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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 MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE 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 May 15, 2002 is 529,445.
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TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2002 and June 30, 2001 1
Consolidated Statement of Operations for the three months and nine months
ended March 31, 2002 and 2001 2
Consolidated Statement of Cash Flows for the nine months ended
March 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</Table>
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
MARCH 31, JUNE 30,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,149 $ 19,407
Accounts receivable - trade 55,135 54,479
Inventories 23,293 35,574
Other current assets 13,516 12,295
--------- ---------
Total current assets 98,093 121,755
Property, plant and equipment, net 205,220 213,475
Investment in land held for sale 990 990
Investment in limited partnership 2,414 2,652
Goodwill, net 160,395 160,395
Other assets, net of accumulated amortization 10,180 9,913
--------- ---------
Total assets $ 477,292 $ 509,180
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,728 $ 5,829
Accounts payable - trade 47,878 67,171
Accrued expenses 9,914 16,819
Revolving Credit Facility 16,200 --
Current portion of long-term debt 12,547 6,196
--------- ---------
Total current liabilities 91,267 96,015
Revolving Credit Facility -- 2,000
Long-term debt 316,133 321,593
Deferred income taxes 48,676 50,098
Commitments and contingencies (Note 3)
Common stock held by the ESOP 24,674 15,300
Less: unearned compensation (9,318) --
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 37,596 38,361
Treasury stock (188) (188)
Accumulated deficit (24,281) (14,004)
Unallocated ESOP shares (7,272) --
--------- ---------
Total stockholders' equity 5,860 24,174
--------- ---------
Total liabilities and stockholders' equity $ 477,292 $ 509,180
========= =========
</Table>
See accompanying notes to consolidated financial statements.
1
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ 136,578 $ 221,273 $ 430,814 $ 644,571
Cost of goods sold 117,144 202,761 396,534 587,573
Non-cash ESOP compensation 57 265 183 685
Depreciation 5,145 5,007 15,287 14,971
Amortization of goodwill -- 1,145 -- 3,437
--------- --------- --------- ---------
Gross profit 14,232 12,095 18,810 37,905
Selling, general and administrative expenses 2,307 2,338 7,687 7,387
--------- --------- --------- ---------
Income (loss) from operations 11,925 9,757 11,123 30,518
Interest expense 9,806 10,020 28,894 29,368
Other income (expense)
Non-cash change in fair value of derivatives 971 871 895 723
Loss on sale of investment in land held for sale -- (327) -- (327)
Other, net 244 182 435 437
--------- --------- --------- ---------
1,215 726 1,330 833
Income (loss) before income taxes and cumulative
effect of accounting change 3,334 463 (16,441) 1,983
Provision (benefit) for income taxes 1,326 143 (5,453) 2,379
--------- --------- --------- ---------
Cumulative effect of accounting change
(net of $221 income tax benefit) -- -- -- (410)
Net income (loss) $ 2,008 $ 320 $ (10,988) $ (806)
========= ========= ========= =========
Basic income (loss) per share
Income (loss) before cumulative effect of accounting
change $ 5.83 $ (2.97) $ (20.68) $ (4.38)
Cumulative effect of accounting change -- -- -- (.79)
--------- --------- --------- ---------
Income (loss) per share $ 5.83 $ (2.97) $ (20.68) $ (5.17)
========= ========= ========= =========
Weighted average shares outstanding - basic 464,758 521,945 497,533 516,945
========= ========= ========= =========
Diluted income (loss) per share
Income (loss) before cumulative effect of accounting
change $ 5.69 $ (2.89) $ (20.64) $ (4.27)
Cumulative effect of accounting change -- -- -- (.79)
--------- --------- --------- ---------
Income (loss) per share $ 5.69 $ (2.89) $ (20.64) $ (5.06)
========= ========= ========= =========
Weighted average shares outstanding - diluted 476,278 536,116 497,533 $ 531,116
========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
2
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(10,988) $ (806)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 15,287 14,971
Amortization of goodwill and other assets -- 3,437
Amortization of debt issuance costs and deferred premium 901 6,177
Earnings from investment in limited partnership (200) (423)
Loss on sale of investment in land held for sale -- 327
Deferred income taxes (2,377) (1,762)
Non-cash ESOP compensation 183 685
Non-cash change in fair value of derivatives (895) (92)
Non-cash net reduction in note receivable from ESOP 530 1,500
Change in:
Accounts receivable (656) (11,699)
Inventories 12,281 (7,707)
Other assets 3,577 (3,446)
Accounts payable (19,293) (6,993)
Accrued expenses (7,860) (8,992)
Distribution from investment in limited partnership 438 525
-------- --------
Net cash used in operating activities (9,072) (14,298)
Cash flows from investing activities:
Capital expenditures (7,032) (10,163)
Proceeds from sale of investment in land held for sale -- 741
-------- --------
Net cash used in investing activities (7,032) (9,422)
Cash flows from financing activities:
Change in bank overdraft (1,101) (1,750)
Net borrowings under Revolving Credit Facility 14,200 22,250
Payments on long-term debt (7,766) (11,443)
Payment of cash bonus plan -- (213)
Issuance of treasury stock -- 72
Purchase ESOP shares (2,487) --
-------- --------
Net cash provided by financing activities 2,846 8,916
-------- --------
Net decrease in cash and cash equivalents (13,258) (14,804)
Cash and cash equivalents, at beginning of period 19,407 14,929
-------- --------
Cash and cash equivalents, at end of period $ 6,149 $ 125
======== ========
</Table>
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" herein. 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 second 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)
butene-1, used in the manufacture of plastic resins, fuel additives and
synthetic alcohols; (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 packaging.
On July 1, 2000, 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 direct parent of Texas Petrochemicals LP prior to
the conversion, retained a 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 had 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 organizational 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.
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
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments have been
made which are necessary to fairly present the financial position of the Company
as of March 31, 2002 and the results of its operations and cash flows for the
interim period ended March 31, 2002. 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 for the year ended June 30, 2001. Certain amounts from prior
periods have been reclassified to conform to current period presentation.
4
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
INCOME (LOSS) PER SHARE
The basic and diluted weighted average shares outstanding used in the
computation of income per share are net of 63,825 and 5,000 shares held by the
Employee Stock Ownership Plan ("ESOP") that are not allocated to employees as of
March 31, 2002 and 2001, respectively. For the three and nine months ended March
31, 2002, income (loss) used in calculating the basic and diluted income (loss)
per share has been increased by $0.7 million, which reflects a decrease in the
market value of shares allocated to employees. For the three and nine months
ended March 31, 2001, income (loss) used in calculating the basic and diluted
income (loss) per share has been reduced by $1.9 million, which reflects the
increase in the market value of shares allocated to employees, to the extent
that such increase has not already been recognized as compensation expense in
the current period or as appreciation in value in prior periods. The effect of
unallocated ESOP shares and stock options was not dilutive for the three and
nine months ended March 31, 2001 for purposes of calculating dilutive income
(loss) per share.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INVENTORIES:
MARCH 31, JUNE 30,
2002 2001
--------- ---------
Finished goods $ 11,602 $ 13,583
Raw materials 10,334 20,497
Chemicals and supplies 1,357 1,494
--------- ---------
$ 23,293 $ 35,574
========= =========
</Table>
<Table>
<Caption>
OTHER CURRENT ASSETS:
MARCH 31, JUNE 30,
2002 2001
--------- ---------
Catalyst inventory $ 4,816 $ 5,389
Other receivables 3,407 4,929
Prepaid and other 5,293 1,977
--------- ---------
$ 13,516 $ 12,295
========= =========
</Table>
5
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
<Table>
<Caption>
PROPERTY, PLANT AND EQUIPMENT:
MARCH 31, JUNE 30,
2002 2001
--------- ---------
Chemical plants $ 304,028 $ 300,379
Construction in progress 20,417 17,704
Other 6,509 5,839
--------- ---------
330,954 323,922
Less accumulated depreciation 125,734 110,447
--------- ---------
$ 205,220 $ 213,475
========= =========
</Table>
<Table>
<Caption>
ACCRUED EXPENSES:
MARCH 31, JUNE 30,
2002 2001
--------- ---------
Accrued interest $ 8,330 $ 12,439
Property and sales taxes 778 2,320
Federal and state income taxes -- 213
Other 806 1,847
--------- ---------
$ 9,914 $ 16,819
========= =========
</Table>
<Table>
<Caption>
LONG TERM DEBT:
MARCH 31, JUNE 30,
2002 2001
--------- ---------
Bank Credit Agreement:
Term A Loan $ 4,165 $ 8,237
Term B Loan 33,935 35,295
Revolving Credit Facility 16,200 2,000
Senior Subordinated Notes 225,000 225,000
Discount Notes 57,650 57,650
Deferred premium on Senior Subordinated Notes 1,366 1,607
Loan commitment - ESOP 5,315 --
Note payable for insurance premium 1,249 --
--------- ---------
344,880 329,789
Less current maturities 28,747 6,196
--------- ---------
Long-term debt $ 316,133 $ 323,593
========= =========
</Table>
6
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Bank Credit Agreement originally provided for term loans in the amount
of $130 million and a Revolving Credit Facility 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 Facility and Term A Loan
at March 31, 2002 and 2001 and 3.0% for the Term B Loan at March 31, 2002 and
2001, respectively) or the greater of the prime rate and the federal funds rate
plus 1/2% plus a margin (1.0% and 0.5% for at March 31, 2002 and 2001).
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, maintenance of certain financial ratios, and limitations on
capital expenditures, indebtedness, investments and sales of assets and
subsidiary stock. The Company obtained an 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 the fourth quarter of
fiscal year 2001 and the first quarter of fiscal year 2002
3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency ("EPA"),
the U.S. Coast Guard, the Army Corps of Engineers, the Texas Natural Resource
Conservation Commission ("TNRCC"), 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
that 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.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a severe nonattainment area for ozone under the Clean Air
Act ("CAA"). Accordingly, the State of Texas is in the process of developing a
revised State Implementation Plant ("SIP") which will require significant
reductions in emissions of ozone precursors, including volatile organic
compounds and oxides of nitrogen
7
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
from the plants in Harris County. The SIP will require certain additional
emission reductions from the Company's facilities. Such reductions will require
the Company to modify existing controls, install additional controls for air
emissions, or install new equipment. The current rules would require most area
plants, including the Company's Houston plant, to reduce emissions of nitrogen
oxide by approximately 90%. However, a negotiated plan agreed to by TNRCC and
the affected plants would reduce the amount of the required reductions to 75% if
certain scientific data support such reduction. Approval by EPA of the SIP is
anticipated to occur by late 2002. Although the Company is unable at this time
to predict with certainty the cost of modifying its facilities to comply with
the requirements of the SIP, the Company estimates that such costs could range
from $30 million to $60 million. Such costs will depend on the final form and
scope of the SIP, and determination of the detailed modifications that could be
required to comply with the SIP. The Company anticipates that the majority of
the costs to modify its facilities would be incurred from fiscal year 2003 to
2006.
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 sold in California as of December 31, 2002. On March
14, 2002, Governor Davis issued Executive Order D-52-02 extending the
commencement of the ban to December 31, 2003, based on his finding that it would
not be practical to replace MTBE with ethanol by the date of the original ban.
Several other states have enacted laws providing for reduction or elimination of
MTBE from gasoline. The California and New York bans have been challenged in
federal court. However, if the ban in California goes into effect as scheduled,
it would be expected to materially reduce MTBE demand and to have a material
adverse effect on the Company's financial results.
In addition, certain states have established maximum contaminant levels
("MCLs") for MTBE in drinking water supplies ranging from 10 to 17 ppb. The EPA
has not yet established MCLs, but has an advisory of 20 to 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
MCLs.
There continues to be action in Congress that may impact the use of MTBE
in gasoline. Included are legislative proposals that 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 to have a material adverse effect
on the Company's financial results.
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. The California Environment Protection Agency has designated MTBE as
a possible human carcinogen.
8
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. ACCOUNTING CHANGE
In July 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which
addresses financial reporting and accounting for goodwill and other intangible
assets. The pronouncement stipulates that goodwill should no longer be amortized
but rather periodically assessed for impairment. The Company has applied the
provisions in SFAS No. 142 and concluded that goodwill was not impaired. The
Company will continue to periodically assess goodwill for impairment. Goodwill
amortization expense of $3.4 million was recorded for the nine months ended
March 31, 2001.
In July 2000, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS No.
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.
5. EMPLOYEE STOCK OWNERSHIP PLAN
In August 2001, the TPC Holding Corp. Employee Stock Ownership Trust
("Trust") purchased 69,000 shares of common stock of Texas Petrochemical
Holdings, Inc. from existing shareholders in exchange for cash and
seller-financing. The cash portion of the offer to the 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 recorded as an advance to the general
partner and reflected as a contra account in the Company's shareholders' equity
section. The seller-financing portion of the offer was financed with a $5.3
million non-recourse note issued from the Trust to a selling shareholder. This
note is to be financed over a 10-year period at a 6% interest rate. TPC Holding
Corp., the sponsor of the Plan has reflected this note as a loan commitment in
long-term debt and the related unallocated shares as a contra account in
shareholders' equity. Currently, the Trust does not have sufficient funds to pay
the future principal and interest payment requirements under the
seller-financing note. Texas Petrochemicals LP anticipates that it will fund
these principal and interest payments of $0.8 million on an annual basis,
however, there is no commitment or requirement to make such funding. The holder
of the non-recourse note holds a security interest in the shares sold to the
Trust, but has no recourse against the Company, Texas Petrochemicals LP, the
sponsor or the Trust for non-payment of the notes. The Company's contribution to
the Trust for the nine months ended March 31, 2002 was $0.6 million, which was
reported as compensation expense.
In certain situations, the participants of the ESOP have the option to put
their allocated shares back to the plan sponsor at the current fair value of the
stock. Under normal circumstances, the put option is triggered by retirement or
termination of the employee, and generally provides an option period of two
years. Prior to the end of fiscal year 2001, no put options were exercisable. In
fiscal year 2002, qualifying employees who retired or were terminated from
fiscal year 1996 to 2001 were allowed to exercise their put option. In April
2002, Texas Petrochemicals LP funded $1.7 million to qualifying participants who
exercised their put option.
9
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Subsequent to fiscal year 2002, on an annual basis, employees who meet the
put option qualification requirements will be allowed to exercise their put
option. The future funding for the exercise of the put options is expected to
come from Texas Petrochemicals LP and is allowed under the provisions of its
debt agreements. No commitment or requirement, however, exists for Texas
Petrochemicals LP to make such funding. The amount of the put option is based on
the number of shares exercisable and the current appraised share value of $146
per share. The appraised value of the shares will change on an annual basis with
the issuance of the new appraisal report.
6. ADVANCE FROM TEXAS PETROCHEMICALS LP
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 . The payment has been recorded as a
note payable to Texas Petrochemicals LP, which eliminates in consolidation. The
note is due on August 10, 2010 and bears an interest rate of 6% per annum
payable at maturity. The note, including principal and interest, is subject to
mandatory prepayments in amounts otherwise due by Texas Petrochemical Holdings,
Inc. to Texas Petrochemicals LP under an existing tax sharing agreement.
On January 2, 2002, a semiannual interest payment of $3.9 million was made
on the Discount Notes, thus reducing the Company's cash balance to $5.4 million
at March 31, 2002. The Company anticipates a substantial portion of the
remaining cash balance from the advance will be utilized to make the next
semiannual interest payment of $3.9 million on July 1, 2002. The Company expects
to have approximately $1.5 million in remaining cash from the advance to fund
future semiannual interest payments. Unless Texas Petrochemicals LP provides
funding to Texas Petrochemical Holdings, Inc. or additional capital is raised at
Texas Petrochemical Holdings, Inc. there will not be sufficient cash balances at
Texas Petrochemical Holdings, Inc. to fund the entire semiannual interest
payment due January 2, 2003. While the intention of the cash advance is to fund
future interest requirements on the Discount Notes, there is no requirement or
commitment that these funds be used solely or explicitly for that purpose. A
failure to make an interest payment on the Discount Notes qualifies as an event
of default under the indenture of the Discount Notes. The holder of the Discount
Notes would be entitled to seek remedies permitted under the provisions of the
indenture. No assets of Texas Petrochemicals LP secure the obligations of Texas
Petrochemical Holdings, Inc.; however, under certain circumstances, a default
under the Discount Notes could trigger a cross default in the Texas
Petrochemicals LP Bank Credit Agreement and Senior Subordinated Notes
indentures, thus giving the holders of these securities the remedies allowed
under the indentures.
7. 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 distributions from these
subsidiaries as its source of cash flow. Management has determined that
separate, full financial statements of TPC Holding Corp.
10
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
("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:
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
March 31, 2002
(in thousands)
<Table>
<Caption>
Parent Guarantor Non-Guarantors Eliminations Total
--------- --------- -------------- ------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,477 $ $ 672 $ $ 6,149
Accounts receivable - trade 55,135 55,135
Inventories 23,293 23,293
Other current assets 13,516 13,516
--------- --------- -------------- ------------ ---------
Total current assets 5,477 92,616 98,093
Property, plant and equipment, net 205,220 205,220
Investments in land held for sale 990 990
Investment in and advances to limited partnership 2,414 2,414
Goodwill, net 160,395 160,395
Other assets, net of accumulated amortization 133 10,047 10,180
Consolidated subsidiaries 81,108 81,108 -- (162,216) --
--------- --------- -------------- ------------ ---------
Total assets $ 86,718 $ 81,108 $ 471,682 $ (162,216) $ 477,292
========= ========= ============== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ $ $ 4,728 $ $ 4,728
Accounts payable - trade 47,878 47,878
Accrued expenses 631 9,283 9,914
Revolving Credit Facility 16,200 16,200
Current portion of long-term debt 12,547 12,547
--------- --------- -------------- ------------ ---------
Total current liabilities 631 90,636 91,267
Long-term debt 57,650 5,315 253,168 316,133
Deferred income taxes (9,319) 57,995 48,676
Common stock held by the ESOP 24,674 24,674
Less: unearned compensation (9,318) (9,318)
Stockholders' equity:
Partners' equity 81,108 (81,108)
Common Stock 5 5
Additional paid in capital 37,596 77,730 (77,730) 37,596
Treasury stock (188) (188)
Accumulated earnings (deficit) (24,281) 3,378 (3,378) (24,281)
Unallocated ESOP shares (5,315) (1,957) (7,272)
Advance to parent 9,268 (9,268)
--------- --------- -------------- ------------ ---------
Total stockholders' equity 22,400 75,793 69,883 (162,216) 5,860
--------- --------- -------------- ------------ ---------
Total liabilities and stockholders' equity $ 86,718 $ 81,108 $ 471,682 $ (162,216) $ 477,292
========= ========= ============== ============ =========
</Table>
11
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 2001
(in thousands)
<Table>
<Caption>
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 Credit Facility 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
========= ========= ============== ============ =========
</Table>
12
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Income
Nine Months Ended March 31, 2002
(in thousands)
<Table>
<Caption>
Parent Guarantor Non-Guarantors Eliminations Total
--------- --------- -------------- ------------ ---------
Revenues $ $ $ 430,814 $ $ 430,814
Cost of goods sold 396,534 396,534
Non-cash ESOP compensation 183 183
Depreciation and amortization 15,287 15,287
-------------- ---------
Gross profit 18,810 18,810
Selling, general and administrative expenses 94 7,593 7,687
--------- --------- -------------- ------------ ---------
Income (loss) from operations (94) 11,217 11,123
Interest expense 6,231 22,663 28,894
Other income (expense):
Other, net 95 1,235 1,330
--------- --------- -------------- ------------ ---------
Income (loss) before income taxes
and cumulative effect of
accounting change (6,230) (10,211) (16,441)
Provision (benefit) for income taxes (1,964) (3,489) (5,453)
Equity in net income of subsidiaries (6,722) (6,722) 13,444
--------- --------- -------------- ------------ ---------
Net income (loss) $ (10,988) $ (6,722) $ (6,722) $ 13,444 $ (10,988)
========= ========= ============== ============ =========
</Table>
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Income
Nine Months Ended March 31, 2001
(in thousands)
<Table>
<Caption>
Parent Guarantor Non-Guarantors Eliminations Total
-------- --------- -------------- ------------ ---------
Revenues $ $ $ 644,571 $ $ 644,571
Cost of goods sold 587,573 587,573
Non-cash ESOP compensation 685 685
Depreciation and amortization 18,408 18,408
-------------- ---------
Gross profit 37,905 37,905
Selling, general and administrative expenses 23 8 7,356 7,387
-------- --------- -------------- ------------ ---------
Income (loss) from operations (23) (8) 30,549 30,518
Interest expense 5,278 24,090 29,368
Other income (expense):
Other, net 833 833
-------- --------- -------------- ------------ ---------
Income before income taxes
and cumulative effect of
accounting change (5,301) (8) 7,292 1,983
Provision (benefit) for income taxes (1,762) 4,141 2,379
Equity in net income of subsidiaries 2,733 2,741 (5,474) --
Cumulative effect of accounting change,
(net of tax of $221 income tax benefit) (410) (410)
-------- --------- -------------- ------------ ---------
Net income (loss) $ (806) $ 2,733 $ 2,741 $ (5,474) $ (806)
======== ========= ============== ============ =========
</Table>
13
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Nine Months Ended March 31, 2002
(in thousands)
<Table>
<Caption>
Parent Guarantor Non-Guarantors Eliminations Total
-------- --------- -------------- ------------ ---------
Cash flows from operating activities:
Net income (loss) $ (10,988) $ (6,722) $ (6,722) $ 13,444 $ (10,988)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation of fixed assets 15,287 15,287
Amortization of debt issue costs 901 901
Earnings from investment in limited partnership (200) (200)
Deferred income taxes (2,377) (2,377)
Non-cash ESOP compensation 183 183
Non-cash change in fair value of derivatives (895) (895)
Non-cash net reduction in advance to general partner 530 530
Change in:
Accounts receivable (656) (656)
Inventories 12,281 12,281
Other assets 1,754 1,823 3,577
Accounts payable, accrued and other (1,279) (25,874) (27,153)
Distribution from limited partnership 438 438
-------- --------- -------------- ------------ ---------
Net cash used in operating activities (10,513) (6,722) (5,281) 13,444 (9,072)
Cash flows from investing activities:
Capital expenditures (7,032) (7,032)
-------- --------- -------------- ------------ ---------
Net cash used in investing activities (7,032) (7,032)
Cash flows from financing activities:
Change in bank overdraft (1,101) (1,101)
Net repayments under revolver 14,200 14,200
Payments on long-term debt (7,766) (7,766)
Advance to Parent (9,268) 9,268
Advance to general partner (2,487) (2,487)
-------- --------- -------------- ------------ ---------
Net cash provided by financing activities (6,422) 9,268 2,846
Net increase (decrease) in cash and cash equivalents (10,513) (6,722) (18,735) 22,712 (13,258)
Cash and cash equivalents, at beginning of period 19,407 19,407
-------- --------- -------------- ------------ ---------
Cash and cash equivalents, at end of period $ (10,513) $ (6,722) $ 672 $ 22,712 $ 6,149
======== ========= ============== ============ =========
</Table>
14
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Nine Months Ended March 31, 2001
(in thousands)
<Table>
<Caption>
Parent Guarantor Non-Guarantors Eliminations Total
-------- --------- -------------- ------------ --------
Cash flows from operating activities:
Net income (loss) $ (806) $ 2,733 $ 2,741 $ (5,474) $ (806)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of fixed assets 14,971 14,971
Amortization of goodwill and other assets 3,437 3,437
Amortization of debt issue costs 5,273 904 6,177
Loss on disposal of land 327 327
Earnings from limited partnership (423) (423)
Deferred income taxes (785) (977) (1,762)
Non-cash ESOP compensation 685 685
Non-cash change in fair value of derivative (92) (92)
Non-cash net reduction in note receivable from ESOP 1,500 1,500
Change in:
Accounts receivable (11,699) (11,699)
Inventories (7,707) (7,707)
Other assets 595 (4,041) (3,446)
Accounts payable, accrued and other (1,616) (14,369) (15,985)
Distribution from limited partnership 525 525
-------- --------- -------------- ------------ --------
Net cash provided (used) by 2,661 2,733 (14,218) (5,474) (14,298)
operating activities
Cash flows from investing activities:
Capital expenditures (10,163) (10,163)
Proceeds from sale of land 741 741
-------- --------- -------------- ------------ --------
Net cash used in investing activities (9,422) (9,422)
Cash flows from financing activities:
Change in bank overdraft (1,750) (1,750)
Net repayments under revolver 22,250 22,250
Payments on long-term debt (11,443) (11,443)
Payment of cash bonus plan (213) (213)
Issuance of treasury stock 72 72
-------- --------- -------------- ------------ --------
Net cash provided (used) by
financing activities 72 8,844 8,916
-------- --------- -------------- ------------ --------
Net increase (decrease) in cash and cash equivalents 2,733 2,733 (14,796) (5,474) (14,804)
Cash and cash equivalents, at beginning of period 10 14,919 14,929
-------- --------- -------------- ------------ --------
Cash and cash equivalents, at end of period $ 2,733 $ 2,743 $ 123 $ (5,474) $ 125
======== ========= ============== ============ ========
</Table>
15
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 Texas
Petrochemical Holdings, Inc. and its wholly owned subsidiary, TPC Holding Corp.,
collected referred to as the "Company" herein, included elsewhere in this
report.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales
of butadiene, fuel products (methyl tertiary-butyl ether ("MTBE"), butene-2 and
alkylate) and specialty products (butene-1, isobutylene concentrate, high purity
isobutylene, diisobutylene and polyisobutylene). The recent sluggish economy has
impacted demand, primarily in the Company's butadiene and specialty products
businesses. During the first quarter of the current fiscal year, the Company's
financial performance was negatively impacted by continued disruptions to its
business caused by a fire in one of its operating units in May, 2001 and severe
flooding in June, 2001. The Company's financial performance improved during the
current quarter due to lower raw material and energy cost as compared to the
prior year quarter.
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 sold in California as of December 31, 2002. On
March 14, 2002, Governor Davis issued Executive Order D-52-02 extending the
commencement of the ban to December 31, 2003, based on his finding that it would
not be practical to replace MTBE with ethanol by the date of the original ban.
Several other states have enacted laws providing for reduction or elimination of
MTBE from gasoline. The California and New York bans have been challenged in
federal court. However, if the ban in California goes into effect as scheduled,
it would be expected to materially reduce MTBE demand and to have a material
adverse effect on the Company's financial results.
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.
Environmental Protection Agency has not yet established MCLs but has an advisory
of 20 to 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 MCLs.
There continues to be action in Congress to impact the use of MTBE in
gasoline. Included are legislative proposals that would ban MTBE, eliminate the
oxygen requirement of the Clean Air Act 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 to have a material adverse effect
on the Company's financial results.
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. The California Environmental Protection Agency has designated MTBE
as a possible human carcinogen.
16
REVENUES
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 and nine months ended March 31, 2002 and 2001, respectively.
<Table>
<Caption>
Revenues
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Butadiene $ 26.9 20% $ 45.3 20% $ 82.7 19% $134.2 21%
Fuel Products(1) 73.4 53 126.8 57 240.2 56 369.0 57
Specialty Products(2) 34.1 25 43.1 20 101.1 23 125.4 19
Other(3) 2.2 2 6.1 3 6.8 2 $ 16.0 3
------ --- ------ --- ------ --- ------ ---
Total $136.6 100% $221.3 100% $430.8 100% $644.6 100%
====== === ====== === ====== === ====== ===
</Table>
- ----------
(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.
<Table>
<Caption>
Sales Volumes
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene 213.0 201.6 610.1 615.6
Fuel Products(1) 90.7 107.4 315.4 329.2
Specialty Products 163.0 152.8 461.8 460.8
</Table>
- ----------
(1) Volumes in millions of gallons. Includes 67.8 million, 86.7 million, 241.1
million and 269.8 million gallons of MTBE sales, of which 8.5 million,
26.2 million, 43.0 million and 94.5 million gallons of finished MTBE were
purchased for resale for the three and nine months ended March 31, 2002
and 2001, respectively.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Revenues $136.6 100% $221.3 100% $430.8 100% $644.6 100%
Cost of goods sold 117.1 86 202.8 92 396.5 92 587.6 91
Non-cash ESOP compensation 0.2 -- 0.3 -- 0.2 -- 0.7 --
Depreciation and amortization 5.1 4 6.1 3 15.3 4 18.4 3
------ --- ------ --- ------ --- ------ ---
Gross profit 14.2 10 12.1 5 18.8 4 37.9 6
Selling, general and administrative expenses 2.3 2 2.3 1 7.7 2 7.4 1
------ --- ------ --- ------ --- ------ ---
Income from operations $ 11.9 9% $ 9.8 4% $ 11.1 2% $ 30.5 5%
====== === ====== === ====== === ====== ===
</Table>
17
Three months ended March 31, 2002 compared to the three months ended March 31,
2001
REVENUES
The Company's revenues decreased by approximately 38%, or $84.7
million, to $136.6 million for the three months ended March 31, 2002 from $221.3
million for the three months ended March 31, 2001. Butadiene sales revenues
decreased due to lower sales prices as compared to the prior year quarter.
Butadiene sales prices were lower during the current quarter due to reduced
domestic customer demand. Fuel products sales revenues declined primarily as a
result of lower MTBE sales prices and MTBE sales volumes as compared to the
prior year quarter. Lower MTBE sales prices were driven by lower crude oil and
gasoline prices. MTBE sales volumes declined due to lower volumes of MTBE
purchased for resale. Specialty products sales revenues were lower than the
prior year quarter due primarily to lower sales prices driven by reduced
feedstock and energy costs.
GROSS PROFIT
Gross profit increased by 17% or $2.1 million, to $14.2 million for the
three months ended March 31, 2002 from $12.1 million for the three months ended
March 31, 2001. Gross margin during this period increased to 10.4% from 5.5%.
Gross profit was positively impacted during the current year quarter by lower
feedstock and energy costs. The improvement in product margins more than offset
the impact of income in the prior year quarter of $4.1 million from an insurance
settlement and shipping contracts. In addition, gross profit increased during
the current quarter compared to the corresponding prior year quarter by the
elimination of goodwill amortization expense upon adoption of Statement of
Financial Accounting Standards No. 142 starting July 2001. Goodwill amortization
expense of $1.1 million was recorded during the three months ended March 31,
2001.
INCOME FROM OPERATIONS
Income from operations increased 21% or $2.1 million, to $11.9 million
for the three months ended March 31, 2002 from $9.8 million for the three months
ended March 31, 2001. Operating margin during this period increased to 8.7% from
4.4%. This increase in income from operations was primarily due to the same
factors contributing to the increase in gross profit described above.
Nine months ended March 31, 2002 compared to the nine months ended March 31,
2001
REVENUES
The Company's revenues decreased by 33%, or $213.8 million, to $430.8
million for the nine months ended March 31, 2002 from $644.6 million for the
nine months ended March 31, 2001. Butadiene sales prices were lower during the
current period due to reduced domestic customer demand. Fuel products sales
revenues declined primarily as a result of lower MTBE sales prices and MTBE
sales volumes as compared to the prior year period. Lower MTBE sales prices were
driven by lower crude oil and gasoline prices. MTBE sales volumes declined due
to lower volumes of MTBE purchased for resale. Specialty products sales revenues
were lower than the prior year period due primarily to lower sales prices driven
by reduced feedstock and energy costs.
18
GROSS PROFIT
Gross profit decreased by 50% or $19.1 million, to $18.8 million for
the nine months ended March 31, 2002 from $37.9 million for the nine months
ended March 31, 2001. Gross margin during this period decreased to approximately
4.4% from 5.9%. 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 2001
resulted in a reduction of MTBE production of approximately 30% during the
current period compared to the prior year period adjusted for the turnaround in
August 2000. The repairs during the current period 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 period were higher than planned due to the operational outages sustained
at the end of fiscal year 2001. These raw materials subsequently declined in
value due to a significant decline in market prices during the current period.
The resulting higher cost of 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 prices during the first nine months
of the period. These declines negatively impacted the unit margins in the fuel
products and butadiene businesses. Gross profit increased during the current
period compared to the corresponding prior year period by the elimination of
goodwill amortization expense upon the adoption of SFAS No. 142 starting in July
2001. Goodwill amortization expense of $3.4 million was recorded during the nine
months ended March 31, 2001.
INCOME FROM OPERATIONS
Income from operations decreased by 63% or $19.3 million, to $11.2
million for the nine months ended March 31, 2002 from $30.5 million for the nine
months ended March 31, 2001. Operating margin during this period decreased to
2.6% from 4.7%. The decrease in income from operations was primarily due to the
same factors contributing to the decrease in gross profit described above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Nine months ended March 31, 2002 compared to the nine months ended March 31,
2001
Net cash used by operating activities was $9.1 million for the nine
months ended March 31, 2002 compared to $14.3 million for the nine months ended
March 31, 2001. The decrease of $5.2 million was caused by a decrease in working
capital during the current period offset by lower net income. Net cash used in
investing activities was $7.0 million for the nine months ended March 31, 2002
compared to $9.4 million for the nine months ended March 31, 2001. The decrease
of $2.4 million was due to lower capital expenditures. Net cash provided by
financing activities was $2.8 million for the nine months ended March 31, 2002
compared to $8.9 million net cash provided for the nine months ended March 31,
2001.
LIQUIDITY
The Company's liquidity needs arise primarily from principal and
interest payments under the Bank Credit Agreement and the Subordinated Notes in
addition to funding for capital expenditures and income taxes. Additionally,
beginning in January 2002, a semiannual cash interest payment of $3.9 million
was required under the Discount Notes, which were issued directly by Texas
Petrochemical Holdings, Inc. As a stand-alone entity, Texas Petrochemical
Holdings, Inc. does not maintain continuing operations that generate cash flow
to meet these interest payments. Texas Petrochemicals LP generates 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 Company's
Subordinated Notes. On August 10, 2001, Texas
19
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 Petrochemical Holdings, Inc. to meet
additional future interest requirements.
On January 2, 2002, a semiannual interest payment of $3.9 million was
made on the Discount Notes thus reducing the Company's cash balance to $5.4
million at March 31, 2002. The Company anticipates a substantial portion of the
remaining cash balance from the advance will be utilized to make the next
semiannual interest payment of $3.9 million on July 1, 2002. The Company expects
to have approximately $1.5 million in remaining cash from the advance to fund
future semiannual interest payments. Unless Texas Petrochemicals LP provides
funding to Texas Petrochemical Holdings, Inc. or additional capital is raised at
Texas Petrochemical Holdings, Inc. there will not be sufficient cash balances at
Texas Petrochemical Holdings, Inc. to fund the entire semiannual interest
payment due January 2, 2003. While the intention of the cash advance is to fund
future interest requirements on the Discount Notes, there is no requirement or
commitment that these funds be used solely or explicitly for that purpose. A
failure to make an interest payment on the Discount Notes qualifies as an event
of default under the indenture of the Discount Notes. The holder of the Discount
Notes would be entitled to seek remedies permitted under the provisions of the
indenture. No assets of Texas Petrochemicals LP secure the obligations of Texas
Petrochemical Holdings, Inc., however, under certain circumstances a default
under the Discount Notes could trigger a cross default in the Texas
Petrochemicals LP Bank Credit Agreement and Senior Subordinated Notes
indentures, thus giving the holders of these securities the remedies allowed
under the indentures.
In August 2001, the TPC Holding Corp. Employee Stock Ownership Trust (the
"Trust") purchased 69,000 shares of common stock of Texas Petrochemical
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 recorded as a advance to the general
partner and reflected as a contra account in the Company's shareholders' equity.
The seller-financing portion of the offer was financed with a $5.3 million
non-recourse note issued from the Trust to a 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. Currently, the
Trust does not have sufficient funds to pay the future principal and interest
payment requirements under the seller-financing note. Texas Petrochemicals LP
anticipates that it will fund these principal and interest payments of $0.8
million on an annual basis, however, there is no commitment or requirement to
make such funding. The holder of the non-recourse note holds a security interest
in the common stock, but has no recourse against the Company, Texas
Petrochemicals LP, the sponsor or the Trust for non-payment of the note. The
Company's contribution to the Trust for the nine months ended March 31, 2002 was
$0.6 million, which was reported as compensation expense.
In certain situations, the participants 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, and generally provides an option period of two
years. Prior to the end of fiscal year 2001, no put options were exercisable. In
fiscal year 2002, qualifying employees who retire or were terminated from fiscal
year 1996 to 2001 were allowed to exercise their put option. In April 2002,
Texas Petrochemicals LP funded $1.7 million to qualifying participants who
exercised their put option.
Beginning in fiscal year 2002, on an annual basis, employees who meet the
put option qualification requirements were allowed to exercise their put option.
20
The future funding for the exercise of the put options is expected to come
from Texas Petrochemicals LP and is allowed under the provisions of its debt
agreements. No commitment or requirement, however, exists for Texas
Petrochemicals LP to make such funding. The amount of the put option is based on
the number of shares exercisable and the current appraised share value of $146
per share. The appraised value of the shares will change on an annual basis with
the issuance of the new appraisal report.
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 of finished goods. Additionally, the Company has a $40 million Revolving
Credit Facility, of which $16.2 million was used at March 31, 2002, to provide
funds for ongoing operations, working capital and planned capital expenditures.
The Company's liquidity during the nine months ended March 31, 2002 compared to
the prior year corresponding period has been impacted by a decline in operating
results, changes in working capital and funding of $2.5 million to the Trust.
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. In order to improve liquidity, the Company has taken steps to reduce
capital expenditures and working capital. In addition to reductions of inventory
quantities on hand, declines in product prices in the current fiscal year have
contributed to the Company's ability to reduce working capital. Potential future
increases in product prices may impact the Company's ability to maintain low
levels of working capital and, in the event of significant product price
increases, would have a substantial impact on the Company's liquidity position.
The Company's ability to borrow is limited by the terms of the Bank Credit
Agreement, Discount Notes and the Subordinated Notes. The Bank Credit Agreement,
Discount Notes 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. The Company's availability under the
Revolving Credit Facility is tied to, among other things, the ratio of Debt to
EBITDA as defined in the Bank Credit Agreement. Future declines in the Company's
EBITDA could result in a decline in the amount of available capacity in the
Revolving Credit Facility, if an amendment to the Bank Credit Agreement were not
obtained. Additionally, the Company's Revolving Credit Facility is scheduled to
expire on December 31, 2002. Failure to obtain alternative financing or an
extension of the existing facility by December 31, 2002 would create a
significant reduction in the Company's liquidity and could have a substantial
negative impact on the Company's business operations and financial condition.
The Company obtained an 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
year 2001 and the first quarter of fiscal year 2002.
CAPITAL EXPENDITURES
The Company's capital expenditures relate principally to improving
operating efficiencies. Capital expenditures for the nine months ended March 31,
2002 were $7.0 million. The Company's expenses include approximately $20 million
annually for plant maintenance, which are not treated as capital expenditures.
The Company currently plans to spend approximately $9 million in capital
expenditures for fiscal year 2002.
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
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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
The Company's primary sources of market risk are fluctuations in
commodity prices and in interest rates.
COMMODITY PRICES
The Company manages its exposure to commodity price fluctuations by
entering into contracts on raw material purchases and product sales with third
parties. In addition, the Company periodically enters into commodity price swap
agreements, options and futures contracts to reduce price risk by either
purchasing or selling raw materials or other products in the market. At March
31, 2002, the Company had outstanding natural gas swap and option contracts with
notional volumes totaling 320,000 mmbtus. The fair value of these outstanding
derivative instruments at March 31, 2002 has been recorded in the financial
statements as a $0.3 million loss. A hypothetical 10% unfavorable change in the
price of natural gas from that in effect at the end of the period would not have
a material adverse effect on the financial position or results of operations of
the Company. Additionally, the Company recognized a $0.7 million loss on natural
gas swap and option contracts that settled during the three months ended March
31, 2002.
INTEREST RATE RISK
The Company maintains an overall interest rate risk-management strategy
that from time to time incorporates the use of derivative instruments to
minimize its exposure to changes in the fair value of its fixed rate debt and to
volatility in LIBOR rates associated with its floating rate debt. As of March
31, 2002 the Company had no interest rate derivatives instruments outstanding.
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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, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended March 31, 2002.
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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 PETROCHEMICAL HOLDINGS, INC.
Dated: May 15, 2002 By: /s/ Carl S. Stutts
-------------------------------------
Carl S. Stutts
Executive Vice President,
Chief Financial Officer
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