288,182 291,856
Cash bonus plan ............................................. 5,856 9,766
Deferred income taxes ....................................... 61,135 62,941
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $1 par value, 4,500,000 shares authorized
and 4,126,000 shares issued and outstanding .......... 4,162 4,162
Additional paid in capital .............................. 71,773 71,643
Accumulated deficit ..................................... (15,565) (14,126)
Note receivable from ESOP ............................... (5,000) (6,000)
--------- ---------
Total stockholders' equity ........................... 55,370 55,679
--------- ---------
Total liabilities and stockholders' equity ......... $ 494,594 $ 496,753
========= =========
See accompanying notes to consolidated financial statements.
1
TEXAS PETROCHEMICALS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues ................................... $ 104,918 $ 141,105 $ 204,944 $ 276,548
Cost of goods sold ......................... 89,305 122,189 169,581 235,840
Non-cash ESOP compensation ................. 130 -- 130 --
Depreciation and amortization .............. 7,749 7,736 15,441 15,463
----------- ----------- ----------- -----------
Gross profit ............................. 7,734 11,180 19,792 25,245
Selling, general and administrative expenses 1,757 1,667 4,072 3,180
----------- ----------- ----------- -----------
Income from operations ............... 5,977 9,513 15,720 22,065
Interest expense ........................... 8,777 8,766 17,192 17,839
Other income (expense):
Loss on disposal of non-plant assets . (44) (44) (436)
Other, net ........................... 302 136 989 432
----------- ----------- ----------- -----------
258 136 945 (4)
Income (loss) before income taxes .... (2,542) 883 (527) 4,222
Provision (benefit) for income taxes ....... (448) 786 912 2,432
----------- ----------- ----------- -----------
Net income (loss) .................... $ (2,094) $ 97 $ (1,439) $ 1,790
=========== =========== =========== ===========
Income (loss) per share .................... $ (0.50) $ 0.02 $ (0.35) $ 0.43
=========== =========== =========== ===========
Weighted average shares outstanding ........ 4,162,000 4,162,000 4,162,000 4,162,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
TEXAS PETROCHEMICALS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) .................................. $ (1,439) $ 1,790
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of fixed assets ....................... 12,982 12,571
Amortization of goodwill and other assets .......... 2,457 2,892
Amortization of debt issue costs and
deferred premium ................................. 577 543
Loss on disposal of non-plant assets ............... 44 436
Earnings from limited partnership .................. (460) (278)
Deferred income taxes .............................. (1,466) (784)
Non-cash ESOP compensation ......................... 130 --
Change in:
Accounts receivable .............................. 295 (3,788)
Inventories ...................................... (934) (3,422)
Other assets ..................................... (4,259) 300
Accounts payable ................................. 2,809 7,262
Payable to Parent ................................ (2,735) --
Accrued expenses ................................. 3,010 4,182
-------- --------
Net cash provided by operating activities ..... 11,011 21,704
Cash flows from investing activities:
Capital expenditures ............................... (10,793) (4,480)
Proceeds from the sale of non-plant assets ......... 477 871
Distribution from limited partnership .............. 567 215
-------- --------
Net cash used in investing activities ......... (9,749) (3,394)
Cash flows from financing activities:
Change in bank overdraft ........................... 3,955 (5,127)
Net borrowings (repayments) under revolver ......... 600 (7,000)
Proceeds from issuance of long-term debt ........... -- 3,192
Payments on long-term debt ......................... (3,496) (5,962)
Payment of cash bonus plan ......................... (3,910) (3,900)
Debt issuance costs ................................ (163) (475)
Reduction in note receivable from ESOP ............. 1,000 1,000
-------- --------
Net cash used in financing activities ......... (2,014) (18,272)
-------- --------
Net increase (decrease) in cash and cash equivalents ... (752) 38
Cash and cash equivalents, at beginning of period ...... 956 101
-------- --------
Cash and cash equivalents, at end of period ............ $ 204 $ 139
======== ========
See accompanying notes to consolidated financial statements.
3
TEXAS PETROCHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Texas
Petrochemicals Corporation and its wholly owned subsidiary, Texas Butylene
Chemical Company, collectively referred to as (the "Company"). The Company
through its facility in Houston, Texas is the second 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 that 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 December 31, 1998 and
the results of its operations and cash flows for the interim period ended
December 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 Form 10-K
thereto, for the year ended June 30, 1998. The June 30, 1998 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
TEXAS PETROCHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
DECEMBER 31, JUNE 30,
1998 1998
------------ ----------
Finished goods ......................... $ 7,934 $ 4,701
Raw materials .......................... 9,024 10,415
Chemicals and supplies ................. 1,186 2,094
-------- --------
$ 18,144 $ 17,210
======== ========
PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31, JUNE 30,
1998 1998
------------- ----------
Chemical plants ........................ $267,085 $260,808
Construction in progress ............... 18,115 13,624
Other .................................. 2,335 2,308
-------- --------
287,535 276,740
Less accumulated depreciation, depletion
and amortization ................... 62,507 49,523
-------- --------
$225,028 $227,217
======== ========
OTHER ASSETS:
DECEMBER 31, JUNE 30,
1998 1998
-------------- -----------
Debt issue costs ....................... $ 13,578 $ 13,415
Organizational costs ................... 573 573
Intangibles and other .................. 2,862 4,502
-------- --------
17,013 18,490
Less accumulated amortization .......... 6,716 5,811
-------- --------
$ 10,297 $ 12,679
======== ========
5
TEXAS PETROCHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
ACCRUED EXPENSES:
DECEMBER 31, JUNE 30,
1998 1998
------------ ----------
Accrued interest ............................ $ 14,119 $ 14,581
Property and sales taxes .................... 4,827 2,836
Federal and state taxes ..................... 1,725 710
Other ....................................... 1,207 741
-------- --------
$ 21,878 $ 18,868
======== ========
LONG TERM DEBT:
DECEMBER 31, JUNE 30,
1998 1998
------------- ----------
Bank Credit Agreement:
Term A Loan .............................. $ 19,502 $ 21,003
Term B Loan .............................. 41,900 42,393
ESOP Loan ................................ 5,000 6,000
Revolving Credit Loans ................... 12,600 12,000
Senior Subordinated Notes ................... 225,000 225,000
Deferred premium on Senior Subordinated Notes 2,411 2,571
Long-term financing ......................... 1,368 1,871
-------- --------
307,781 310,838
Less current maturities ..................... 6,999 6,982
-------- --------
Long-term debt .............................. $300,782 $303,856
======== ========
The Bank Credit Agreement provides 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 December 31, 1998) or the
greater of the prime rate and the federal funds rate plus 1/2% plus a margin
(1.5% at December 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 Bank Credit Agreement and the Senior Subordinated 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 June 30, 1998 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 1999 and part of fiscal
2000.
6
TEXAS PETROCHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
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.
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.
7
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 six months ended December
31, 1998 and 1997.
REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(DOLLARS IN MILLIONS)
Butadiene ............ $ 26.7 25% $ 36.6 26% $ 53.1 26% $ 72.6 26%
MTBE ................. 50.6 48 64.1 45 94.8 46 125.8 45
n-Butylenes .......... 12.5 12 16.6 12 23.7 12 32.5 12
Specialty Isobutylenes 11.8 12 19.1 14 26.6 13 37.4 14
Other(1) ............. 3.3 3 4.7 3 6.7 3 8.2 3
------ ------ ------ ------ ------ ------ ------ ------
Total ................ $104.9 100% $141.1 100% $204.9 100% $276.5 100%
====== ====== ====== ====== ====== ====== ====== ======
- ----------
(1) Includes utility revenues and revenues realized from the Company's
terminalling facilities.
8
SALES VOLUMES
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
1998 1997 1998 1997
----- ----- ----- -----
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene .................. 217.2 203.6 413.2 402.3
MTBE(1) .................... 85.8 73.4 151.4 141.3
n-Butylenes ................ 86.6 93.0 169.7 178.3
Specialty Isobutylenes ..... 61.3 91.5 136.2 178.7
- ----------
(1) Volumes in millions of gallons.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
Revenues .......................... $104.9 100% $141.1 100% $204.9 100% $276.5 100%
Cost of goods sold ................ 89.3 85 122.2 87 169.6 83 235.8 85
Non-cash ESOP compensation ........ 0.1 1 -- -- 0.1 -- -- --
Depreciation and amortization ..... 7.8 7 7.7 5 15.4 7 15.5 6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit .................. 7.7 7 11.2 8 19.8 10 25.2 9
Selling, general and administrative 1.7 1 1.7 1 4.1 2 3.2 1
------ ------ ------ ------ ------ ------ ------ ------
Income from operations ........ $ 6.0 6% $ 9.5 7% $ 15.7 8% $ 22.0 8%
====== ====== ====== ====== ====== ====== ====== ======
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1997
REVENUES
The Company's revenues decreased by approximately 26%, or $36.2 million, to
$104.9 million for the three months ended December 31, 1998 from $141.1 million
for the three months ended December 31, 1997. Butadiene sales revenues decreased
approximately 27% as a result of lower sales prices partially offset by higher
sales volumes. Butadiene sales prices have dropped significantly as compared to
the prior year due to an oversupply of imported product in the market. MTBE
sales revenues decreased approximately 21% as a result of lower sales prices as
compared to the prior year quarter partially offset by higher sales volumes.
MTBE prices are significantly lower as a result of its relationship to gasoline
and crude oil prices, which fell sharply during the period. N-butylene sales
revenues also decreased over the prior year quarter due to lower sales prices
and lower sales volumes. Specialty isobutylene sales revenues decreased due to
lower sales volumes of isobutylene concentrate, which was partially offset by
higher sales volumes of high purity isobutylene and diisobutylene. Sales volumes
of isobutylene concentrate were lower due to a planned outage at one of the
Company's major customers. Improvements in high purity isobutylene and
diisobutylene sales volume is attributable to customer demand.
9
GROSS PROFIT
Gross profit decreased by approximately 31%, or $3.5 million, to $7.7
million for the three months ended December 31, 1998 from $11.2 million for the
three months ended December 31, 1997. Gross margin during this period decreased
to 7.3% from 7.9%. This decrease in gross profit was primarily attributable to
lower MTBE margins and lower sales volumes of n-butylenes and specialty
isobutylenes. During the current quarter despite lower butadiene sales prices,
the Company's margin increased due to lower spot crude butadiene prices. MTBE
margins were lower as compared to the prior quarter due to lower sales prices,
however a portion of the price decline was offset by lower feedstock costs.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 37%, or $3.5 million, to
$6.0 million for the three months ended December 31, 1998 from $9.5 million for
the three months ended December 31, 1997. Operating margin during this period
decreased to 5.7% from 6.7%. This decrease in income from operations was
primarily due to the same factors contributing to the decrease in gross profit
described above. An increase in selling, general and administrative costs
attributable to software integration and business development contributed to the
decline in income from operations.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
REVENUES
The Company's revenues decreased by approximately 26%, or $71.6 million, to
$204.9 million for the six months ended December 31, 1998 from $276.5 million
for the six months ended December 31, 1997. Butadiene sales revenues decreased
approximately 27% as a result of lower sales prices partially offset by higher
sales volumes. Butadiene sales prices have dropped significantly as compared to
the prior year due to an oversupply of imported product in the market. MTBE
sales revenues decreased approximately 25% as a result of lower sales prices as
compared to the prior year partially offset by higher sales volumes. MTBE prices
are significantly lower as a result of its relationship to gasoline and crude
oil prices. N-butylene sale revenues also decreased over the prior year due to
lower sales prices and lower sales volumes. Specialty isobutylene sales revenues
decreased due to lower sales volumes of isobutylene concentrate, which was
partially offset by higher sales volumes of high purity isobutylene and
diisobutylene. Sales volumes of isobutylene concentrate were lower due to a
planned outage at one of the Company's major customers. Improvements in high
purity isobutylene and diisobutylene sales volume is attributable to customer
demand.
GROSS PROFIT
Gross profit decreased by approximately 21%, or $5.4 million, to $19.8
million for the six months ended December 31, 1998 from $25.2 million for the
six months ended December 31, 1997. Gross margin during this period increased to
9.7% from 9.1%. This decrease in gross profit was primarily attributable to
lower MTBE margins and lower sales volumes of specialty isobutylenes. During the
current period, despite lower butadiene sales prices, the Company's margin
increased due to lower spot crude butadiene prices. MTBE margins were lower as
compared to the prior year due to lower sales prices, however a portion of the
price decline was offset by lower feedstock costs.
10
INCOME FROM OPERATIONS
Income from operations decreased by approximately 29%, or $6.3 million, to
$15.7 million for the six months ended December 31, 1998 from $22.0 million for
the six months ended December 31, 1997. Operating margin during this period
decreased to 7.7% from 7.9%. This decrease in income from operations was
primarily due to the same factors contributing to the decrease in gross profit
described above. An increase in selling, general and administrative costs
attributable to software integration and business development contributed to the
decline in income from operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
Net cash provided by operating activities was $11.0 million for the six
months ended December 31, 1998 compared to $21.7 million for the six months
ended December 31, 1997. The decrease of $10.7 million was attributable to
decreased net income and increases in working capital. Net cash used in
investing activities was $9.7 million for the six months ended December 31, 1998
compared to $3.4 million for the six months ended December 31, 1997. The
increase of $6.3 million was attributable to increased capital expenditures. Net
cash used in financing activities was $2.0 million for the six months ended
December 31, 1998 compared to $18.3 million for the six months ended December
31, 1997. The decrease of $16.3 million was attributable to the change in bank
overdraft and lower repayments of long-term debt and the revolver.
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 $12.6 million was
in use at December 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 and the Subordinated Notes. The Bank Credit Agreement and
the Subordinated 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.
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 six months ended December 31, 1998, $3.9 million of this amount was paid to
eligible participants and the remaining $13.7 million will be made in future
quarterly installments.
11
CAPITAL EXPENDITURES
The Company's capital expenditures relate principally to improving operating
efficiencies and maintaining environmental compliance. Capital expenditures for
the six months ended December 31, 1998 were $10.8 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 1997, the Financial Accounting Standards Board ("FASB") 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." During 1998, the FASB issued
SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement
Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has adopted the provisions of SFAS No. 128, SFAS No.
129, SFAS 130, SFAS 131 and SFAS 132 with no material revisions to the
disclosure in the financial statements. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will analyze
this pronouncement 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 Company is currently in the process of
installing an upgraded information technology (IT) system and anticipates that
it will be fully implemented by mid calendar year 1999. The Company made the
decision to upgrade its IT system prior to concerns surrounding the year 2000.
Management believes the full implementation of this IT system will ensure the
Company's financial systems are compliant with the year 2000. The Company is
also evaluating its non-IT systems, consisting primarily of plant processing
equipment, for year 2000 compliance. The Company has not fully quantified these
areas but they are not expected to have a material impact on the Company's
financial position, results of operations or cash flows. In addition to
evaluating its own compliance with the year 2000, the Company is currently
requesting all of its major customers and suppliers to supply it with a report
of the status of their compliance. At this point, the Company has not received
sufficient responses to determine its exposure to non-compliance by a third
party. The Company is in the process of preparing a contingency plan 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.
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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, 1998.
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
December 31, 1998.
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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 PETROCHEMICALS CORPORATION
(Registrant)
Dated: February 12, 1999 By: /s/ CARL S. STUTTS
(Signature)
Carl S. Stutts
Vice President Finance and
Corporate Development
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