**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-Q**

| **(Mark One)** | ** **                                                                                              |
|----------------|---------------------------------------------------------------------------------------------------------|
| **x**          | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
| ** **     | **For the  quarterly period ended March 31, 2006**                                                 |
| ** **     | **OR**                                                                                                  |
| **o**          | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**CommissionFile Number 001-11763**

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**TRANSMONTAIGNE INC.**

| **Delaware**                       |   | **06-1052062**       |
|------------------------------------|--------|----------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer     |
| of incorporation  or organization) |   | Identification  No.) |

 

**1670 BroadwaySuite 3100Denver, Colorado 80202**

(Address, including zipcode, of principal executive offices)

**(303) 626-8200**

(Telephone number,including area code)

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such report), and (2) hasbeen subject to such filing requirements for the past90 days. Yes  xNo  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated  filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2)  Yes  o  No  x

Asof April 24, 2006, there were 50,010,607 shares of the Registrant’s CommonStock outstanding.

 

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**TABLEOF CONTENTS**

|            | ** ** | ** **                                                                                                                                                        | ** ** | **Page No.** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** ** | ** ** | **Part I.  Financial Information**                                                                                                                           | ** ** |              |       | ** ** |   |
| Item 1.    |       | Unaudited Consolidated Financial Statements                                                                                                                       |       |              | 5          | ** ** |   |
|       |       | Consolidated balance sheets as of March 31, 2006  and June 30, 2005                                                                                     |       |              | 6          | ** ** |   |
|       |       | Consolidated statements of operations for the three  and nine months ended March 31, 2006 and 2005                                                           |       |              | 7          | ** ** |   |
|       |       | Consolidated statements of preferred stock and common  stockholders’ equity for the year ended June 30, 2005 and nine months  ended March 31, 2006 |       |              | 8          | ** ** |   |
|       |       | Consolidated statements of cash flows for the three  and nine months ended March 31, 2006 and 2005                                                           |       |              | 9          | ** ** |   |
|       |       | Notes to consolidated financial statements                                                                                                                        |       |              | 10         | ** ** |   |
| Item 2.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                       |       |              | 34         | ** ** |   |
| Item 3.    |       | Qualitative and Quantitative Disclosures about Market  Risk                                                                                                       |       |              | 68         | ** ** |   |
| Item  4.   |       | Controls  and Procedures                                                                                                                                          |       |              | 71         | ** ** |   |
| ** ** | ** ** | **Part II.  Other Information**                                                                                                                              |       |              |       | ** ** |   |
| Item  5.   |       | Other Information                                                                                                                                                 |       |              | 72         | ** ** |   |
| Item 6.    |       | Exhibits                                                                                                                                                          |       |              | 72         | ** ** |   |

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

This Quarterly Report contains certain forward-lookingstatements and information relating to TransMontaigne Inc., including thefollowing:

i.                   certainstatements, including possible or assumed future results of operations, in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations;”

ii.               any statementscontained herein or therein regarding the prospects for our business or any ofour services;

iii.           any statements precededby, followed by or that include the words “may,” “seeks,” “believes,” “expects,”“anticipates,” “intends,” “continues,” “estimates,” “plans,” “targets,” “predicts,”“attempts,” “is scheduled,” or similar expressions; and

iv.             other statementscontained herein or therein regarding matters that are not historical facts.

Our business and results of operations are subject torisks and uncertainties, many of which are beyond our ability to control orpredict. Because of these risks and uncertainties, actual results may differmaterially from those expressed or implied by forward-looking statements,and investors are cautioned not to place undue reliance on such statements,which speak only as of the date thereof.

The following riskfactors, discussed in more detail under the heading “Risk Factors” in ourAnnual Report on Form 10-K for the year ended June 30, 2005,filed on September 13, 2005, are important factors that could cause actualresults to differ materially from our expectations and may adversely affect ourbusiness and results of operations, include, but are not limited to:

·       theavailability of adequate supplies of and demand for petroleum products in theareas in which we operate;

·       theeffects of competition and our ability to renew customer contracts;

·       theimpact of petroleum product price fluctuations on our sales margins and theeffect of changes in commodity prices on our liquidity;

·       thesuccess of our risk management activities;

·       volumesof refined petroleum product throughput or stored in our terminal facilities;

·       TransMontaignePartners’ inability to pay the minimum quarterly distribution on thesubordinated units that we own;

·       continuedcreditworthiness of, and performance by, contract counterparties;

·       thetax and other effects of the exercise of TransMontaigne Partners’ options topurchase our fixed assets;

·       operationalhazards and availability and cost of insurance on our assets and operations;

·       theimpact of any failure of our information technology systems;

·       theavailability of acquisition opportunities and successful integration and futureperformance of acquired assets;

·       thethreat of terrorist attacks or war;

·       theimpact of current and future laws and governmental regulations;

·       thefailure of TransMontaigne Partners to avoid federal income taxation as acorporation or the imposition of state level taxation;

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·       liabilityfor environmental claims;

·       theimpact of the departure of any key officers; and

·       generaleconomic, market or business conditions.

An additional riskfactor that could cause actual results to differ materially from ourexpectations and may adversely affect our business and results of operations isthe consummation of the pending merger with SemGroup, L.P. and its affiliates,which in turn is dependent upon, among other things:

·       theability of the parties to satisfy, or to cause the satisfaction of, theconditions to completion of the pending merger with SemGroup, L.P. and itsaffiliates, including receipt of stockholder approval;

·       theactual terms of the financing transactions entered into in connection withfunding the merger and other transactions contemplated by the merger agreement;and

·       theoccurrence of any event or change in circumstances that could give rise totermination of the merger agreement, or the failure of the merger to becompleted for any other reason.

We believe the increase in our stock price subsequentto March 21, 2006, the last unaffected stock price prior to the pressreports of a potential transaction, is largely attributable to the cash considerationinvestors expect to receive if the merger is consummated. Accordingly, if themerger is not completed, our stock price likely will decrease. We can provideno assurance that all conditions to the parties’ obligations to complete themerger will be satisfied. As a result, it is possible that the merger may notbe completed even if approved by our stockholders. Please see our PreliminaryProxy Statement filed with the Securities and Exchange Commission on May 1,2006 for a detailed description of the terms, conditions and provisionsregarding the pending merger with SemGroup, L.P.

In addition, thefollowing factors and circumstances under or related to the pending mergercould have an adverse impact on our business and operations:

·       asof March 31, 2006, we have incurred approximately $1.4 million in mergerrelated expenses. Under the merger agreement, we are required to pay atermination fee of $15 million to SemGroup, L.P. under specified circumstances.The termination fee would be payable if we terminated the merger agreement withSemGroup, L.P. to enter into an agreement with Morgan Stanley Capital GroupInc.;

·       themerger with SemGroup, L.P. places certain limitations on the manner in which wecan conduct our ongoing operations. In addition, our management has devoted,and likely will continue to devote, a significant amount of time to the pendingmerger. These efforts have, and may continue to, temporarily distractmanagement’s attention from our day-to-day business operations and otherbusiness opportunities;

·       approvals,clearances or consents required to consummate the merger could also delay orjeopardize the completion of the merger, further impacting management’s abilityto manage our day-to-day operations; and

·       certain key employees may departbecause of a desire not to remain with us after completion of the merger and wecan make no assurances that we will be able to retain key employees to the sameextent we have been able to do so in the past.

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**Part I.Financial Information**

**ITEM 1.**                UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS

The interim unaudited consolidated financialstatements of TransMontaigne Inc. as of and for the three and nine monthsended March 31, 2006, are included herein beginning on the following page.The accompanying unaudited interim consolidated financial statements should beread in conjunction with our annual consolidated financial statements andrelated notes for the year ended June 30, 2005, together with ourdiscussion and analysis of financial condition and results of operations,included in our Annual Report on Form 10-K filed on September 13,2005.

TransMontaigne Inc.is a holding company with the following active subsidiaries during the threeand nine months ended March 31, 2006.

·       TransMontaigneProduct Services Inc. (“TPSI”)

·       TransMontaigneServices Inc.

·       TransMontaigneTransport Inc.

·       CoastalFuels Marketing, Inc.

·       CoastalTug and Barge, Inc.

·       TransMontaignePartners L.P.

·       Radcliff/EconomyMarine Services, Inc. (since August 1, 2005)

We do not have off-balance-sheet arrangements(other than operating leases) or special-purpose entities.

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**TransMontaigne Inc. and subsidiariesConsolidated balance sheets(In thousands)**

| ** **                                                                        | ** ** | **March 31,  2006** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                        |       |                     |       |                    |       |
| Current assets:                                                                   |       |                     |       |                    |       |
| Cash and cash  equivalents                                                        |       | $                        | 9,494      |                    | $          | 29,721 |   |
| Restricted cash held by  commodity broker                                         |       | 11,411                   |       | 10,436                  |       |
| Trade accounts  receivable, net                                                   |       | 422,250                  |       | 381,771                 |       |
| Inventories—discretionary  volumes                                           |       | 232,409                  |       | 274,774                 |       |
| Unrealized gains on  derivative contracts                                         |       | 18,992                   |       | 7,620                   |       |
| Deferred tax assets                                                               |       | 18,704                   |       | 18,401                  |       |
| Prepaid expenses and  other                                                       |       | 6,393                    |       | 6,767                   |       |
|                                                                              |       | 719,653                  |       | 729,490                 |       |
| Property, plant and  equipment, net                                               |       | 364,300                  |       | 344,532                 |       |
| Product linefill and  tank bottom volumes                                         |       | 21,626                   |       | 24,325                  |       |
| Investment in Lion Oil  Company                                                   |       | 10,131                   |       | 10,131                  |       |
| Deferred debt issuance  costs, net                                                |       | 8,203                    |       | 9,778                   |       |
| Other assets, net                                                                 |       | 40,206                   |       | 23,725                  |       |
|                                                                              |       | $                        | 1,164,119  |                    | $          | 1,141,981 |   |
| **LIABILITIES, PREFERRED STOCK, AND  COMMON STOCKHOLDERS’ EQUITY** |       |                     |       |                    |       |
| Current liabilities:                                                              |       |                     |       |                    |       |
| Commodity margin loan                                                             |       | $                        | 10,000     |                    | $          | — |   |
| Working capital credit  facility                                                  |       | 17,500                   |       | —                  |       |
| Trade accounts payable                                                            |       | 181,796                  |       | 212,040                 |       |
| Income taxes payable                                                              |       | 4,097                    |       | 29,801                  |       |
| Unrealized losses on  derivative contracts                                        |       | 13,725                   |       | 47,215                  |       |
| Inventory due to others  under exchange agreements                                |       | 58,718                   |       | 16,429                  |       |
| Excise taxes payable                                                              |       | 85,291                   |       | 79,597                  |       |
| Other accrued  liabilities                                                        |       | 24,302                   |       | 20,791                  |       |
| Deferred revenue—supply  chain management services                           |       | 3,108                    |       | 3,981                   |       |
|                                                                              |       | 398,537                  |       | 409,854                 |       |
| Other liabilities:                                                                |       |                     |       |                    |       |
| Long-term debt                                                                    |       | 245,508                  |       | 228,307                 |       |
| Deferred tax liabilities                                                          |       | 49,880                   |       | 46,413                  |       |
| Unrealized losses on  derivative contracts                                        |       | —                   |       | 234                     |       |
| Total liabilities                                                                 |       | 693,925                  |       | 684,808                 |       |
| Non-controlling  interests in TransMontaigne Partners                             |       | 82,566                   |       | 81,440                  |       |
| Series B redeemable  convertible preferred stock                             |       | 20,608                   |       | 49,249                  |       |
| Common stockholders’ equity:                                                 |       |                     |       |                    |       |
| Common stock                                                                      |       | 484                      |       | 456                     |       |
| Capital in excess of par  value                                                   |       | 322,435                  |       | 299,681                 |       |
| Deferred stock-based  compensation                                                |       | —                   |       | (7,042                  | )          |
| Retained earnings                                                                 |       | 44,101                   |       | 33,389                  |       |
|                                                                              |       | 367,020                  |       | 326,484                 |       |
|                                                                              |       | $                        | 1,164,119  |                    | $          | 1,141,981 |   |

 

See accompanying notes to consolidated financial statements.

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**TransMontaigne Inc. and subsidiariesConsolidated statements of operations(In thousands, except per share amounts)**

| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Supply, distribution,  and marketing:                                         |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                                                      |       | $                                                | 2,424,328  |                                            | $          | 2,140,187 |   | $ | 7,265,819 |   | $ | 5,980,972 |   |
| Cost of product sold and other direct costs and  expenses                     |       | (2,375,217                                       | )          | (2,055,714                                      | )          | (7,208,986 | ) | (5,852,803 | ) |
|                                                                          |       | 49,111                                           |       | 84,473                                          |       | 56,833 |   | 128,169 |   |
| Terminals, pipelines,  and tugs and barges:                                   |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                                                      |       | 32,369                                           |       | 29,254                                          |       | 94,430 |   | 83,248 |   |
| Direct operating costs and expenses                                           |       | (19,895                                          | )          | (15,447                                         | )          | (56,533 | ) | (45,308 | ) |
|                                                                          |       | 12,474                                           |       | 13,807                                          |       | 37,897 |   | 37,940 |   |
|                                                                          |       | 61,585                                           |       | 98,280                                          |       | 94,730 |   | 166,109 |   |
| Costs and expenses:                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Selling, general and administrative expenses                                  |       | (12,142                                          | )          | (9,885                                          | )          | (37,050 | ) | (32,120 | ) |
| Merger related expenses                                                       |       | (1,350                                           | )          | —                                          |       | (1,350 | ) | — |   |
| Depreciation and amortization                                                 |       | (7,273                                           | )          | (6,274                                          | )          | (20,703 | ) | (17,808 | ) |
| Gain (loss) on disposition of assets, net                                     |       | 10,617                                           |       | 2,993                                           |       | 11,802 |   | (606 | ) |
| Total costs and expenses                                                      |       | (10,148                                          | )          | (13,166                                         | )          | (47,301 | ) | (50,534 | ) |
| Operating income                                                              |       | 51,437                                           |       | 85,114                                          |       | 47,429 |   | 115,575 |   |
| Other income (expenses):                                                      |       |                                             |       |                                            |       |   |   |   |   |
| Dividend income                                                               |       | 107                                              |       | 9                                               |       | 690 |   | 390 |   |
| Interest income                                                               |       | 169                                              |       | 149                                             |       | 626 |   | 250 |   |
| Interest expense                                                              |       | (7,164                                           | )          | (6,375                                          | )          | (20,013 | ) | (19,316 | ) |
| Other financing  costs:                                                       |       |                                             |       |                                            |       |   |   |   |   |
| Amortization of deferred debt issuance costs                                  |       | (525                                             | )          | (455                                            | )          | (1,575 | ) | (1,603 | ) |
| Write-off of debt issuance costs related to  former bank credit facility      |       | —                                           |       | —                                          |       | — |   | (3,392 | ) |
| Total other expenses                                                          |       | (7,413                                           | )          | (6,672                                          | )          | (20,272 | ) | (23,671 | ) |
| Earnings before income taxes                                                  |       | 44,024                                           |       | 78,442                                          |       | 27,157 |   | 91,904 |   |
| Income tax  expense                                                           |       | (16,729                                          | )          | (31,377                                         | )          | (10,320 | ) | (36,762 | ) |
| Non-controlling  interests’ share in earnings of TransMontaigne Partners |       | (1,571                                           | )          | —                                          |       | (5,425 | ) | — |   |
| Net earnings                                                                  |       | 25,724                                           |       | 47,065                                          |       | 11,412 |   | 55,142 |   |
| Earnings  allocable to preferred stock                                        |       | (1,520                                           | )          | (10,344                                         | )          | (762 | ) | (12,148 | ) |
| Net earnings attributable to common stockholders                              |       | $                                                | 24,204     |                                            | $          | 36,721 |   | $ | 10,650 |   | $ | 42,994 |   |
| Earnings per share:                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Basic net earnings per common share                                           |       | $                                                | 0.50       |                                            | $          | 0.92 |   | $ | 0.22 |   | $ | 1.08 |   |
| Diluted net earnings per common share                                         |       | $                                                | 0.48       |                                            | $          | 0.90 |   | $ | 0.21 |   | $ | 1.07 |   |
| Weighted average common  shares outstanding:                                  |       |                                             |       |                                            |       |   |   |   |   |
| Basic                                                                         |       | 48,404                                           |       | 39,793                                          |       | 47,890 |   | 39,672 |   |
| Diluted                                                                       |       | 53,377                                           |       | 52,558                                          |       | 53,687 |   | 51,709 |   |

 

See accompanying notes to consolidated financial statements.

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**TransMontaigne Inc. and subsidiariesConsolidated statements of preferred stock and common stockholders’ equityYear ended June 30, 2005 and nine months ended March 31, 2006(In thousands)**

| ** **                                                                                         | ** ** | **Series B  Preferred  stock** | ** ** | **Common  stock** | ** ** | **Capital in  excess of  par value** | ** ** | **Deferred  stock-based  compensation** | ** ** | **Retained  earnings  (accumulated  deficit)** | ** ** | **Total  common  stockholders’  equity** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| **Balance at June 30, 2004**                                                                  |       |                                | $          | 77,719            |       |                                                |       | $                                       | 411        |                                           |       |                                          | $          | 251,775 |   |   |   | $ | (4,129 | ) |   |   | $ | (19,768 | ) |   |   | $ | 228,289 |   |   |
| Common stock issued for options exercised                                                          |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | 347        |                                          |       |   | — |   |   |   | — |   |   |   | 347 |   |   |
| Common stock repurchased from employees for  withholding taxes                                     |       |                                | —     |              |       |                                                | (1         | )                                       |       |                                           | (816       | )                                             |       |   | — |   |   |   | — |   |   |   | (817 | ) |   |
| Net tax effect arising from stock-based compensation                                          |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | 272        |                                          |       |   | — |   |   |   | — |   |   |   | 272 |   |   |
| Forfeiture of restricted stock awards prior to  vesting                                            |       |                                | —     |              |       |                                                | (2         | )                                       |       |                                           | (1,222     | )                                             |       |   | 1,224 |   |   |   | — |   |   |   | — |   |   |
| Deferred compensation related to restricted stock  awards                                          |       |                                | —     |              |       |                                                | 7          |                                    |       |                                           | 4,163      |                                          |       |   | (4,170 | ) |   |   | — |   |   |   | — |   |   |
| Amortization of deferred stock-based compensation                                             |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | 2,625 |   |   |   | — |   |   |   | 2,625 |   |   |
| Warrant granted to MSCG in exchange for product  supply agreements                                 |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | 14,600     |                                          |       |   | — |   |   |   | — |   |   |   | 14,600 |   |   |
| Preferred stock dividends paid-in kind                                                             |       |                                | 1,087      |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Preferred stock dividends                                                                          |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | (4,207 | ) |   |   | (4,207 | ) |   |
| Amortization of premium on  Series B Redeemable Convertible Preferred stock         |       |                                | (1,546     | )                 |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | 1,546 |   |   |   | 1,546 |   |   |
| Conversion of Series B Redeemable Convertible  Preferred stock into common stock              |       |                                | (28,011    | )                 |       |                                                | 41         |                                    |       |                                           | 27,970     |                                          |       |   | — |   |   |   | — |   |   |   | 28,011 |   |   |
| Deferred compensation related to restricted  TransMontaigne Partners’ common unit awards |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | 2,592      |                                          |       |   | (2,592 | ) |   |   | — |   |   |   | — |   |   |
| Net earnings                                                                                       |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | 55,818 |   |   |   | 55,818 |   |   |
| **Balance at June 30, 2005**                                                                  |       |                                | $          | 49,249            |       |                                                |       | $                                       | 456        |                                           |       |                                          | $          | 299,681 |   |   |   | $ | (7,042 | ) |   |   | $ | 33,389 |   |   |   | $ | 326,484 |   |   |
| Elimination of deferred stock-based compensation due  to adoption of SFAS 123(R)              |       |                                | —     |              |       |                                                | (16        | )                                       |       |                                           | (7,026     | )                                             |       |   | 7,042 |   |   |   | — |   |   |   | — |   |   |
| Common stock issued for options exercised                                                          |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | 224        |                                          |       |   | — |   |   |   | — |   |   |   | 224 |   |   |
| Common stock repurchased from employees for  withholding taxes                                     |       |                                | —     |              |       |                                                | (1         | )                                       |       |                                           | (830       | )                                             |       |   | — |   |   |   | — |   |   |   | (831 | ) |   |
| Amortization of deferred stock-based compensation                                             |       |                                | —     |              |       |                                                | 4          |                                    |       |                                           | 2,154      |                                          |       |   | — |   |   |   | — |   |   |   | 2,158 |   |   |
| Preferred stock dividends                                                                          |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | (1,068 | ) |   |   | (1,068 | ) |   |
| Amortization of premium on Series B redeemable  convertible preferred stock              |       |                                | (368       | )                 |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | 368 |   |   |   | 368 |   |   |
| Conversion of Series B redeemable convertible  preferred stock into common stock         |       |                                | (28,273    | )                 |       |                                                | 41         |                                    |       |                                           | 28,232     |                                          |       |   | — |   |   |   | — |   |   |   | 28,273 |   |   |
| Net earnings                                                                                       |       |                                | —     |              |       |                                                | —     |                                    |       |                                           | —     |                                          |       |   | — |   |   |   | 11,412 |   |   |   | 11,412 |   |   |
| **Balance  at March 31, 2006**                                                                |       |                                | $          | 20,608            |       |                                                |       | $                                       | 484        |                                           |       |                                          | $          | 322,435 |   |   |   | $ | — |   |   |   | $ | 44,101 |   |   |   | $ | 367,020 |   |   |

 

See accompanying notes to consolidated financial statements.

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**TransMontaigne Inc. and subsidiariesConsolidated statements of cash flows(In thousands)**

| ** **                                                                                      | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                         | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                                      |       |                                             |       |                                           |       |   |   |   |   |
| Net earnings                                                                                    |       | $                                                | 25,724     |                                           | $          | 47,065 |   | $ | 11,412 |   | $ | 55,142 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities: |       |                                             |       |                                           |       |   |   |   |   |
| Amortization of deferred revenue                                                                |       | (1,809                                           | )          | (2,376                                         | )          | (5,112 | ) | (5,065 | ) |
| Depreciation and amortization                                                                   |       | 7,273                                            |       | 6,274                                          |       | 20,703 |   | 17,808 |   |
| Amortization of deferred stock-based  compensation                                              |       | 641                                              |       | 697                                            |       | 2,158 |   | 1,972 |   |
| Amortization of deferred debt issuance costs                                                    |       | 525                                              |       | 455                                            |       | 1,575 |   | 1,603 |   |
| Write-off of debt issuance costs                                                                |       | —                                           |       | —                                         |       | — |   | 3,392 |   |
| (Gain) loss on disposition of assets, net                                                       |       | (10,617                                          | )          | (2,993                                         | )          | (11,802 | ) | 606 |   |
| Net change in unrealized (gains) losses on long-term  derivative contracts                 |       | —                                           |       | (88                                            | )          | (235 | ) | 452 |   |
| Non-controlling interests’ share in earnings of  TransMontaigne Partners              |       | 1,571                                            |       | —                                         |       | 5,425 |   | — |   |
| Changes  in operating assets and liabilities, net of effects from acquisitions:                 |       |                                             |       |                                           |       |   |   |   |   |
| Trade accounts receivable, net                                                                  |       | (56,749                                          | )          | (53,543                                        | )          | (19,873 | ) | (85,633 | ) |
| Inventories—discretionary volumes                                                          |       | (9,678                                           | )          | 126,824                                        |       | 46,248 |   | 18,937 |   |
| Prepaid expenses and other                                                                      |       | 620                                              |       | 466                                            |       | (504 | ) | (2,056 | ) |
| Trade accounts payable                                                                          |       | 7,398                                            |       | 50,755                                         |       | (33,218 | ) | 83,619 |   |
| Income taxes payable                                                                            |       | 16,727                                           |       | 31,375                                         |       | (26,366 | ) | 36,935 |   |
| Inventory due to others under exchange agreements                                               |       | 4,644                                            |       | 7,621                                          |       | 42,289 |   | (2,919 | ) |
| Unrealized (gains) losses on derivative contracts                                               |       | 20,734                                           |       | 26,546                                         |       | (40,623 | ) | 7,934 |   |
| Excise taxes payable and other accrued liabilities                                              |       | 5,438                                            |       | 16,023                                         |       | 4,684 |   | 5,865 |   |
| Net cash provided by (used in) operating activities                                             |       | 12,442                                           |       | 255,101                                        |       | (3,239 | ) | 138,592 |   |
| **Cash flows from investing  activities:**                                                      |       |                                             |       |                                           |       |   |   |   |   |
| Acquisition of Radcliff and Oklahoma City terminals,  net of cash acquired                      |       | —                                           |       | —                                         |       | (53,911 | ) | — |   |
| Exchange of terminals                                                                           |       | (5,910                                           | )          | —                                         |       | (5,910 | ) | — |   |
| Acquisition of terminals, pipelines, tugs and barges                                            |       | (573                                             | )          | —                                         |       | (4,521 | ) | (7,947 | ) |
| Additions to property, plant and equipment—expansion  of facilities                        |       | (2,295                                           | )          | (768                                           | )          | (6,220 | ) | (2,690 | ) |
| Additions to property, plant and equipment—maintain  existing facilities                   |       | (822                                             | )          | (848                                           | )          | (2,397 | ) | (2,589 | ) |
| (Increase) decrease in restricted cash held by  commodity broker                                |       | (10,028                                          | )          | 1,310                                          |       | (748 | ) | 354 |   |
| Proceeds from disposition of assets                                                             |       | 16,938                                           |       | 5,757                                          |       | 18,525 |   | 5,757 |   |
| Other                                                                                           |       | 8                                                |       | (5                                             | )          | (125 | ) | 3 |   |
| Net cash provided by (used in) investing activities                                             |       | (2,682                                           | )          | 5,446                                          |       | (55,307 | ) | (7,112 | ) |
| **Cash flows from financing  activities:**                                                      |       |                                             |       |                                           |       |   |   |   |   |
| Net borrowings (repayments) of commodity margin loan                                            |       | 10,000                                           |       | (8,383                                         | )          | 10,000 |   | (1,923 | ) |
| Net borrowings (repayments) of debt                                                             |       | (21,092                                          | )          | (239,000                                       | )          | 34,701 |   | (110,000 | ) |
| Deferred debt issuance costs                                                                    |       | —                                           |       | (149                                           | )          | — |   | (3,517 | ) |
| Common stock issued for options exercised                                                       |       | 19                                               |       | 41                                             |       | 224 |   | 119 |   |
| Common stock repurchased from employees for  withholding taxes                                  |       | (59                                              | )          | (38                                            | )          | (831 | ) | (805 | ) |
| Distributions paid to non-controlling interests in  TransMontaigne Partners                     |       | (1,721                                           | )          | —                                         |       | (4,089 | ) | — |   |
| Common units repurchased by TransMontaigne Partners’  long-term incentive plan             |       | (211                                             | )          | —                                         |       | (211 | ) | — |   |
| Preferred stock dividends paid in cash                                                          |       | (301                                             | )          | (1,110                                         | )          | (1,475 | ) | (2,220 | ) |
| Net cash provided by (used in) financing activities                                             |       | (13,365                                          | )          | (248,639                                       | )          | 38,319 |   | (118,346 | ) |
| Increase (decrease) in cash and cash equivalents                                                |       | (3,605                                           | )          | 11,908                                         |       | (20,227 | ) | 13,134 |   |
| Cash and cash equivalents at beginning of period                                                |       | 13,099                                           |       | 7,384                                          |       | 29,721 |   | 6,158 |   |
| Cash and cash equivalents at end of period                                                      |       | $                                                | 9,494      |                                           | $          | 19,292 |   | $ | 9,494 |   | $ | 19,292 |   |
| **Supplemental disclosures of  cash flow information:**                                         |       |                                             |       |                                           |       |   |   |   |   |
| Cash paid for (refund of) income taxes                                                          |       | $                                                | 2          |                                           | $          | 2 |   | $ | 36,686 |   | $ | (173 | ) |
| Cash paid for  interest expense                                                                 |       | $                                                | 2,755      |                                           | $          | 2,094 |   | $ | 15,069 |   | $ | 15,143 |   |

 

See accompanying notes to consolidated financial statements.

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**TransMontaigne Inc. and subsidiariesNotes to consolidated financial statementsMarch 31, 2006 and June 30, 2005**

**(1)**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**(a) Principlesof Consolidation and Use of Estimates**

The accompanying unaudited consolidated financialstatements in this Quarterly Report on Form 10-Q have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission. Accordingly, these statements reflect adjustments (consisting onlyof normal recurring entries), which are, in our opinion, necessary for a fairpresentation of the financial results for the interim periods presented.Certain information and notes normally included in annual financial statementshave been condensed in or omitted from these interim financial statementspursuant to such rules and regulations. These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes for the year ended June 30, 2005, togetherwith our discussion and analysis of financial condition and results ofoperations, included in our Annual Report on Form 10-K filed on September 13,2005.

Our accounting and financial reporting policiesconform to accounting principles and practices generally accepted in the UnitedStates of America. The accompanying unaudited consolidated financial statementsinclude the accounts of TransMontaigne Inc., a Delaware corporation (“TransMontaigne”),and its controlled subsidiaries. All significant inter-company accountsand transactions have been eliminated in consolidation, except for throughputfees, storage fees, pipeline transportation fees, tug and barge fees and otherfees charged to our supply, distribution and marketing operations by ourterminals, pipelines, and tugs and barges. The related inter-companyrevenues and costs offset within the accompanying consolidated statements ofoperations.

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. The followingestimates, in our opinion, are subjective in nature, require the exercise ofjudgment, and involve complex analysis: allowance for doubtful accounts; fairvalue of inventories—discretionary volumes (used to evaluate the financialperformance of our business segments); fair value of derivative contracts; andaccrued environmental obligations. Changes in these estimates and assumptionswill occur as a result of the passage of time and the occurrence of futureevents. Actual results could differ from these estimates.

**(b) Nature ofBusiness and Basis of Presentation**

TransMontaigne Inc., a Delaware corporation based inDenver, Colorado, was formed in 1995 to create an independent refined petroleumproducts distribution and supply company. We are a holding company thatconducts operations in the United States primarily in the Gulf Coast, Florida,East Coast, and Midwest regions. We provide integrated terminal,transportation, storage, supply, distribution, and marketing services torefiners, wholesalers, distributors, marketers, and industrial and commercialend-users of refined petroleum products. Our principal activities consistof (i) terminal, pipeline, and tug and barge operations, (ii) supply,distribution, and marketing, and (iii) managing the activities of TransMontaignePartners L.P.

On May 27, 2005, TransMontaigne Partners L.P. (“TransMontaignePartners”), a master limited partnership and consolidated subsidiary of ours,completed its initial public offering of common units. 

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TransMontaigne Partnersreceived net proceeds of approximately $73.0 million for the issuance andsale of 3,852,500 common units, after giving effect to the exercise of theunderwriters’ over-allotment option, at the initial public offering price of$21.40 per common unit, and the payment of the underwriting discount,structuring fee and other offering costs of approximately $9.5 million.TransMontaigne Partners also received approximately $7.9 million for theissuance and sale of 450,000 subordinated units to an affiliate of MorganStanley Capital Group Inc. (“MSCG”) in a separate private placement at aprice of $17.65 per subordinated unit. We contributed seven refined productsterminals located in Florida, the Razorback Pipeline, and two refined productsterminals located in Mt. Vernon, Missouri and Rogers, Arkansas toTransMontaigne Partners in exchange for a 2% general partner interest,2,872,266 subordinated units, and a distribution of $111.5 million. Wealso entered into an omnibus agreement and terminaling and transportation servicesagreement with TransMontaigne Partners. The omnibus agreement sets forth theterms on which we will provide TransMontaigne Partners with certain general andadministrative services, insurance coverage and environmental and otherindemnification, among other terms. We also have agreed to provideTransMontaigne Partners with certain options and rights of first refusal topurchase additional refined petroleum product terminal assets, andTransMontaigne Partners has agreed to provide us certain rights of first refusalwith respect to its assets and additional terminal capacity added byTransMontaigne Partners in the future.

Effective January 1,2006, we contributed the Mobile, Alabama terminal, which we acquired fromRadcliff/Economy Marine Services, Inc. on August 1, 2005 (see Note 2to Notes to consolidated financial statements), to TransMontaigne Partners forapproximately $17.9 million.

**(c) Accountingfor Terminal, Pipeline, and Tug and Barge Activities**

In connection with our terminal, pipeline, and tug andbarge operations, we utilize the accrual method of accounting for revenues andexpenses. We generate revenues in our terminal, pipeline, and tug and bargeoperations from throughput fees, storage fees, transportation fees, ship-assistfees, management fees and cost reimbursements, and fees from other ancillaryservices. Throughput revenues are recognized when the product is delivered tothe customer; storage revenues are recognized ratably over the term of thestorage contract; transportation revenues are recognized when the product hasbeen delivered to the customer at the specified delivery location; ship-assistrevenues are recognized when docking and other services are provided to marinevessels; management fees and cost reimbursements are recognized as the servicesare performed; and other service revenues are recognized as the services areperformed.

Shipping and handlingcosts attributable to our terminal, pipeline, and tug and barge operations areincluded in direct operating costs and expenses in the accompanyingconsolidated statements of operations.

**(d) Accountingfor Supply, Distribution, and Marketing Activities**

In our supply, distribution and marketing operations,we purchase refined petroleum products, schedule them for delivery to ourterminals, as well as terminals owned by third parties, and then sell thoseproducts to our customers through rack spot sales, contract sales, and bulksales. Revenues from our sales of physical inventory are recognized pursuant tothe accrual method of accounting (i.e., when cash becomes due and payable to uspursuant to the terms of the sales contracts). Revenues from rack spot salesand contract sales are recognized when the product is delivered to the customerthrough a truck loading rack or marine fueling equipment. Revenues from bulksales are recognized when the title to the product is transferred to thecustomer, which generally occurs upon confirmation of the terms of the sale.

Shipping and handlingcosts attributable to our supply, distribution, and marketing operations areincluded in cost of product sold in the accompanying consolidated statements ofoperations.

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**(e) Accountingfor Supply Chain Management Services Activities**

We provide supply chain management services tocompanies and governmental entities that desire to outsource their fuel supplyfunction and to reduce the price volatility associated with their fuelsupplies. We offer three types of supply chain management services: deliveredfuel price management, retail price management, and logistical supply chainmanagement services.

Delivered fuel price management contracts involve thesales of committed quantities of specific motor fuels delivered to our customer’sproprietary fleet refueling locations at fixed prices for terms up to threeyears. Under retail price management contracts, customers commit for terms upto 18 months to a specific monthly quantity of product within one or moremetropolitan areas and agree to a net settlement with us for the differencebetween a stipulated retail price index and our fixed contract price. Ourlogistical supply chain management arrangements permit our customers to use ourproprietary web-based inventory management system for a fee, which typically ischarged on a per gallon basis.

Revenue from sales madepursuant to delivered fuel price management contracts are recognized when titleto the product is transferred to the customer, which generally occurs upondelivery of the product to the customer’s proprietary fleet refueling location.Revenue from sales made pursuant to retail price management contracts arerecognized when title to the product is transferred to the customer, whichgenerally occurs upon lifting of the product by the customer at the retailgasoline station. Revenue from logistical supply chain management services feesis recognized on a straight-line basis over the term of the contract.

**(f) Accountingfor Risk Management Activities**

We enter into riskmanagement contracts, principally NYMEX futures contracts, to manage ourexposure to changes in commodity prices. We evaluate our market risk exposurefrom an overall portfolio basis that considers changes in physical inventories—discretionaryvolumes held for immediate sale or exchange, inventory due to others underexchange agreements, open positions in derivative contracts, and open positionsin risk management contracts. We enter into risk management contracts thatoffset the changes in the values of our inventories—discretionary volumes heldfor immediate sale or exchange and derivative contracts. At March 31, 2006and June 30, 2005, our open positions in risk management contractsprincipally were NYMEX futures contracts (purchases and sales) and NYMEXoptions (calls and puts).

**(g) Accountingfor Derivative Contracts**

Our contract sales, bulk sales, delivered fuel pricemanagement, retail price management, risk management contracts and productsupply contracts qualify as derivative instruments pursuant to the requirementsof Statement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities*. All derivative contracts are required to be reported asassets and liabilities at fair value in the accompanying consolidated balancesheet in accordance with SFAS No. 133. The fair value of our derivativecontracts is included in “Unrealized gains or losses on derivative contracts”in the accompanying consolidated balance sheets. Changes in the fair value ofour derivative contracts are included in net operating margins attributable toour supply, distribution and marketing operations.

The estimated fair valueof our delivered fuel price management and retail price management contracts atorigination is deferred because our estimate of the fair value is not evidencedby quoted market prices or current market transactions for the contracts intheir entirety. The deferred revenue is amortized into income over therespective terms of the contracts as the products are delivered to the groundfleet customers. Subsequent changes in the fair value of our delivered fuel pricemanagement and retail price management contracts are included in marginsattributable to our supply, distribution, and marketing operations.

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**(h) Presentationof Revenues**

We present revenue from our rack spot sales, contractsales, certain bulk sales, and delivered fuel price management contracts on agross basis in the accompanying consolidated statements of operations becauseour obligations under these arrangements are settled via transfer of title andrisk of loss of the product to the customer. Revenue from our retail pricemanagement contracts and risk management contracts are presented on a net basis(i.e., product costs are required to be netted directly against gross revenuesto arrive at net revenues) in the accompanying consolidated statements ofoperations because our obligations under these arrangements are settled on anet cash basis. The logistical supply chain management services fees do notinvolve the sale of inventory and, therefore, only the service fee is presentedin the accompanying consolidated statements of operations.

We have presented bulktransactions that were “booked out” on a net basis in the consolidatedstatements of operations (i.e., product costs are netted directly against grossrevenues to arrive at net revenues). A “book out” occurs when one party appearsmore than once for the sale and purchase of a specific grade of refined productfor a specific scheduling date to transport product on a particular commoncarrier pipeline. In that instance, we and other pipeline shippers agree not toschedule or deliver the refined product that originates and ends with the samecounterparty, but rather settle in cash the amounts due to or from eachintervening counterparty, thus booking out the transaction. We also present “buy/sell”transactions on a net basis in the consolidated statements of operations. A “buy/sell”transaction is a purchase and sale of inventory with the same counterparty,provided that the purchase transaction and the sale transaction are enteredinto in contemplation of one another. For the three months ended March 31,2006 and 2005, we reduced revenues and cost of product sold by approximately$458.3 million and $499.0 million, respectively, for book outs andbuy/sell transactions. For the nine months ended March 31, 2006 and 2005,we reduced revenues and cost of product sold by approximately$1,360.8 million and $2,175.3 million, respectively, for book outsand buy/sell transactions. The presentation of book outs and buy/selltransactions on a net basis has no effect on our operating income or netearnings.

**(i) Accountingfor Inventories—Discretionary Volumes**

Ourinventories—discretionary volumes consist of refined petroleum products,primarily gasolines, distillates, and No. 6 oil. Inventories—discretionaryvolumes are presented in the accompanying consolidated balance sheets ascurrent assets and are carried at the lower of cost (first-in, first-out) ormarket (replacement cost). Inventories—discretionary volumes are as follows (inthousands):

| ** **                                   | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Amount**                   | ** ** | **Bbls**                    | ** ** | **Amount** | ** ** | **Bbls** | ** ** |
| Volumes held for  immediate sale or exchange |       | $                            | 128,529    |                        | 1,955      |   | $ | 153,123 |   | 2,415 |   |
| Volumes held for  base operations            |       | 103,880                      |       | 1,487                       |       | 121,651 |   | 2,011 |   |
| Inventories—discretionary  volumes      |       | $                            | 232,409    |                        | 3,442      |   | $ | 274,774 |   | 4,426 |   |

 

At March 31, 2006 and June 30, 2005, themarket value of our volumes held for immediate sale or exchange exceeded theircost basis by approximately $8.5 million and $2.1 million,respectively. At March 31, 2006 and June 30, 2005, the market valueof our volumes held for base operations exceeded their cost basis byapproximately $6.9 million and $0.2 million, respectively.

During the three monthsended March 31, 2006, we decreased our volumes held for base operations byapproximately 0.5 million barrels as a result of leasing our light oil Riverterminal capacity to Valero Energy Corporation. During the year ended June 30,2005, we decreased our volumes held for base operations by approximately 2.0million barrels as a result of our product supply agreement with Morgan StanleyCapital Group Inc.

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**(j) InventoryDue to Others Under Exchange Agreements**

We enter into exchangeagreements generally with major oil companies and independent marketing andtrading companies. Exchange agreements generally are fixed-term agreements thatinvolve our receipt of a specified volume of product at one location inexchange for delivery by us of product at a different location. At March 31,2006 and June 30, 2005, current liabilities included inventory due toothers under exchange agreements of approximately 738,000 barrels and 296,000barrels, respectively, with a fair value of approximately $58.7 millionand $16.4 million, respectively. The amount recorded represents the fairvalue of inventory due to others under exchange agreements at the respectivebalance sheet date.

**(k) Accountingfor Product Linefill and Tank Bottom Volumes**

Our product linefill and tank bottom volumes arerequired to be held for operating balances in the conduct of our overalloperating activities. We do not intend to sell or exchange these inventories inthe ordinary course of business and, therefore, we generally do not manage thecommodity price risks associated with these volumes.

At March 31, 2006 and June 30, 2005, ourproduct linefill and tank bottom volumes are presented in the accompanyingconsolidated balance sheets as non-current assets and are carried at the lowerof cost (weighted average) or market (replacement cost). The replacement costof our product linefill and tank bottom volumes is based on the nearest quotedwholesale market price. At March 31, 2006 and June 30, 2005, we hadapproximately 808,000 barrels and 925,000 barrels, respectively, of productreflecting tank bottoms and linefill in our proprietary terminal connectionswith an adjusted cost basis of approximately $21.6 million and$24.3 million, respectively. At March 31, 2006 and June 30,2005, the market value of our product linefill and tank bottom volumes exceededtheir cost basis by approximately $43.4 million and $34.8 million,respectively.

During the three monthsended March 31, 2006, we decreased our product linefill and tank bottomvolumes by approximately 0.1 million barrels as a result of leasing our lightoil River terminal capacity to Valero Energy Corporation. We sold these productlinefill and tank bottom volumes for approximately $9.9 million resulting in again on sale of approximately $6.8 million.

**(l) RestrictedCash Held by Commodity Broker**

Restricted cash representscash deposits held by our commodity broker to cover initial margin requirementsrelated to open NYMEX futures contracts.

**(m) DeferredDebt Issuance Costs**

Deferreddebt issuance costs are as follows (in thousands):

| ** **                                      | ** ** | **June 30,  2005** | ** ** | **Additions** | ** ** | **Amortization** | ** ** | **March 31,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------|------------|------------------|------------|--------------------------|------------|
| Senior secured  working capital credit facility |       |                    | $          | 3,422         |       |             |       | $                        | —     |   |   |   | $ | (606 | ) |   |   | $ | 2,816 |   |   |
| Senior  subordinated notes                      |       |                    | 5,455      |          |       |             | —     |                     |       |   | (831 | ) |   |   | 4,624 |   |   |
| TransMontaigne  Partners’ credit facility  |       |                    | 901        |          |       |             | —     |                     |       |   | (138 | ) |   |   | 763 |   |   |
|                                            |       |                    | $          | 9,778         |       |             |       | $                        | —     |   |   |   | $ | (1,575 | ) |   |   | $ | 8,203 |   |   |

 

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**(n) EnvironmentalObligations**

At March 31, 2006 andJune 30, 2005, we had accrued environmental obligations of approximately$7.1 million and $6.1 million, respectively, representing our bestestimate of our remediation obligations (see Note 10 of Notes toconsolidated financial statements). During the nine months ended March 31,2006, we made payments of approximately $1.5 million towards ourenvironmental remediation obligations. During the nine months ended March 31,2006, we charged to income approximately $0.7 million to increase ourestimate of our future environmental remediation obligations. During the ninemonths ended March 31, 2006, we assumed approximately $1.2 million ofenvironmental remediation obligations in connection with our acquisition of theRadcliff and Oklahoma City terminals (see Note 2 of Notes to consolidatedfinancial statements). During the nine months ended March 31, 2006, weassumed net environmental remediation obligations of approximately $0.6 millionin connection with our exchange of terminals with BP Plc (see Note 3 of Notesto consolidated financial statements). During the nine months ended March 31,2006 and 2005, we received insurance recoveries of approximately $265,000 and$1.6 million, respectively, which have been recognized as a reduction of directoperating costs and expenses in the accompanying consolidated statements ofoperations.

**(o) Equity-BasedCompensation Plans**

Forperiods ending prior to July 1, 2005, we accounted for our employee stockoption plans and restricted stock awards using the intrinsic value methodpursuant to APB Opinion No. 25, *Accountingfor Stock Issued to Employees*. If compensation cost for our stock-basedcompensation plans had been determined based on the fair value at the grantdates for awards under those plans pursuant to Statement of FinancialAccounting Standards No. 123, *Accountingfor Stock-Based Compensation*, our net earnings and earningsper common share would have been reduced to the pro forma amounts indicatedbelow (in thousands, except for per share amounts):

| ** **                                                                 | ** ** | **Three months ended  March 31, 2005** | ** ** | **Nine months ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net earnings  attributable to common stockholders:                         |       |                                                       |       |                                                      |       |   |   |   |   |
| As reported                                                                |       |                                                       | $          | 36,721                                                    |       |   |   | $ | 42,994 |   |   |
| Amortization of the fair value of stock options  granted to employees |       |                                                       | (24        | )                                                         |       |   | (75 | ) |   |
| Pro forma                                                                  |       |                                                       | $          | 36,697                                                    |       |   |   | $ | 42,919 |   |   |
| Earnings per share:                                                        |       |                                                       |       |                                                      |       |   |   |   |   |
| As reported                                                                |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic                                                                      |       |                                                       | $          | 0.92                                                      |       |   |   | $ | 1.08 |   |   |
| Diluted                                                                    |       |                                                       | $          | 0.90                                                      |       |   |   | $ | 1.07 |   |   |
| Pro forma                                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic                                                                      |       |                                                       | $          | 0.92                                                      |       |   |   | $ | 1.08 |   |   |
| Diluted                                                                    |       |                                                       | $          | 0.90                                                      |       |   |   | $ | 1.06 |   |   |

 

There were no options granted during the nine monthsended March 31, 2006 and the years ended June 30, 2005, 2004 and2003. The weighted average fair value at grant dates for options granted duringthe year ended June 30, 2002 was $3.08. The primary assumptions used toestimate the fair value of options granted on the date of grant using the Black-Scholesoption-pricing model during the year ended June 30, 2002 were asfollows: no dividend yield, expected volatility of 79%, risk-free rate of4.49%, and expected life of 4 years.

Effective July 1, 2005, we adopted the provisionsof Statement of Financial Accounting Standards No. 123 (R), *Share-Based Payment*. This Statementrequires us to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of the award.

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That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award. We are required to estimate the number ofequity instruments that are expected to vest in measuring the totalcompensation cost to be recognized over the related service period.

For awards granted prior to July 1, 2005, we arerequired to measure compensation cost for the portion of outstanding awards forwhich the requisite service has not yet been rendered (i.e., the unvestedportion of the award as of July 1, 2005). The compensation cost for theseawards is based on their relative grant-date fair values.

For awards granted on orafter July 1, 2005, compensation cost will be recognized over the serviceperiod on a straight-line basis. For awards granted before July 1, 2005,compensation cost is recognized over the related service period on anaccelerated basis pursuant to FASB Interpretation No. 28.

**(p) EarningsPer Common Share**

Basic earnings per common share is calculated based onthe weighted average number of common shares outstanding during the period,excluding restricted common stock subject to continuing vesting requirements.Diluted earnings per share is calculated based on the weighted average numberof common shares outstanding during the period and, when dilutive, potentialcommon shares from the exercise of stock options and warrants to purchasecommon stock and restricted common stock subject to continuing vestingrequirements pursuant to the treasury stock method. Diluted earnings per sharealso gives effect, when dilutive, to the conversion of the preferred stockpursuant to the if-converted method.

In the event dividends ona per share equivalent basis are declared on our common stock in excess of thedividends declared on the Series B redeemable convertible preferred stock,the Series B redeemable convertible preferred stock will participate as ifthe Series B redeemable convertible preferred stock was converted intocommon stock. Accordingly, the Series B redeemable convertible preferredstock has been determined to be a “participating” security for purposes ofcomputing earnings per share.

**(q) Reclassifications**

Certain amounts in theprior period have been reclassified to conform to the current period’spresentation. Net earnings and stockholders’ equity have not been affected bythese reclassifications.

**(2)**   ACQUISITIONS

On August 1, 2005, we acquired all theoutstanding shares of capital stock of Radcliff/Economy Marine Services, Inc.(“Radcliff”) for a purchase price of approximately $52.1 million, net of cashacquired of approximately $2.1 million. The purchase price is composed ofapproximately $41.8 million paid in cash plus the assumption of Radcliff’sexisting outstanding debt of approximately $12.4 million. The acquisitionincludes two petroleum products terminals, one in Mobile, Alabama and one inPensacola, Florida, with combined aggregate storage capacity of approximately350,000 barrels, two tugboats, six barges, and twelve tractors andassociated trailers. The consolidated financial statements include the resultsof operations of the Radcliff facilities from the closing date of thetransaction (August 1, 2005). The purchase price was allocated to theassets and liabilities acquired based upon the estimated fair value of theassets and liabilities as of the acquisition date.

Effective October 31, 2005, TransMontaignePartners purchased a refined product terminal with approximately 150,000barrels of aggregate storage capacity in Oklahoma City, Oklahoma from MagellanPipeline Company, L.P. for approximately $1.9 million. The Oklahoma Cityterminal currently provides integrated terminaling services to a major oilcompany. The accompanying consolidatedfinancial statements include the results of operations of the Oklahoma Cityterminal from the closing date of the acquisition (October 31, 2005).

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Thepurchase price was allocated as follows (in thousands):

| ** **                                                                | ** ** | **Radcliff** | ** ** | **Oklahoma  City** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| Restricted cash                                                           |       | $            | 228        |               |       | $ | — |   |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $47 |       | 20,097       |       |               | —     |   |   |
| Discretionary  inventory, product linefill and tank bottom volumes        |       | 4,259        |       |               | —     |   |   |
| Prepaid expenses  and other                                               |       | 292          |       |               | —     |   |   |
| Property, plant  and equipment                                            |       | 16,779       |       |               | 2,493      |   |   |
| Deferred tax  assets                                                      |       | 303          |       |               | —     |   |   |
| Goodwill                                                                  |       | 19,384       |       |               | —     |   |   |
| Trade accounts  payable                                                   |       | (3,304       | )          |               | —     |   |   |
| Accrued  environmental obligations                                        |       | (605         | )          |               | (625       | ) |   |
| Deferred tax  liabilities                                                 |       | (4,130       | )          |               | —     |   |   |
| Due to former  Radcliff stockholders                                      |       | (1,000       | )          |               | —     |   |   |
| Other assumed  liabilities                                                |       | (250         | )          |               | (10        | ) |   |
| Cash paid, net of  cash acquired                                          |       | $            | 52,053     |               |       | $ | 1,858 |   |   |

 

Theunaudited pro forma combined results of operations as if the acquisition of theRadcliff and Oklahoma City terminals had occurred on July 1, 2004 are asfollows (in thousands, except per share data):

| ** **                           | ** ** | **Three months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| ** **                           | ** ** | **2005**                         | ** ** |
| Revenue                              |       |                             | $          | 2,222,600 |   |   |
| Net earnings                         |       |                             | $          | 48,668 |   |   |
| Basic net earnings per  common share |       |                             | $          | 0.95 |   |   |

 

| ** **                           | ** ** | **Nine months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **March 31,**              | ** ** | **March 31,**              | ** ** |
| ** **                           | ** ** | **2006**                        | ** ** | **2005**                        | ** ** |
| Revenue                              |       |                            | $          | 7,381,755                       |       |   |   | $ | 6,212,504 |   |   |
| Net earnings                         |       |                            | $          | 11,377                          |       |   |   | $ | 59,327 |   |   |
| Basic net earnings per  common share |       |                            | $          | 0.22                            |       |   |   | $ | 1.17 |   |   |

 

**(3)**   EXCHANGEOF TERMINALS

On February 1, 2006, we transferred to BP Plc (“BP”)approximately $5.9 million and six of our Southeast terminals with an aggregatestorage capacity of approximately 0.8 million barrels in exchange for nine BPterminals with an aggregate storage capacity of approximately 1.2 millionbarrels. The BP terminals we received in the exchange are adjacent to certainof our other Southeast terminals. Under the terms of the exchange agreement, weand BP agreed to throughput refined products at the facilities to be owned andoperated by the other party. We currently are obligated to throughputapproximately 21,000 barrels per day through BP-owned facilities and BPcurrently is obligated to throughput approximately 26,000 barrels per daythrough our facilities. The respective throughput obligations are terminal specificand are in effect for the next one to five years.

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Theexchange of terminals with BP has been reflected in the accompanying financialstatements based on the fair value of the terminals received. Included in gain(loss) on disposition of assets, net for the three months ended March 31,2006, is a loss of approximately $(1.7) million on the exchange of theterminals. The loss on the exchange of the terminals is as follows: 

| Fair value of net assets  received in the exchange:         |   |    |   |    |   |
|-------------------------------------------------------------|--------|---------|--------|---------|--------|
| Land                                                        |   | $       | 2,389  |    |   |   |
| Terminals, pipelines and equipment                          |   | 21,775  |   |    |   |
| Environmental obligations assumed                           |   | (1,163  | )      | 23,001  |   |
| Carrying amount of net  assets transferred in the exchange: |   |    |   |    |   |
| Cash paid                                                   |   | $       | (5,910 | )       |   |   |
| Land                                                        |   | (1,221  | )      |    |   |
| Terminals, pipelines and equipment                          |   | (18,157 | )      |    |   |
| Environmental obligations transferred                       |   | 543     |   | (24,745 | )      |
| Loss on exchange  of terminals                              |   |    |   | $       | (1,744 | ) |
|                                                             |        |         |        |         |        |  |  |

 

**(4)**   DISPOSITIONOF ASSETS

Gain (loss) on disposition of assets, net for thethree months ended March 31, 2006, reflects approximately $(1.7) millionloss on the exchange of terminals with BP, approximately $5.5 million gain onthe sale of our NYMEX seats, and approximately $6.8 million gain on the sale ofproduct linefill and tank bottom volumes. Gain (loss) on disposition of assets,net for the three months ended March 31, 2005, consists principally of anapproximately $2.7 million gain on the sale of land held for investmentpurposes in Miami, Florida.

Gain (loss) on dispositionof assets, net for the nine months ended March 31, 2006, reflects approximately$(1.7) million loss on the exchange of terminals with BP, approximately $5.5million gain on the sale of our NYMEX seats, approximately $6.8 million gain onthe sale of product linefill and tank bottom volumes, approximately $1.1million gain from the final insurance recovery on the involuntary conversion ofour historical Pensacola terminal facilities and approximately $0.1 milliongain on the sale of the Wisconsin terminal. Gain (loss) on disposition ofassets, net for the nine months ended March 31, 2005, consists principallyof an approximately $(3.6) million loss on the involuntary conversion ofour historical Pensacola terminal facilities due to the damage caused byHurricane Ivan offset by an approximately $2.7 million gain on the sale of landheld for investment purposes in Miami, Florida.

**(5)**   TRADEACCOUNTS RECEIVABLE

Tradeaccounts receivable, net consists of the following (in thousands):

| ** **                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Trade accounts  receivable            |       | $                  | 423,116    |              | $          | 382,324 |   |
| Less allowance  for doubtful accounts |       | (866               | )          | (553              | )          |
|                                  |       | $                  | 422,250    |              | $          | 381,771 |   |

 

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**(6)**   UNREALIZEDGAINS AND LOSSES ON DERIVATIVE CONTRACTS

Unrealizedgains and losses on derivative contracts are as follows (in thousands):

| ** **                           | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                           | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Unrealized  gains—current asset |       | $                  | 18,992     |              | $          | 7,620 |   |
| Unrealized  losses—current      |       | (13,725            | )          | (47,215           | )          |
| Unrealized  losses—long-term    |       | —             |       | (234              | )          |
| Unrealized losses—liability     |       | (13,725            | )          | (47,449           | )          |
| Net asset  (liability)               |       | $                  | 5,267      |              | $          | (39,829 | ) |

 

At March 31, 2006 and June 30, 2005, therewere no unrealized gains or losses on NYMEX futures contracts because NYMEXfutures contracts require daily settlement for changes in commodity prices onopen futures contracts.

At March 31, 2006,included in unrealized gains—current asset is an unrealized gain ofapproximately $1.1 million related to certain short positions taken in theNYMEX options market. At June 30, 2005, included in unrealized losses—currentis an unrealized loss of approximately $3.6 million related to certain shortpositions taken in the NYMEX options market.

**(7)**   PREPAIDEXPENSES AND OTHER CURRENT ASSETS

Prepaidexpenses and other are as follows (in thousands):

| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Prepaid insurance                       |       |               | $          | 2,296             |       |   |   | $ | 2,246 |   |   |
| Amounts due from  insurance carrier     |       |               | —     |              |       |   | 954 |   |   |
| Asset held for  sale                    |       |               | —     |              |       |   | 1,200 |   |   |
| Prepaid business  taxes                 |       |               | 1,000      |              |       |   | 552 |   |   |
| Additive  detergent                     |       |               | 1,170      |              |       |   | 985 |   |   |
| Prepaid software  maintenance fees      |       |               | 167        |              |       |   | 105 |   |   |
| Amounts due from  Rio Vista/Penn Octane |       |               | 1,300      |              |       |   | — |   |   |
| Other                                   |       |               | 460        |              |       |   | 725 |   |   |
|                                    |       |               | $          | 6,393             |       |   |   | $ | 6,767 |   |   |

 

Amounts due from insurance carrier represents ourremaining estimated proceeds to be received on insurance claims related to theinvoluntary conversion of our historical Pensacola terminal facilities due tothe damage caused by Hurricane Ivan. During the three months ended December 31,2005, we collected the final insurance recovery.

During the six months ended December 31, 2005, wedecided to retain the land at our historical Pensacola terminal facilities toaugment the Pensacola terminal facilities that we acquired from Radcliff (see Note2 of Notes to consolidated financial statements). In prior periods, asset heldfor sale was carried at the lower of cost or fair value less costs ofdisposition and consisted of the land held for sale at our historical Pensacolaterminal facilities.

In connection with our duediligence review of certain assets and operations of Rio Vista and Penn Octane,we advanced approximately $1.3 million. The advance is due and payable ondemand and is secured by certain terminaling assets in Brownsville, Texas.

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**(8)**   PROPERTY,PLANT AND EQUIPMENT

Property,plant and equipment, net is as follows (in thousands):

| ** **                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Land                                |       | $                  | 44,341     |              | $          | 38,710 |   |
| Terminals,  pipelines and equipment |       | 396,644            |       | 374,213           |       |
| Technology and  equipment           |       | 14,751             |       | 14,751            |       |
| Tugs and barges                     |       | 33,708             |       | 27,277            |       |
| Furniture,  fixtures and equipment  |       | 6,806              |       | 6,784             |       |
| Construction in  progress           |       | 5,427              |       | 1,747             |       |
|                                |       | 501,677            |       | 463,482           |       |
| Less accumulated  depreciation      |       | (137,377           | )          | (118,950          | )          |
|                                |       | $                  | 364,300    |              | $          | 344,532 |   |

 

**(9)**   OTHERASSETS

Otherassets, net are as follows (in thousands):

| ** **                                                                                     | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                     | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Prepaid  transportation                                                                        |       |               | $          | 737               |       |   | $ | 326 |   |
| Goodwill                                                                                       |       |               | 26,237     |              |       | 6,853 |   |
| Product supply  agreement, net of accumulated amortization of $2,607 and $1,043, respectively  |       |               | 11,993     |              |       | 13,557 |   |
| Acquired  intangible, net of accumulated amortization of $1,542 and  $1,167, respectively |       |               | 958        |              |       | 1,333 |   |
| Commodity trading  membership                                                                  |       |               | —     |              |       | 1,500 |   |
| Deposits and  other assets                                                                     |       |               | 281        |              |       | 156 |   |
|                                                                                           |       |               | $          | 40,206            |       |   | $ | 23,725 |   |

 

Prepaidtransportation relates to our contractual transportation and deficiencyagreement with an interstate product pipeline. The agreement calls for aguaranteed minimum shipping volume over the term of the agreement. If actualvolumes shipped are less than the guaranteed minimum volumes, we must make apayment to the interstate pipeline company for any shortfall at the contractedpipeline tariff. Such payments are accounted for as prepaid transportation,since we have a stated time period, after the end of the term of the agreement,to apply the amounts to charges for using the interstate pipeline in thefuture.

| ** **             | ** ** | **June 30,  2005** | ** ** | **Payments  during  the period** | ** ** | **Amounts  applied  during the  period** | ** ** | **Change in  estimate  during the  period** | ** ** | **March 31,  2006** | ** ** |
|------------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **(in thousands)** | ** ** |
| Prepaid transportation |       |                    | $          | 326                                   |       |                                          |       | $                                                     | 411        |                     |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 737 |   |   |
|                        |            |                         |            |                                       |            |                                               |            |                                                       |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Goodwill represents the excess of the aggregatepurchase price over the fair value of the identifiable assets acquired.Goodwill is not amortized, but instead tested for impairment on an annual basisduring the three months ended June 30. We carry approximately $6.9 millionof goodwill related to our November 1997 acquisition of the ITAPCOterminals and approximately $19.4 million of goodwill related to our August 2005acquisition of Radcliff.

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On November 23, 2004, we granted to MSCG warrantsto acquire 5.5 million shares of our common stock at an exercise price of$6.60 per share as partial consideration for agreeing to enter into a 7-yearproduct supply agreement (see Note 16 of Notes to consolidated financialstatements). The value ascribed to the product supply agreement is beingamortized to income over the 7-year term of the agreement, commencing in January 2005.

Acquired intangible represents the right to use theCoastal Fuels trade name for a period of five years commencing February 28,2003. The cost of the acquired intangible is being amortized on a straight-linebasis over five years.

Commodity tradingmembership represents the purchase price we paid to acquire two seats on theNYMEX. During the three months ended March 31, 2006, we sold the two seatson the NYMEX for approximately $7.0 million resulting in a gain on sale ofapproximately $5.5 million.

**(10)**   OTHERACCRUED LIABILITIES

Otheraccrued liabilities are as follows (in thousands):

| ** **                                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                          | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Accrued  environmental obligations                  |       |               | $          | 7,130             |       |   | $ | 6,148 |   |
| Accrued lease  abandonment                          |       |               | 1,265      |              |       | 1,798 |   |
| Accrued  indemnities—NORCO                     |       |               | 1,000      |              |       | 1,000 |   |
| Accrued  transportation and deficiency obligations  |       |               | 393        |              |       | 640 |   |
| Accrued property  taxes                             |       |               | 1,237      |              |       | 2,245 |   |
| Assumed  litigation costs—Coastal Fuels assets |       |               | 325        |              |       | 325 |   |
| Dividend  payable—preferred stock              |       |               | 301        |              |       | 708 |   |
| Accrued interest  payable                           |       |               | 6,323      |              |       | 1,521 |   |
| Customer advances  and deposits                     |       |               | 873        |              |       | 1,773 |   |
| Accrued  compensation and benefits                  |       |               | 2,059      |              |       | 3,004 |   |
| Due to former  owners of Radcliff                   |       |               | 1,000      |              |       | — |   |
| Accrued expenses  and other                         |       |               | 2,396      |              |       | 1,629 |   |
|                                                |       |               | $          | 24,302            |       |   | $ | 20,791 |   |

 

*Accrued Lease Abandonment.**  *We vacated certain office space in Denver,Colorado during June 2003 and we vacated certain excess space in Atlanta,Georgia during October 2002. In connection with our acquisition of theCoastal Fuels assets during February 2003, we vacated a sales office inCoral Gables, Florida. The accrual for the abandonment of the office leases representsthe excess of the remaining lease payments subsequent to vacancy of the spaceby us over the estimated sublease rentals to be received based on currentmarket conditions. At March 31, 2006 and June 30, 2005, the accruedliability for lease abandonment costs was approximately $1.3 million and$1.8 million, respectively.

| ** **                | ** ** | **Accrued  liability at  June 30,  2005** | ** ** | **Change in  estimate  charged  to expense** | ** ** | **Amounts  paid during  the period** | ** ** | **Accrued  liability at  March 31,  2006** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **(in thousands)**                             | ** ** |
| Accrued lease abandonment |       |                                                | $          | 1,798                                                  |       |                                           |       | $                                                    | —     |   |   |   | $ | (533 | ) |   |   | $ | 1,265 |   |   |
|                           |            |                                                     |            |                                                        |            |                                                |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Weexpect to pay the accrued liability of approximately $1.3 million, net ofestimated sublease rentals, as follows (in thousands):

| **Years ending June 30:** | ** ** | ** ** | ** ** | **Lease  payments** | ** ** | **Estimated  sublease  rentals** | ** ** | **Accrued  liability** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------|------------|----------------------------------|------------|------------------------|------------|
| 2006 (Remainder  of the year)            |       |       | $          | 265                 |       |                             |       | $                      | (92        | ) |   |   | $ | 173 |   |   |
| 2007                                     |       |       | 995        |                |       |                             | (346       | )                      |       |   | 649 |   |   |
| 2008                                     |       |       | 306        |                |       |                             | (159       | )                      |       |   | 147 |   |   |
| 2009                                     |       |       | 313        |                |       |                             | (165       | )                      |       |   | 148 |   |   |
| 2010                                     |       |       | 318        |                |       |                             | (170       | )                      |       |   | 148 |   |   |
|                                     |       |       | $          | 2,197               |       |                             |       | $                      | (932       | ) |   |   | $ | 1,265 |   |   |

 

**(11)**   DEFERREDREVENUE—SUPPLY CHAIN MANAGEMENT SERVICES

Weenter into price management contracts with ground fleet customers and jobbersthat permit them to fix the price of their fuel purchases. During the ninemonths ended March 31, 2006, we originated retail and delivered fuel pricemanagement contracts with an estimated fair value of approximately$4.2 million, representing the excess of the amounts we expect to receivefrom the ground fleet customers and jobbers over our estimate of the forwardprice curve of the underlying commodity adjusted for location differentials. Wehave deferred the estimated fair value of these contracts at originationbecause our estimate of the fair value is not evidenced by quoted market pricesor current market transactions for the contracts in their entirety. We amortizethe deferred revenue into net revenues attributable to our supply,distribution, and marketing operations over the respective terms of thecontracts as the products are delivered. During the nine months ended March 31,2006, we recognized approximately $5.1 million in revenues attributable toour supply, distribution and marketing operations from the amortization of thedeferred revenue from these contracts.

| ** **                                 | ** ** | **Deferred  revenue at  June 30, 2005** | ** ** | **Additions  during  the period** | ** ** | **Amounts  amortized  during  the period** | ** ** | **Deferred  revenue at  March 31, 2006** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands)**                                | ** ** |
| Retail price  management contracts         |       |                                                   | $          | 968                                    |       |                                            |       | $                                                       | 3,311      |   |   |   | $ | (1,790 | ) |   |   | $ | 2,489 |   |   |
| Delivered fuel  price management contracts |       |                                                   | 3,013      |                                   |       |                                            | 928        |                                                    |       |   | (3,322 | ) |   |   | 619 |   |   |
|                                       |       |                                                   | $          | 3,981                                  |       |                                            |       | $                                                       | 4,239      |   |   |   | $ | (5,112 | ) |   |   | $ | 3,108 |   |   |

 

**(12)**   DEBT

Debtis as follows (in thousands):

| ** **                                      | ** ** | **March 31,  2006** | ** ** | **June 30,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Commodity margin  loan                          |       | $                        | 10,000     |                    | $          | — |   |
| Senior secured  working capital credit facility |       | 17,500                   |       | —                  |       |
| Senior  subordinated notes                      |       | 200,000                  |       | 200,000                 |       |
|                                            |       | 227,500                  |       | 200,000                 |       |
| TransMontaigne  Partners’ credit facility  |       | 45,508                   |       | 28,307                  |       |
|                                            |       | 273,008                  |       | 228,307                 |       |
| Less debt  classified as current                |       | (27,500                  | )          | —                  |       |
| Long-term debt                                  |       | $                        | 245,508    |                    | $          | 228,307 |   |

 

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*CommodityMargin Loan.**  *Wecurrently have a commodity margin loan agreement with our commodity broker thatallows us to borrow up to $10 million to fund certain initial andvariation margin requirements in commodities accounts maintained by us with ourcommodity broker. The entire unpaid principal amount of the loan, together withaccrued interest, is due and payable on demand. Outstanding loans bear interestat the average 90-day Treasury Bill rate plus 1.50% (6.1% at March 31,2006).

*SeniorSecured Working Capital Credit Facility.**  *The senior secured working capital creditfacility provides for a maximum borrowing line of credit equal to the lesser of(i) $400 million and (ii) the borrowing base ($460 millionat March 31, 2006), which is a function, among other things, of our cash, accountsreceivable, inventory, exchanges, margin deposits and certain reserveadjustments as defined in the facility. Outstanding letters of credit($115 million at March 31, 2006) are counted against the maximumborrowing capacity available at any time. Borrowings under the senior securedworking capital credit facility bear interest (at our option) based on a baserate plus an applicable margin, or LIBOR plus an applicable margin; theapplicable margins are a function of the average excess borrowing baseavailability (as defined therein). Interest on loans under the senior securedworking capital credit facility is due and payable periodically, based on theapplicable interest rate and related interest period, generally each one, twoor three months. The weighted average interest rate on borrowings under thesenior secured working capital credit facility was 6.3% during the nine monthsended March 31, 2006. In addition, we pay a commitment fee ranging from0.25% to 0.50% per annum on the total amount of the unused commitments.Borrowings under the senior secured working capital credit facility are securedby, among other things, our cash, accounts receivable, inventories, certainterminal facilities with an orderly liquidation value of not less than $100 million,and certain other current assets. The only financial covenant contained in thesenior secured working capital credit facility is a minimum fixed chargecoverage ratio test that is computed on a quarterly basis and it is applicablewhenever the average availability falls below $50 million for the lastmonth of any quarter (average availability was $189 million for the month endedMarch 31, 2006). In that event, we must satisfy a minimum fixed chargecoverage ratio requirement of 110%. The principal balance of loans and anyaccrued and unpaid interest is due and payable in full on the maturity date, September 13,2009.

*TransMontaignePartners’ Credit Facility.**  *OnMay 9, 2005, TransMontaigne Partners entered into a $75 millionsenior secured credit facility. The credit facility provides for a maximumborrowing line of credit equal to the lesser of (i) $75 million and (ii) fourtimes Consolidated EBITDA of TransMontaigne Partners (as defined;$86.9 million at March 31, 2006). Borrowings under the creditfacility bear interest (at TransMontaigne Partners’ option) based on a baserate plus an applicable margin, or LIBOR plus an applicable margin; theapplicable margins are a function of the total leverage ratio (as defined).Interest on loans under the credit facility is due and payable periodically,based on the applicable interest rate and related interest period, generallyeither one, two or three months. The weighted average interest rate onborrowings under the TransMontaigne Partners’ credit facility was 5.9% duringthe nine months ended March 31, 2006. In addition, TransMontaigne Partnerspays a commitment fee ranging from 0.375% to 0.50% per annum on the totalamount of the unused commitments. Borrowings under the TransMontaigne Partners’credit facility are secured by a lien on TransMontaigne Partners’ assets,including cash, accounts receivable, inventory, general intangibles, investmentproperty, contract rights and real property, except for TransMontaigne Partners’real property located in Florida. The terms of the credit facility includecovenants that restrict TransMontaigne Partners’ ability to make capitalexpenditures and cash distributions. The primary financial covenants containedin the TransMontaigne Partners’ credit facility are a total leverage ratio test(not to exceed four times) and an interest coverage ratio test (not to be lessthan three times). The principal balance of loans and any accrued and unpaidinterest are due and payable in full on the maturity date, May 9, 2010.

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*SeniorSubordinated Notes.**  *OnMay 30, 2003, we consummated the sale and issuance of $200 millionaggregate principal amount of 91¤8%Senior Subordinated Notes due 2010 and received proceeds of $194.5 million(net of underwriters’ discounts of $5.5 million). The Senior SubordinatedNotes mature on June 1, 2010 and interest is payable semi-annually inarrears on each June 1 and December 1 commencing on December 1,2003. The Senior Subordinated Notes are unsecured and subordinated to all ofour existing and future senior debt. Upon the occurrence of certain events,each holder of the Senior Subordinated Notes may require us to repurchase allor a portion of its notes at a purchase price equal to 101% of the principalamount thereof, plus accrued interest. The indenture governing the SeniorSubordinated Notes contains covenants that, among other things, limit ourability to incur additional indebtedness, pay dividends on, redeem orrepurchase our common stock, make investments, make certain dispositions ofassets, engage in transactions with affiliates, create certain liens, andconsolidate, merge, or transfer all or substantially all of our assets. TheSenior Subordinated Notes are fully and unconditionally guaranteed on a jointand several basis by our subsidiaries other than (1) minor subsidiariesthat are inactive and have no assets or operations and (2) sinceMay 27, 2005, TransMontaigne Partners L.P. and its general partner and thewholly-owned subsidiaries of TransMontaigne Partners L.P.

We are a holding company for our subsidiaries, with noindependent assets or operations. Accordingly, we are dependent upon thedistribution of the earnings of our subsidiaries, whether in the form ofdividends, advances or payments on account of inter-company obligations,to service our debt obligations. There are no restrictions on our ability toobtain funds from our subsidiaries other than TransMontaigne Partners L.P.TransMontaigne Partners L.P. is not a party to the indenture governing theSenior Subordinated Notes and, therefore, TransMontaigne Partners L.P. and itssubsidiaries are not guarantors of the Senior Subordinated Notes.

24

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Summarizedconsolidating financial information for TransMontaigne Inc. and theguarantor subsidiaries and TransMontaigne Partners and the non-guarantorsubsidiaries as of and for the three months ended March 31, 2006 is asfollows (in thousands):

| ** **                                                    | ** ** | **TransMontaigne Inc.  and guarantor  subsidiaries** | ** ** | **TransMontaigne  Partners and  non-guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                    |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Current assets                                                |       |                                                           | $          | 716,921                                                            |       |             |       | $                | 2,828      |   |   |   | $ | (96 | ) |   | $ | 719,653 |   |
| Property, plant  and equipment, net                           |       |                                                           | 238,849    |                                                               |       |             | 125,451    |             |       |   | — |   |   | 364,300 |   |
| Other assets                                                  |       |                                                           | 78,435     |                                                               |       |             | 1,731      |             |       |   | — |   |   | 80,166 |   |
|                                                          |       |                                                           | $          | 1,034,205                                                          |       |             |       | $                | 130,010    |   |   |   | $ | (96 | ) |   | $ | 1,164,119 |   |
| **Liabilities  and Equity**                                   |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Current  liabilities                                          |       |                                                           | $          | 395,744                                                            |       |             |       | $                | 2,889      |   |   |   | $ | (96 | ) |   | $ | 398,537 |   |
| Long-term  debt                                               |       |                                                           | 200,000    |                                                               |       |             | 45,508     |             |       |   | — |   |   | 245,508 |   |
| Other liabilities                                             |       |                                                           | 50,833     |                                                               |       |             | —     |             |       |   | (953 | ) |   | 49,880 |   |
| Non-controlling  interests                                    |       |                                                           | —     |                                                               |       |             | —     |             |       |   | 82,566 |   |   | 82,566 |   |
| Preferred stock                                               |       |                                                           | 20,608     |                                                               |       |             | —     |             |       |   | — |   |   | 20,608 |   |
| Partners’ equity                                         |       |                                                           | —     |                                                               |       |             | 81,613     |             |       |   | (81,613 | ) |   | — |   |
| Common  stockholders’ equity                             |       |                                                           | 367,020    |                                                               |       |             | —     |             |       |   | — |   |   | 367,020 |   |
|                                                          |       |                                                           | $          | 1,034,205                                                          |       |             |       | $                | 130,010    |   |   |   | $ | (96 | ) |   | $ | 1,164,119 |   |
| **Statement  of Operations**                                  |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Revenues                                                      |       |                                                           | $          | 2,444,607                                                          |       |             |       | $                | 12,090     |   |   |   | $ | — |   |   | $ | 2,456,697 |   |
| Cost of product  sold and direct operating costs and expenses |       |                                                           | (2,390,417 | )                                                                  |       |             | (4,695     | )                |       |   | — |   |   | (2,395,112 | ) |
| Costs and  expenses                                           |       |                                                           | (6,212     | )                                                                  |       |             | (3,936     | )                |       |   | — |   |   | (10,148 | ) |
| Other income  (expenses)                                      |       |                                                           | (5,525     | )                                                                  |       |             | (740       | )                |       |   | (1,148 | ) |   | (7,413 | ) |
| Income tax  expense                                           |       |                                                           | (16,729    | )                                                                  |       |             | —     |             |       |   | — |   |   | (16,729 | ) |
| Non-controlling  interests’ share in earnings            |       |                                                           | —     |                                                               |       |             | —     |             |       |   | (1,571 | ) |   | (1,571 | ) |
| Net earnings                                                  |       |                                                           | $          | 25,724                                                             |       |             |       | $                | 2,719      |   |   |   | $ | (2,719 | ) |   | $ | 25,724 |   |
| **Statement  of Cash Flows**                                  |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Net cash provided  by operating activities               |       |                                                           | $          | 7,371                                                              |       |             |       | $                | 5,071      |   |   |   | $ | — |   |   | $ | 12,442 |   |
| Net cash provided  by (used in) investing activities          |       |                                                           | 16,087     |                                                               |       |             | (18,769    | )                |       |   | — |   |   | (2,682 | ) |
| Net cash provided  by (used in) financing activities          |       |                                                           | (26,976    | )                                                                  |       |             | 13,611     |             |       |   | — |   |   | (13,365 | ) |
| (Decrease) in  cash and cash equivalents                      |       |                                                           | (3,518     | )                                                                  |       |             | (87        | )                |       |   | — |   |   | (3,605 | ) |
| Cash and cash  equivalents at beginning of period             |       |                                                           | 12,401     |                                                               |       |             | 698        |             |       |   | — |   |   | 13,099 |   |
| Cash and cash  equivalents at end of period                   |       |                                                           | $          | 8,883                                                              |       |             |       | $                | 611        |   |   |   | $ | — |   |   | $ | 9,494 |   |

 

25

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Summarizedconsolidating financial information for TransMontaigne Inc. and theguarantor subsidiaries and TransMontaigne Partners and the non-guarantorsubsidiaries for the nine months ended March 31, 2006 is as follows (inthousands):

| ** **                                                    | ** ** | **TransMontaigne Inc.  and guarantor  subsidiaries** | ** ** | **TransMontaigne  Partners and  non-guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **Statement of Operations**                                   |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Revenues                                                      |       |                                                           | $          | 7,325,251                                                          |       |             |       | $                | 34,998     |   |   |   | $ | — |   |   | $ | 7,360,249 |   |
| Cost of product  sold and direct operating costs and expenses |       |                                                           | (7,252,575 | )                                                                  |       |             | (12,944    | )                |       |   | — |   |   | (7,265,519 | ) |
| Costs and  expenses                                           |       |                                                           | (36,723    | )                                                                  |       |             | (10,578    | )                |       |   | — |   |   | (47,301 | ) |
| Other income  (expenses)                                      |       |                                                           | (14,221    | )                                                                  |       |             | (1,797     | )                |       |   | (4,254 | ) |   | (20,272 | ) |
| Income tax  expense                                           |       |                                                           | (10,320    | )                                                                  |       |             | —     |             |       |   | — |   |   | (10,320 | ) |
| Non-controlling  interests’ share in earnings            |       |                                                           | —     |                                                               |       |             | —     |             |       |   | (5,425 | ) |   | (5,425 | ) |
| Net earnings                                                  |       |                                                           | $          | 11,412                                                             |       |             |       | $                | 9,679      |   |   |   | $ | (9,679 | ) |   | $ | 11,412 |   |
| **Statement of Cash Flows**                                   |       |                                                           |       |                                                               |       |             |       |             |       |   |   |   |   |   |   |
| Net cash provided  by (used in) operating activities          |       |                                                           | $          | (16,144                                                            | )          |             |       | $                | 12,905     |   |   |   | $ | — |   |   | $ | (3,239 | ) |
| Net cash (used  in) investing activities                      |       |                                                           | (33,495    | )                                                                  |       |             | (21,812    | )                |       |   | — |   |   | (55,307 | ) |
| Net cash provided  by financing activities               |       |                                                           | 29,042     |                                                               |       |             | 9,277      |             |       |   | — |   |   | 38,319 |   |
| Increase  (decrease) in cash and cash equivalents             |       |                                                           | (20,597    | )                                                                  |       |             | 370        |             |       |   | — |   |   | (20,227 | ) |
| Cash and cash  equivalents at beginning of period             |       |                                                           | 29,480     |                                                               |       |             | 241        |             |       |   | — |   |   | 29,721 |   |
| Cash and cash  equivalents at end of period                   |       |                                                           | $          | 8,883                                                              |       |             |       | $                | 611        |   |   |   | $ | — |   |   | $ | 9,494 |   |

 

For all periods ended after the issuance of the SeniorSubordinated Notes (May 30, 2003) and before the closing of TransMontaignePartners’ initial public offering (May 27, 2005), we had no subsidiariesthat had not guaranteed the Senior Subordinated Notes on a full andunconditional, joint and several basis, other than subsidiaries that wereminor. Accordingly, we have not presented consolidating financial informationas of and for the three and nine months ended March 31, 2005, because suchinformation would be substantially duplicative with the accompanyingconsolidated financial statements. TransMontaigne Partners completed itsinitial public offering and commenced operations on May 27, 2005.

Scheduledmaturities of debt at March 31, 2006 are as follows (in thousands):

| **Years ending June 30:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 10,000     |       |
| 2007                                     |       | —     |       |
| 2008                                     |       | —     |       |
| 2009                                     |       | —     |       |
| 2010                                     |       | 263,008    |       |
|                                     |       | $          | 273,008    |       |

 

26

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**(13)**   PREFERREDSTOCK

At March 31,2006 and June 30, 2005, we have authorized the issuance of up to 2,000,000shares of preferred stock. Preferred stock is as follows (in thousands, exceptshare data):

| ** **                                                                                                                                                                                                    | ** ** | **March 31,  2006** | ** ** | **June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Series B  redeemable convertible preferred stock, par value $0.01 per share, 100,000  shares authorized, 20,063 and 47,195 shares issued and outstanding,  liquidation preference of $20,063 and $47,195 |       |                     | $          | 20,608                  |       |   | $ | 49,249 |   |
|                                                                                                                                                                                                               |            |                          |            |                         |            |  |  |  |  |

 

At March 31, 2006 and June 30, 2005, therewere 20,063 and 47,195 shares, respectively, of Series B redeemableconvertible preferred stock outstanding. During the nine months ended March 31,2006, 27,132 shares of Series B redeemable convertible preferred stockwere converted into approximately 4.1 million shares of common stock at therequest of the holder.

The Series B redeemable convertible preferredstock has a liquidation value of $1,000 per share, bears dividends at the rateof 6% per annum of the liquidation value, and is mandatorily redeemable betweenJune 30, 2007 and December 31, 2007 for shares of common stock and/orcash at our option, subject to limitations on the total number of shares ofcommon stock permitted to be used in the exchange and issued to anystockholder. Dividends are cumulative and payable quarterly. The dividends arepayable in cash, unless precluded by contract or the senior secured workingcapital credit facility, in which case dividends are payable in additionalshares of Series B redeemable convertible preferred stock. The Series Bredeemable convertible preferred stock may be put to us, at the option of theholder, for cash equal to the greater of its liquidation value or conversionvalue upon the future occurrence of a fundamental change (including thoserelating to sale of substantially all of the assets, delisting of our commonstock from a national exchange, change in control, bankruptcy filing, and anevent of default that accelerates the repayment of our debt). We may call theoutstanding shares of Series B redeemable convertible preferred stockafter June 30, 2005 if certain specified conditions are met. The Series Bredeemable convertible preferred stock is convertible, at the option of theholder, into common stock at $6.60 per share, subject to adjustment upon theoccurrence of specified future events. The holders of the Series Bredeemable convertible preferred stock have the right to vote on all matters(except the election of directors) with the holders of the common stock (votingcollectively as a single class).

Preferred stock dividends on the Series Bredeemable convertible preferred stock were $0.7 million and $2.1 millionfor the nine months ended March 31, 2006 and 2005, respectively. Theamount of the Series B redeemable convertible preferred stock dividendrecognized for financial reporting purposes for the nine months ended March 31,2006 and 2005, is composed of the amount of the dividend payable and paid tothe holders of the Series B redeemable convertible preferred stock of$1.1 million and $3.3 million, respectively, offset by the amortization ofthe premium on the carrying amount of the Series B redeemable convertiblepreferred stock of $0.4 million and $1.2 million, respectively.

At its issuance date (June 28,2002), the fair value of the Series B redeemable convertible preferredstock exceeded its liquidation value. The carrying amount of the Series Bredeemable convertible preferred stock will be decreased ratably over its 5-yearterm until it equals its liquidation value with an equal reduction in the amountof preferred stock dividends recorded for financial reporting purposes.

**(14)**   COMMONSTOCK

At March 31, 2006 and June 30, 2005, we wereauthorized to issue up to 150,000,000 shares of common stock with a par valueof $0.01 per share. At March 31, 2006 and June 30, 2005, there were50,010,607 shares and 45,586,475 shares issued and outstanding, respectively.Our senior secured working capital credit facility, senior subordinated notesand the certificate of designations of our Series B 

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redeemable convertiblepreferred stock contain restrictions on the payment of dividends on our commonstock.

Wehave a restricted stock plan that provides for awards of common stock tocertain key employees, subject to forfeiture if employment terminates prior tothe applicable vesting dates. Information about restricted common stockactivity for the nine months ended March 31, 2006 and the year ended June 30,2005 is as follows:

| ** **                                        | ** ** | **Total shares** | ** ** | **Vested shares** | ** ** | **Unvested shares** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|------------------------|------------|--------------------------|------------|
| Outstanding at  June 30, 2004                |       |                  | 2,178,003  |                   |       |                     | 553,795    |   |   |   | 1,624,208 |   |   |
| Granted                                           |       |                  | 689,200    |                   |       |                     | —     |   |   |   | 689,200 |   |   |
| Cancelled                                         |       |                  | (229,350   | )                      |       |                     | —     |   |   |   | (229,350 | ) |   |
| Repurchased from  employees for withholding taxes |       |                  | (131,625   | )                      |       |                     | (131,625   | ) |   |   | — |   |   |
| Vested                                            |       |                  | —     |                   |       |                     | 446,758    |   |   |   | (446,758 | ) |   |
| Outstanding at  June 30, 2005                |       |                  | 2,506,228  |                   |       |                     | 868,928    |   |   |   | 1,637,300 |   |   |
| Granted                                           |       |                  | 478,000    |                   |       |                     | —     |   |   |   | 478,000 |   |   |
| Cancelled                                         |       |                  | (90,895    | )                      |       |                     | —     |   |   |   | (90,895 | ) |   |
| Repurchased from  employees for withholding taxes |       |                  | (133,022   | )                      |       |                     | (133,022   | ) |   |   | — |   |   |
| Vested                                            |       |                  | —     |                   |       |                     | 428,280    |   |   |   | (428,280 | ) |   |
| Outstanding at  March 31, 2006               |       |                  | 2,760,311  |                   |       |                     | 1,164,186  |   |   |   | 1,596,125 |   |   |

 

During the nine months ended March 31, 2006, wegranted awards of 478,000 shares of restricted common stock to key employees.The deferred stock based compensation associated with those awards wasapproximately $4.6 million, which is being amortized into income over theirfour-year vesting period.

Amortization of deferredcompensation of approximately $2.2 million and $2.0 million isincluded in selling, general and administrative expense for the nine monthsended March 31, 2006 and 2005, respectively.

**(15)**   STOCKOPTIONS

Informationabout stock option activity for the nine months ended March 31, 2006 andthe year ended June 30, 2005, is as follows:

| ** **                                       | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at June 30, 2004 |       | 885,500    |       |                                   | $          | 4.48 |   |   |
| Cancelled                                        |       | (31,600    | )          |                                   | 3.75       |   |   |
| Exercised                                        |       | (85,998    | )          |                                   | 4.05       |   |   |
| Outstanding at  June 30, 2005               |       | 767,902    |       |                                   | 4.55       |   |   |
| Cancelled                                        |       | (3,000     | )          |                                   | 11.00      |   |   |
| Exercised                                        |       | (59,800    | )          |                                   | 3.75       |   |   |
| Outstanding at  March 31, 2006              |       | 705,102    |       |                                   | $          | 4.59 |   |   |
| Exercisable at  March 31, 2006              |       | 675,102    |       |                                   | $          | 4.57 |   |   |

 

28

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Informationabout stock options outstanding under the 1997 Plan at March 31, 2006, isas follows:

| ** **                                  | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                                                | ** ** | **Options exercisable**                | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| **Range of exercise prices** | ** ** | ** ** | ** ** | **Number  outstanding** | ** ** | **Weighted  average  remaining life  in years** | ** ** | **Weighted  average  exercise prices** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  prices** | ** ** |
| $3.75—7.25                             |       |       | 695,602    |                    |       |                                                      | 4.8        |                                        |       |   | $ | 4.49 |   |   |   | 665,602 |   |   |   | $ | 4.46 |   |   |
| $11.00—13.50                           |       |       | 8,500      |                    |       |                                                      | 2.7        |                                        |       |   | $ | 11.88 |   |   |   | 8,500 |   |   |   | $ | 11.88 |   |   |
| $17.25                                      |       |       | 1,000      |                    |       |                                                      | 1.4        |                                        |       |   | $ | 17.25 |   |   |   | 1,000 |   |   |   | $ | 17.25 |   |   |
|                                        |       |       | 705,102    |                    |       |                                                      |       |                                        |       |   |   |   |   |   | 675,102 |   |   |   |   |   |   |
|                                             |            |            |            |                         |            |                                                           |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(16)**   WARRANTS

On November 23, 2004,we granted to MSCG warrants to acquire 5.5 million shares of our commonstock at an exercise price of $6.60 per share as partial consideration foragreeing to enter into a 7-year product supply agreement. The fair valueof the warrants at the grant date of approximately $14.6 million wasrecorded as an increase to other assets (product supply agreement—seeNote 9 of Notes to consolidated financial statements) and additionalpaid-in capital. The primary assumptions used to estimate the fair value of thewarrants using the Black-Scholes option-pricing model were asfollows: no dividend yield, expected volatility of 41%, risk-free interest rateof 3.62%, and a contractual life of 5.3 years.

**(17)**   COMMITMENTSAND CONTINGENCIES

*LegalProceedings.**  *Wehave been named as a defendant in various lawsuits and a party to various otherlegal proceedings, in the ordinary course of business, some of which arecovered in whole or in part by insurance. We believe that the outcome of suchlawsuits and other proceedings will not individually or in the aggregate have amaterial adverse effect on our consolidated financial condition, results ofoperations, or cash flows. At March 31, 2006 and June 30, 2005, wehave accrued obligations for legal settlements of approximately $0.3 millionand $0.3 million, respectively, representing our best estimate of our losscontingencies that are probable of occurrence (see Note 10 of Notes toconsolidated financial statements).

*Transportation andDeficiency Agreements.**  *Inconnection with our sale of two product distribution facilities in Little Rock,Arkansas, we are potentially liable for payments of up to approximately$0.7 million per year for a five-year period through June 30, 2006.At June 30, 2005, we had an accrued liability of approximately$0.6 million representing our estimate of the future amounts we expect topay for the shortfall in volumes for the remainder of the term of theagreement. During the nine months ended March 31, 2006, we paidapproximately $0.4 million as settlement for our shortfall in volumes for theyear ended June 30, 2005. Based on actual throughput volumes for the ninemonths ended March 31, 2006, we increased our estimate of the liability byapproximately $0.1 million resulting in a remaining accrued liability ofapproximately $0.4 million at March 31, 2006.

| ** **                                  | ** ** | **June 30,  2005** | ** ** | **Payments  during  the period** | ** ** | **Amounts  applied  during the  period** | ** ** | **Change in  estimate  during the  period** | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| Accrued  liability—T&D obligations |       |                    | $          | (640                                  | )          |                                          |       | $                                                     | 386        |                     |       |   | $ | — |   |   |   | $ | (139 | ) |   |   | $ | (393 | ) |   |
|                                             |            |                         |            |                                       |            |                                               |            |                                                       |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

29

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*Operating Leases.**  *Future minimum lease payments under ournon-cancelable operating leases are as follows (in thousands):

| **Years ending June 30:** | ** ** | ** ** | ** ** | **Office  space** | ** ** | **Vessel  charters** | ** ** | **Terminal and  pipeline capacity** | ** ** | **Property and  equipment** | ** ** |
|------------------------------------------|------------|------------|------------|-------------------|------------|----------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|
| 2006 (Remainder  of the year)            |       | $          | 373        |              | $          | 3,665                |       |                                          | $          | 590                              |       |   |   | $ | 125 |   |   |
| 2007                                     |       | 1,490      |       | 9,347             |       |                 | 2,494      |                                          |       |                             | 429        |   |   |
| 2008                                     |       | 1,648      |       | —            |       |                 | 2,413      |                                          |       |                             | 354        |   |   |
| 2009                                     |       | 1,630      |       | —            |       |                 | 807        |                                          |       |                             | 231        |   |   |
| 2010                                     |       | 1,695      |       | —            |       |                 | 92         |                                          |       |                             | 110        |   |   |
| Thereafter                               |       | 2,573      |       | —            |       |                 | 5          |                                          |       |                             | 194        |   |   |
|                                     |       | $          | 9,409      |              | $          | 13,012               |       |                                          | $          | 6,401                            |       |   |   | $ | 1,443 |   |   |

 

Rentalexpense under operating leases is as follows (in thousands):

| ** **                      | ** ** | **Nine months ended  March 31,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Office space                    |       | $                                               | 1,060      |   | $ | 1,277 |   |
| Vessel charters                 |       | 11,295                                          |       | 9,023 |   |
| Terminal and  pipeline capacity |       | 2,798                                           |       | 3,650 |   |
| Property and  equipment         |       | 560                                             |       | 392 |   |
|                            |       | $                                               | 15,713     |   | $ | 14,342 |   |

 

**(18) EARNINGS PERSHARE**

Thefollowing table reconciles the computation of basic and diluted weightedaverage shares(in thousands):

| ** **                                                          | ** ** | **Three months  ended  March 31,** | ** ** | **Nine months  ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic weighted  average shares                                      |       | 48,404                                       |       | 39,793                                      |       | 47,890 |   | 39,672 |   |
| Effect of dilutive  securities:                                     |       |                                         |       |                                        |       |   |   |   |   |
| Restricted common stock subject to continuing  vesting requirements |       | 806                                          |       | 505                                         |       | 923 |   | 314 |   |
| Stock options                                                       |       | 295                                          |       | 346                                         |       | 326 |   | 282 |   |
| Series B redeemable convertible preferred stock           |       | 3,040                                        |       | 11,209                                      |       | 3,427 |   | 11,209 |   |
| MSCG warrants                                                       |       | 832                                          |       | 705                                         |       | 1,121 |   | 232 |   |
| Diluted weighted average  shares                                    |       | 53,377                                       |       | 52,558                                      |       | 53,687 |   | 51,709 |   |

 

Weexclude potentially dilutive securities from our computation of dilutedearnings per share when their effect would be anti-dilutive. The followingsecurities were excluded from the dilutive earnings per share computation forthe three and nine months ended March 31, 2006, as their inclusion wouldhave been anti-dilutive (in thousands):

| ** **                                                          | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                          | ** ** | **2006**           | ** ** |
| Restricted common  stock subject to continuing vesting requirements |       |               | 464        |   |   |
| Stock options                                                       |       |               | 10         |   |   |

 

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For the three months endedMarch 31, 2006, certain shares of restricted common stock were excludedbecause the unamortized deferred compensation exceeded the average quotedmarket price of our common stock and certain stock options were excludedbecause their exercise prices exceeded the average quoted market price of ourcommon stock during the period. The excluded shares of restricted common stockhad unamortized deferred compensation of $9.72 per share. The excluded stockoptions had a weighted average exercise price of $12.45 per share. 

**(19) BUSINESSSEGMENTS**

We provideintegrated terminal, transportation, storage, supply, distribution andmarketing services to refiners, wholesalers, distributors, marketers, andindustrial and commercial end-users of refined petroleum products. We conductbusiness in the following business segments:

·       *Terminals, pipelines, and tugs and barges*—consistsof an extensive terminal and pipeline infrastructure that handles refinedpetroleum products with transportation connections via pipelines, barges,vessels, rail cars and trucks to our facilities or to TransMontaigne Partners’facilities with an emphasis on transportation connections primarily through theColonial, Plantation, TEPPCO, Explorer and Magellan pipeline systems.

·       *Supply, distribution and marketing*—consistsof services for the supply and distribution of refined petroleum productsthrough rack spot sales, contract sales, and bulk sales in the physical andderivative markets, with retail, wholesale, industrial and commercial customersusing our terminal racks and marine refueling equipment, and providing relatedvalue-added fuel procurement and supply chain management services.

Our chief operating decision maker is our ChiefExecutive Officer (“CEO”). Our CEO reviews the financial performance of ourbusiness segments using a financial performance measure that is referred to byus as “margins and inventory management” for purposes of making operatingdecisions and assessing financial performance. Accordingly, we present “margins”for each of our two business segments: (i) terminals, pipelines, and tugsand barges and (ii) supply, distribution and marketing.

For the terminals, pipelines, and tugs and bargessegment, “margins” is composed of revenues less direct operating costs andexpenses. There are no differences between “margins” for our terminals,pipelines, and tugs and barges segment and the “margins” reported for thatsegment in our accompanying historical financial statements.

Our CEO assesses the “margins and inventory management”of our supply, distribution, and marketing segment using financial informationthat is prepared pursuant to the mark-to-market method of accounting. Ourpresentation of “margins and inventory procurement” for the supply,distribution and marketing segment differs from “margins” for that segment aspresented in our accompanying historical consolidated statements of operationsdue to the treatment of our inventories—discretionary volumes (which includesboth volumes held for immediate sale or exchange and volumes held for baseoperating requirements). Inventories—discretionary volumes are reflected atfair value, which matches the treatment of our derivative contracts (e.g.,volumes due to others under exchange agreements, forward purchase and saleagreements) and risk management contracts (principally NYMEX futurescontracts). Because our inventories—discretionary volumes are composed ofrefined petroleum products, which are commodities with established tradingmarkets and readily ascertainable market prices, we believe that the financialperformance of our supply, distribution and marketing segment can be appropriatelyevaluated using the mark-to-market method. Our inventories—discretionaryvolumes are carried at the lower of cost or market in the accompanyinghistorical consolidated balance sheets, while our derivative and riskmanagement contracts are carried at fair value. As a result, if refinedpetroleum product prices are increasing during the end of a quarter, we mayreport in the accompanying historical statements of operations significantlosses on derivative and risk management contracts and significant deferredgains on discretionary inventory 

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volumes at the end of thatquarter and report significant gains on our beginning inventories—discretionaryvolumes when they are sold in the following quarter. Therefore, the effects ofchanges in the fair value of our inventories—discretionary volumes are includedin “margins and inventory management” attributable to our supply, distributionand marketing segment in the period in which the fair value actually changes.

The differences between “margins and inventory management”used by our CEO in reviewing the financial performance of our business segmentsand the “margins” reported in our accompanying historical financial statementsare presented as “Inventory adjustments” in the accompanying “Reconciliation toearnings before income taxes.”

Thefinancial performance of our business segments is as follows (in thousands):

| ** **                                                                                                                                       | ** ** | **Three months   ended   March 31,** | ** ** | **Nine months   ended   March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2006**                                       | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Terminals, pipelines, and tugs and barges:**                                                                                                   |       |                                           |       |                                          |       |   |   |   |   |
| TransMontaigne  Partners L.P. facilities                                                                                                         |       | $                                              | 7,395      |                                          | $          | 5,655 |   | $ | 22,054 |   | $ | 14,274 |   |
| Brownsville  facilities                                                                                                                          |       | 1,644                                          |       | 1,230                                         |       | 4,467 |   | 3,284 |   |
| Southeast  facilities                                                                                                                            |       | 3,765                                          |       | 5,442                                         |       | 11,381 |   | 16,251 |   |
| River facilities                                                                                                                                 |       | (835                                           | )          | 1,145                                         |       | (212 | ) | 2,098 |   |
| Other                                                                                                                                            |       | 505                                            |       | 335                                           |       | 207 |   | 2,033 |   |
| Margins                                                                                                                                          |       | 12,474                                         |       | 13,807                                        |       | 37,897 |   | 37,940 |   |
| **Supply, distribution and marketing:**                                                                                                          |       |                                           |       |                                          |       |   |   |   |   |
| Light oils—marketing margins:                                                                                                               |       |                                           |       |                                          |       |   |   |   |   |
| TransMontaigne  Partners L.P. facilities                                                                                                         |       | 5,231                                          |       | 1,666                                         |       | 20,404 |   | 8,612 |   |
| Southeast  facilities                                                                                                                            |       | 187                                            |       | 2,744                                         |       | (11,897 | ) | 11,340 |   |
| River facilities                                                                                                                                 |       | 1,170                                          |       | 525                                           |       | 3,864 |   | 2,043 |   |
| Other                                                                                                                                            |       | 800                                            |       | 60                                            |       | 429 |   | 232 |   |
|                                                                                                                                             |       | 7,388                                          |       | 4,995                                         |       | 12,800 |   | 22,227 |   |
| Heavy  oils—marketing margins                                                                                                               |       | 2,445                                          |       | 2,980                                         |       | 13,254 |   | 10,956 |   |
| Supply chain  management services margins                                                                                                        |       | 2,469                                          |       | 6,067                                         |       | 3,458 |   | 12,715 |   |
| Margins                                                                                                                                          |       | 12,302                                         |       | 14,042                                        |       | 29,512 |   | 45,898 |   |
| **Inventory procurement and management:**                                                                                                        |       |                                           |       |                                          |       |   |   |   |   |
| Gains (losses)  from risk management of light oil volumes to be liquidated upon commencement  of MSCG product supply agreement                   |       | —                                         |       | (181                                          | )          | — |   | 9,437 |   |
| Increase in value  of light oil volumes nominated under the MSCG product supply agreement  prior to receipt of the product at our terminals |       | 24,314                                         |       | 36,632                                        |       | 51,720 |   | 36,632 |   |
| Increase in value  of base operating inventory                                                                                                   |       | 13,967                                         |       | 39,871                                        |       | 30,997 |   | 42,980 |   |
| (Losses) from  risk management of base operating inventory and light oil volumes nominated  under the MSCG product supply agreement              |       | (7,409                                         | )          | —                                        |       | (9,069 | ) | — |   |
| Storage fees for  light oil tank capacity                                                                                                        |       | (457                                           | )          | (857                                          | )          | (1,371 | ) | (5,302 | ) |
| Other financial  and costing variances, net                                                                                                      |       | 8,268                                          |       | 6,286                                         |       | (31,884 | ) | 16,314 |   |
| Trading  activities, net                                                                                                                         |       | —                                         |       | —                                        |       | — |   | 28 |   |
| Inventory  management                                                                                                                            |       | 38,683                                         |       | 81,751                                        |       | 40,393 |   | 100,089 |   |
| Margins and  inventory management                                                                                                                |       | $                                              | 63,459     |                                          | $          | 109,600 |   | $ | 107,802 |   | $ | 183,927 |   |

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| **Reconciliation to earnings  before income taxes:**                  |   |    |   |    |   |    |   |    |    |
|-----------------------------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|---------|---------|
| Margins and  inventory management                                     |   | $       | 63,459 |    | $      | 109,600 |   | $       | 107,802 |   | $ | 183,927 |   |
| **Inventory  adjustments:**                                           |   |    |   |    |   |    |   |    |    |
| Gains recognized on beginning  inventories—discretionary volumes |   | 13,567  |   | 10,210  |   | 2,369   |   | 3,712   |    |
| Gains deferred on ending inventories—discretionary  volumes      |   | (15,441 | )      | (21,530 | )      | (15,441 | )      | (21,530 | )       |
| **Total margins**                                                     |   | 61,585  |   | 98,280  |   | 94,730  |   | 166,109 |    |
| **Other  items:**                                                     |   |    |   |    |   |    |   |    |    |
| Selling, general and administrative expenses                          |   | (12,142 | )      | (9,885  | )      | (37,050 | )      | (32,120 | )       |
| Merger related expenses                                               |   | (1,350  | )      | —  |   | (1,350  | )      | —  |    |
| Depreciation and amortization                                         |   | (7,273  | )      | (6,274  | )      | (20,703 | )      | (17,808 | )       |
| Gain (loss) on disposition of assets, net                             |   | 10,617  |   | 2,993   |   | 11,802  |   | (606    | )       |
| **Operating income**                                                  |   | 51,437  |   | 85,114  |   | 47,429  |   | 115,575 |    |
| Other expense, net                                                    |   | (7,413  | )      | (6,672  | )      | (20,272 | )      | (23,671 | )       |
| **Earnings  before income taxes**                                     |   | $       | 44,024 |    | $      | 78,442  |   | $       | 27,157  |   | $ | 91,904 |   |

 

Supplementalinformation regarding our revenues for our business segments is summarizedbelow (in thousands):

| ** **                                      | ** ** | **Three months  ended  March 31,** | ** ** | **Nine months  ended  March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Terminals, pipelines, and tugs  and barges:** |       |                                         |       |                                        |       |   |   |   |   |
| Revenues from external customers                |       | $                                            | 14,135     |                                        | $          | 11,244 |   | $ | 41,144 |   | $ | 33,540 |   |
| Inter-segment revenues                          |       | 18,234                                       |       | 18,010                                      |       | 53,286 |   | 49,708 |   |
| Total revenues                                  |       | $                                            | 32,369     |                                        | $          | 29,254 |   | $ | 94,430 |   | $ | 83,248 |   |
| **Supply, distribution and  marketing:**        |       |                                         |       |                                        |       |   |   |   |   |
| Revenues from external customers                |       | $                                            | 2,424,328  |                                        | $          | 2,140,187 |   | $ | 7,265,819 |   | $ | 5,980,972 |   |
| Inter-segment revenues                          |       | —                                       |       | —                                      |       | — |   | — |   |
| Total revenues                                  |       | $                                            | 2,424,328  |                                        | $          | 2,140,187 |   | $ | 7,265,819 |   | $ | 5,980,972 |   |

 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis of the results of operations and financial condition should beread in conjunction with the accompanying unaudited consolidated financialstatements.

**POTENTIAL CHANGE INCONTROL OF TRANSMONTAIGNE INC.**

On March 27, 2006, we entered into a definitiveagreement with SemGroup, L.P. and its affiliates, which we refer to,individually and collectively, as “SemGroup,” to exchange all of ouroutstanding shares of common stock, including shares of our common stockissuable upon conversion of our outstanding Series B redeemableconvertible preferred stock, for $9.75 per share in cash. The consummation ofthe merger is subject to, among other things: (i) approval of a majorityof the outstanding shares of common stock and Series B preferred stock, onan as-converted basis, voting as a single class at a special meeting ofstockholders, (ii) receipt by SemGroup of proceeds of the financings substantiallyupon the terms set forth in the commitment letters and (iii) receipt ofcustomary approvals, including the expiration or termination of the applicablewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSRAct”).

On April 21, 2006, we filed with the FederalTrade Commission and the Department of Justice the notification and reportforms required by the HSR Act with respect to the proposed merger with SemGroup.Unless it is extended, the waiting period under the HSR Act currently isexpected to end on or before May 22, 2006.

On April 26, 2006, we received a proposal fromMorgan Stanley Capital Group Inc. (“Morgan Stanley”) to acquire us at a priceof $10.50 per share, in cash, and otherwise on substantially the same terms asour pending sale to SemGroup. Morgan Stanley’s proposal is subject only to (i) satisfactoryreview and approval of the disclosure schedule and other schedules and exhibitsto the SemGroup merger agreement, (ii) satisfactory completion ofconfirmatory due diligence, which Morgan Stanley is prepared to commenceimmediately and which they believe can be completed, with our cooperation, infive days, and (iii) execution of a definitive merger agreement. On April 28,2006, our board of directors authorized our senior management to meet withrepresentatives of Morgan Stanley to negotiate a definitive merger agreement inaccordance with the terms of the Morgan Stanley offer. On May 8, 2006 weapproved the terms of a definitive merger agreement with Morgan Stanley.SemGroup has until the close of business on Thursday, May 11, 2006, toprovide our board of directors with a revised merger agreement that our boardof directors determines is at least as favorable to our stockholders as theMorgan Stanley merger agreement.

On May 1, 2006, wefiled with the Securities and Exchange Commission preliminary proxy materialsregarding the proposed merger with SemGroup.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

A summary of thesignificant accounting policies that we have adopted and followed in thepreparation of our consolidated financial statements is detailed in ourconsolidated financial statements for the year ended June 30, 2005,included in our Annual Report on Form 10-K filed on September 13,2005 (see Note 1 of Notes to consolidated financial statements). Certainof these accounting policies require the use of estimates. The followingestimates, in our opinion, are subjective in nature, require the exercise ofjudgment, and involve complex analysis: allowance for doubtful accounts; fairvalue of inventories—discretionary volumes (used to evaluate the financialperformance of our business segments); fair value of derivative contracts; andaccrued environmental obligations. These estimates are based on our knowledgeand understanding of current conditions and actions we may take in the future.Changes in these estimates will occur as a result of the passage of time andthe occurrence of future events. 

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Subsequentchanges in these estimates may have a significant impact on our financialcondition and results of operations.

**SIGNIFICANTDEVELOPMENTS DURING THE NINE MONTHS ENDED MARCH 31, 2006**

On July 20, 2005, TransMontaigne Partnersannounced that it declared a distribution of $0.15 per unit payable on August 9,2005 to unitholders of record on July 29, 2005.

On August 1, 2005, we announced the closing ofthe acquisition of Radcliff/Economy Marine Services, Inc. (“Radcliff”) fora purchase price of approximately $52.1 million, net of cash acquired ofapproximately $2.1 million. The purchase price is composed of approximately$41.8 million paid in cash plus the assumption of Radcliff’s existingoutstanding debt of approximately $12.4 million. The acquisition includestwo petroleum products terminals, one in Mobile, Alabama and one in Pensacola,Florida, with combined aggregate storage capacity of approximately 350,000barrels. In addition, we acquired two tugboats, six barges, twelve tractors andassociated trailers and approximately $22.0 million in net workingcapital.

On August 16, 2005, we announced the signing ofpurchase agreements to acquire certain LPG assets and refined petroleumproducts tank capacity in Brownsville, Texas and Matamoros, Mexico from RioVista Energy Partners L.P. and Penn Octane Corporation for a total purchaseprice of approximately $27.5 million. The closing of the acquisition issubject to our completion of additional due diligence.

During the three months ended September 30, 2005,approximately 27,132 shares of Series B redeemable convertible preferredstock were converted into approximately 4.1 million shares of commonstock.

On August 29, 2005 and September 24, 2005,Hurricane Katrina and Hurricane Rita caused severe damage along the UnitedStates Gulf Coast and into the southern United States. There was no significantlong-term damage to our facilities caused by these hurricanes.

On October 20, 2005, TransMontaigne Partners announcedthat it declared a distribution of $0.40 per unit payable on November 8,2005 to the unitholders of record on October 31, 2005.

On October 24, 2005, Hurricane Wilma struckFlorida. There was no significant long-term damage to our facilities caused byHurricane Wilma.

Effective October 31, 2005, TransMontaignePartners purchased a refined product terminal with approximately 150,000barrels of aggregate storage capacity in Oklahoma City, Oklahoma from MagellanPipeline Company, L.P. for approximately $1.9 million.

On January 12, 2006, we announced the signing ofa terminal exchange agreement with BP affecting seventeen terminals located inthe Southeast, which were formerly operated by us pursuant to an informal jointventure with BP. The transaction closed on January 31, 2006. Under theterms of the agreement, BP owns and operates six terminals and we own andoperate nine terminals, while the remaining two terminals are suppliedseparately and operated by us for the benefit of both companies. BP is obligatedto throughput approximately 26,000 barrels per day through our owned facilitiesand we are obligated to throughput approximately 21,000 barrels per day throughBP’s owned facilities.

On January 19, 2006, TransMontaigne Partnersannounced a distribution of $0.40 per unit payable on February 8, 2006 to unitholdersof record on January 31, 2006.

On January 19, 2006, TransMontaigne Partnersannounced that it had authorized a program for the repurchase, from time totime, of outstanding common units of the Partnership for purposes of makingsubsequent grants of restricted units under the Partnership’s Long-TermIncentive Plan to key employees and executive officers of TransMontaigneServices Inc., and the non-employee directors of its general 

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partner. TransMontaignePartners anticipates repurchasing annually up to approximately $1.2 million ofaggregate market value of its outstanding common units for this purpose. However,there is no guarantee as to the exact number of units or dollar amount that willbe repurchased, and the purchases may be discontinued at any time.

On February 23, 2006, TransMontaigne Partnersannounced the execution of a new five-year terminaling services agreement withMarathon Petroleum Company LLC regarding approximately 1.0 million barrels ofasphalt storage capacity throughout its Florida terminal facilities. Theterminaling services agreement became effective on February 20, 2006 atthe Jacksonville and Port Manatee, Florida terminal facilities and becameeffective on May 1, 2006 at the Cape Canaveral and Port Everglades,Florida terminal facilities. Simultaneous with the effective dates of theMarathon agreement, the existing agreement with TransMontaigne Partners’current asphalt customer expired.

On March 3, 2006, weannounced the execution of a new seven-year terminaling services agreement witha subsidiary of Valero Energy Corporation regarding approximately 1.0 millionbarrels of gasoline and distillate storage capacity throughout our Riverterminal facilities. The terminaling services agreement became effective April 1,2006.

**SUBSEQUENT EVENTS**

On April 19, 2006,TransMontaigne Partners announced a distribution of $0.43 per unit payable on May 9,2006 to unitholders of record on April 28, 2006.

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**RESULTS OFOPERATIONS—MARKET CONDITIONS**

During September andthrough October 10, 2005, we witnessed substantial price disparities andmarket disruptions in the wholesale markets. The major refiners were pricingtheir branded products substantially below the price at which they wereoffering unbranded products in the wholesale market. The price of product inthe wholesale market generally reflects the cost of product at the tailgate ofthe refinery adjusted for the cost of transportation to the wholesale market.In effect, the major refiners were subsidizing the price of product in thewholesale markets; major refiners were charging their branded customerswholesale market prices that were below the cost of product in the bulkmarkets. For example, the low branded and unbranded price of unleaded gasolinein the Charlotte, North Carolina wholesale market from August 1, 2005through March 31, 2006 are as follows ($/gallon):

From August 29, 2005 through September 7,2005, we sold product to our contract customers at our Southeast facilitiesbased on the subsidized prices being offered by major refiners to their brandedcustomers in the wholesale market, resulting in realized losses on our lightoil marketing margins of approximately $12 million. We historically sellapproximately 80,000 barrels per day of unbranded product at our Southeastfacilities under contracts with OPIS indexes. On September 7, 2005, weinformed our contract customers at our Southeast facilities that we wereexercising our rights under our sales contracts to temporarily cease sellingthem product under the OPIS-based pricing provisions in their contracts withus. However, we offered to sell product to these customers under interimpricing provisions that would stay in effect until the pricing disparities inthe wholesale market subsided. From September 8, 2005 to October 10,2005, we averaged approximately 45,000 barrels per day under contracts withinterim pricing provisions. The interim pricing provisions were intended toreflect the cost of product in the bulk markets and the cost of transportationfrom the bulk markets to the wholesale markets. To the extent that contractcustomers at our Southeast facilities submit to us notices of dispute claimingthat we did not have the right to suspend the OPIS-pricing provisions in oursales contracts and such disputes are not resolved directly with our customers,we will resolve such disputes through mediation and arbitration provisions ofthe applicable contracts. We continue to believe that we were within our rightsunder the contracts to impose interim pricing provisions during the period ofprice disparities and market disruptions in the wholesale 

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markets. During December 2005,we renegotiated the contract with our largest Southeast contract customer andthe customer waived any rights it may have had for claims against us. Webelieve that the outcome of the disputes with our customers will notindividually or in the aggregate have a material adverse effect on ourconsolidated financial condition, results of operations, or cash flows. At March 31,2006, we have not accrued any reserves for potential loss contingenciesresulting from the disputes with our customers because such a loss, in ourview, is not probable of occurrence.

Pricesfor refined petroleum products were higher during the three and nine monthsended March 31, 2006, as compared to the same period in 2005, resulting inhigher per unit revenues from the sales of refined petroleum products. Pricesfor gasoline and heating oil for the three and nine months ended March 31,2006 and 2005 are as follows (in $/gallon):

| ** **         | ** ** | **Three months  ended  March 31,** | ** ** | **Nine months  ended  March 31,** | ** ** |
|--------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2006**                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Unleaded gasoline: |       |                                         |       |                                        |       |   |   |   |   |
| High               |       | 2.0375                                       |       | 1.6170                                      |       | 3.1165 |   | 1.6170 |   |
| Low                |       | 1.4385                                       |       | 1.1078                                      |       | 1.3605 |   | 0.9325 |   |
| Average            |       | 1.6955                                       |       | 1.3219                                      |       | 1.7503 |   | 1.2472 |   |
| Heating oil:       |       |                                         |       |                                        |       |   |   |   |   |
| High               |       | 1.8708                                       |       | 1.5948                                      |       | 2.5675 |   | 1.5948 |   |
| Low                |       | 1.5480                                       |       | 1.1008                                      |       | 1.5295 |   | 1.0253 |   |
| Average            |       | 1.7176                                       |       | 1.3587                                      |       | 1.7816 |   | 1.2770 |   |

 

 

Relativemonth-end commodity prices per gallon from June 30, 2004 to March 31,2006 (near-month NYMEX close on the last day of the month) are as follows($/gallon):

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Our light oil marketing margins are affected by thesupply and demand for light oil products in the wholesale delivery locations(e.g., terminal truck racks). While demand for light oil products may beinfluenced by seasonality (e.g., higher demand for gasoline during the summerdriving season and higher demand for heating oil during the winter heatingseason), we believe that the availability of supply of light oil products inthe wholesale delivery markets has the most significant impact on our ability togenerate favorable light oil marketing margins. The availability of supply oflight oil products in the wholesale delivery markets is impacted by a varietyof factors, including the availability of crude oil supplies, currentutilization of refining capacity, the shape of the forward price curve in thefutures market, refinery crack spreads, and availability of pipeline and vesselshipping capacity. For example, adequate crude oil supplies, high utilizationof refining capacity, an increasing forward price curve, favorable refinerycrack spreads and available shipping capacity would likely result in anabundance of light oil products in the wholesale delivery markets. An abundanceof light oil products in the wholesale delivery locations generally produces lowermarketing margins. Conversely, tight crude oil supplies, refinery outages, adecreasing forward price curve, moderate refinery crack spreads and limitedshipping capacity would likely result in tight supply of light oil products inthe wholesale delivery markets. A tight supply of light oil products in thewholesale delivery locations generally produces higher marketing margins.

During the three months ended March 31, 2006, theNYMEX futures market initially anticipated rising gasoline and heating oilprices as the prices in the prompt month (i.e., the immediately succeedingmonth) were slightly higher than the prices in the current month. At the end ofMarch 2006, the NYMEX futures market anticipated declining gasoline andheating oil prices as the prices in the prompt month were slightly lower thatthe prices in the current month. A combination of anticipated higher futureprices (referred to as a “contango” market) and favorable refinery crackspreads encouraged refiners to maximize production and ship their gasoline anddistillate production to the wholesale delivery markets. An increase ingasoline and distillate inventories in the wholesale delivery markets generallyresults in limited margin opportunities on wholesale deliveries.

The value of petroleum products in any local deliverymarket is the sum of the commodity price as reflected on the NYMEX and thebasis differential for that local delivery market. The basis differential forany local delivery market is the spread between the cash price in the physicalmarket and the quoted price in the futures markets for the prompt month. Forthose physical and derivative positions as to which we choose to manage theassociated commodity price risk, the primary objective of our risk managementstrategy is to minimize the financial impact on us from changes in petroleumcommodity prices affected by world-wide crude oil and petroleum products supplyand demand disruptions (e.g., the Iraq war, OPEC production quotas, disruptionsdue to hurricanes and other weather-related occurrences, foreign countrywork stoppages, and major refinery outages). We utilize NYMEX futures contractsto manage the financial impact on us from changes in commodity prices due to “world-wide”events. NYMEX futures contracts are obligations to purchase or sell a specificvolume of inventory at a fixed price at a future date. We believe that theutilization of NYMEX futures contracts to manage commodity price risk minimizesthe financial impact on us from changes in “world-wide” commodity prices. Wegenerally do not manage the financial impact on us from changes in basisdifferentials affected by local market supply and demand disruptions (e.g.,local pipeline delivery disruptions, local refinery outages, periodic change inlocal government specifications for gasolines and distillates, localseasonality in product demand, and 

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disruptionsdue to local weather related occurrences). The impacts on us from changes inbasis differentials are as follows:

| **Basis Differential**                                                                      | ** ** | ** ** | ** ** | **Change in Basis  Differential** | ** ** | **Net  Position** | ** ** | **Financial  Impact** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Futures price in  excess of physical market price (“negative basis differential”) |       |       | Increasing |                                        |       |              | Long       |                  |       |   | Loss |   |   |
| Futures price in  excess of physical market price                                                |       |       | Increasing |                                        |       |              | Short      |                  |       |   | Gain |   |   |
| Futures price in  excess of physical market price                                                |       |       | Decreasing |                                        |       |              | Long       |                  |       |   | Gain |   |   |
| Futures price in  excess of physical market price                                                |       |       | Decreasing |                                        |       |              | Short      |                  |       |   | Loss |   |   |
| Physical market  price in excess of futures price (“positive basis differential”) |       |       | Increasing |                                        |       |              | Long       |                  |       |   | Gain |   |   |
| Physical market  price in excess of futures price                                                |       |       | Increasing |                                        |       |              | Short      |                  |       |   | Loss |   |   |
| Physical market  price in excess of futures price                                                |       |       | Decreasing |                                        |       |              | Long       |                  |       |   | Loss |   |   |
| Physical market price in  excess of futures price                                                |       |       | Decreasing |                                        |       |              | Short      |                  |       |   | Gain |   |   |

 

Thespread between the month-end basis differential (quoted near-month NYMEXfutures price and the cash price in the United States Gulf Coast market) andthe monthly average basis differential from June 30, 2004 to March 31,2006 are as follows ($/gallon):

When we nominate refinedpetroleum products to be supplied by third parties at our terminals, we enterinto futures contracts (i.e., short futures contracts) to sell a correspondingamount of product to protect against price fluctuations for the underlyingcommodity. When we ultimately sell the underlying inventory to a customer, weunwind the related risk management contract. In order to effectively manage commodityprice risk, we must predict when we will sell the underlying product. When weenter into a forward sale commitment to deliver product to a customer in thefuture at a fixed price, we enter into a futures contract (i.e., a long futurescontract) to purchase a corresponding amount of product to protect againstprice fluctuations for the underlying commodity. When we ultimately deliver theunderlying 

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productto a customer, we unwind the related risk management contract. We believe thatthe uncertainties of crude oil supply caused in part by the Iraq war, thepossibility of unplanned refinery outages and the increased participation ofhedge funds in the futures markets periodically results in a lack ofcorrelation between the cash market and the futures market (i.e., the physicalcash markets are driven by supply and demand, whereas, the futures markets aredriven by geopolitical events and expectations). When there is a lack ofcorrelation between the cash market and the futures market, the cost of managingour commodity price risk may increase. Because of the overall high level ofcommodity prices combined with the possibility of an increase in the cost ofmanaging the commodity price risk associated with our discretionaryinventories, we distributed and transported fewer barrels of discretionaryinventories through our terminal infrastructure during the year ended June 30,2005 and the nine months ended March 31, 2006, which resulted in lowerinventory volumes available for rack spot sales.

**RESULTS OF OPERATIONS—BUSINESS SEGMENTS**

We are required to reportmeasures of profit and loss that are used by our chief operating decision maker(our Chief Executive Officer or CEO) in assessing the financial performance ofour reportable segments. Our CEO assesses the financial performance of each ofour reportable segments using a financial performance measure, which we referto as “margins and inventory management.”

**Terminals, pipelines, tugs and barges—margins**

Our “margins” for theterminal, pipelines, tugs and barges segment are identical to the “margins” forsuch segment described under “Results of Operations—Historical FinancialStatements.” Selected quarterly “margins” for the terminal, pipelines, tugs andbarges segment for each of the three and nine months ended March 31, 2006and 2005 are summarized below (in thousands):

| ** **                                  | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Terminals, pipelines, tugs and  barges:** |       |                                             |       |                                            |       |   |   |   |   |
| TransMontaigne  Partners L.P. facilities:   |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                    |       | $                                                | 12,090     |                                            | $          | 9,714 |   | $ | 34,998 |   | $ | 26,406 |   |
| Direct operating costs and expenses         |       | (4,695                                           | )          | (4,059                                          | )          | (12,944 | ) | (12,132 | ) |
| Net operating margins                       |       | 7,395                                            |       | 5,655                                           |       | 22,054 |   | 14,274 |   |
| Brownsville facilities:                     |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                    |       | 3,045                                            |       | 2,462                                           |       | 8,703 |   | 7,133 |   |
| Direct operating costs and expenses         |       | (1,401                                           | )          | (1,232                                          | )          | (4,236 | ) | (3,849 | ) |
| Net operating margins                       |       | 1,644                                            |       | 1,230                                           |       | 4,467 |   | 3,284 |   |
| Southeast facilities:                       |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                    |       | 8,468                                            |       | 9,640                                           |       | 25,750 |   | 28,655 |   |
| Direct operating costs and expenses         |       | (4,703                                           | )          | (4,198                                          | )          | (14,369 | ) | (12,404 | ) |
| Net operating margins                       |       | 3,765                                            |       | 5,442                                           |       | 11,381 |   | 16,251 |   |
| River facilities:                           |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                    |       | 2,468                                            |       | 2,668                                           |       | 6,868 |   | 7,142 |   |
| Direct operating costs and expenses         |       | (3,303                                           | )          | (1,523                                          | )          | (7,080 | ) | (5,044 | ) |
| Net operating margins                       |       | (835                                             | )          | 1,145                                           |       | (212 | ) | 2,098 |   |
| Other:                                      |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                    |       | 6,298                                            |       | 4,770                                           |       | 18,111 |   | 13,912 |   |
| Direct operating costs and expenses         |       | (5,793                                           | )          | (4,435                                          | )          | (17,904 | ) | (11,879 | ) |
| Net operating margins                       |       | 505                                              |       | 335                                             |       | 207 |   | 2,033 |   |
| **Margins**                                 |       | $                                                | 12,474     |                                            | $          | 13,807 |   | $ | 37,897 |   | $ | 37,940 |   |

 

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**Supply, distribution and marketing—margins andinventory management**

Our presentation of“margins and inventory management” for the supply, distribution and marketingsegment differs from “margins” for that segment as presented in ouraccompanying historical consolidated statements of operations due to thetreatment of our inventories—discretionary volumes (which includes both volumesheld for immediate sale or exchange and volumes held for base operatingrequirements). Inventories—discretionary volumes are reflected at fair value,which matches the treatment of our derivative contracts (e.g., volumes due toothers under exchange agreements, forward purchase and sale agreements) andrisk management contracts (principally NYMEX futures contracts). Because our inventories—discretionaryvolumes are composed of refined petroleum products, which are commodities withestablished trading markets and readily ascertainable market prices, we believethat the financial performance of our supply, distribution and marketingsegment can be appropriately evaluated using the mark-to-market method. Ourinventories—discretionary volumes are carried at the lower of cost or market inthe accompanying historical consolidated balance sheets, while our derivativeand risk management contracts are carried at fair value. As a result, ifrefined petroleum product prices are increasing during the end of a quarter, wemay report in the accompanying historical statement of operations significantlosses on derivative and risk management contracts and significant deferredgains on discretionary inventory volumes at the end of that quarter and reportsignificant gains on our beginning inventories—discretionary volumes when theyare sold in the following quarter. Therefore, the effects of changes in thefair value of our inventories—discretionary volumes are included in “marginsand inventory management” attributable to our supply, distribution andmarketing segment in the period in which the fair value actually changes.

*Marketing margins.**  *Light oil and heavy oil marketing marginsare based on the actual selling price to the customer, the cost of product soldand the standard cost of transportation and throughput. For purposes ofcomputing our light oil margins, the cost of product sold is based on the priorday’s market value of the product as determined in the United States Gulf Coastbulk market for all facilities except TransMontaigne Partners’ Floridafacilities. For TransMontaigne Partners’ Florida facilities, the cost ofproduct sold is based on an OPIS index.

Supply chain management services margins includemargins from the sale of refined petroleum products under delivered fuel pricemanagement contracts, net gains and losses from the settlement of retail pricemanagement contracts and fees from logistical supply chain management services.Margins under delivered fuel price management contracts are based on therelationship of the spread between the futures price and the physical wholesalemarket price at the date the contract was executed with the customer (referredto as “basis sold”) and the spread between the futures price and the physicalwholesale market price at the date the product was lifted by the customer(referred to as “basis bought”). Net gains and losses from the settlement ofretail price management contracts are based on basis sold and basis bought inthe retail market. Fees from logistical supply chain management services arecharged on a per gallon basis for the use of our proprietary web-basedinventory management system.

*Inventory procurement andmanagement.**  *Duringthe three months ended March 31, 2005, we commenced purchasing light oilproduct from MSCG for our Florida and Southeast marketing activities. Pursuantto the terms of the MSCG supply agreement, the unit cost of the products isdetermined prior to their actual delivery to our terminals. Consequently,during rising commodity prices, we will recognize gains between the date theproduct is priced and the date of its receipt because the MSCG supply agreementqualifies as a derivative contract (see Note 1(g) of Notes toconsolidated financial statements). During declining commodity prices, we willrecognize losses between the pricing date and the date of receipt. Because ofthe significant increase in commodity prices experienced during the three andnine months ended March 31, 2006, we recognized approximately $24.3million and $51.7 million, respectively, of gains on approximately3.0 million barrels, which represents the average volume of barrels pricedunder the terms of the MSCG supply agreement but not yet delivered to ourterminals. At March 31, 2006, we were managing the commodity price riskassociated with approximately 3.0 million barrels of undelivered 

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in-transit volumessupplied to our terminals under the MSCG supply agreement. During the three andnine months ended March 31, 2006, we recognized (losses) of approximately$(7.4) million and $(9.1) million, respectively, from these risk managementactivities.

We currently maintainapproximately 1.5 million barrels of base operating inventory in terminalfacilities as safety stock to ensure an adequate supply of inventory to meetour delivery obligations to our customers. During periods of rising commodityprices, we will recognize increases in the value of these volumes, whereasduring periods of declining commodity prices, we will recognize decreases inthe value of these volumes. During the three and nine months endedMarch 31, 2006, the value of our base operating inventory increased byapproximately $14.0 million and $31.0 million, respectively, due to risingcommodity prices. At March 31, 2006, the commodity price risk associatedwith the approximately 1.5 million barrels of base operating inventoryvolumes was not managed.

Storage fees for light oil tank capacity decreasedduring the three and nine months ended March 31, 2006 as compared to 2005,due principally to the commencement of our terminaling services agreements withMSCG for tank capacity at our Southeast facilities that historically had beenleased to our supply, distribution and marketing operations.

Other financial and costing variances, net include thefinancial variances (favorable and unfavorable) associated with the purchaseprice of our inventory volumes held for immediate sale or exchange, thecorrelation between the physical market and the futures market, the variancebetween our actual transportation and throughput charges and our standardcosts, and the net margins generated from bulk transactions. During periods ofstrong correlation between the physical and futures markets, we will recognizenominal variances. During periods of expanding spreads between the cash pricein the physical market and the quoted price in the futures markets for theprompt month, we will recognize gains (losses) if we are net short (long) inthe physical market. During periods of contracting spreads between the cashprice in the physical market and the quoted price in the futures markets forthe prompt month, we will recognize gains (losses) if we are net long (short)in the physical market. For the nine months ended March 31, 2006, otherfinancial and costing variances, net were unfavorably impacted by changes inthe injection date of products into the Colonial pipeline caused by HurricanesKatrina and Rita. The cost of product purchased under the MSCG product supplyagreement is based on the actual injection date of products into the Colonialpipeline. We enter into risk management contracts to manage the commodity pricerisk associated with product purchased under the MSCG product supply agreementbased on the expected injection date of products into the Colonial pipeline.When the cost of product purchased under the MSCG product supply agreement isdetermined by reference to a period of time other than the period of time inwhich we entered into the associated risk management contracts, we willrecognize unfavorable variances during rising prices. We also recognizefinancial and costing variances based on the relationship of the spread betweenthe futures price and the physical wholesale market price at the date productis priced under the MSCG product supply agreement (referred to as “basis bought”)and the spread between the futures price and the physical wholesale marketprice at the date the product was lifted by the customer (referred to as “basissold”). During the three and nine months ended March 31, 2006,werecognized favorable (unfavorable) variances of approximately $8.3 million and$(31.9) million, respectively.

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Forthe three months ended March 31, 2006 and 2005, the margins and inventorymanagement attributable to our supply, distribution and marketing segment were$51.0 million and $95.8 million, respectively. For the nine monthsended March 31, 2006 and 2005, the margins and inventory managementattributable to our supply, distribution and marketing segment were$69.9 million and $146.0 million, respectively.

| ** **                                                                                                                                       | ** ** | **Three months  ended  March 31,** | ** ** | **Nine months  ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2006**                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Supply, distribution and  marketing:**                                                                                                         |       |                                         |       |                                        |       |   |   |   |   |
| Light  oils—marketing margins:                                                                                                              |       |                                         |       |                                        |       |   |   |   |   |
| TransMontaigne Partners L.P. facilities                                                                                                          |       | $                                            | 5,231      |                                        | $          | 1,666 |   | $ | 20,404 |   | $ | 8,612 |   |
| Southeast facilities                                                                                                                             |       | 187                                          |       | 2,744                                       |       | (11,897 | ) | 11,340 |   |
| River facilities                                                                                                                                 |       | 1,170                                        |       | 525                                         |       | 3,864 |   | 2,043 |   |
| Other                                                                                                                                            |       | 800                                          |       | 60                                          |       | 429 |   | 232 |   |
|                                                                                                                                             |       | 7,388                                        |       | 4,995                                       |       | 12,800 |   | 22,227 |   |
| Heavy oils—marketing margins                                                                                                                |       | 2,445                                        |       | 2,980                                       |       | 13,254 |   | 10,956 |   |
| Supply chain management services margins                                                                                                         |       | 2,469                                        |       | 6,067                                       |       | 3,458 |   | 12,715 |   |
| Margins                                                                                                                                          |       | 12,302                                       |       | 14,042                                      |       | 29,512 |   | 45,898 |   |
| **Inventory procurement and  management:**                                                                                                       |       |                                         |       |                                        |       |   |   |   |   |
| Gains from risk management of light oil volumes to  be liquidated upon commencement of MSCG product supply agreement                             |       | —                                       |       | (181                                        | )          | — |   | 9,437 |   |
| Increase in value of light oil volumes nominated  under the MSCG product supply agreement prior to receipt of the product  at our terminals |       | 24,314                                       |       | 36,632                                      |       | 51,720 |   | 36,632 |   |
| Increase in value of base operating inventory                                                                                                    |       | 13,967                                       |       | 39,871                                      |       | 30,997 |   | 42,980 |   |
| (Losses) from risk management of base operating  inventory and light oil volumes nominated under the MSCG product supply  agreement              |       | (7,409                                       | )          | —                                      |       | (9,069 | ) | — |   |
| Storage fees for light oil tank capacity                                                                                                         |       | (457                                         | )          | (857                                        | )          | (1,371 | ) | (5,302 | ) |
| Other financial and costing variances, net                                                                                                       |       | 8,268                                        |       | 6,286                                       |       | (31,884 | ) | 16,314 |   |
| Trading activities, net                                                                                                                          |       | —                                       |       | —                                      |       | — |   | 28 |   |
| Inventory management                                                                                                                             |       | 38,683                                       |       | 81,751                                      |       | 40,393 |   | 100,089 |   |
| Margins and  inventory management                                                                                                                |       | $                                            | 50,985     |                                        | $          | 95,793 |   | $ | 69,905 |   | $ | 145,987 |   |

 

Ourlight oil marketing margins in points ($0.0001) per gallon for the three andnine months ended March 31, 2006 and 2005 are as follows:

| ** **                               | ** ** | **Three months  ended  March 31,** | ** ** | **Nine months  ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                     | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Light oils—marketing margins:**   |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TransMontaigne Partners’ facilities |       |                                         | 150        |                                        |       |   | 64 |   |   |   | 199 |   |   |   | 117 |   |   |
| Southeast facilities                     |       |                                         | 4          |                                        |       |   | 51 |   |   |   | (81 | ) |   |   | 71 |   |   |
| River facilities                         |       |                                         | 354        |                                        |       |   | 196 |   |   |   | 372 |   |   |   | 200 |   |   |
| Other                                    |       |                                         | 90         |                                        |       |   | 8 |   |   |   | 19 |   |   |   | 8 |   |   |
| All  facilities—weighted average    |       |                                         | 81         |                                        |       |   | 55 |   |   |   | 45 |   |   |   | 81 |   |   |

 

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Ourlight oil marketing volumes in average barrels per day for the three and ninemonths ended March 31, 2006 and 2005 are as follows: 

| ** **                               | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Light oils—marketing volumes:**   |       |                                             |       |                                            |       |   |   |   |   |
| TransMontaigne Partners’ facilities |       | 92,073                                           |       | 68,725                                          |       | 89,012 |   | 63,849 |   |
| Southeast facilities                     |       | 117,744                                          |       | 143,751                                         |       | 127,115 |   | 139,366 |   |
| River facilities                         |       | 8,748                                            |       | 7,091                                           |       | 9,012 |   | 8,987 |   |
| Other                                    |       | 23,502                                           |       | 19,901                                          |       | 19,218 |   | 26,627 |   |

 

Thedifferences between “margins and inventory management” used by our CEO inreviewing the financial performance of our business segments and the marginsreported in our accompanying historical financial statements for the three andnine months ended March 31, 2006 and 2005, are as follows (in thousands): 

| ** **                                                            | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Reconciliation to margins:**                                        |       |                                             |       |                                            |       |   |   |   |   |
| **Margins  and inventory management**                                 |       | $                                                | 50,985     |                                            | $          | 95,793 |   | $ | 69,905 |   | $ | 145,987 |   |
| Gains recognized on beginning  inventories—discretionary volumes |       | 13,567                                           |       | 10,210                                          |       | 2,369 |   | 3,712 |   |
| Gains deferred on ending inventories—discretionary  volumes      |       | (15,441                                          | )          | (21,530                                         | )          | (15,441 | ) | (21,530 | ) |
| **Margins—historical financial  statements**                     |       | $                                                | 49,111     |                                            | $          | 84,473 |   | $ | 56,833 |   | $ | 128,169 |   |

 

**RESULTS OFOPERATIONS—HISTORICAL FINANCIAL STATEMENTS**

Thefollowing selected historical financial statement measures are derived from ourunaudited interim financial statements for the three and nine months ended March 31,2006 and 2005 (in thousands): 

| ** **                                           | ** ** | **Three months ended  March 31,** | ** ** | **Nine months ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Margins(1):                                          |       |                                             |       |                                            |       |   |   |   |   |
| Supply, distribution, and marketing                  |       | $                                                | 49,111     |                                            | $          | 84,473 |   | $ | 56,833 |   | $ | 128,169 |   |
| Terminals, pipelines, tugs and barges                |       | 12,474                                           |       | 13,807                                          |       | 37,897 |   | 37,940 |   |
| Operating income                                     |       | 51,437                                           |       | 85,114                                          |       | 47,429 |   | 115,575 |   |
| Earnings before  income taxes                        |       | 44,024                                           |       | 78,442                                          |       | 27,157 |   | 91,904 |   |
| Net earnings                                         |       | 25,724                                           |       | 47,065                                          |       | 11,412 |   | 55,142 |   |
| Net cash provided  by (used in) operating activities |       | 12,442                                           |       | 255,101                                         |       | (3,239 | ) | 138,592 |   |
| Net cash provided  by (used in) investing activities |       | (2,682                                           | )          | 5,446                                           |       | (55,307 | ) | (7,112 | ) |
| Net cash provided by  (used in) financing activities |       | (13,365                                          | )          | (248,639                                        | )          | 38,319 |   | (118,346 | ) |
|                                                      |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

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(1)          Marginsrepresents revenues, less cost of product sold and other direct operating costsand expenses.

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**THREE MONTHS ENDED MARCH 31, 2006 AS COMPARED TOTHREE MONTHS ENDED MARCH 31,2005**

We reported net earningsof $25.7 million for the three months ended March 31, 2006, compared tonet earnings of $47.1 million for the three months ended March 31,2005. After earnings allocable to preferred stock, the net earningsattributable to common stockholders was $24.2 million for the three monthsended March 31, 2006, compared to net earnings of $36.7 million forthe three months ended March 31, 2005. Basic earnings per common share forthe three months ended March 31, 2006 and 2005, were $0.50 and $0.92,respectively, based on 48.4 million and 39.8 million weighted averagecommon shares outstanding, respectively. Diluted earnings per common share forthe three months ended March 31, 2006 and 2005, were $0.48 and $0.90,respectively, based upon 53.4 million and 52.6 million weightedaverage diluted shares outstanding, respectively.

**Terminals, pipelines, and tugs and barges**

In ourterminals, pipelines, and tugs and barges operations, we provide distributionrelated services to wholesalers, distributors, marketers, retail gasolinestation operators, cruise-ship operators and industrial and commercialend-users of refined petroleum products and other commercial liquids. Themargins from our terminals, pipelines, and tugs and barges operations for thethree months ended March 31, 2006 were $12.5 million, compared to$13.8 million for the three months ended March 31, 2005. On August 1,2005, we acquired Radcliff, which includes two petroleum products terminals,two tugboats, six barges, and twelve tractors and associated trailers. Theresults of operations of Radcliff are included from the closing date of thetransaction (August 1, 2005). For the three months ended March 31,2006, Radcliff generated approximately $2.2 million in revenues andapproximately $1.5 million in direct operating costs and expenses. The marginsfrom our terminals, pipelines, and tugs and barges operations are as follows(in thousands):

| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Throughput and  additive injection fees, net |       | $                                                | 14,539     |   | $ | 10,688 |   |
| Storage fees                                 |       | 6,613                                            |       | 9,296 |   |
| Pipeline transportation  fees                |       | 1,150                                            |       | 1,177 |   |
| Tugs and barges                              |       | 4,398                                            |       | 3,596 |   |
| Management fees  and cost reimbursements     |       | 946                                              |       | 1,112 |   |
| Other                                        |       | 4,723                                            |       | 3,385 |   |
| Revenues                                     |       | 32,369                                           |       | 29,254 |   |
| Less direct operating costs and expenses     |       | (19,895                                          | )          | (15,447 | ) |
| Margins                                      |       | $                                                | 12,474     |   | $ | 13,807 |   |

 

*Throughput and additiveinjection fees, net.*   Weown and operate a terminal infrastructure that handles products withtransportation connections via pipelines, barges, rail cars and trucks. We earnthroughput fees for each barrel of product that is distributed at our terminalsthrough our supply and marketing efforts, through exchange agreements, or forthird parties. Terminal throughput fees are based on the volume of productsdistributed at the facility’s truck loading racks, generally at a standard rateper barrel of product. We provide injection services in connection with thedelivery of product at our terminals. These fees generally are based on thevolume of product injected and delivered over the rack at our terminals.

Exchange agreementsprovide for the exchange of product at one delivery location for product at adifferent location. We generally receive a terminal throughput fee based on thevolume of the product exchanged, in addition to the cost of transportation fromthe receipt location to the exchange delivery 

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location.For the three months ended March 31, 2006 and 2005, we averagedapproximately 47,000 and 48,000 barrels per day, respectively, of deliveredvolumes under exchange agreements.

Terminal throughput andadditive injection fees, net were approximately $14.5 million and$10.7 million for the three months ended March 31, 2006 and 2005,respectively. The increase of approximately $3.8 million in terminal throughputand additive injection fees, net is due principally to approximately $1.4million of throughput fees charged on light oil volumes at the TransMontaignePartners’ facilities of which approximately $0.6 million results from theacquisition of the Mobile terminal, approximately $2.0 million of throughputfees charged on heavy oil volumes at the TransMontaigne Partners’ facilities,approximately $0.3 million of throughput fees resulting from the acquisition ofRadcliff’s Pensacola terminal, and an increase of approximately $0.7 million atour Brownsville facilities offset by a decrease of approximately $0.6 millionat our Southeast facilities. For the three months ended March 31, 2006 and2005, we averaged approximately 417,000 barrels and 326,000 barrels perday, respectively, of throughput volumes at our terminals, including volumesunder exchange agreements.

Included in the terminalthroughput and additive injection fees, net for the three months ended March 31,2006 and 2005, are fees charged to TransMontaigne’s supply, distribution andmarketing segment of approximately $10.8 million and $9.0 million,respectively.

*Storage fees.*   Welease storage capacity at our terminals to third parties and, prior to May 27,2005, our supply, distribution and marketing segment. Terminal storage feesgenerally are based on a per barrel of leased capacity per month and will varywith the duration of the storage agreement and the type of product stored.

Terminal storage fees wereapproximately $6.6 million and $9.3 million for the three monthsended March 31, 2006 and 2005, respectively. The decrease of$2.7 million in storage fees was due principally to a decrease in storagefees of approximately $2.3 million resulting from the conversion of the feescharged on heavy oil volumes from a storage agreement to a throughput agreementat the TransMontaigne Partners’ facilities and a decrease of approximately $0.3million in storage fees charged at our Southeast facilities resulting from thecommencement of terminaling services agreements with MSCG.

Included in the terminalstorage fees for the three months ended March 31, 2006 and 2005, are feescharged to TransMontaigne’s supply, distribution and marketing segment ofapproximately $nil and $3.3 million, respectively.

*Pipeline transportationfees.*   We own an interstateproducts pipeline operating from Mt. Vernon, Missouri to Rogers, Arkansas (the “RazorbackPipeline”), together with associated terminal facilities at Mt. Vernon andRogers. We earn pipeline transportation fees at our Razorback Pipeline based onthe volume of product transported and the distance from the origin point to thedelivery point. We also earn transportation fees at our Port Evergladespipeline hydrant system based on the volume of product delivered to cruiseships and freight vessels.

For the three months endedMarch 31, 2006 and 2005, we earned pipeline transportation fees ofapproximately $1.2 million and $1.2 million, respectively.

Included in the pipelinetransportation fees for the three months ended March 31, 2006 and 2005,are fees charged to TransMontaigne’s supply, distribution and marketing segmentof approximately $1.1 million and $1.2 million, respectively.

*Tugs and barges.*   Wecurrently own and operate 14 tugboats and 19 barges that deliver product tocruise ships and other marine vessels for refueling and to transport third-partyproduct from our storage tanks to our customers’ facilities. Our tugboats earnfees for providing docking and other ship-assist services to cruise and cargoships and other marine vessels. Bunkering fees are based on the volume and typeof product sold, transportation fees are based on the volume of product that isshipped and the distance to the delivery point, and docking and othership-assist services are based on a per docking per tugboat basis.

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For the three months ended March 31, 2006 and2005, we earned bunkering fees, transportation fees, and other ship-assistservices fees of approximately $4.4 million and $3.6 million,respectively. The increase of $0.8 million in tug and barge fees is due principallyto approximately $0.5 million of fees resulting from the acquisition ofRadcliff.

Included in the tugs and barges fees for the threemonths ended March 31, 2006 and 2005, are fees charged to TransMontaigne’ssupply, distribution and marketing segment of approximately $2.7 millionand $2.2 million, respectively.

*Managementfees and cost reimbursements.*   Wemanage and operate for a major oil company certain tank capacity atTransMontaigne Partners’ Port Everglades (South) terminal and receive a reimbursementof costs. Subsequent to May 27, 2005, we manage and operate on behalf ofour supply, distribution and marketing segment certain tank capacity owned by autility and receive a management fee. We also manage and operate for a foreignoil company a bi-directional products pipeline connected to our Brownsville,Texas terminal facility. Prior to February 1, 2006, we managed andoperated for BP 15 terminals that are adjacent to our Southeast facilitiesand received a reimbursement of costs. We continue to manage and operate for BPtwo terminals that are adjacent to our Southeast facilities and receive areimbursement of costs. For the three months ended March 31, 2006 and2005, we received from BP a reimbursement of costs of approximately $0.4million and $0.8 million, respectively.

For the three months ended March 31, 2006 and2005, we earned management fees and cost reimbursements from our terminal andpipeline operations of approximately $0.9 million and $1.1 million,respectively.

Included in the management fees and costreimbursements for the three months ended March 31, 2006 and 2005, arefees charged to TransMontaigne’s supply, distribution and marketing segment ofapproximately $0.3 million and $nil, respectively.

*Otherrevenues.*   In addition to providingstorage and distribution services at our terminal facilities, we also provideancillary services including heating and mixing of stored products and producttransfer services. We also recognize gains from the sale of product to oursupply, distribution and marketing operation resulting from the excess ofproduct deposited by third parties into our terminals over the amount ofproduct that the customer is contractually permitted to withdraw from thoseterminals.

For the three months ended March 31, 2006 and2005, other revenues from our terminals, pipelines, and tugs and bargesoperations were approximately $4.7 million and $3.4 million,respectively. The increase of $1.3 million in other revenues is due principallyto approximately $1.3 million in product gains and approximately $0.5 millionfrom the acquisition of Radcliff offset by a decrease in ancillary services ofapproximately $0.5 million.

Included in other revenues for the three months ended March 31,2006 and 2005, are fees charged to TransMontaigne’s supply, distribution andmarketing segment of approximately $3.3 million and $2.3 million,respectively.

48

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*Direct operating costs andexpenses.*   The direct operatingcosts and expenses of the terminals, pipelines, and tugs and barges operationsinclude the directly-related wages and employee benefits, utilities,communications, maintenance and repairs, property taxes, rent, vehicleexpenses, environmental compliance costs, materials and supplies. For the threemonths ended March 31, 2006 and 2005, the direct operating costs andexpenses of the terminals, pipelines, and tugs and barges were approximately$19.9 million and $15.4 million, respectively. For the three monthsended March 31, 2006, Radcliff generated approximately $1.5 million indirect operating costs and expenses. The direct operating costs and expenses ofour terminals, pipelines, and tugs and barges operations are as follows (inthousands):

| ** **                                                 | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Wages and  employee benefits                               |       | $                                                | 6,465      |   | $ | 6,198 |   |
| Utilities and  communication charges                       |       | 1,351                                            |       | 1,150 |   |
| Repairs and  maintenance                                   |       | 6,644                                            |       | 3,409 |   |
| Property and  casualty insurance costs                     |       | 1,000                                            |       | 913 |   |
| Office, rentals  and property taxes                        |       | 1,637                                            |       | 1,516 |   |
| Vehicles and fuel  costs                                   |       | 1,167                                            |       | 696 |   |
| Environmental  compliance costs                            |       | 985                                              |       | 1,334 |   |
| Other                                                      |       | 761                                              |       | 375 |   |
| Less—property and  environmental insurance recoveries |       | (115                                             | )          | (144 | ) |
| Direct operating  costs and expenses                       |       | $                                                | 19,895     |   | $ | 15,447 |   |

 

During the three monthsended March 31, 2006, we incurred repairs and maintenance of approximately$1.8 million throughout our River terminal facilities in preparation for thecommencement of a seven-yearterminaling services agreement with a subsidiary of Valero Energy Corporationregarding approximately 1.0 million barrels of gasoline and distillate storagecapacity.

**Supply,distribution and marketing**

Themargins from our supply, distribution and marketing operations for the threemonths ended March 31, 2006, were $49.1 million, compared to$84.5 million for the three months ended March 31, 2005. For thethree months ended March 31, 2006, Radcliff generated approximately $54.6million in revenues and approximately $1.0 million in margins. The margins fromour supply, distribution and marketing operations are as follows (inthousands):

| ** **                                          | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Rack spot sales                                     |       | $                                                | 292,589    |   | $ | 245,402 |   |
| Contract sales                                      |       | 1,427,790                                        |       | 1,135,306 |   |
| Bulk sales                                          |       | 506,351                                          |       | 606,257 |   |
| Supply chain  management services                   |       | 197,598                                          |       | 153,222 |   |
| Total revenues                                      |       | 2,424,328                                        |       | 2,140,187 |   |
| Cost of product  sold                               |       | (2,366,887                                       | )          | (2,042,299 | ) |
| Net margins before other direct costs and expenses  |       | 57,441                                           |       | 97,888 |   |
| Other direct costs and  expenses:                   |       |                                             |       |   |   |
| Net gains on risk management activities             |       | 5,848                                            |       | 13,042 |   |
| Change in unrealized losses on derivative contracts |       | (14,178                                          | )          | (26,457 | ) |
| Margins                                             |       | $                                                | 49,111     |   | $ | 84,473 |   |

 

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We sell our products to customers primarily throughthree types of arrangements: rack spot sales, contract sales and bulk sales.

*Rackspot sales.**  *Rackspot sales are sales to commercial and industrial end-users, independentretailers, cruise-ship operators and jobbers that do not involve continuingcontractual obligations to purchase or deliver product. Rack spot sales arepriced and delivered on a daily basis through truck loading racks or marinefueling equipment. Our selling price of a particular product on a particularday at a particular terminal is a function of our supply at that terminal, ourestimate of the costs to replenish the product at that terminal, our desire toreduce inventory levels at that terminal that day, and other factors. Rack spotsales are recognized as revenues when the product is delivered to the customerthrough the truck loading rack or marine fueling equipment.

Rack spot sales were approximately $292.6 millionand $245.4 million for the three months ended March 31, 2006 and2005, respectively. The increase of approximately $47.2 million is dueprincipally to higher commodity prices offset by a slight decline in deliveredvolumes under rack spot sales. For the three months ended March 31, 2006and 2005, we averaged approximately 43,000 and 45,000 barrels per day,respectively, of delivered volumes under rack spot sales.

*Contractsales.**  *Contractsales are sales to commercial and industrial end users, independent retailers,cruise-ship operators, and jobbers that are made pursuant to negotiatedcontracts, generally ranging from one to six months in duration. Contract salesprovide these customers with a specified volume of product during the agreementterm. At the customer’s option, the pricing of the product delivered under acontract sale may be fixed at a stipulated price per gallon, or it may varybased on changes in published indices. Contract sales are recognized asrevenues when the product is delivered to the customer through the truckloading rack or marine fueling equipment.

Contract sales were approximately $1,427.8 million and$1,135.3 million for the three months ended March 31, 2006 and 2005,respectively. The increase of approximately $292.5 million is due principallyto higher commodity prices offset by a slight decline in delivered volumesunder contract sales. For the three months ended March 31, 2006 and 2005,we averaged approximately 222,000 and 233,000 barrels per day,respectively, of delivered volumes under contract sales.

*Bulksales.**  *Bulksales are sales of large quantities of product to wholesalers, distributors,and marketers in major cash markets typically prior to the product beinginjected into the common carrier pipeline. We also make bulk sales of productsprior to their scheduled delivery to us while the product is being transportedin the common carrier pipelines or by barge or vessel.

Bulk sales were approximately $506.4 million and$606.3 million for the three months ended March 31, 2006 and 2005,respectively. The decrease of approximately $99.9 million is dueprincipally to a decrease in volumes transferred to our bulk customers offsetby higher commodity prices. We have decreased the volumes transferred to ourbulk customers due principally to a reduction in the number of barrels wemaintain in the bulk markets as a result of a change in business strategycaused in part by higher commodity prices and the cost of executing our riskmanagement strategies. For the three months ended March 31, 2006 and 2005,we averaged approximately 80,000 and 106,000 barrels per day,respectively, of delivered volumes under bulk sales.

*Supplychain management services contracts.**  *We provide supply chain managementservices to companies and governmental entities that desire to outsource theirfuel supply function and to reduce the price volatility associated with theirfuel supplies. We offer three types of supply chain management services:delivered fuel price management, retail price management and logistical supplychain management services.

Sales pursuant to supply chain management servicescontracts were approximately $197.6 million and $153.2 million forthe three months ended March 31, 2006 and 2005, respectively. The increaseof 

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approximately$44.4 million is due principally to higher commodity prices offset by adecline in delivered volumes under supply chain management services contracts.For the three months ended March 31, 2006 and 2005, we averagedapproximately 28,000 barrels and 31,000 barrels per day, respectively, ofdelivered volumes under supply chain management services contracts.

*Cost of product sold.**  *The cost of product sold includes the costof the product inventory sold on a first-in, first-out basis, pipelinetransportation and other freight costs, terminal throughput, additive andstorage costs, and commissions. Cost of product sold is approximately$2,366.9 million and $2,042.3 million for the three months ended March 31,2006 and 2005, respectively. Cost of product sold is as follows (in thousands):

| ** **                               | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Inventory product  costs                 |       | $                                                | 2,331,732  |   | $ | 2,005,166 |   |
| Transportation  and related charges      |       | 22,018                                           |       | 22,315 |   |
| Throughput,  storage and related charges |       | 12,410                                           |       | 13,958 |   |
| Other                                    |       | 727                                              |       | 860 |   |
| Cost of product  sold                    |       | $                                                | 2,366,887  |   | $ | 2,042,299 |   |

 

*Netgains (losses) on risk management activities.**  *Our risk management strategy generally isintended to maintain a balanced position of forward sale commitments againstour discretionary inventories held for immediate sale or exchange, inventoryvolumes due to others under exchange agreements, open positions in derivativecontracts, and open positions in risk management contracts, thereby reducingexposure to commodity price fluctuations. We evaluate our exposure to commodityprice risk from an overall portfolio basis and offset that position with riskmanagement contracts, principally NYMEX futures contracts.

When we nominate refined petroleum products to besupplied by third parties at our terminals, we enter into futures contracts(i.e., short futures contracts) to sell a corresponding amount of product toprotect against price fluctuations for the underlying commodity. When we ultimatelysell the underlying inventory to a customer, we unwind the related riskmanagement contract. In order to effectively manage commodity price risk, wemust predict when we will sell the underlying product.

When we enter into a forward sale commitment to deliverproduct to a customer in the future at a fixed price, we enter into a futurescontract (i.e., a long futures contract) to purchase a corresponding amount ofproduct to protect against price fluctuations for the underlying commodity.When we ultimately deliver the underlying product to a customer, we unwind therelated risk management contract.

During a period of rising prices, long (short) futurescontracts will increase (decrease) in value resulting in a gain (loss). Duringa period of declining prices, our long (short) futures contracts will decrease(increase) in value resulting in a loss (gain).

Net gains on riskmanagement activities were approximately $5.8 million and$13.0 million for the three months ended March 31, 2006 and 2005,respectively.

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**Costs and expenses**

Selling,general and administrative expenses for the three months ended March 31,2006, were $12.1 million, compared to $9.9 million for the threemonths ended March 31, 2005. For the three months ended March 31,2006, Radcliff incurred approximately $0.3 million in selling, general andadministrative expenses. Selling, general and administrative expenses are asfollows (in thousands):

| ** **                                         | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Wages and  employee benefits                       |       | $                                                | 8,810      |   | $ | 7,768 |   |
| Office costs,  utilities and communication charges |       | 1,125                                            |       | 1,076 |   |
| Accounting  expenses                               |       | 850                                              |       | 128 |   |
| Legal expenses                                     |       | 641                                              |       | 171 |   |
| Property and  casualty insurance                   |       | 201                                              |       | 200 |   |
| Other                                              |       | 515                                              |       | 542 |   |
| Selling, general  and administrative expenses      |       | $                                                | 12,142     |   | $ | 9,885 |   |

 

For the three months ended March 31, 2006, weincurred merger related expenses of approximately $1.4 million associated withour pending merger transaction with SemGroup. The merger related expenses arecomposed of $1.0 million for a fairness opinion and approximately $0.4 millionin fees paid to legal advisors. 

Depreciation and amortization for the three monthsended March 31, 2006 and 2005, was $7.3 million and$6.3 million, respectively. The increase of $1.0 million indepreciation and amortization is due principally to the depreciation on currentyear additions. 

Gain (loss) on dispositionof assets, net for the three months ended March 31, 2006, reflectsapproximately $(1.7) million loss on the exchange of terminals with BP,approximately $5.5 million gain on the sale of our NYMEX seats, andapproximately $6.8 million gain on the sale of product linefill and tank bottomvolumes. Gain (loss) on disposition of assets, net for the three months ended March 31,2005, consists principally of an approximately $2.7 million gain on the sale ofland held for investment purposes in Miami, Florida.

**Other income andexpenses**

Dividend income for the three months ended March 31,2006, was $0.1 million, as compared to $9,000 for the three months ended March 31,2005. During the three months ended March 31, 2006, we receivedapproximately $82,000 in dividends from our commodity trading membership.

Interest income for the three months ended March 31,2006, was $169,000, as compared to $149,000 for the three months ended March 31,2005. Pursuant to our cash management practices, excess cash balances are usedto pay down our outstanding borrowings, if any, under our senior securedworking capital credit facility and commodity margin loan and, then invested inshort-term investments.

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Interestexpense for the three months ended March 31, 2006, was $7.2 million,compared to $6.4 million during the three months ended March 31,2005. Interest expense is as follows (in thousands):

| ** **                                      | ** ** | **Three months  ended  March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| TransMontaigne  Partners’ credit facility  |       | $                                            | 697        |   | $ | — |   |
| Senior secured  working capital credit facility |       | 1,230                                        |       | 1,446 |   |
| Senior  subordinated notes                      |       | 4,563                                        |       | 4,563 |   |
| Letters of credit                               |       | 608                                          |       | 320 |   |
| Commodity margin  loan                          |       | 66                                           |       | 46 |   |
| Interest expense                                |       | $                                            | 7,164      |   | $ | 6,375 |   |

 

**Income taxes**

Income tax expense was$16.7 million and $31.4 million for the three months ended March 31,2006 and 2005, respectively, which represents an effective combined federal andstate income tax rate of 38% and 40%, respectively.

**Preferred stockdividends**

Preferred stock dividends on our Series Bredeemable convertible preferred stock were $0.2 million and$0.7 million for the three months ended March 31, 2006 and 2005,respectively. At its issuance (June 28, 2002), the fair value of the Series Bredeemable convertible preferred stock exceeded its liquidation value. Theinitial carrying amount of the Series B redeemable convertible preferredstock will be decreased ratably over its 5-year term until it equals itsliquidation value with an equal reduction in the amount of preferred stockdividends recorded for financial reporting purposes. For the three months endedMarch 31, 2006 and 2005, the amount of the dividend recognized forfinancial reporting purposes is composed of the amount of the dividend payableto the holders of the Series B redeemable convertible preferred stock of$0.3 million and $1.1 million, respectively, offset by theamortization of the premium on the carrying amount of the Series Bredeemable convertible preferred stock of $0.1 million and$0.4 million, respectively.

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**NINE MONTHS ENDED MARCH 31,2006 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2005**

We reported net earningsof $11.4 million for the nine months ended March 31, 2006, comparedto net earnings of $55.1 million for the nine months ended March 31,2005. After earnings allocable to preferred stock, the net earningsattributable to common stockholders was $10.7 million and $43.0 million for thenine months ended March 31, 2006 and March 31, 2005, respectively.Basic earnings per common share for the nine months ended March 31, 2006and 2005, were $0.22 and $1.08, respectively, based on 47.9 million and39.7 million weighted average common shares outstanding, respectively.Diluted earnings per common share for the nine months ended March 31, 2006and 2005, were $0.21 and $1.07, respectively, based upon 53.7 million and51.7 million weighted average diluted shares outstanding, respectively.

**Terminals,pipelines, and tugs and barges**

Thenet operating margins from our terminals, pipelines, and tugs and bargesoperations for the nine months ended March 31, 2006 were$37.9 million, compared to $37.9 million for the nine months ended March 31,2005. On August 1, 2005, we acquired Radcliff, which includes twopetroleum products terminals, two tugboats, six barges, and twelvetractors and associated trailers. The results of operations of Radcliff areincluded from the closing date of the transaction (August 1, 2005). Forthe nine months ended March 31, 2005, Radcliff generated approximately$6.2 million in revenues and approximately $4.3 million in direct operatingcosts and expenses. The net operating margins from our terminals, pipelines,and tugs and barges operations are as follows (in thousands):

| ** **                                   | ** ** | **Nine months ended  March 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Throughput and  additive injection fees, net |       | $                                               | 42,281     |   | $ | 30,924 |   |
| Storage fees                                 |       | 19,752                                          |       | 27,428 |   |
| Pipeline  transportation fees                |       | 3,032                                           |       | 2,982 |   |
| Tugs and barges                              |       | 12,993                                          |       | 10,395 |   |
| Management fees  and cost reimbursements     |       | 4,078                                           |       | 3,637 |   |
| Other                                        |       | 12,294                                          |       | 7,882 |   |
| Revenues                                     |       | 94,430                                          |       | 83,248 |   |
| Less direct operating costs and expenses     |       | (56,533                                         | )          | (45,308 | ) |
| Net operating  margins                       |       | $                                               | 37,897     |   | $ | 37,940 |   |

 

*Throughputand additive injection fees, net.**  *Weearn throughput fees for each barrel of product that is distributed at ourterminals through our supply and marketing efforts, through exchangeagreements, or for third parties. Terminal throughput fees are based on thevolume of products distributed at the facility’s truck loading racks, generallyat a standard rate per barrel of product. We provide injection services inconnection with the delivery of product at our terminals. These fees generallyare based on the volume of product injected and delivered over the rack at ourterminals.

Exchange agreements provide for the exchange ofproduct at one delivery location for product at a different location. Wegenerally receive a terminal throughput fee based on the volume of the productexchanged, in addition to the cost of transportation from the receipt locationto the exchange delivery location. For the nine months ended March 31,2006 and 2005, we averaged approximately 49,000 and 48,000 barrels per day,respectively, of delivered volumes under exchange agreements.

Terminal throughput and additive injection fees, netwere approximately $42.3 million and $30.9 million for the ninemonths ended March 31, 2006 and 2005, respectively. The increase ofapproximately $11.4 million in terminal throughput and additive injection fees,net is due principally to 

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approximately $4.2 millionof throughput fees charged on light oil volumes at the TransMontaigne Partners’facilities of which approximately $2.0 million results from the acquisition ofthe Mobile terminal, approximately $5.9 million of throughput fees charged onheavy oil volumes at the TransMontaigne Partners’ facilities, approximately$0.8 million of throughput fees resulting from the acquisition of Radcliff’sPensacola terminal and an increase of approximately $1.7 million at ourBrownsville facilities offset by a decrease of approximately $1.0 million atour Southeast facilities. For the nine months ended March 31, 2006 and2005, we averaged approximately 386,000 barrels and 323,000 barrels perday, respectively, of throughput volumes at our terminals, including volumesunder exchange agreements.

Included in the terminal throughput and additiveinjection fees, net for the nine months ended March 31, 2006 and 2005, arefees charged to TransMontaigne’s supply, distribution and marketing segment ofapproximately $33.3 million and $26.2 million, respectively.

*Storagefees.*   We lease storagecapacity at our terminals to third parties and, prior to May 27, 2005, oursupply, distribution and marketing segment. Terminal storage fees generally arebased on a per barrel of leased capacity per month and will vary with theduration of the storage agreement and the type of product stored.

Terminal storage fees were approximately$19.8 million and $27.4 million for the nine months ended March 31,2006 and 2005, respectively. The decrease of $7.6 million in storage feeswas due principally to a decrease in storage fees of approximately $5.5 millionresulting from the conversion of the fees charged on heavy oil volumes from astorage agreement to a throughput agreement and a decrease of approximately$1.7 million in storage fees charged at our Southeast facilities resulting fromthe commencement of terminaling services agreements with MSCG.

Included in the terminal storage fees for the ninemonths ended March 31, 2006 and 2005, are fees charged to TransMontaigne’ssupply, distribution and marketing segment of approximately $nil and$10.3 million, respectively.

*Pipelinetransportation fees.*   Weown an interstate products pipeline operating from Mt. Vernon, Missouri toRogers, Arkansas (the “Razorback Pipeline”), together with associated terminalfacilities at Mt. Vernon and Rogers. We earn pipeline transportation fees atour Razorback Pipeline based on the volume of product transported and thedistance from the origin point to the delivery point. We also earntransportation fees at our Port Everglades pipeline hydrant system based on thevolume of product delivered to cruise ships and freight vessels.

For the nine months ended March 31, 2006 and2005, we earned pipeline transportation fees of approximately $3.0 millionand $3.0 million, respectively.

Included in the pipeline transportation fees for thenine months ended March 31, 2006 and 2005, are fees charged toTransMontaigne’s supply, distribution and marketing segment of approximately$3.0 million and $3.0 million, respectively.

*Tugsand barges.*   We currently own andoperate 14 tugboats and 19 barges that deliver product to cruise ships and othermarine vessels for refueling and to transport third-party product fromour storage tanks to our customers’ facilities. Our tugboats earn fees forproviding docking and other ship-assist services to cruise and cargo ships andother marine vessels. Bunkering fees are based on the volume and type ofproduct sold, transportation fees are based on the volume of product that isshipped and the distance to the delivery point, and docking and othership-assist services are based on a per docking per tugboat basis.

For the nine months ended March 31, 2006 and2005, we earned bunkering fees, transportation fees, and other ship-assistservices fees of approximately $13.0 million and $10.4 million,respectively. The 

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increase of $2.6 millionin tug and barge fees is due principally to approximately $1.8 million of feesresulting from the acquisition of Radcliff.

Included in the tugs and barges fees for the ninemonths ended March 31, 2006 and 2005, are fees charged to TransMontaigne’ssupply, distribution and marketing segment of approximately $7.9 millionand $5.4 million, respectively.

*Managementfees and cost reimbursements.*   Wemanage and operate for a major oil company certain tank capacity atTransMontaigne Partners’ Port Everglades (South) terminal and receive areimbursement of costs. Subsequent to May 27, 2005, we manage and operateon behalf of our supply, distribution and marketing segment certain tankcapacity owned by a utility and receive a management fee. We also manage andoperate for a foreign oil company a bi-directional products pipeline connectedto our Brownsville, Texas terminal facility. Prior to February 1, 2006, wemanaged and operated for BP 15 terminals that are adjacent to ourSoutheast facilities and received a reimbursement of costs. We continue tomanage and operate for BP two terminals that are adjacent to our Southeastfacilities and receive a reimbursement of costs. For the nine months ended March 31,2006 and 2005, we received from BP a reimbursement of costs of approximately$2.4 million and $2.7 million, respectively.

For the nine months ended March 31, 2006 and2005, we earned management fees and cost reimbursements from our terminal andpipeline operations of approximately $4.1 million and $3.6 million,respectively.

Included in the management fees and costreimbursements for the nine months ended March 31, 2006 and 2005, are feescharged to TransMontaigne’s supply, distribution and marketing segment ofapproximately $0.8 million and $nil, respectively.

*Otherrevenues.*   In addition to providingstorage and distribution services at our terminal facilities, we also provideancillary services including heating and mixing of stored products and producttransfer services. We also recognize gains from the sale of product to oursupply, distribution and marketing operation resulting from the excess ofproduct deposited by third parties into our terminals over the amount ofproduct that the customer is contractually permitted to withdraw from thoseterminals.

For the nine months ended March 31, 2006 and2005, other revenues from our terminals, pipelines, and tugs and bargesoperations were approximately $12.3 million and $7.9 million,respectively. The increase of $4.4 million in other revenues is due principallyto approximately $3.9 million in product gains and approximately $1.4 millionfrom the acquisition of Radcliff offset by a decrease in ancillary services ofapproximately $1.0 million.

Included in other revenues for the nine months ended March 31,2006 and 2005, are fees charged to TransMontaigne’s supply, distribution andmarketing segment of approximately $8.3 million and $4.8 million,respectively.

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*Direct operating costs andexpenses.*   The direct operatingcosts and expenses of the terminals, pipelines, and tugs and barges operationsinclude the directly related wages and employee benefits, utilities,communications, maintenance and repairs, property taxes, rent, vehicleexpenses, environmental compliance costs, materials and supplies. For the ninemonths ended March 31, 2006 and 2005, the direct operating costs andexpenses of the terminals, pipelines, and tugs and barges were approximately$56.5 million and $45.3 million, respectively. For the nine months ended March 31,2006, Radcliff generated approximately $4.3 million in direct operating costsand expenses. The direct operating costs and expenses of our terminals,pipelines, and tugs and barges operations are as follows (in thousands):

| ** **                                                 | ** ** | **Nine months ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Wages and  employee benefits                               |       | $                                               | 20,681     |   | $ | 19,082 |   |
| Utilities and  communication charges                       |       | 3,814                                           |       | 3,118 |   |
| Repairs and  maintenance                                   |       | 16,318                                          |       | 11,668 |   |
| Property and  casualty insurance costs                     |       | 2,933                                           |       | 2,542 |   |
| Office, rentals  and property taxes                        |       | 4,833                                           |       | 4,379 |   |
| Vehicles and fuel  costs                                   |       | 3,594                                           |       | 2,018 |   |
| Environmental compliance  costs                            |       | 3,251                                           |       | 3,166 |   |
| Other                                                      |       | 1,374                                           |       | 923 |   |
| Less—property and  environmental insurance recoveries |       | (265                                            | )          | (1,588 | ) |
| Direct operating  costs and expenses                       |       | $                                               | 56,533     |   | $ | 45,308 |   |

 

**Supply,distribution and marketing**

Themargins from our supply, distribution and marketing operations for the ninemonths ended March 31, 2006, were $56.8 million, compared to$128.2 million for the nine months ended March 31, 2005. For the ninemonths ended March 31, 2006, Radcliff generated approximately $163.7million in revenues and approximately $5.3 million in margins. The margins fromour supply, distribution and marketing operations are as follows (inthousands):

| ** **                                          | ** ** | **Nine months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Rack spot sales                                     |       | $                                               | 883,376    |   | $ | 643,606 |   |
| Contract sales                                      |       | 4,298,524                                       |       | 3,156,725 |   |
| Bulk sales                                          |       | 1,453,629                                       |       | 1,744,793 |   |
| Supply chain  management services                   |       | 630,290                                         |       | 435,848 |   |
| Total revenues                                      |       | 7,265,819                                       |       | 5,980,972 |   |
| Cost of product  sold                               |       | (7,241,388                                      | )          | (5,874,723 | ) |
| Margins before other direct costs and expenses      |       | 24,431                                          |       | 106,249 |   |
| Other direct costs and  expenses:                   |       |                                            |       |   |   |
| Net gains (losses) on risk management activities    |       | (4,047                                          | )          | 30,305 |   |
| Change in unrealized losses on derivative contracts |       | 36,449                                          |       | (8,385 | ) |
| Margins                                             |       | $                                               | 56,833     |   | $ | 128,169 |   |

 

We sell our products to customers primarily throughthree types of arrangements: rack spot sales, contract sales and bulk sales.

*Rackspot sales.**  *Rackspot sales are sales to commercial and industrial end-users, independentretailers, cruise-ship operators and jobbers that do not involve continuingcontractual obligations to purchase or deliver product. Rack spot sales arepriced and delivered on a daily basis through truck 

57

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loading racks or marinefueling equipment. Our selling price of a particular product on a particularday at a particular terminal is a function of our supply at that terminal, ourestimate of the costs to replenish the product at that terminal, our desire toreduce inventory levels at that terminal that day, and other factors. Rack spotsales are recognized as revenues when the product is delivered to the customerthrough the truck loading rack or marine fueling equipment.

Rack spot sales were approximately $883.4 millionand $643.6 million for the nine months ended March 31, 2006 and 2005,respectively. The increase of approximately $239.8 million is dueprincipally to higher commodity prices. For the nine months ended March 31,2006 and 2005, we averaged approximately 42,000 and 42,000 barrels per day,respectively, of delivered volumes under rack spot sales.

*Contractsales.**  *Contractsales are sales to commercial and industrial end users, independent retailers,cruise-ship operators, and jobbers that are made pursuant to negotiatedcontracts, generally ranging from one to six months in duration. Contract salesprovide these customers with a specified volume of product during the agreementterm. At the customer’s option, the pricing of the product delivered under acontract sale may be fixed at a stipulated price per gallon, or it may varybased on changes in published indices. Contract sales are recognized asrevenues when the product is delivered to the customer through the truckloading rack or marine fueling equipment.

Contract sales were approximately$4,298.5 million and $3,156.7 million for the nine months ended March 31,2006 and 2005, respectively. The increase of approximately$1,141.8 million is due principally to higher commodity prices offset by aslight decline in delivered volumes under contract sales. For the nine monthsended March 31, 2006 and 2005, we averaged approximately 219,000 and221,000 barrels per day, respectively, of delivered volumes under contractsales.

*Bulksales.**  *Bulksales are sales of large quantities of product to wholesalers, distributors,and marketers in major cash markets typically prior to the product beinginjected into the common carrier pipeline. We also make bulk sales of productsprior to their scheduled delivery to us while the product is being transportedin the common carrier pipelines or by barge or vessel.

Bulk sales were approximately $1,453.6 millionand $1,744.8 million for the nine months ended March 31, 2006 and2005, respectively. The decrease of approximately $291.2 million is dueprincipally to a decrease in volumes transferred to our bulk customers offsetby higher commodity prices. We have decreased the volumes transferred to ourbulk customers due principally to a reduction in the number of barrels wemaintain in the bulk markets as a result of a change in business strategycaused in part by higher commodity prices and the cost of executing our riskmanagement strategies. For the nine months ended March 31, 2006 and 2005,we averaged approximately 70,000 and 185,000 barrels per day,respectively, of delivered volumes under bulk sales.

*Supplychain management services contracts.**  *We provide supply chain managementservices to companies and governmental entities that desire to outsource theirfuel supply function and to reduce the price volatility associated with theirfuel supplies. We offer three types of supply chain management services:delivered fuel price management, retail price management and logistical supplychain management services.

Sales pursuant to supply chain management servicescontracts were approximately $630.3 million and $435.8 million forthe nine months ended March 31, 2006 and 2005, respectively. The increaseof approximately $194.5 million is due principally to higher commodityprices offset by a slight decline in delivered volumes under supply chainmanagement services contracts. For the nine months ended March 31, 2006and 2005, we averaged approximately 30,000 barrels and 31,000 barrels per day,respectively, of delivered volumes under supply chain management servicescontracts.

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*Cost of product sold.**  *The cost of product sold includes the costof the product inventory sold on a first-in, first-out basis, pipelinetransportation and other freight costs, terminal throughput, additive andstorage costs, and commissions. Cost of product sold is approximately$7,241.4 million and $5,874.7 million for the nine months endedMarch 31, 2006 and 2005, respectively. Cost of product sold is as follows(in thousands):

| ** **                               | ** ** | **Nine months ended  March 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Inventory product  costs                 |       | $                                               | 7,130,444  |   | $ | 5,753,609 |   |
| Transportation  and related charges      |       | 71,387                                          |       | 75,614 |   |
| Throughput,  storage and related charges |       | 36,854                                          |       | 43,750 |   |
| Other                                    |       | 2,703                                           |       | 1,750 |   |
| Cost of product sold                     |       | $                                               | 7,241,388  |   | $ | 5,874,723 |   |

 

*Netgains (losses) on risk management activities.**  *Our risk management strategy generally isintended to maintain a balanced position of forward sale commitments againstour discretionary inventories held for immediate sale or exchange, inventoryvolumes due to others under exchange agreements, open positions in derivativecontracts, and open positions in risk management contracts, thereby reducingexposure to commodity price fluctuations. We evaluate our exposure to commodityprice risk from an overall portfolio basis and offset that position with risk managementcontracts, principally futures contracts on the NYMEX.

When we nominate refined petroleum products to besupplied by third parties at our terminals, we enter into futures contracts(i.e., short futures contracts) to sell a corresponding amount of product toprotect against price fluctuations for the underlying commodity. When weultimately sell the underlying inventory to a customer, we unwind the relatedrisk management contract. In order to effectively manage commodity price risk,we must predict when we will sell the underlying product.

When we enter into a forward sale commitment todeliver product to a customer in the future at a fixed price, we enter into afutures contract (i.e., a long futures contract) to purchase a correspondingamount of product to protect against price fluctuations for the underlyingcommodity. When we ultimately deliver the underlying product to a customer, weunwind the related risk management contract.

During a period of rising prices, long (short) futurescontracts will increase (decrease) in value resulting in a gain (loss). Duringa period of declining prices, our long (short) futures contracts will decrease(increase) in value resulting in a loss (gain).

Net gains (losses) on riskmanagement activities were approximately $(4.0) million and$30.3 million for the nine months ended March 31, 2006 and 2005,respectively.

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**Costs and expenses**

Selling,general and administrative expenses for the nine months ended March 31,2006, were $37.1 million, compared to $32.1 million for the ninemonths ended March 31, 2005. For the nine months ended March 31,2006, Radcliff incurred approximately $1.4 million in selling, general andadministrative expenses. Selling, general and administrative expenses are asfollows (in thousands):

| ** **                                         | ** ** | **Nine months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Wages and  employee benefits                       |       | $                                               | 26,268     |   | $ | 25,640 |   |
| Office costs,  utilities and communication charges |       | 3,555                                           |       | 3,159 |   |
| Accounting  expenses                               |       | 2,648                                           |       | 402 |   |
| Legal expenses                                     |       | 1,910                                           |       | 884 |   |
| Property and  casualty insurance                   |       | 625                                             |       | 640 |   |
| Other                                              |       | 2,044                                           |       | 1,395 |   |
| Selling, general  and administrative expenses      |       | $                                               | 37,050     |   | $ | 32,120 |   |

 

For the three months ended March 31, 2006, weincurred merger related expenses of approximately $1.4 million associated withour pending merger transaction with SemGroup. The merger related expenses arecomposed of $1.0 million for a fairness opinion and approximately $0.4 millionin fees paid to legal advisors. 

Depreciation and amortization for the nine monthsended March 31, 2006 and 2005, was $20.7 million and$17.8 million, respectively. The increase of $2.9 million indepreciation and amortization for the nine months ended March 31, 2006 ascompared to 2005 is due principally to the depreciation on current yearadditions and the amortization of the product supply agreement.

Gain (loss) on dispositionof assets, net for the nine months ended March 31, 2006, reflectsapproximately $(1.7) million loss on the exchange of terminals with BP,approximately $5.5 million gain on the sale of our NYMEX seats, approximately$6.8 million gain on the sale of product linefill and tank bottom volumes,approximately $1.1 million gain from the final insurance recovery on theinvoluntary conversion of our historical Pensacola terminal facilities andapproximately $0.1 million gain on the sale of the Wisconsin terminal. Gain(loss) on disposition of assets, net for the nine months ended March 31,2005, consists principally of an approximately $(3.6) million loss on theinvoluntary conversion of our historical Pensacola terminal facilities due tothe damage caused by Hurricane Ivan offset by an approximately $2.7 milliongain on the sale of land held for investment purposes in Miami, Florida.

**Other income andexpenses**

Dividend income for the nine months ended March 31,2006, was $0.7 million, as compared to $0.4 million for the nine months ended March 31,2005. During the nine months ended March 31, 2006, we receivedapproximately $0.3 million in dividends from our commodity trading membership.During the nine months ended March 31, 2006 and 2005, we receivedapproximately $0.4 million and $0.4 million, respectively, in dividends fromLion Oil Company.

Interest income for the nine months ended March 31,2006, was $0.6 million, as compared to $0.3 million for the nine months ended March 31,2005. Pursuant to our cash management practices, excess cash balances are usedto pay down our outstanding borrowings, if any, under our senior securedworking capital credit facility and commodity margin loan and, then invested inshort-term investments.

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Interestexpense for the nine months ended March 31, 2006, was $20.0 million,compared to $19.3 million during the nine months ended March 31,2005. Interest expense is as follows (in thousands):

| ** **                                      | ** ** | **Nine months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| TransMontaigne  Partners’ credit facility  |       | $                                               | 1,665      |   | $ | — |   |
| Senior secured  working capital credit facility |       | 3,095                                           |       | 3,245 |   |
| Senior  subordinated notes                      |       | 13,687                                          |       | 13,687 |   |
| Former credit  facility                         |       | —                                          |       | 1,331 |   |
| Letters of credit                               |       | 1,411                                           |       | 947 |   |
| Commodity margin  loan                          |       | 155                                             |       | 106 |   |
| Interest expense                                |       | $                                               | 20,013     |   | $ | 19,316 |   |

 

Other financing costs, netfor the nine months ended March 31, 2006, were $1.6 million, comparedto $5.0 million for the nine months ended March 31, 2005. During thenine months ended March 31, 2005, we wrote off the debt issuance costs ofapproximately $3.4 million associated with our former credit facility. On September 13,2004, we repaid our former credit facility with proceeds from our seniorsecured working capital credit facility.

**Income taxes**

Income tax expense was$10.3 million and $36.8 million for the nine months ended March 31,2006 and 2005, respectively, which represents an effective combined federal andstate income tax rate of 38% and 40%, respectively.

**Preferred stockdividends**

Preferred stock dividendson our Series B redeemable convertible preferred stock were$0.7 million and $2.1 million for the nine months ended March 31,2006 and 2005, respectively. At its issuance (June 28, 2002), the fairvalue of the Series B redeemable convertible preferred stock exceeded itsliquidation value. The initial carrying amount of the Series B redeemableconvertible preferred stock will be decreased ratably over its 5-yearterm until it equals its liquidation value with an equal reduction in theamount of preferred stock dividends recorded for financial reporting purposes.For the nine months ended March 31, 2006 and 2005, the amount of thedividend recognized for financial reporting purposes is composed of the amountof the dividend payable to the holders of the Series B redeemableconvertible preferred stock of $1.1 million and $3.3 million,respectively, offset by the amortization of the premium on the carrying amountof the Series B redeemable convertible preferred stock of$0.4 million and $1.2 million, respectively.

**LIQUIDITY, CAPITALRESOURCES, AND COMMODITY PRICE RISK**

At March 31, 2006, our current assets exceededour current liabilities by $321.1 million, as compared to$319.6 million at June 30, 2005.

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Ourinventories—discretionary volumes are presented in the accompanyingconsolidated balance sheet as current assets and are carried at the lower ofcost or market. Inventories—discretionary volumes are as follows (inthousands):

| ** **                                   | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Amount**                   | ** ** | **Bbls**                    | ** ** | **Amount** | ** ** | **Bbls** | ** ** |
| Volumes held for  immediate sale or exchange |       | $                            | 128,529    |                        | 1,955      |   | $ | 153,123 |   | 2,415 |   |
| Volumes held for  base operations            |       | 103,880                      |       | 1,487                       |       | 121,651 |   | 2,011 |   |
| Inventories—discretionary  volumes      |       | $                            | 232,409    |                        | 3,442      |   | $ | 274,774 |   | 4,426 |   |

 

Ourvolumes held for immediate sale or exchange generally are subject to price riskmanagement. Our base operating inventory volumes generally are not subject toprice risk management. Based on the current level of our operations, we haveestablished our base operating inventory volumes, exclusive of product linefilland tank bottom volumes, at approximately 1.5 million barrels. Changes inour operation, such as the acquisition of additional terminals, increases inour contract sales volumes, entering into product supply agreements or leasingtank capacity to third parties, may result in changes in the volume of our baseoperating inventory volumes. Inventories—discretionary volumes are composed ofthe following (in thousands):

| ** **                              | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Amount**                   | ** ** | **Bbls**                    | ** ** | **Amount** | ** ** | **Bbls** | ** ** |
| Gasolines                               |       | $                            | 82,788     |                        | 1,071      |   | $ | 136,247 |   | 2,123 |   |
| Distillates                             |       | 88,521                       |       | 1,131                       |       | 113,670 |   | 1,657 |   |
| No. 6 oil  and other               |       | 61,100                       |       | 1,240                       |       | 24,857 |   | 646 |   |
| Inventories—discretionary  volumes |       | $                            | 232,409    |                        | 3,442      |   | $ | 274,774 |   | 4,426 |   |

 

Ourproduct linefill and tank bottom volumes consist of refined products held inour proprietary terminal pipeline connections and tank bottoms. Our productlinefill and tank bottom volumes are not held for sale or exchange in theordinary course of business. Our product linefill and tank bottom volumes arepresented in the accompanying consolidated balance sheet as non-current assetsand are carried at original cost adjusted for impairment write-downs tocurrent market values. Product linefill and tank bottom volumes consist of thefollowing (in thousands):

| ** **                                | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **Amount**                   | ** ** | **Bbls**                    | ** ** | **Amount** | ** ** | **Bbls** | ** ** |
| Gasoline                                  |       | $                            | 12,805     |                        |       | 465 |   |   | $ | 14,267 |   |   | 522 |   |   |
| Distillates                               |       | 7,403                        |       |                        | 288        |   |   | 8,774 |   |   | 351 |   |   |
| No. 6 oil  and other                 |       | 1,418                        |       |                        | 55         |   |   | 1,284 |   |   | 52 |   |   |
| Product linefill and  tank bottom volumes |       | $                            | 21,626     |                        |       | 808 |   |   | $ | 24,325 |   |   | 925 |   |   |

 

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Thefollowing table indicates the maturities of our derivative contracts, includingthe credit quality of our counterparties to those contracts with unrealizedgains at March 31, 2006.

| ** **                                               | ** ** | **Fair value of contracts**    | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **Maturity less  than 1 year** | ** ** | **Maturity   1-3 years** | ** ** | **Maturity in  excess of  3 years** | ** ** | **Total** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                       | ** ** |
| Unrealized gain—asset      |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                         |       |                                          | $          | 6,220 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 6,220 |   |
| Non-investment grade                                     |       |                                          | 762        |   |   |   | — |   |   |   | — |   |   | 762 |   |
| No external rating                                       |       |                                          | 12,010     |   |   |   | — |   |   |   | — |   |   | 12,010 |   |
|                                                     |       |                                          | 18,992     |   |   |   | — |   |   |   | — |   |   | 18,992 |   |
| Unrealized  loss—liability                          |       |                                          | (13,725    | ) |   |   | — |   |   |   | — |   |   | (13,725 | ) |
| Net unrealized  gain—asset                          |       |                                          | $          | 5,267 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 5,267 |   |

 

At March 31, 2006, there were no unrealized gainsor losses on NYMEX futures contracts because NYMEX futures contracts requiredaily settlement for changes in commodity prices on open futures contracts. At March 31,2006, included in unrealized gain position—asset is an unrealized gain ofapproximately $1.1 million related to certain short positions taken in theNYMEX options market.

Thefollowing table includes information about the changes in the fair value of ourderivative contracts for the nine months ended March 31, 2006 (inthousands):

| Fair value at June 30,  2005                                                                   |   | $       | (39,829 | )      |
|-----------------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Amounts realized  or otherwise settled during the period                                            |   | 59,457  |    |
| Fair value of  contracts originated during the period, which are included in  deferred revenue |   | 4,239   |    |
| Change in fair  value attributable to change in commodity prices                                    |   | (18,600 | )       |
| Fair value at  March 31, 2006                                                                  |   | $       | 5,267   |   |

 

Excluding acquisitions, capital expenditures for thethree and nine months ended March 31, 2006, were $3.1 million and$8.6 million, respectively, for terminal and pipeline facilities and assets tosupport these facilities. Future capital expenditures will depend on numerousfactors, including the availability, economics and cost of appropriateacquisitions which we identify and evaluate; the economics, cost and requiredregulatory approvals with respect to the expansion and enhancement of existingsystems and facilities; customer demand for the services we provide; local,state and federal governmental regulations; environmental compliancerequirements; and the availability of debt financing and equity capital onacceptable terms.

Our senior secured working capital credit facility asin effect at March 31, 2006 provides for a maximum borrowing line ofcredit that was the lesser of (i) $400 million and (ii) theborrowing base (as defined; $460 million at March 31, 2006). Theborrowing base is a function of our cash, accounts receivable, inventory,exchanges, margin deposits, and certain reserve adjustments as defined in thefacility. The maximum borrowing amount is reduced by the amount of letters ofcredit that are outstanding. At March 31, 2006, we had borrowings of $17.5million outstanding and letters of credit of $115 million outstandingunder the senior secured working capital credit facility. We also had theability to borrow an additional $217.5 million under the facility based onthe borrowing base computation at March 31, 2006. All outstandingborrowings under the senior secured working capital credit facility are due andpayable on September 13, 2009.

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The senior secured working capital credit facility isour primary means of short-term liquidity to finance working capitalrequirements. The senior secured working capital credit facility containsaffirmative and negative covenants (including limitations on indebtedness,limitations on dividends and other distributions, limitations on certain inter-companytransactions, limitations on mergers, consolidation and the disposition ofassets, limitations on investments and acquisitions and limitations on liens)that are customary for a facility of this nature. The senior secured workingcapital credit facility also contains customary representations and warranties(including those relating to corporate organization and authorization,compliance with laws, absence of defaults, material agreements and litigation)and customary events of default (including those relating to monetary defaults,covenant defaults, cross defaults and bankruptcy events). The only financialcovenant contained in the senior secured working capital credit facility is aminimum fixed charge coverage ratio test that is tested on a quarterly basiswhenever the average availability falls below $50 million for the lastmonth of any quarter (average availability was approximately $189 millionfor the month ended March 31, 2006). In that event, we must satisfy aminimum fixed charge coverage ratio requirement of 110%. The fixed chargecoverage ratio is based on a defined financial performance measure within thesenior secured working capital credit facility known as “fixed charges EBITDA.”

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Thecomputation of the fixed charge coverage ratio for the twelve months ended March 31,2006, is as follows (in thousands):

| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Twelve  Months  Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|
| ** **                                                                                                    | ** ** | **June 30,**                | ** ** | **September 30,**    | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                    | ** ** | **2005**                         | ** ** | **2005**                  | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| **Financial performance debt  covenant test:**                                                                |       |                             |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated  adjusted EBITDA                                                                                 |       | $                                | (980       | )                         |       | $ | 13,087 |   |   |   | $ | (19,356 | ) |   |   | $ | 48,966 |   |   |   | $ | 41,717 |   |   |
| Capital  expenditures                                                                                         |       | (3,361                           | )          |                      | (2,193     | ) |   |   | (3,307 | ) |   |   | (3,117 | ) |   |   | (11,978 | ) |   |
| TransMontaigne Partners’  capital expenditures                                                           |       | 222                              |       |                      | 568        |   |   |   | 616 |   |   |   | 834 |   |   |   | 2,240 |   |   |
| Cash (paid for)  refund of income taxes                                                                       |       | (29,704                          | )          |                      | (13,907    | ) |   |   | 20,316 |   |   |   | (16,729 | ) |   |   | (40,024 | ) |   |
| Preferred stock  dividends paid in cash                                                                       |       | (1,281                           | )          |                      | (301       | ) |   |   | (301 | ) |   |   | (301 | ) |   |   | (2,184 | ) |   |
| Fixed charges  EBITDA                                                                                         |       | $                                | (35,104    | )                         |       | $ | (2,746 | ) |   |   | $ | (2,032 | ) |   |   | $ | 29,653 |   |   |   | $ | (10,229 | ) |   |
| Fixed charges for  the period                                                                                 |       | $                                | 5,009      |                      |       | $ | 5,126 |   |   |   | $ | 6,299 |   |   |   | $ | 6,301 |   |   |   | $ | 22,735 |   |   |
| Fixed charge  coverage ratio based on rolling four consecutive quarters                                       |       |                             |       |                      |       |   |   |   |   |   |   |   |   |   |   |   | (45 | )% |   |
| Deficiency in  fixed charges EBITDA to meet minimum fixed charge coverage ratio                               |       |                             |       |                      |       |   |   |   |   |   |   |   |   |   |   |   | $ | 35,238 |   |   |
| **Reconciliation of consolidated  adjusted EBITDA to cash flows provided by (used in) operating activities:** |       |                             |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated  adjusted EBITDA                                                                                 |       | $                                | (980       | )                         |       | $ | 13,087 |   |   |   | $ | (19,356 | ) |   |   | $ | 48,966 |   |   |   | $ | 41,717 |   |   |
| TransMontaigne  Partners’ operating income                                                               |       | 1,364                            |       |                      | 3,635      |   |   |   | 4,089 |   |   |   | 3,459 |   |   |   | 12,547 |   |   |
| TransMontaigne  Partners’ depreciation and amortization                                                  |       | 674                              |       |                      | 1,567      |   |   |   | 1,626 |   |   |   | 1,942 |   |   |   | 5,809 |   |   |
| Cash distributions  from TransMontaigne Partners                                                              |       | —                           |       |                      | (453       | ) |   |   | (1,208 | ) |   |   | (1,208 | ) |   |   | (2,869 | ) |   |
| Gain on  disposition of assets, net                                                                           |       | (735                             | )          |                      | —     |   |   |   | — |   |   |   | (10,617 | ) |   |   | (11,352 | ) |   |
| Gains recognized  on beginning inventories—discretionary volumes held for immediate sale or  exchange    |       | 10,311                           |       |                      | 2,125      |   |   |   | 10,576 |   |   |   | 4,311 |   |   |   | 10,311 |   |   |
| Gains deferred on  ending inventories—discretionary volumes held for immediate sale or exchange          |       | (2,125                           | )          |                      | (10,576    | ) |   |   | (4,311 | ) |   |   | (8,502 | ) |   |   | (8,502 | ) |   |
| Increase in FIFO cost  basis of base operating inventory volumes                                              |       | 8,339                            |       |                      | 39,601     |   |   |   | (30,773 | ) |   |   | 9,849 |   |   |   | 27,016 |   |   |
| Lower of cost or  market write-downs on base operating inventory volumes                                      |       | (1,772                           | )          |                      | (809       | ) |   |   | — |   |   |   | — |   |   |   | (2,581 | ) |   |
| Interest expense,  net                                                                                        |       | (5,011                           | )          |                      | (5,129     | ) |   |   | (6,299 | ) |   |   | (6,301 | ) |   |   | (22,740 | ) |   |
| TransMontaigne  Partners’ interest expense, net                                                          |       | (167                             | )          |                      | (463       | ) |   |   | (501 | ) |   |   | (694 | ) |   |   | (1,825 | ) |   |
| Cash (paid for)  refund of income taxes                                                                       |       | (29,704                          | )          |                      | (13,907    | ) |   |   | 20,316 |   |   |   | (16,729 | ) |   |   | (40,024 | ) |   |
| Amortization of  deferred revenue                                                                             |       | (1,841                           | )          |                      | (1,572     | ) |   |   | (1,731 | ) |   |   | (1,809 | ) |   |   | (6,953 | ) |   |
| Amortization of  deferred stock-based compensation                                                            |       | 652                              |       |                      | 894        |   |   |   | 623 |   |   |   | 641 |   |   |   | 2,810 |   |   |
| Net change in  unrealized (gains) losses on long-term derivative contracts                                    |       | 296                              |       |                      | (12        | ) |   |   | (223 | ) |   |   | — |   |   |   | 61 |   |   |
| Change in  operating assets and liabilities                                                                   |       | (67,173                          | )          |                      | (64,523    | ) |   |   | 48,026 |   |   |   | (10,866 | ) |   |   | (94,536 | ) |   |
| Cash flows provided by  (used in) operating activities                                                        |       | $                                | (87,872    | )                         |       | $ | (36,535 | ) |   |   | $ | 20,854 |   |   |   | $ | 12,442 |   |   |   | $ | (91,111 | ) |   |

 

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If we were to fail the fixed charge ratio covenant, orany other covenant contained in the senior secured working capital creditfacility, we would seek a waiver from our lenders under such facility. If wewere unable to obtain a waiver from our lenders, we would be in breach of the seniorsecured working capital credit facility and the lenders would be entitled todeclare all outstanding borrowings immediately due and payable. In addition, adefault under the senior secured working capital credit facility would triggera cross-default provision in the indenture covering our seniorsubordinated notes.

If we are acquired by SemGroup or any other thirdparty, the completion of such transaction would constitute a “change of control”under the senior secured working capital credit facility and, therefore, wouldrequire a waiver from the lenders. Alternatively, SemGroup or any other thirdparty acquirer may elect to provide us with an alternative credit facility. Thefinancing commitment letters provided to us by SemGroup provide for an alternativecredit facility.

On May 30, 2003, weconsummated the sale and issuance of $200 million aggregate principalamount of 91¤8%senior subordinated notes due 2010 (“Notes”) and received proceeds of$194.5 million (net of underwriters’ discounts of $5.5 million). Weused the net proceeds from the offering of the Notes to repay a$200 million term loan. The Notes mature on June 1, 2010 and interestis payable semi-annually in arrears on each June 1 and December 1commencing on December 1, 2003. The Notes are unsecured and subordinatedto all of our existing and future senior debt. Upon certain events, each holderof the Notes may require us to repurchase all or a portion of its notes at apurchase price equal to 101% of the principal amount thereof, plus accruedinterest.

**Off-balance sheetarrangements**

We have outstanding letters of credit with thirdparties in the amount of $115 million, which expire within one year.

See Notes 3, 6, 10, 12, 13 and 17 of Notes toconsolidated financial statements for additional information regarding ourcontractual obligations and off-balance sheet arrangements that may affect ourresults of operations and financial condition.

We believe that ourcurrent working capital position; future cash expected to be provided byoperating activities; available borrowing capacity under our senior securedworking capital credit facility and commodity margin loan; and our relationshipwith institutional lenders and equity investors should enable us to meet ourplanned capital and liquidity requirements through at least the maturity dateof our senior secured working capital credit facility (September 2009).

**NEW ACCOUNTINGPRONOUNCEMENTS**

In December 2004, the FASB issued FASB Statement No. 153(“SFAS 153”), “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29.”This Statement amends APB Opinion No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets. As a result, exchanges ofsimilar productive assets are recognized at fair value with a resultant gain(loss) on disposition of assets unless exchanges of nonmonetary assets lackcommercial substance. For TransMontaigne, SFAS 153 is effective for nonmonetaryasset exchanges after July 1, 2005 (see Note 3 of Notes to consolidatedfinancial statements).

In March 2005, the FASB issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations—an interpretation of SFAS 143,” which requirescompanies to recognize a liability for the fair value of a legal obligation toperform asset-retirement activities that are conditional on a futureevent, if the amount can be reasonably estimated. For TransMontaigne,FIN 47 is effective for annual reporting periods beginning after December 15,2005. We are evaluating the 

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requirements underFIN 47 and do not anticipate the adoption will have a significant impacton our consolidated financial statements.

In September 2005,the Emerging Issues Task Force (EITF) reached a consensus with respect to EITFIssue No. 04-13 (“EITF 04-13”), “Accounting for Purchases and Sales ofInventory with the Same Counterparty.” The EITF concluded that inventorypurchase and sale transactions with the same counterparty that are entered intoin contemplation of one another should be combined for purposes of applying APBOpinion No. 29, “Accounting for Nonmonetary Transactions.” We havepresented “buy/sell” transactions on a net basis in the consolidated statementsof operations (see Note 1(h) of Notes to consolidated financialstatements).

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**ITEM 3.**                QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The information containedin Item 3 updates, and should be read in conjunction with, information setforth in Part II, Item 7A in our Annual Report on Form 10-K forthe year ended June 30, 2005, in addition to the interim unauditedconsolidated financial statements, accompanying notes and management’sdiscussion and analysis of financial condition and results of operationspresented in Items 1 and 2 of this Quarterly Report on Form 10-Q.There are no material changes in the market risks faced by us from thosereported in our Annual Report on Form 10-K for the year ended June 30,2005.

**Commodity risk**

The value of petroleumproducts in any local delivery market is the sum of the commodity price asreflected on the NYMEX and the basis differential for that local deliverymarket. The basis differential for any local delivery market is the spreadbetween the cash price in the physical market and the quoted price in thefutures markets for the prompt month. For those physical and derivativepositions as to which we choose to manage the associated commodity price risk,the primary objective of our risk management strategy is to minimize thefinancial impact on us from changes in petroleum commodity prices affected byworld-wide crude oil and petroleum products supply and demand disruptions(e.g., the Iraq war, OPEC production quotas, disruptions due to hurricanes andother weather-related occurrences, foreign country work stoppages, andmajor refinery outages). We utilize NYMEX futures contracts to manage thefinancial impact on us from changes in commodity prices due to “world-wide”events. NYMEX futures contracts are obligations to purchase or sell a specificvolume of inventory at a fixed price at a future date. We believe that theutilization of NYMEX futures contracts to manage commodity price risk minimizesthe financial impact on us from changes in “world-wide” commodity prices. Wegenerally do not manage the financial impact on us from changes in basisdifferentials affected by local market supply and demand disruptions (e.g.,local pipeline delivery disruptions, local refinery outages, periodic change inlocal government specifications for gasolines and distillates, local seasonalityin product demand, and disruptions due to local weather related occurrences).The impacts on us from changes in basis differentials are as follows:

| **Basis Differential**                                                                 | ** ** | ** ** | ** ** | **Change in Basis  Differential** | ** ** | **Net  Position** | ** ** | **Financial  Impact** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Futures price in  excess of physical market price (“negative basis differential”) |       |       | Increasing |                                        |       |              | Long       |                  |       |   | Loss |   |   |
| Futures price in  excess of physical market price                                           |       |       | Increasing |                                        |       |              | Short      |                  |       |   | Gain |   |   |
| Futures price in  excess of physical market price                                           |       |       | Decreasing |                                        |       |              | Long       |                  |       |   | Gain |   |   |
| Futures price in  excess of physical market price                                           |       |       | Decreasing |                                        |       |              | Short      |                  |       |   | Loss |   |   |
| Physical market  price in excess of futures price (“positive basis differential”) |       |       | Increasing |                                        |       |              | Long       |                  |       |   | Gain |   |   |
| Physical market  price in excess of futures price                                           |       |       | Increasing |                                        |       |              | Short      |                  |       |   | Loss |   |   |
| Physical market  price in excess of futures price                                           |       |       | Decreasing |                                        |       |              | Long       |                  |       |   | Loss |   |   |
| Physical market price in  excess of futures price                                           |       |       | Decreasing |                                        |       |              | Short      |                  |       |   | Gain |   |   |

 

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Thephysical and derivative positions that expose us to commodity price risk and anindication of whether those positions were actively managed under the our riskmanagement strategies during the three months ended March 31, 2006 are asfollows:

| **Position**                                                                                    | ** ** | ** ** | ** ** | **Derivative  Contract** | ** ** | **Subject to  Commodity  Price Risk** | ** ** | **Commodity  Price  Risk Actively  Managed** | ** ** | **Long (Short)  Position at  March 31, 2006  (in 000’s barrels)** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| Fixed-price  forward purchase commitments prior to receipt of the product at our  terminal |       |       | Yes        |                     |       |                                            | Yes        |                                              |       |                                                                                                 | Yes        |   |   |   | 3,000 |   |   |
| Discretionary  inventory held for immediate sale or exchange                                    |       |       | No         |                     |       |                                            | Yes        |                                              |       |                                                                                                 | Yes        |   |   |   | 1,955 |   |   |
| Discretionary  volumes held for base operations                                                 |       |       | No         |                     |       |                                            | Yes        |                                              |       |                                                                                                 | No         |   |   |   | 1,487 |   |   |
| Product linefill  and tank bottom volumes                                                       |       |       | No         |                     |       |                                            | Yes        |                                              |       |                                                                                                 | No         |   |   |   | 808 |   |   |
| Fixed-price  forward sale commitments                                                           |       |       | Yes        |                     |       |                                            | Yes        |                                              |       |                                                                                                 | Yes        |   |   |   | (1,927 | ) |   |
| Inventory due to  others under exchange agreements                                              |       |       | Yes        |                     |       |                                            | Yes        |                                              |       |                                                                                                 | Yes        |   |   |   | (738 | ) |   |
| Risk management  contracts—NYMEX futures contracts                                         |       |       | Yes        |                     |       |                                            | Yes        |                                              |       |                                                                                                 | —     |   |   |   | (516 | ) |   |
| Risk management  contracts—NYMEX options                                                   |       |       | Yes        |                     |       |                                            | Yes        |                                              |       |                                                                                                 | —     |   |   |   | (1,302 | ) |   |

 

1

Our risk management strategies and practices currentlydo not qualify for “hedge accounting” for financial reporting purposes becausewe do not designate and associate the risk management contracts as hedges ofspecific physical and derivative positions and we do not document and test theeffectiveness of the relationship between the risk management contracts and thephysical and derivative positions.

We evaluate our exposure to commodity price risk froman overall portfolio basis. Our risk management strategies are intended tomaintain a balanced position of discretionary inventories held for immediatesale or exchange, fixed-price forward purchase commitments, inventory dueto others under exchange agreements, fixed-price forward sale commitmentsand risk management contracts, thereby reducing exposure to commodity pricefluctuations. To the extent that we do not manage the commodity price riskrelating to a position that is subject to commodity price risk and commodityprices move adversely, we could suffer losses on that position. If, however,prices move favorably, we would realize a gain that we would not realize ifsubstantially all of our positions were managed.

Our risk management policy permits management thediscretion to manage the commodity price risk relating to all discretionaryvolumes, including those volumes designated as base operating inventory volumesand the undelivered in-transit volumes supplied to our terminals under theproduct supply agreement with MSCG. At March 31, 2006, we were managingthe commodity price risk associated with approximately 2.3 million barrelsof undelivered in-transit volumes supplied to our terminals under the productsupply agreement with MSCG and with respect to our net position ofdiscretionary inventory held for immediate sale or exchange, inventory due toothers under exchange agreements and certain NYMEX futures contracts, our shortpositions exceeded our long positions by approximately (0.2) million barrels.At March 31, 2006, we did not manage the commodity price risk onapproximately 2.8 million barrels composed of approximately1.5 million barrels of discretionary inventories held for base operations,approximately 0.7 million barrels of undelivered in-transit volumessupplied to our terminals under the product supply agreement with MSCG andapproximately 0.8 million barrels of product linefill and tank bottoms.

Except for our discretionary volumes held for baseoperations, when we take title and accept risk of loss on refined petroleumproducts supplied by third parties at our terminals, we enter into futures 

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contracts (i.e., shortfutures contracts) to sell a corresponding amount of product to protect againstprice fluctuations for the underlying commodity. In order to effectively managecommodity price risk, we must predict when we will sell the underlying product.When we ultimately sell the underlying inventory to a customer, we terminatethe related futures contract. If there is correlation in price changes betweenthe forward price curve in the futures market and the value of physicalproducts in the cash market, the net changes in our variation margin positionshould be offset by the net operating margins we receive when we sell theunderlying discretionary inventory. Therefore, in order to effectively managecommodity price risk, we must predict when we will sell the underlying product.If we fail to accurately predict the timing of those future sales, and theproduct remains in our inventory longer than the expiration date of the futurescontract, we must settle the old futures contract and enter into a new futurescontract to sell the product to manage the commodity price risk against thesame inventory. Furthermore, we may be unable to precisely match the underlyingproduct in our futures contracts with the exact type of product in our physicalinventory. To the extent that price fluctuations of the product covered by theNYMEX futures contract do not match the price fluctuations of the product inour physical inventory, our exposure may not be mitigated.

When we enter into a forward sale commitment todeliver product to a customer in the future at a fixed price, we enter into afutures contract (i.e., a long futures contract) to purchase a correspondingamount of product to protect against price fluctuations for the underlyingcommodity. When we ultimately deliver the underlying product to a customer, weunwind the related risk management contract. We may be unable to preciselymatch the underlying product in our futures contracts with the exact type ofproduct in our fixed-price forward sale commitment. To the extent thatprice fluctuations of the product covered by the NYMEX futures contract do notmatch the price fluctuations of the product in our fixed-price forwardsale commitment, our exposure may not be mitigated.

When our discretionary inventory volumes held forimmediate sale or exchange exceeds our fixed-price forward salecommitments, we will maintain a net short futures position. When our fixed-priceforward sale commitments exceed our discretionary inventory volumes held forimmediate sale or exchange, we will maintain a net long futures position.During a period of rising prices, long (short) futures contracts will increase(decrease) in value resulting in a gain (loss). During a period of decliningprices, our long (short) futures contracts will decrease (increase) in valueresulting in a loss (gain). Therefore, if we are in a net short futuresposition during periods of rising commodity prices, we expect to recognizesignificant net margin before other direct costs and expenses from the sale ofthe physical product offset by significant net losses on risk managementactivities resulting in overall net operating margins that are in line withexpectations. Conversely, if we are in a net short futures position duringperiods of declining commodity prices, we expect to recognize minimal, if any,net margin before other direct costs and expenses from the sale of the physicalproduct offset by significant net gains on risk management activities resultingin overall net operating margins that are, again, in line with expectations.

For the three months ended March 31, 2006 and2005, we recognized net gains on risk management activities of approximately$5.8 million and $13.0 million, respectively. For the nine months ended March 31,2006 and 2005, we recognized net gains (losses) on risk management activitiesof approximately $(4.0) million and $30.3 million, respectively.

The NYMEX requires an initial margin deposit to open afutures contract. At March 31, 2006 and June 30, 2005, we hadapproximately $11.4 million and $10.4 million, respectively, ondeposit to cover our initial margin requirements on open NYMEX futurescontracts. NYMEX futures contracts also require daily settlements for changesin commodity prices. Unfavorable commodity price changes subject us tovariation margin calls that require us to make cash payments to the NYMEX inamounts that may be material. At March 31, 2006, a $0.05 per gallonunfavorable change in commodity prices would have required us to make a cashpayment of approximately $3.8 million to cover the variation margin.Conversely, a $0.05 per gallon favorable change in commodity prices would havepermitted us to receive 

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approximately$3.8 million. We use our available cash and credit lines to fund thesemargin calls, but such funding requirements could exceed our ability to accesscapital.

At March 31, 2006, a$0.05 per gallon unfavorable change in commodity prices relative to our openpositions in derivative contracts and risk management contracts would haveresulted in the recognition of a loss (realized and unrealized) ofapproximately $3.1 million. However, the fair value of our discretionaryinventory held for immediate sale or exchange would have increased by approximately$4.1 million. The gain from the increase in the fair value of our discretionaryinventory volumes held for immediate sale or exchange will not be recognizedfor financial reporting purposes until those volumes have been sold tocustomers, which may be in an accounting period subsequent to the accountingperiod in which the losses on derivative contracts and risk managementcontracts are recognized.

**Interest rate risk**

At March 31, 2006, wehad outstanding borrowings of $17.5 million under our senior secured workingcapital credit facility and $45.5 million under TransMontaigne Partners’ creditfacility. We are exposed to interest rate risk because our senior securedworking capital credit facility and TransMontaigne Partners’ credit facilityare variable-rate-based credit facilities. Based on the outstanding balance ofour variable-interest-rate debt at March 31, 2006, and assuming marketinterest rates increase or decrease by 100 basis points, the potential annualincrease or decrease in interest expense is approximately $0.6 million.

**ITEM 4.**                CONTROLSAND PROCEDURES

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed by us in thereports that we file or submit to the Securities and Exchange Commission underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified by the Commission’s rules andforms, and that information is accumulated and communicated to our management,including our principal executive and principal financial officers (whom werefer to as our Certifying Officers), as appropriate to allow timely decisionsregarding required disclosure. Our management evaluated, with the participationof our Certifying Officers, the effectiveness of our disclosure controls andprocedures as of March 31, 2006, pursuant to Rule 13a-15(b) underthe Exchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of March 31, 2006, our disclosure controls and procedures wereeffective.

There were no changes in our internal control overfinancial reporting that occurred during the fiscal quarter ended March 31,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**Part II. OtherInformation**

**ITEM 5.**                OTHERINFORMATION

In view of the pendingtransaction with SemGroup as discussed in more detail under the heading “PotentialChange in Control of TransMontaigne Inc.” in Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations to this reportand as described in our reports on Form 8-K filed with theSecurities and Exchange Commission (“SEC”) on March 29, 2006, April 6,2006 and May 8, 2006, our board of directors has delayed calling theannual meeting of stockholders for the fiscal year ended June 30, 2005 inorder to keep expenses at a minimum. We intend to hold an annual meeting in2006 only if a merger is not completed. If we hold such an annual meeting, itwill be more than 30 days after the anniversary date of the 2005 annual meeting.In order to be eligible for inclusion in our proxy materials for our 2006annual meeting, if such meeting is held, written notice of any stockholderproposal must be received by us a reasonable time before we begin to print andmail our proxy materials for such annual meeting. If the annual meeting isheld, as soon as the date for the annual meeting is determined we will adviseour stockholders of the possible mailing date for our proxy materials in aperiodic report filed with the SEC pursuant to the Securities Exchange Act of1934 or by other appropriate notice. 

**ITEM 6.**                EXHIBITS

Exhibits:

| 2.1  |   | Agreement and Plan of Merger, dated March 27,  2006, by and among SemGroup, L.P., SemGroup Subsidiary Holding, L.L.C., TMG  Acquisition Company and TransMontaigne Inc. (incorporated by reference to  Exhibit 2.1 of TransMontaigne Inc.’s Current Report on Form 8-K  dated March 27, 2006, as filed with the SEC on March 29, 2006) |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                           |
| 31.2 |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                           |
| 32.1 |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

| Dated May 9, 2006 | TRANSMONTAIGNE INC. |
|------------------------|---------------------|
|                   | (Registrant)        |
|                   | By:                 | /s/ DONALD H. ANDERSON |
|                   | ** **          | **Donald H. Anderson** |
|                   | *** ***        | ***President and Chief Executive  Officer*** |
|                   |                | /s/ RANDALL J. LARSON |
|                   | ** **          | **Randall J. Larson** |
|                   | *** ***        | ***Executive Vice President, Chief  Financial Officer, and Chief Accounting Officer*** |

 

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**EXHIBIT INDEX**

| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Agreement and Plan of Merger, dated March 27,  2006, by and among SemGroup, L.P., SemGroup Subsidiary Holding, L.L.C., TMG  Acquisition Company and TransMontaigne Inc. (incorporated by reference to  Exhibit 2.1 of TransMontaigne Inc.’s Current Report on Form 8-K  dated March 27, 2006, as filed with the SEC on March 29, 2006) |
| 31.1*               |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                           |
| 31.2*               |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                           |
| 32.1*               |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |
| 32.2*               |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       |

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*                    Filedherewith.

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