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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 SEPTEMBER 30, 2001
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
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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 14, 2001 is 529,445.
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TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of September 30, 2001 and June 30, 2001 1
Consolidated Statement of Operations for the three months ended
September 30, 2001 and 2000 2
Consolidated Statement of Cash Flows for the three months ended
September 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15
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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2001 2001
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,423 $ 19,407
Accounts receivable - trade 49,449 54,479
Inventories 31,343 35,574
Other current assets 19,376 12,295
---------- ----------
Total current assets 109,591 121,755
Property, plant and equipment, net 211,811 213,475
Investment in land held for sale 990 990
Investment in limited partnership 2,502 2,652
Goodwill, net 160,395 160,395
Other assets, net of accumulated amortization 9,516 9,913
---------- ----------
Total assets $ 494,805 $ 509,180
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 7,117 $ 5,829
Accounts payable - trade 47,936 67,171
Accrued expenses 13,060 16,819
Current portion of long-term debt 9,610 6,196
---------- ----------
Total current liabilities 77,723 96,015
Revolving line of credit 23,500 2,000
Long-term debt 323,624 321,593
Deferred income taxes 48,833 50,098
Commitments and contingencies (Note 3)
Common stock held by the ESOP 25,857 15,300
Less: unearned compensation (10,293)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 voting and
100,000 shares non-voting authorized, 529,445 voting
shares issued and outstanding 5 5
Additional paid in capital 38,097 38,361
Treasury stock (188) (188)
Accumulated deficit (24,751) (14,004)
Unallocated ESOP shares (7,602) -
----------- ----------
Total stockholders' equity 5,561 24,174
---------- ----------
Total liabilities and stockholders' equity $ 494,805 $ 509,180
========== ==========
See accompanying notes to consolidated financial statements.
1
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
-------------- --------------
Revenues $ 154,922 $ 220,588
Cost of goods sold 153,144 195,620
Non-cash ESOP compensation 69 155
Depreciation and amortization 5,056 6,122
----------- -----------
Gross profit (loss) (3,347) 18,691
Selling, general and administrative expenses 2,698 2,646
----------- -----------
Income (loss) from operations (6,045) 16,045
Interest expense 9,613 9,750
Other income (expense)
Non-cash change in fair value of derivatives (706) (364)
Other, net 56 77
----------- -----------
(650) (287)
Income (loss) before income taxes and cumulative
effect of accounting change (16,308) 6,008
Provision (benefit) for income taxes (5,561) 2,694
Cumulative effect of accounting change - (410)
----------- -----------
(net of $221 income tax benefit)
Net income (loss) $ (10,747) $ 2,904
============ ===========
Basic income (loss) per share
Income (loss) before cumulative effect of accounting change $ (21.68) $ 6.47
Cumulative effect of accounting change (.80)
----------- -----------
Income (loss) per share $ (21.68) $ 5.67
=========== ===========
Weighted average shares outstanding - basic 495,808 511,945
=========== ===========
Diluted income (loss) per share
Income (loss) before cumulative effect of accounting change $ (21.68) $ 6.18
Cumulative effect of accounting change (.77)
----------- -----------
Income (loss) per share $ (21.68) $ 5.41
============ ===========
Weighted average shares outstanding - diluted 495,808 536,422
=========== ===========
See accompanying notes to consolidated financial statements.
2
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (10,747) $ 2,904
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of fixed assets 5,056 4,976
Amortization of goodwill and other assets - 1,146
Amortization of debt issuance costs and deferred premium 301 2,021
Earnings from limited partnership - (60)
Deferred income taxes 656 (593)
Non-cash ESOP compensation 69 155
Non-cash change in fair value of derivatives 706 995
Change in:
Accounts receivable 5,030 (2,370)
Inventories 4,231 893
Other assets (6,177) (1,980)
Accounts payable (19,235) (1,858)
Accrued expenses (3,759) (4,874)
Distribution from limited partnership 150 150
----------- ----------
Net cash provided by (used in) operating activities (23,719) 1,505
Cash flows from investing activities:
Capital expenditures (3,392) (3,458)
----------- ----------
Net cash used in investing activities (3,392) (3,458)
Cash flows from financing activities:
Change in bank overdraft 1,288 (1,083)
Net borrowings under revolver 21,500 400
Payments on long-term debt (3,374) (7,742)
Payment of cash bonus plan - (213)
Purchase of share by ESOP (2,287) 500
----------- ---------
Net cash provided by (used in) financing activities 17,127 (8,138)
----------- ----------
Net decrease in cash and cash equivalents (9,984) (10,091)
Cash and cash equivalents, at beginning of period 19,407 14,929
----------- ----------
Cash and cash equivalents, at end of period $ 9,423 $ 4,838
=========== ==========
See accompanying notes to consolidated financial statements.
3
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 one of the largest producers of butadiene, the largest
producer of butene-1, and the third largest producer of methyl tertiary-butyl
ether ("MTBE") in North America. 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) alkylate, used as a gasoline blend component; (iv) n-butylenes
(butene-1 and butene-2), used in the manufacture of plastic resins, fuel
additives and synthetic alcohols; and (v) specialty isobutylenes, primarily used
in the production of specialty rubbers, lubricant additives, detergents and
coatings and (vi) polyisobutylenes, used in the production of fuel and lube
additives, adhesives, sealants and packing.
On July 1, 2000, the Texas Petrochemicals LP converted its legal form from
a corporation to a limited partnership pursuant to the conversion provision of
the Texas Business Corporation Act and the Texas Revised Limited Partnership
Act. TPC Holding, Corp., the Texas Petrochemicals LP immediate parent prior to
the conversion, retained a direct 1% ownership interest in the partnership and
became its sole general partner. Petrochemical Partnership holdings, Inc., a new
wholly owned subsidiary of TPC Holding Corp., acquired the remaining 99%
ownership interest and simultaneously became a limited partner of the
partnership. This change has no effect on the current management of the Company
or its existing operations. The Texas Business Corporation Act provides that the
effect of the conversion is that Texas Petrochemicals LP as a legal entity
continues to exist, without interruption, but in the organizational form of a
Texas limited partnership rather than in the prior organization form of a Texas
corporation. As a result of the above equity restructuring there was no change
in the carrying values of the Company's assets and liabilities.
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. 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, 2001
and the results of its operations and cash flows
4
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the interim period ended September 30, 2001. 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, 2001. The June
30, 2000 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.
INCOME PER SHARE
The basic and diluted weighted average shares outstanding used in the
computation of income per share are net of 67,275 and 15,000 shares held by the
Employee Stock Ownership Plan ("ESOP"), that are not allocated to employees as
of September 30, 2001 and 2000, respectively. The diluted weighted average
shares outstanding for the three months ended September 30, 2000 include the
dilutive effect of stock options outstanding of 6,977 shares. The effect of
unallocated ESOP shares and stock options was not dilutive for the three months
ended September 30, 2001 for purposes of calculating dilutive income (loss) per
share.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
SEPTEMBER 30, JUNE 30,
2001 2001
-------------- --------------
Finished goods $ 19,289 $ 13,583
Raw materials 10,676 20,497
Chemicals and supplies 1,378 1,494
---------- ----------
$ 31,343 $ 35,574
========== ==========
OTHER CURRENT ASSETS:
SEPTEMBER 30, JUNE 30,
2001 2001
-------------- --------------
Catalyst inventory $ 6,934 $ 5,389
Other receivables 4,677 4,929
Prepaid and other 7,765 1,977
---------- ----------
$ 19,376 $ 12,295
========== ==========
5
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
PROPERTY, PLANT AND EQUIPMENT:
SEPTEMBER 30, JUNE 30,
2001 2001
-------------- --------------
Chemical plants $ 300,379 $ 300,379
Construction in progress 21,096 17,704
Other 5,839 5,839
----------- -----------
327,314 323,922
Less accumulated depreciation 115,503 110,447
----------- -----------
$ 211,811 $ 213,475
=========== ===========
ACCRUED EXPENSES:
SEPTEMBER 30, JUNE 30,
2001 2001
-------------- --------------
Accrued interest $ 8,309 $ 12,439
Property and sales taxes 2,886 2,320
Federal and state income taxes - 213
Other 1,865 1,847
---------- ----------
$ 13,060 $ 16,819
========== ==========
LONG TERM DEBT:
SEPTEMBER 30, JUNE 30,
2001 2001
-------------- --------------
Bank Credit Agreement:
Term A Loan $ 6,769 $ 8,237
Term B Loan 34,364 35,295
Revolving Credit Loans 23,500 2,000
Senior Subordinated Notes 225,000 225,000
Discount Notes 57,650 57,650
Deferred premium on Senior Subordinated Notes 1,527 1,607
Loan commitment - ESOP 5,315 -
Note payable for insurance premium 2,609 -
----------- -----------
356,734 329,789
Less current maturities 9,610 6,196
----------- -----------
Long-term debt $ 347,124 $ 323,593
=========== ===========
6
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Bank Credit Agreement provided for term loans in the amount of $130
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 Term A Loan and Term B Loan are due on December 31,
2002 and June 30, 2004, respectively. The Revolving Credit 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 1.50% for the Revolving Credit Loan and Term A Loan at
September 30, 2001 and 2000 and 3.00% for the Term B Loan at September 30, 2001
and 2000, respectively) or the greater of the prime rate and the federal funds
rate plus 1/2% plus a margin (1.0% and .50% for at September 30, 2001 and 2000).
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 Discount Notes 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. In March
2001, the Company obtained an amendment to the Bank Credit Agreement related to
certain financial ratios and capital expenditure limitations. The Company
obtained a second amendment to the Bank Credit Agreement in July 2001 that
amended the definition of EBITDA to allow for an exclusion of losses associated
with the fire and flood damage for fourth quarter of fiscal 2001 and first
quarter of fiscal 2002.
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 adverse impact on the Company's financial position, results of
operations or cash flows.
7
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Company received a Notice of Violation ("NOV") on March 10, 2000 from
the Environmental Protection Agency ("EPA") relating to certain discrepancies
alleged to have been found during routine inspections conducted by EPA in 1995
and 1997. The NOV led to the filing of a judicial complaint against the Company.
The Company vigorously disputed the factual and legal basis of the NOV and
settlement negotiations were initiated. The EPA, the Department of Justice, and
the Company are currently finalizing a settlement that will entail a civil
penalty and the installation of vapor controls on three organic liquid storage
vessels on or before October 1, 2002. The anticipated settlement of such issues
is not expected to have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
Legal actions have been filed in several states for recovery for alleged
property damage and/or costs of remediation and replacement of water supplies
due to the presence of MTBE. As of this point in time, the Company has not been
named in any of these actions; however, no assurance can be given that the
Company will not be named in these or other future actions.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the EPA, 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.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur material remediation costs related to its management,
transportation and disposal of solid and hazardous materials and wastes, or to
its pipeline operations.
There continues to be action in Congress to impact the use of MTBE in
gasoline. The most prevalent legislative proposals would ban MTBE, eliminate the
oxygen requirement of the Clean Air Act ("CAA") of 1990 or require the use of
ethanol as a gasoline-blending component. The Company is not able to predict
whether such legislation will be adopted. If adopted, however, such legislation
would be expected to materially reduce MTBE demand and the Company's financial
results.
8
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. ACCOUNTING CHANGE
On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities" and SFAS No. 138, "Accounting for Derivative Instruments and
Certain Hedging Activity, and Amendment of SFAS 133". Accordingly, upon adoption
of these pronouncements the Company recorded all derivative instruments on the
balance sheet at their respective fair values with an offsetting entry as a
cumulative change in accounting principle, net of tax. The cumulative effect on
earnings was a pre-tax charge of $0.6 million less a tax benefit of $0.2
million.
In July 2001, the Company adopted SFAS No. 142 "Goodwill and other
Intangible Assets". Accordingly, the Company no longer amortizes goodwill but
rather tests for goodwill impairment. Under the guidance of SFAS No. 142, the
Company has six months from the date of adoption to perform the test. To date
the Company has not completed this test.
5. EMPLOYEE STOCK OWNERSHIP PLAN
In August 2001, the TPC Holding Corp. Employee Stock Ownership Trust (the
"Trust") purchased 69,000 shares of common stock of Texas Petrochemicals
Holdings, Inc. from existing shareholders in exchange for cash and seller
financing. The cash portion of the offer to selling shareholders was funded by a
loan made by Texas Petrochemicals LP to the Trust. The loan of $2.5 million is
financed over a 10-year period at a 6% interest rate. The unallocated shares
related to the loan have been reflected as a contra account in shareholders'
equity. The seller financing portion of the offer was financed with a $5.3
million note issued from the Trust to the selling shareholder. This note is to
be financed over a 10-year period at a 6% interest rate. The Company has
reflected this note as a loan commitment in long-term debt and the related
unallocated shares as a contra account in shareholders' equity. The Company's
contribution to the Employee Stock Ownership Plan ("ESOP") for the three months
ended September 30, 2001 was $0.2 million, which was reported as compensation
expense.
The employees of the ESOP have the option to put their allocated shares
back to the Company at the current fair value of the stock. Under normal
circumstances the put option is triggered by retirement or termination of the
employee. Beginning in fiscal 2002 qualifying employees will be allowed to
exercise their put option.
6. 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:
9
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
September 30, 2001
(in thousands)
Parent Guarantor Non-Guarantors Eliminations Total
ASSETS
Current assets:
Cash and cash equivalents $ 9,290 $ $ 133 $ $ 9,423
Accounts receivable - trade 49,449 49,449
Inventories 31,343 31,343
Other current assets 19,657 (281) 19,376
------- ------- -------- --------- --------
Total current assets 9,290 100,582 (281) 109,591
Property, plant and equipment, net 211,811 211,811
Investments in land held for sale 990 990
Investment in and advances to limited partnership 2,502 2,502
Goodwill, net 160,395 160,395
Other assets, net of accumulated amortization 267 9,249 9,516
Consolidated subsidiaries 78,340 78,340 (156,680)
------- ------- -------- --------- --------
Total assets $87,897 $78,340 $485,529 $(156,961) $494,805
======= ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ $ $ 7,117 $ $ 7,117
Accounts payable - trade 47,936 47,936
Payable to Affilate 281 (281)
Accrued expenses 1,946 11,114 13,060
Current portion of long-term debt 9,610 9,610
------- ------- -------- --------- --------
Total current liabilities 2,227 75,777 (281) 77,723
Revolving line of credit 23,500 23,500
Long-term debt 57,650 5,315 260,659 323,624
Deferred income taxes (9,975) 58,808 48,833
Common stock held by the ESOP 25,857 25,857
Less: unearned compensation (10,293) (10,293)
Stockholders' equity:
Partners' equity 78,340 (78,340)
Common Stock 5 5
Additional paid in capital 38,097 75,805 (75,805) 38,097
Treasury stock (188) (188)
Accumulated earnings (deficit) (24,751) 2,535 (2,535) (24,751)
Note receivable - Parent 9,268 (9,268)
Unallocated ESOP shares (5,315) (2,287) (7,602)
Advance to General partner (2,287) 2,287
------- ------- -------- --------- --------
Total stockholders' equity 22,431 73,025 66,785 (156,691) 5,561
------- ------- -------- --------- --------
Total liabilities and stockholders' equity $87,897 $78,340 $485,529 $(156,961) $494,805
======= ======= ======== ========= ========
10
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 2001
(in thousands)
Parent Guarantor Non-Guarantors Eliminations Total
ASSETS
Current assets:
Cash and cash equivalents $ $ $ 19,407 $ $ 19,407
Accounts receivable - trade 54,479 54,479
Inventories 35,574 35,574
Other current assets (192) 12,487 12,295
------- ------- -------- --------- --------
Total current assets (192) 121,947 121,755
Property, plant and equipment, net 213,475 213,475
Investments in land held for sale 990 990
Investment in and advances to limited partnership 2,652 2,652
Goodwill, net 160,395 160,395
Other assets, net of accumulated amortization 349 9,564 9,913
Consolidated subsidiaries 87,648 87,648 - (175,296) -
------- ------- -------- --------- --------
Total assets $87,805 $87,648 $509,023 $(175,296) $509,180
======= ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ $ $ 5,829 $ $ 5,829
Accounts payable - trade 67,171 67,171
Payable to Parent 213 (213)
Accrued expenses 16,606 213 16,819
Current portion of long-term debt 6,196 6,196
------- ------- -------- --------- --------
Total current liabilities 96,015 96,015
Revolving line of credit 2,000 2,000
Long-term debt 57,650 263,943 321,593
Deferred income taxes (9,319) 59,417 50,098
Common stock held by the ESOP 15,300 15,300
Less: unearned compensation
Stockholders' equity:
Partners' Equity 87,648 (87,648)
Common Stock 5 5
Additional paid in capital 38,361 75,805 (75,805) 38,361
Accumulated deficit (14,004) 11,843 (11,843) (14,004)
Treasury stock (188) (188)
------- ------- -------- --------- --------
Total stockholders' equity 24,174 87,648 87,648 (175,296) 24,174
------- ------- -------- --------- --------
Total liabilities and stockholders' equity $87,805 $ 87,648 $509,023 $(175,296) $509,180
======= ======== ======== ========= ========
11
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, 2001
(in thousands)
Parent Guarantor Non-Guarantors Eliminations Total
Revenues $ $ $154,922 $ $154,922
Cost of goods sold 153,144 153,144
Non-cash ESOP compensation 69 69
Depreciation and amortization 5,056 5,056
-------- -------
Gross profit (loss) (3,347) (3,347)
Selling, general and administrative expenses 42 2,656 2,698
------- ------ -------- ------ --------
Income (loss) from operations (42) (6,003) (6,045)
Interest expense 2,002 7,611 9,613
Other income (expense) 20 (670) (650)
-------- ------ -------- ------ --------
Income (loss) before income taxes (2,024) (14,284)
(16,308)
Provision (benefit) for income taxes (654) (4,907) (5,561)
Equity in net income of subsidiaries (9,377) (9,377) 18,754
-------- ------- -------- ------- --------
Net income (loss) $(10,747) $(9,377) $ (9,377) $18,754 $(10,747)
======== ======= ======== ======= ========
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Three Months Ended September 30, 2000
(in thousands)
Parent Guarantor Non-Guarantors Eliminations Total
Revenues $ $ $220,588 $ $220,588
Cost of goods sold 195,620 195,620
Non-cash ESOP compensation 155 155
Depreciation and amortization 6,122 6,122
-------- --------
Gross profit 18,691 18,691
Selling, general and administrative expenses 10 2,636 2,646
------- ------ -------- ------- --------
Income (loss) from operations (10) 16,055 16,045
Interest expense 1,721 8,029 9,750
Other income (expense) (287) (287)
------- ------ -------- ------- --------
Income (loss) before income taxes (1,731) 7,739 6,008
Provision (benefit) for income taxes (574) 3,268 2,694
Equity in net income of subsidiaries 4,061 4,061 - (8,122) -
Cumulative effect of accounting change, net of tax - - (410) - (410)
------- ------ ------- ------- --------
Net income $ 2,904 $4,061 $ 4,061 $(8,122) $ 2,904
======= ====== ======= ======== ========
TEXAS PETROCHEMICAL HOLDINGS, INC.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Three Months Ended September 30, 2001
(in thousands)
Parent Guarantor Non-Guarantors Eliminations Total
Cash flows from operating activities:
Net income (loss) $ (10,747) $(9,377) $(9,377) $ 18,754 $(10,747)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets 5,056 5,056
Amortization of debt issue costs 301 301
Deferred income taxes 1,215 (559) 656
Non-cash ESOP compensation 69 69
Non-cash change in fair value of derivatives 706 706
Change in:
Accounts receivable 5,030 5,030
Inventories 4,231 4,231
Other assets (1,769) (4,408) (6,177)
Accounts payable, accrued and other 1,946 (24,940) (22,994)
Distribution from limited partnership 150 150
--------- ------- ------- --------- --------
Net cash provided by operating activities (9,355) (9,377) (23,741) 18,754 (23,719)
Cash flows from investing activities:
Capital expenditures (3,392) (3,392)
--------- ------- ------- --------- --------
Net cash used in investing activities (3,392) (3,392)
Cash flows from financing activities:
Change in bank overdraft 1,288 1,288
Net repayments under revolver 21,500 21,500
Payments on long-term debt (3,374) (3,374)
Note receivable - Parent (9,268) 9,268
Note receivable - ESOP (2,287) (2,287)
--------- ------- ------- --------- --------
Net cash used in financing activities 7,859 9,268 17,127
Net increase (decrease) in cash and cash equivalents (9,355) (9,377) (19,274) 28,022 (9,984)
Cash and cash equivalents, at beginning of period 19,407 19,407
-------- ------- ------- --------- --------
Cash and cash equivalents, at end of period $ (9,355) $(9,377) $ 133 $ 28,022 $ 9,423
======== ======= ======= ========= ========
13
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, 2000
(in thousands);
Parent Guarantor Non-Guarantors Eliminations Total
Cash flows from operating activities:
Net income (loss) $ 2,904 $ 4,061 $ 4,061 $ (8,122) $ 2,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets 4,976 4,976
Amortization of goodwill and other assets 1,146 1,146
Amortization of debt issue costs 1,720 301 2,021
Earnings from limited partnership (60) (60)
Deferred income taxes (576) (17) (593)
Non-cash ESOP compensation 155 155
Non-cash change in FV of derivatives 995 995
Change in:
Accounts receivable (2,370) (2,370)
Inventories 893 893
Other assets 13 (1,993) (1,980)
Accounts payable, accrued and other - (7) (6,725) (6,732)
Distribution from Limited partnership 150 150
------ ------- ------- --------- --------
Net cash provided by operating activities 4,061 4,054 1,512 (8,122) 1,505
Cash flows from investing activities:
Capital expenditures (3,458) (3,458)
------ ------- -------- --------- --------
Net cash used in investing activities (3,458) (3,458)
Cash flows from financing activities:
Change in bank overdraft (1,083) (1,083)
Net repayments under revolver 400 400
Payments on long-term debt (7,742) (7,742)
Payment of cash bonus plan (213) (213)
Reduction in note receivable from ESOP 500 500
------ ------- ------- --------- --------
Net cash used in financing activities (8,138) (8,138)
------ ------- ------- --------- --------
Net increase (decrease) in cash and cash equivalents 4,061 4,054 (10,084) (8,122) (10,091)
Cash and cash equivalents, at beginning of period 10 14,919 14,929
------ ------- ------- --------- --------
Cash and cash equivalents, at end of period $4,061 $ 4,064 $ 4,835 $ (8,122) $ 4,838
====== ======= ======= ========= ========
14
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, fuel products (MTBE, butene-2 and alkylate), specialty products
(butene-1, isobutylene concentrate, high purity isobutylene, diisobutylene and
polyisobutylene). 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 significantly increased the demand for MTBE in
the early 1990's.
MTBE ENVIRONMENTAL AND MARKET ISSUES
There is concern in a number of states that MTBE may enter drinking water
supplies as a result of leaks in underground gasoline storage tanks. As a result
of this concern, California's Governor, Gray Davis, issued an Executive Order
banning MTBE from gasoline as of December 31, 2002. Currently, the effective
date of the ban is being reconsidered by California because of concerns about
the availability and cost of alternatives to MTBE. Several other states have
enacted laws providing for reduction or elimination of MTBE from gasoline. In
addition certain States have established maximum contaminant levels ("MCLs") for
MTBE in drinking water supplies ranging from 10 to 17 ppb. The U.S. EPA, has not
yet established an MCL, but has an advisory of 20-40 ppb, based on aesthetics.
If MTBE is found at levels exceeding the MCLs, the water will have to be treated
to reduce MTBE concentration to a level at or below the applicable MCL.
There continues to be action in Congress to impact the use of MTBE in
gasoline. The most prevalent legislative proposals would ban MTBE, eliminate the
oxygen requirement of the CAA or require the use of ethanol as a
gasoline-blending component. The Company is not able to predict whether such
legislation will be adopted. If adopted, however, such legislation would be
expected to materially reduce MTBE demand and have an adverse material effect on
the Company's results of operations.
Various scientific bodies have evaluated MTBE as a possible human
carcinogen. To date, the International Agency on Research on Cancer, the
National Toxicology Program and the California Cancer Identification Committee
have found MTBE not to be classifiable as a possible, probable or known human
carcinogen. California EPA has designated MTBE as a possible human carcinogen.
15
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 group and volume of products sold, for the three months ended September
30, 2001 and 2000.
Revenues
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
-------------- ---------------
(DOLLARS IN MILLIONS)
Butadiene $ 28.5 18% $ 44.3 20%
Fuel Products (1) 86.7 56 129.7 59
Specialty Products(2) 36.8 24 42.0 19
Other(3) 2.9 2 4.6 2
------- ---- -------- -----
Total $ 154.9 100% $ 220.6 100%
======= === ======== ===
- ----------
(1) Includes revenue from sales of MTBE, butene-2 and alkylate
(2) Includes revenue from sales of butene-1, isobutylene concentrate,
high-purity isobutylene, diisobutylene and polyisobutylene.
(3) Includes utility revenues and revenues realized from the Company's
terminalling facilities.
Sales Volumes
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
------- ------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene 182.4 217.2
Fuel Products(1) 105.1 110.5
Specialty Products 157.8 160.5
- ----------
(1) Volumes in millions of gallons. Includes 81.9 million and 94.8 million
gallons of MTBE sales, of which 31.6 million and 29.1 million gallons of
finished MTBE purchased for resale for the three months ended September 30, 2001
and 2000, respectively.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
-------------- ---------------
(DOLLARS IN MILLIONS)
Revenues $154.9 100% $ 220.6 100%
Cost of goods sold 153.1 99 195.6 89
Non-cash ESOP compensation 0.1 - 0.2 -
Depreciation and amortization 5.0 3 6.1 3
------ ----- -------- -----
Gross profit (3.3) (2) 18.7 8
Selling, general and administrative expenses 2.7 2 2.6 1
------ ----- -------- -----
Income from operations $ (6.0) (4)% $ 16.1 7%
====== ===== ======== =====
Three months ended September 30, 2001 compared to the three months ended
September 30, 2000
16
REVENUES
The Company's revenues decreased by approximately 30%, or $65.7 million,
to $154.9 million for the three months ended September 30, 2001 from $220.6
million for the three months ended September 30, 2000. Butadiene sales revenues
decreased as a result of lower sales prices and sales volumes as compared to the
prior year quarter. Butadiene sales prices and sales volumes were lower during
the current period a decline in customer demand. Fuel products sales revenues
decreased principally due to lower MTBE sales prices. MTBE sales prices were
lower during the current period as a result of decreases in gasoline prices and
lower consumer demand. Specialty products sales revenues were slightly lower
than the prior years quarter due to lower sales volumes and lower hydrocarbon
values.
GROSS PROFIT
Gross profit decreased by $22.0 million, to ($3.3) million for the three
months ended September 30, 2001 from $18.7 million for the three months ended
September 30, 2000. Gross margin during this period decreased to (2.2%) from
8.5%. Gross profit during the period declined substantially due to operating
problems associated with the fire and flood damage sustained by the plant in May
and June 2001. Repairs that continued in June, July and August resulted in a
reduction of MTBE production of approximately 30 percent during the current
quarter, compared to the prior year quarter adjusted for the turnaround in
August 2000. The repairs during the current quarter included a turnaround to
change damaged catalyst in one of the Company's dehydro units that is used to
produce MTBE. In addition, raw material inventory levels at the beginning of the
current quarter were higher than planned due to the operational outages
sustained at the end of fiscal 2001. These raw materials subsequently declined
in value due to a significant decline in market prices during the current
quarter. The resulting higher cost raw materials combined with lower product
sales prices had a negative effect on unit margins. The Company estimates that
these operating problems related to the fire and flood impacted the first
quarter gross profit by approximately $13 million. Gross profit was also
negatively impacted by additional declines in product values during the quarter.
These declines negatively impacted the unit margins in the fuel products and
butadiene businesses.
INCOME FROM OPERATIONS
Income from operations decreased $22.1 million, to ($6.0) million for the
three months ended September 30, 2001 from $16.1 million for the three months
ended September 30, 2000. Operating margin during this period decreased to
(3.9%) from 7.3%. This decrease in income from operations was primarily due to
the same factors contributing to the decrease in gross profit described above.
The selling, general and administrative costs remained unchanged from the prior
year quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Three months ended September 30, 2001 compared to the three months ended
September 30, 2000
Net cash used by operating activities was $23.7 million for the three
months ended September 30, 2001 compared to $1.5 million net cash provided
million for the three months ended September 30, 2000. The decrease of $25.2
million was primarily caused by a $13.7 million decrease in net income and an
$11.5 million increase in working capital during the current period. Net cash
used in investing activities was $3.4 million for the three months ended
September 30, 2001 compared to
17
$3.5 million for the three months ended September 30, 2000. Net cash provided by
financing activities was $17.1 million for the three months ended September 30,
2001 compared to $8.1 million net cash used for the three months ended September
30, 2000. The increase of $25.2 million was attributable primarily to borrowing
under the revolving credit facility to satisfy current operating needs.
LIQUIDITY
The Company's liquidity needs arise primarily from principal and
interest payments under the Bank Credit Agreement and the Subordinated Notes.
Beginning January 2002, a semiannual cash interest payment of $3.9 million is
required under the Discount Notes, which were issued directly by Texas
Petrochemicals Holdings, Inc. As a stand-alone entity Texas Petrochemical
Holdings, Inc. does not maintain operations that generate cash flow to meet
these interest payments. Texas Petrochemicals LP maintains substantially all
operating cash flow for the Company. Texas Petrochemicals LP's ability to fund
interest on the Discount Notes is limited by the terms of the Senior Subordinate
Notes. On August 10, 2001 Texas Petrochemicals LP funded a cash payment of $9.3
million to Texas Petrochemical Holdings, Inc. to be held for future scheduled
interest payments on the Discount Notes. There can be no assurance that Texas
Petrochemicals LP will be able to continue to fund cash payments to Texas
Petrochemicals Holding, Inc. to meet additional future interest requirements.
Additionally, beginning in fiscal 2002 qualifying employees will be allowed to
exercise their put option under the terms of the ESOP (See Footnote 5 on Page
9). The future funding for the exercise of the put option is expected to come
from Texas Petrochemicals LP. No commitment or requirement exists for Texas
Petrochemicals LP to make such funding. The Company estimates that the current
value of the put options exercisable in the fiscal year 2002 at approximately $1
million.
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 maintained a cash balance of
$9.4 million as of September 30, 2001. Additionally, the Company has a $40
million Revolving Credit Facility of which $23.5 million was used at September
30, 2001, to provide funds for ongoing operations, working capital and planned
capital expenditures. The Company's liquidity in the current quarter has been
impacted by a decline in operating results, changes in working capital, and
funding of $2.5 million to the ESOP. While the Company currently has
availability of funds under the Revolving Credit Facility there can be no
guarantee that such availability will be sufficient in the future. 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. Additionally, the Bank Credit Agreement
requires the Company to maintain certain financial ratios. In March 2001, the
Company obtained an amendment to the Bank Credit Agreement related to certain
financial ratios and capital expenditure limitations. The Company obtained a
second amendment to the Bank Credit Agreement in July 2001 that amended the
definition of EBITDA to allow for an exclusion of losses associated with the
fire and flood damage sustained during the fourth quarter of fiscal 2001 and the
first quarter of fiscal 2002.
CAPITAL EXPENDITURES
The Company's capital expenditures relate principally to improving
production capacity and improving operating efficiencies. Capital expenditures
for three months ended September 30, 2001
18
were $3.4 million. The Company expenses approximately $20 million annually for
plant maintenance. These maintenance costs are not treated as capital
expenditures.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This filing includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are identified as any
statement that does not relate strictly to historical or current facts. They use
words such as "anticipate," "believe," "intend," "plan," "projection,"
"forecast," "strategy," "position," "continue," "estimate," "expect," "may,"
"will," or the negative of those terms or other variations of them or by
comparable terminology. In particular, statements expressed or implied,
concerning future operating results or the ability to generate sales, income or
cash flow are forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions.
The future results of our operations may differ materially from those expressed
in these forward-looking statements. Many of the factors that will determine
these results are beyond our ability to control or predict. Specific factors
that could cause actual results to differ from those in the forward-looking
statements include but are not limited to those factors disclosed in conjunction
with the forward looking statements included herein ("Cautionary Disclosures").
Subsequent written or oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant quantitative or qualitative changes in the
Company's risk sensitive instruments during the three months ended September 30,
2001.
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, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.17 Second Amendment to Amended and Restated Credit Agreement by and
among Texas Petrochemicals LP, TPC Holdings and Chase Manhattan
Bank
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 2001.
19
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 14, 2001 By: /s/ CARL S. STUTTS
----------------------------------------
(Signature)
Carl S. Stutts
Executive Vice President,
Chief Financial Officer
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.17 Second Amendment to Amended and Restated Credit Agreement by and
among Texas Petrochemicals LP, TPC Holdings and Chase Manhattan
Bank