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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ........... TO ...............
REGISTRATION NUMBER 333-37811
TEXAS PETROCHEMICAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0504002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
THREE RIVERWAY, SUITE 1500
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 627-7474
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) AND 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of common stock of the registrant outstanding as of
September 24, 1998 is 467,778.
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TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements With Accountants on Accounting 43
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 54
Signatures 55
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PART I
ITEM 1. BUSINESS
Texas Petrochemical Holdings, Inc. and its wholly owned subsidiary Texas
Petrochemicals Corporation collectively referred to as (the "Company") is the
largest producer of butadiene and butene-1, and the third largest producer of
MTBE, in North America, in terms of production capacity. In addition, the
Company is the sole producer of diisobutylene and isobutylene concentrate in the
United States and the largest domestic merchant supplier of high purity
isobutylene to the chemical market. The Company's products include: (i)
butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an
oxygenate and octane enhancer in gasoline; (iii) n-butylenes (butene-1 and
butene-2), used in the manufacture of plastic resins, fuel additives and
synthetic alcohols; and (iv) specialty isobutylenes, primarily used in the
production of specialty rubbers, lubricant additives, detergents and coatings.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
material suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge. During fiscal 1997
the Company successfully gained access to the MTBE market on the East Coast of
the United States through the negotiation of a terminalling and storage
agreement with the Northville terminal in Linden, New Jersey.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
Mr. Dave C. Swalm acquired from Tenneco, Inc. the assets (principally comprised
of the Houston facility) of Petro-Tex Chemical Corporation ("Petro-Tex") the
prior owner of the Company's manufacturing facility.
On July 1, 1996 Texas Olefins Company ("TOC"), Texas Petrochemicals
Corporation and a raw material supply contract of Clarkston Corporation (the
"Affiliate") were acquired for approximately $371 million in a series of
transactions (the "Acquisition"). After the transactions, TOC was merged with
and into Texas Petrochemicals Corporation with Texas Petrochemicals Corporation
becoming a 100% owned subsidiary of Texas Petrochemical Holdings, Inc. Texas
Petrochemical Holdings, Inc. is closely held and was formed by a group of
investors.
The Company's principal executive offices are located at Three Riverway,
Suite 1500, Houston, Texas 77056. The Company's telephone
number is (713) 627-7474.
PRODUCTS
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base. As the
largest producer of butadiene in North America, the Company believes that many
of its customers place significant value on its ability to provide a reliable
domestic supply of butadiene and as a result have entered into long-term sales
contracts with the Company.
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The Company extracts butadiene from crude butadiene, which is generated from
the production of ethylene and is comprised of a number of valuable components,
including butadiene, isobutylene, n-butylenes, isobutane and n-butane. Many U.S.
ethylene producers rely on third parties such as the Company to process their
crude butadiene streams, as the crude butadiene volumes they produce are not
sufficient to justify the construction of on-site butadiene recovery facilities.
The Company estimates that producers accounting for 65% of U.S. and Canadian
ethylene production capacity do not internally process crude butadiene
by-product streams. The Company is the largest non-integrated crude butadiene
processor in North America and as a result of its strategic importance to
ethylene producers, the Company has been able to secure long-terms supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations.
MTBE is a motor gasoline blending stock which reduces carbon monoxide and
volatile organic compound emissions and enhances the octane content of gasoline,
and has been one of the fastest growing petrochemicals, in terms of volume, over
the past fifteen years. Today, MTBE is the preferred oxygenate for, and a major
component of, RFG and is used in over 30% of the U.S. gasoline pool. MTBE is
produced by reacting methanol and isobutylene. The Company's ability to produce
isobutylene by three alternative methods enables it to produce MTBE by the most
economical process available to the Company. In addition, the Company has the
ability to add incremental isobutylene capacity to capitalize on expected future
growth, at a significantly lower cost than new grass roots, on-purpose capacity.
The Company believes that this incremental capacity gives it a competitive
advantage over other producers who would have to incur greater cost to increase
capacity.
The Company is the leading producer of chemical grade n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications.
Butene-1 is used as a comonomer in the production of high-density polyethylene
("HDPE") and linear low-density polyethylene ("LLDPE"). Both HDPE and LLDPE are
raw materials for the production of trash bags, film wrap, pipe and plastic
containers. Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations. Butene-2 is
recovered as part of the crude butadiene stream that remains after extraction of
butadiene, isobutylene and butene-1. The Company sells purified butene-2
primarily for use in the production of coatings and plasticizers. High purity
isobutylene is used in the production of butyl rubber, which is used to produce
tires and in specialty chemical applications such as in the production of
resins, antioxidants, paints and coatings, synthetic lubricant oils and rubber
chemicals. The Company is currently the largest domestic merchant supplier of
high purity isobutylene to the chemical market. Isobutylene concentrate is
similar to high purity isobutylene in composition, although its purity is 88%
isobutylene compared to 99.9% in high purity isobutylene. The Company markets
isobutylene concentrate for use in the growing lubricant additives business as
well as for use in the production of butyl rubber. The Company is the sole U.S.
producer of isobutylene concentrate. Diisobutylene is used primarily as an
intermediate in the manufacturing of alkylphenols for the surfactant and
phenolic resins markets. Other uses include the production of tackifier and ink
resins, dispersants and lubricant oil additives, and rubber and processing
chemicals. The Company is the sole U.S. producer of diisobutylene.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes.
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COMPANY STRATEGY
The Company believes that it has become the industry leader in the
production of the majority of its products by capitalizing on its production
flexibility, its ability to add significant cost effective, incremental capacity
across its product lines, the marketing experience of its management team, its
competitive cost position and its customer focus. The Company's strategy is to
strengthen its established presence in its selected markets by focusing on the
following factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS The markets in which the Company
competes are cyclical. The Company intends to mitigate the effects of this
cyclicality while benefiting from potential upturns in industry profitability by
optimizing the production of its sales under contracts allowing for a fixed
profit or at prices linked directly or indirectly to raw material prices.
CAPITALIZE ON PRODUCTION FLEXIBILITY The Company has the ability to produce
a number of its intermediate and finished products (i.e. crude butadiene,
isobutylene and butene-1) by a variety of processes. The Company intends to
capitalize on this ability by shifting production to the most economical process
and production level based upon market conditions, thus ensuring a reliable
source of supply for its customers.
UTILIZE INCREMENTAL CAPACITY The Company can increase its capacity to
produce butadiene, isobutylene and its derivatives at significantly lower cost
than that of new construction. The Company's ability to add incremental
butadiene capacity and its relationships with several North American ethylene
producers are expected to enable it to capture the benefit of increased U.S.
crude butadiene supply.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS The Company's production flexibility
and its ability to add low-cost capacity are crucial to its capitalizing on the
attractive demand/supply outlook for a number of its products.
o BUTADIENE. The U.S. supply of crude butadiene is increasing in line with
domestic ethylene production, although it is currently insufficient to
meet U.S. demand. Industry operating rates are expected to remain at
current high levels as the increase in domestic crude butadiene
production is expected to replace imports with butadiene demand remaining
strong in support of derivative businesses.
o MTBE. While the Company expects U.S. demand for MTBE to grow less quickly
than it has over past fifteen years, it believes that future growth in
foreign demand may be considerable. In addition, recently announced U.S.
MTBE capacity additions are minimal. (See "Environmental Regulation").
o BUTENE-1. Demand for butene-1 is closely linked to polyethylene
production growth. The Company expects global production of polyethylene
to increase at higher than historical rates in the next four years. In
addition, the Company expects demand for butene-1 used in other
applications to be strong.
SUSTAIN CUSTOMER FOCUS The Company believes that producing quality products
and providing quality service with dependable supply are key factors in its
ability to compete in the market place for its products. Management believes
that its focus on customer service has resulted in strong customer relationships
and a high degree of customer loyalty. This is evidenced by the fact that
approximately 60% of the Company's current customers have purchased products
from the Company for more than ten years.
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OTHER OPERATIONS
The Company operates a cogeneration power plant that supplies electricity
and process steam to the facility's chemical processing operations. Excess
capacity of this power plant, as well as steam and boiler feed water are
currently sold to neighboring facilities under contracts at a price equal to the
cost of fuel plus a fixed profit. In addition, the Company generates revenues
from its terminals in Baytown, Texas and Lake Charles, Louisiana and from
chemical by-product sales to third parties.
CONTRACTS
The Company enters into three general types of contracts in connection with
its production processes: feedstock supply contracts, product sales contracts
and, to a lesser extent, toll manufacturing agreements. The majority of these
contracts have terms of two to three years and provide for successive one-year
renewals unless either party objects to such renewal in a timely manner.
COMPETITION
The petrochemicals businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemicals industry, are larger and have greater financial resources than
the Company. Among the Company's competitors are some of the world's largest
chemical companies and major integrated petroleum companies that have their own
raw material resources. In addition, a significant portion of the Company's
business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Further,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may continue to expand their role in this
industry in the future. Any of these developments would have a negative impact
on the Company's financial position, results of operations and cash flows.
Given the nature of the markets in which it competes, the Company believes
it has two primary competitive advantages over its competitors. First, the
Company's position as the most significant merchant crude butadiene processor in
the U.S. has allowed it to secure supply arrangements for crude butadiene, which
provide for a fixed profit based on the Company's selling prices for the
finished product. The Company believes that this partially limits its exposure
to fluctuations in raw materials prices. Secondly, the Company's flexible
production processes enable it to take advantage of increases in demand for its
products at a lower cost than its competitors, thus allowing the Company to meet
its customers' needs through the most economic processes.
PATENTS AND LICENSES
The Company presently owns, controls or holds right to approximately 21
patents. The Company believes that its patents, particularly its patents related
to the SKIP, OXO-D and diisobutylene production processes, are important to its
business and provide the Company with certain competitive advantages.
Accordingly, the Company actively protects existing production process
technologies.
The Company has available for license certain of its patented technologies,
including the SKIP and OXO-D processes, to third parties. In addition, the
Company licenses certain technologies, including the process by which it
extracts butadiene from crude butadiene, from third parties.
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ENVIRONMENTAL REGULATION
The Company's policy is to be in compliance with all applicable
environmental laws. The Company is also committed to Responsible Care(R), a
chemical industry initiative to enhance the industry's responsible management of
chemicals. The Company's operations are subject to federal, state, and local
laws and regulations administered by the U.S. EPA, the U.S. Coast Guard, the
Army Corps of Engineers, the Texas Natural Resource Conservation Commission
(TNRCC), the Texas General Land Office, the Texas Department of Health and
various local regulatory agencies. The Company holds all required permits and
registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with the laws
and regulations that materially affect its operations. While management does not
expect that compliance with existing environmental laws will have a material
adverse effect on the Company's financial condition or results of operations,
there can be no assurance that future legislation, regulation or judicial or
administrative decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex, has
indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation. The Company believes that
it has meritorious defenses to Petro-Tex's claim and intends to contest the
claim vigorously. Although no on-site contamination has been identified as
requiring remediation, management believes that certain areas of the Houston
facility were historically used for waste disposal. Based on limited, currently
available information about these waste disposal areas and their contents, the
Company believes that, if such remediation becomes necessary, any remediation
costs would not have a material adverse effect on the Company's financial
condition or results of operations. The Petro-Tex indemnity does not extend to
these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive
regulation under the Resource Conservation and Recovery Act, the Federal Clean
Water Act, the Clean Air Act Amendments (CAA) and similar requirements of state
law. In particular, under the CAA, the EPA and the TNRCC have promulgated, or
are required to promulgate, numerous regulations, which affect or will affect
the operations of the Company. The most significant of these are the so-called
Hazardous Organics National Emission Standard for Hazardous Air Pollutants or
HON Rule, the requirements of Title V of the CAA and rules relating to the
control of emissions of nitrogen, which are known as the Nitrogen Oxides
Reasonably Available Control Technology rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethyl formamide,
benzene, styrene, acrylonitrile and MTBE, which are manufactured, used and/or
processed by the Company, have been identified as HAPs for
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purposes of regulation under the CAA. Areas of concern in the Company's
operations for HAP emissions include equipment leaks, process vents, product
storage, transfer operations and emissions from wastewater streams. The Company
has examined each of these areas and believes that it will be able to achieve
substantial compliance with the HON Rule after incorporating additional
monitoring and record-keeping systems into its operations at a cost that
management believes will not be material.
The NOx RACT Rules require compliance by December 1999. The Company has
examined the rules and believes that the main expenditure required to achieve
compliance will involve the purchase and installation of monitoring equipment
for NOx emissions, which can be either continuous emission monitors, predictive
emission monitors or other approved monitoring methods. Based on its preliminary
study, management estimates that the cost to comply with the NOx RACT Rules will
be $0.8 million.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAA.
Accordingly, the State of Texas is in the process of developing a revised State
Implementation Plan ("SIP") which is expected to require significant reductions
in emissions of ozone precursors, including volatile organic compounds and
oxides of nitrogen in Harris County. To comply with the anticipated SIP, the
Company installed new controls at a cost of approximately $7.8 million. The
Company anticipates that the revised SIP may require certain additional emission
reductions from the Company's facilities. Such reductions would require the
Company to modify existing controls and install additional controls for air
emissions. The Company is unable to predict the cost of modifying its facilities
to comply with any additional requirements that the revised SIP may impose.
The Company has elected to participate in the CARE program sponsored by the
TNRCC under which the Company will voluntarily obtain permits for certain air
emission sources that had historically been "grandfathered" from certain permit
requirements. The Company expects to be required to commit to certain emission
reductions in connection with the CARE program. The anticipated commitments are
not expected to have a materially adverse impact on the Company's operations.
Section 112 of the CAA requires prevention of accidental releases of
certain listed extremely hazardous substances. The EPA's rules implementing
portions of Section 112, which were signed by the EPA Administrator on May 24,
1996, will require the Company to conduct a hazards assessment and develop a
risk management plan by June 1999. The Company expects to complete the required
plan on or before the deadline.
The regulations under Title V of the CAA will require a facility-wide
inventory of emissions, sources and the air pollution control requirements
applicable to those sources. The Company is in the process of compiling the
required inventory. In connection with the Title V program, the Company may be
required to upgrade its on-going monitoring program once it has received its
operating permit; however, as of this point in time the Company does not expect
any costs associated therewith to be significant. It is also possible that the
Company may be required to make modifications to some of its equipment in order
to comply with the terms of the facility-wide Title V permit.
The Company has an active program to manage asbestos-containing material at
its Houston facility in accordance with federal and state environmental, health
and safety regulations. The Company does not believe that, properly managed,
these materials pose a hazard to the health of its employees. There is no
requirement to remove these materials, provided they are properly managed.
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As the plant is reconfigured or additions are made, asbestos-containing
materials are removed or encapsulated by a certified contractor.
The wastewater treatment system for the Houston facility is 75% owned by
the Company and 25% owned by Bayer Corporation ("Bayer"), the owner of an
adjacent facility. Bayer has closed its facility, and the Company now operates
the treatment system, but the federal and state discharge permits are held
jointly by the Company and Bayer. The Company believes that the system has
sufficient capacity for the Company's projected needs.
The Company has completed the first phase of its work on its stormwater
discharge system. An engineering study is underway to determine whether
additional work will be required. The Company has completed installation of
noise barriers for certain equipment.
The terminals in Baytown and Lake Charles are in substantial compliance
with applicable environmental laws and regulations, and management believes that
no significant expenditures will be required at these facilities to allow them
to continue to comply with such laws and regulations.
MTBE and butadiene are the subject of continuing health effect studies. While
there have been some questions about the health effects of MTBE, a multi-agency
review, released June 30, 1997 by the White House's Office of Science and
Technology Policy, concluded that health studies have shown that "persons are
not at increased risk of experiencing acute health effects due to the use of
fuels blended with oxygenates like MTBE." In addition, a February, 1996 study by
the Centers for Disease Control and Prevention, reported that adding oxygenates,
including MTBE, to gasoline reduces emissions of carbon monoxide and benzene and
is unlikely to increase substantially the health risks associated with fuel used
in motor vehicles.
At the end of its 1997 session, the California State Legislature passed and
the Governor signed several bills that focused directly on MTBE and its use as a
component of California Cleaner Burning Gasoline. The first of these laws
required a detailed study of the health effects, associated risks, and benefits
and other items relating to the use of MTBE in California's gasoline. These
studies, conducted by various entities of the University of California system
must be completed by year's end, 1998.
In California and certain other states MTBE has appeared in certain drinking
water wells. It is believed that this circumstance is the result of leaks from
older underground gasoline storage tanks and pipelines. California and federal
law require that all older storage tanks be replaced by the end of 1998 with
double-walled tanks and leak detection devices. The Company believes that
replacement of leaking storage tanks may substantially reduce the incidence of
gasoline components entering into water supplies. Upon consultation with
national trade association personnel, the Company further believes that the
reform and extension of underground storage tank programs may provide an
acceptable legislative or regulatory alternative to direct limitations on MTBE.
In addition, certain bodies of water have shown the presence of MTBE. A
typical source of MTBE in these bodies is the operation of two-cycle outboard
motors, which do not fully combust gasoline. Certain regulatory bodies are
considering imposing limitations on the use of two-cycle outboard motors in
bodies of water that are also used as sources of drinking water.
This California legislation referred to above also required the establishment
of both primary (health) and secondary (taste/odor) standards for MTBE in
drinking water. In July 1998, the California Department of Health Services (DHS)
proposed a secondary standard for MTBE in drinking water of 5 parts per billion
(ppb); final rules are expected to be promulgated by the fourth
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quarter of 1998. There is a possibility that the 5 ppb proposal will be adjusted
to reflect recent scientific findings that support standards for MTBE in
drinking water of 15-22 ppb, a level that corresponds more closely to the 20-40
ppb guidance provided by the federal EPA. The primary health standard for MTBE
in drinking water is to be promulgated by July 1, 1999. The DHS is the agency
responsible for the standard in California. The process will begin with
California's Office of Environment Health Hazard Assessment's (OEHHA) proposal
for a public health goal (PHG) for MTBE in drinking water. Once proposed, the
PHG will be debated by DHS using traditional cost and risk/benefit types of
analyses. A final maximum contaminant level for MTBE in drinking water is
scheduled to be enacted by July 1, 1999. In addition, OEHHA and the
International Agency on Research and Cancer (IARC) are considering whether to
classify MTBE as a possible, probable or known human carcinogen. While IARC
classification may present certain communications challenges, it does not
directly restrict the use of MTBE. Indeed, many useful commercial products are
already so classified or are under IARC consideration.
In connection with the foregoing, there have been requests to ban MTBE as
an additive to gasoline in California. However, a recent study by the California
Air Resources Board showed that MTBE was superior to ethanol, the other
principal oxygenate, in reducing air pollution associated with automobile
exhaust and evaporative emissions. EPA continues to require oxygenates to be
added to gasoline in certain regions of the country either year-round or during
the winter months, and MTBE and ethanol continue to be the oxygenates of choice.
EPA personnel at the Office of Mobile Sources continue to support the
reformulated gasoline program as a major component of the nation's air quality
program. Should the use of MTBE become restricted in major areas of the United
States, this program may become economically untenable. However, no assurance
can be given that actions will not be taken to restrict or prohibit the use of
MTBE in certain areas of the country. Any restriction on or prohibition of the
use of MTBE could have a material adverse effect on the Company's financial
condition or results of operations.
The EPA has also determined that butadiene is a probable human carcinogen.
Effective February 1997, the Occupational Safety and Health Administration
lowered the employee permissible exposure limit ("PEL") over an 8-hour
time-weighted average for butadiene from 1000 parts per million ("ppm") to 1
ppm. The Company has conducted employee exposure monitoring and believes that it
already meets the PEL at most of its operations. For some operations, the
Company anticipates employees will need to use respirators and that additional
emission controls may be necessary. The Company does not expect that the current
health concerns regarding butadiene will have a material adverse effect on the
Company's financial condition or results of operations, although no assurance
can be given that future studies will not result in more stringent regulation of
butadiene.
EMPLOYEES
As of June 30, 1998, the Company had approximately 328 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 136 contract employees to perform routine
maintenance on and around its Houston facility. The Company believes its
relationship with its employees is satisfactory.
SAFETY RECORD
The Company maintains one of the best workman's compensation records in
Texas, equivalent to most clerical operations. Over the last seven years, the
Company has experienced only three lost time injuries. The Company believes this
record is accomplished through extensive classroom and on-the-job training as
well as the efforts of its highly trained, 67-member volunteer emergency
response team.
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ITEM 2. PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile
from the Houston Ship Channel and near one of the chemical industry's largest
domestic processing facilities. Approximately 230 acres is owned by the Company,
and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the
Port of Houston two ship docks, which accommodate barge and ocean-going vessels,
and has the facilities to be served by rail and by truck. In addition, the
facility is connected by pipeline to customers and suppliers of raw materials,
directly and through other major pipelines in the immediate area as well as in
Texas City, and with salt dome storage facilities of other companies located at
both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a
laboratory for sampling and testing. The Company owns and operates a storage and
terminal facility at Baytown, Texas, leases storage and terminal facilities in
Lake Charles, Louisiana and Linden, New Jersey, and leases tank storage capacity
in Bayonne, New Jersey. The Company also leases office space in Three Riverway
Plaza, Houston, Texas as its principal executive offices. The Company believes
that is has adequate facilities for the conduct of its current and planned
operations.
ITEM 3. LEGAL PROCEEDINGS
In addition to the matters disclosed under "Environmental Regulation," the
Company is a party to various claims and litigation arising in the ordinary
course of its business. Management recognizes the uncertainties of litigation
and the possibility that one or more adverse rulings could materially impact
operating results. However, although no assurances can be given, management
believes that other than as disclosed, based on the nature of and its
understanding of the facts and circumstances which give rise to such claims and
litigation, and after considering appropriate reserves that have been
established, that the ultimate resolution of such issues, individually and in
the aggregate, will not have a material adverse effect on the Company's
financial position, results of operation or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1998.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company set forth below for the two years
ended June 30, 1998, the one month period ended June 30, 1996, the twelve months
ended May 31, 1996 and the two years ended May 31, 1995 should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------- ------------------
TWELVE ONE
MONTHS MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, YEAR ENDED JUNE 30,
------------------- ---------- -------- --------------------
1994 1995 1996 1996 1997 1998
------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................... $ 352.4 $ 474.7 $ 455.6 $ 41.4 $ 490.2 $514.8
Income from operations ............ 53.3 47.5 42.0 2.4 18.3 37.3
Interest expense (income) ......... 0.2 (0.7) 1.6 0.1 39.4 40.5
Net income (loss)1 ................ 33.9 32.5 16.7 1.2 (15.5) (4.5)
Loss per common share
Before extraordinary loss ...... -- -- -- -- $(32.04) $ (9.86)
Extraordinary loss ............. -- -- -- -- (3.33) --
------- -------
$(35.37) $ (9.86)
======= =======
BALANCE SHEET DATA (AT PERIOD END):
Total assets ...................... $ 214.6 $ 230.7 $ 167.9 $ 521.5 $497.2
Long-term debt .................... 11.0 -- 13.0 351.9 349.8
</TABLE>
-------------
1 Net income (loss) for the twelve months ended May 31, 1996 includes a
non-recurring charge for the impairment of investment in land of $12.6
million, with an associated income tax benefit of $4.7 million. Net loss for
the year ended June 30, 1997 includes an extraordinary loss of $d1.5 million
for early extinguishment of debt.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials), and from time
to time, other external factors, such as the implementation of the Clean Air Act
Amendments of 1990, which has significantly increased the demand for MTBE.
Historically, the Company has successfully mitigated the cyclicality of the
markets for certain of its end products by entering into contracts with pricing
which allows for a fixed profit by linking prices directly or indirectly to raw
material costs. In addition, the Company has attempted to optimize the use of
isobutylene, an intermediate feedstock produced by the Company, to produce MTBE
or higher margin specialty products depending on prevailing market conditions.
REVENUES
The Company's revenues are a function of the volume of products sold by the
Company and the prices for such products. The following tables set forth the
Company's historical revenues and the percentages of historical revenues by
product and volume of products sold.
<TABLE>
<CAPTION>
REVENUES
PREDECESSOR COMPANY
------------------------------------ -------------------------------------
TWELVE MONTHS ONE MONTH YEAR ENDED JUNE 30,
ENDED ENDED -------------------------------------
MAY 31, 1996 JUNE 30, 1996 1997 1998
----------------- ----------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Butadiene ............ $112.6 25% $ 10.2 25% $130.9 27% $135.0 26%
MTBE ................. 187.4 41 21.0 50 230.3 47 235.4 46
n-Butylenes .......... 48.2 11 3.2 8 49.4 10 55.2 11
Specialty Isobutylenes 74.5 16 5.5 13 62.3 13 73.7 14
Other(1) ............. 32.9 7 1.5 4 17.3 3 15.5 3
------ ------ ------ ------ ------ ------ ------ ------
Total ................ $455.6 100% $ 41.4 100% $490.2 100% $514.8 100%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------
(1) Includes Clarkston's trading revenues from third parties (periods prior to
July 1, 1996 only), utility revenues and revenues realized from the Company's
terminalling facilities.
11
<PAGE>
SALES VOLUMES
PREDECESSOR COMPANY
---------------------------- -------------------
TWELVE MONTHS ONE MONTH YEAR ENDED JUNE 30,
ENDED ENDED -------------------
MAY 31, 1996 JUNE 30, 1996 1997 1998
------------ ------------- ---- -----
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene ................... 622.6 64.6 750.3 822.0
MTBE(1) ..................... 219.8 26.6 274.1 300.4
n-Butylenes ................. 284.6 17.1 266.4 320.4
Specialty Isobutylenes ...... 368.2 23.0 275.7 369.7
- ----------
(1) Volumes in millions of gallons.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------- --------------------------------------
TWELVE MONTHS ONE MONTH YEAR ENDED JUNE 30,
ENDED ENDED --------------------------------------
MAY 31, 1996 JUNE 30, 1996 1997 1998
----------------- ------------------ ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $455.6 100% $ 41.4 100% $490.2 100% $514.8 100%
Cost of goods sold ................ 391.0 86 36.4 88 436.3 89 438.7 85
Depreciation and amortization ..... 15.0 3 1.3 3 29.8 6 31.8 6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit .................. 49.6 11 3.7 9 24.1 5 44.3 9
Selling, general and administrative 7.6 2 1.3 3 5.8 1 7.0 2
------ ------ ------ ------ ------ ------ ------ ------
Income from operations ........ $ 42.0 9% $ 2.4 6% $ 18.3 4% $ 37.3 7%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
REVENUES
The Company's revenues increased by approximately 5%, or $24.6 million, to
$514.8 million for the year ended June 30, 1998 from $490.2 million for the year
ended June 30, 1997. The increase was primarily due to increased sales volumes
of all products, which was partially offset by lower sales prices.
Butadiene revenues increased by approximately 3%, or $4.1 million, to $135.0
million for the year ended June 30, 1998 from $130.9 million for the year ended
June 30, 1997. The increase was attributable to an increase in sales volumes of
approximately 10% or 71.7 million pounds. Production rates during the year
increased as a result of operating efficiencies and the availability of crude
butadiene. The volume increase was offset by a decline in butadiene prices,
which began during the second half of fiscal year. Excess supply and imports of
butadiene into the U.S. market contributed to lower prices.
12
<PAGE>
MTBE revenues increased by approximately 2%, or $5.1 million, to $235.4
million for the year ended June 30, 1998 from $230.3 million for the year ended
June 30, 1997. The increase was due to higher sales volume, which was partially
offset by lower sales prices. MTBE production levels increased during the period
due to improved on-stream time of the Company's Dehydro units during the current
fiscal year. MTBE prices were lower in the current year due to the lower
unleaded gasoline and crude oil prices during the second half of the fiscal
year.
n-Butylenes revenues increased by approximately 12%, or $5.8 million, to
$55.2 million for the year ended June 30, 1998 from $49.4 million for the year
ended June 30, 1997. n-Butylene sales revenue increased due to higher sales
volumes particularly during the first half of the fiscal year. Sales volumes of
butene-1 increased due to an unplanned shutdown of a major competitor in the
market. The Company was able to successfully increase its butene-1 production
rates to meet this demand from customers. Sales volumes of butene-2 to also
increased during the current year.
Specialty isobutylene revenues increased by approximately 18%, or $11.4
million, to $73.7 million for the year ended June 30, 1998 from $62.3 million
for the year ended June 30, 1997. The increase was due to higher sales volumes
of all of the Company's specialty products. Isobutylene concentrate sales
volumes returned to more historical levels during the current year after a down
year in fiscal 1997. Sales volumes of high purity isobutylene and diisobutylene
increased due to customer demand.
GROSS PROFIT
Gross profit increased by approximately 84%, or $20.2 million, to $44.3
million for the year ended June 30, 1998 from $24.1 million for the year ended
June 30, 1997. Gross margin during the period increased to 8.6% from 4.9%. The
gross profit increase was primarily due to higher margins on MTBE and increased
sales volumes of butadiene, n-butylenes and specialty isobutylenes. MTBE margins
improved primarily due to lower isobutane and methanol costs, which was
partially offset by lower MTBE sales prices.
INCOME FROM OPERATIONS
Income from operations increased by approximately 104%, or $19.0 million, to
$37.3 million for the year ended June 30, 1998 from $18.3 million for the year
ended June 30, 1997. Operating margin during this period increased to 7.2% from
3.7%. The increase in income from operations was primarily due to the same
factors contributing the increase in gross profit described above, offset
slightly by and increase in selling, general and administrative expenses. This
increase was associated with increased business development activity in the
current year.
YEAR ENDED JUNE 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED MAY 31, 1996
REVENUES
The Company's revenues increased by approximately 8%, or $34.6 million, to
$490.2 million for the year ended June 30, 1997 from $455.6 for the twelve
months ended May 31, 1996. The increase was primarily attributable to increased
sales volumes of MTBE and butadiene, partially offset by decreases in sales
volumes of specialty isobutylenes.
13
<PAGE>
Butadiene revenues increased by approximately 16%, or $18.3 million, to
$130.9 for the year ended June 30, 1997 from $112.6 million for the twelve
months ended May 31, 1996. The increase was attributable to an increase in sales
volumes of approximately 21%, or 127.7 million pounds, as a result of increased
production levels due to the availability of crude butadiene, processing
efficiencies and strong customer demand. The volume increase was partially
offset by a decline in butadiene sales prices. Prices declined slightly in the
current year as a result of the build up of U.S. tire inventory to record levels
in the prior year.
MTBE revenues increased by approximately 23%, or $42.9 million, to $230.3
million for the year ended June 30, 1997 from $187.4 million for the twelve
months ended May 31, 1996. With the decrease in demand for isobutylene
concentrate for the first half of the fiscal year, the Company shifted its
isobutylene production, an intermediate feedstock, to the production of MTBE.
Demand for MTBE in the market remained strong, thus the Company was able to
supply increased volumes to its customers.
n-Butylenes revenues increased by approximately 2%, or $1.2 million, to
$49.4 million for the year ended June 30, 1997 from $48.2 million for the twelve
months ended May 31, 1996. Sales volumes and prices of butene-1 increased
compared to the prior. The increases were the result of strong demand from
polyethylene producers and successful marketing efforts by the Company. Sales
volumes of butene-2 decreased in the current year as a result of existing market
conditions, which allowed alternative feedstocks to enter the market.
Specialty isobutylene revenues decreased by approximately 16%, or $12.2
million, to $62.3 million for the year ended June 30, 1997 from $74.5 million
for the twelve months ended May 31, 1996. The decrease was primarily
attributable to lower sales volumes of isobutylene concentrate. Product demand
was adversely affected in the first half of the year by high isobutane prices.
Significant improvements in isobutane pricing and demand was noted in the latter
half of the year. Sales revenues for high purity isobutylene and diisobutylene
decreased in the current year as a result of lower sales prices and slightly
lower sales volumes caused by market competition.
Other revenues decreased by approximately 47%, or $15.6 million, to $17.3
million for the year ended June 30, 1997 from $32.9 million for the twelve
months ended May 31, 1996. The decrease in revenues is due to the elimination of
a former affiliate's trading revenues from third parties. The affiliate was
dissolved in June 1996 as part of the Acquisition.
GROSS PROFIT
Gross profit decreased by approximately 51%, or $25.5 million, to $24.1 for
the year ended June 30, 1997 from $49.6 million for the twelve months ended May
31, 1996. Gross margin during the period decreased to 4.9% from 10.9%. The
decrease was primarily attributable to lower margins on MTBE and specialty
isobutylene sales. MTBE margins were adversely affected by high feedstock costs.
Average isobutane and methanol prices were approximately 13% and 25% higher,
respectively, than in prior year. In December 1996, as a result of the decline
in MTBE margins, the Company shut down its Dehydro-1 unit for 52 days which had
a production capacity of approximately 9,000 barrels per day of isobutylene.
Additionally, during October 1996, the Company temporarily shut down Dehydro-1
for 21 days as a result of a scheduled turnaround in order to install a new
waste heat boiler. Higher natural gas prices also contributed to a lower gross
profit during the current year. Gross profits from sales of butadiene and
butene-1 increased over the prior year and were used to partially offset the
above decrease. Gross profit was also negatively impacted by increased
depreciation and amortization expense during the current period as a result of
the increased basis in fixed assets and goodwill from the Acquisition.
14
<PAGE>
INCOME FROM OPERATIONS
Income from operations decreased by approximately 56%, or $23.7 million, to
$18.3 million for the year ended June 30, 1997 from $42.0 million for the twelve
months ended May 31, 1996. Operating margin during the period decreased to 3.7%
from 9.2%. This decrease in income from operations and operating margin was
primarily due to the same factors contributing to the decrease in gross profit
and gross margin described above. The decrease was partially offset by a
decrease in selling, general and administrative costs as a result of cost
savings subsequent to the Acquisition.
INTEREST EXPENSE
Interest expense increased by approximately $37.8 million, to $39.4 million
for the year ended June 30, 1997 from $1.6 million for the twelve months ended
May 31, 1996. The increase in interest expense was associated with long-term
debt incurred by the Company as a result of the Acquisition.
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
REVENUES
The Company's revenues increased by approximately 14%, or $5.2 million, to
$41.4 million for the one month ended June 30, 1996 from $36.2 million for the
one month ended June 30, 1995. This increase was attributable to increased
volumes for butadiene and MTBE. Volumes for n-butylenes and specialty
isobutylenes were down compared to the prior period. Prices for butadiene were
up slightly and MTBE prices were down. Other product prices remained constant
with the prior period.
GROSS PROFIT
Gross profit decreased by approximately 23%, or $1.1 million, to $3.7
million for the one month ended June 30, 1996 from $4.8 million for the one
month ended June 30, 1995. Gross margin during this period decreased slightly to
9.0% from 13.2%. The decline in gross profit was primarily attributable to the
decreased sales price of MTBE.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 27%, or $0.9 million, to
$2.4 million for the one month ended June 30, 1996 from $3.3 million for the one
month ended June 30, 1995. Operating margin during this period declined to 5.9%
from 9.2%. This decrease in income from operations and operating margin was
primarily due to the same factors contributing to the decrease in gross profit
and gross margin described above.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
Net cash provided by (used in) operating activities was $35.0 million for
the year ended June 30, 1998 compared to $(1.8) million for the year ended June
30, 1997. The change of $36.8 million was primarily attributable to improved
profitability levels and changes in working capital. Net cash used in investing
activities was $11.2 million for the year ended June 30, 1998 compared to $352.3
million for the year ended June 30, 1997. The change of $341.1 million was
primarily attributable to the Acquisition of Texas Petrochemicals Corporation on
July 1, 1996, partially offset by proceeds from the sale of non-plant assets and
Predecessor assets and investments. Net cash provided by (used in) financing
activities was $(23.0) million for the year ended June 30, 1998 compared to
$354.2 million for the year ended June 30, 1997. The change of $377.2 million
was primarily attributable to the issuance of long-term debt and proceeds from
the sale of common stock, in order to finance the Acquisition.
YEAR ENDED JUNE 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED MAY 31, 1996
Net cash provided by (used in) operating activities was $(1.8) million for
the year ended June 30, 1997 compared to $44.5 million for the twelve months
ended May 31, 1996. The change of $46.3 million was primarily attributable to
the decrease in overall profitability and changes in working capital. Net cash
provided by (used in) investing activities was $(352.3) million for the year
ended June 30, 1997 compared to $8.2 million for the twelve months ended May 31,
1996. The change of $360.5 million was primarily attributable to the Acquisition
of Texas Petrochemicals Corporation on July 1, 1996, partially offset by
proceeds from the sale of non-plant assets and Predecessor assets and
investments. Net cash provided by (used in) financing activities was $354.2
million for the year ended June 30, 1997 compared to $(69.0) million for the
twelve months ended May 31, 1996. The change of $423.2 million was primarily
attributable to the issuance of long-term debt and proceeds from the sale of
common stock, in order to finance the Acquisition.
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
Net cash provided by operating activities was $13.9 million for the one
month ended June 30, 1996 compared to $1.9 million for the one month ended June
30, 1995. This increase of $12.0 million was primarily attributable to changes
in working capital, partially offset by a decrease in net income. Net cash used
in investing activities was $1.3 million for the one month ended June 30, 1996
compared to net cash provided by investing activities of $5.9 million for the
one month ended June 30, 1995. This change of $7.2 million was due to an
increase in capital expenditures and a decrease in proceeds from sales of
investment securities. Net cash used in financing activities was $9.4 million
for the one month ended June 30, 1996 compared to $4.5 million for the one month
ended June 30, 1995. This increase of $4.9 million was primarily due to a
decrease in bank overdrafts partially offset by an increase in borrowings under
revolving credit lines, a decrease in payments of notes payable and a decrease
in dividends paid.
16
<PAGE>
LIQUIDITY
On July 1, 1996 the Company issued $175 million of 11 1/8% Senior
Subordinated Notes due 2006, $57.7 million of 13 1/2% Discount Notes due 2007
and borrowed $140 million under the Bank Credit Agreement. The Company used the
combined proceeds to finance the Acquisition of Texas Petrochemicals
Corporation. The Company's liquidity needs arise primarily from principal and
interest payments under the Bank Credit Agreement and the Subordinated Notes.
Interest payments are not made on the Discount Notes until 2002. The Company's
primary source of funds to meet debt service requirements is net cash flow
provided by operating activities. Operating cash flow is significantly impacted
by raw materials cost as well as the selling price and volume variances of
finished goods. The Company enters into supply contracts for certain of its
products in order to mitigate the impact of changing prices. Additionally, the
Company has a $40 million Revolving Credit Facility, of which $12 million was in
use at June 30, 1998, to provide adequate funds for ongoing operations, working
capital and planned capital expenditures. The Company believes that the
availability of funds under the Revolving Credit Facility are sufficient to
cover any current liquidity needs which could arise as a result of negative
working capital. The Company's ability to borrow is limited by the terms of the
Bank Credit Agreement, the Subordinated Notes and the Discount Notes. The Bank
Credit Agreement, the Subordinated Notes and the Discount Notes include certain
restrictive covenants, which include but are not limited to, limitations on
capital expenditures, indebtedness, investments and sales of assets and
subsidiary stock. Additionally, the Bank Credit Agreement requires the Company
to maintain certain financial ratios. On June 30, 1998 the Company obtained an
amendment to the Bank Credit Agreement to update the financial ratios relating
to fixed charge coverage and debt to EBITDA for fiscal 1999 and part of fiscal
2000.
In February 1998, the Company entered into a three-year swap agreement for
$125 million of its Senior Subordinated Notes. The swap agreement effectively
converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a
floating debt with a structured collar. Under the agreement the Company's
interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If
LIBOR rates are set above 6.75% the Company's interest rate is floating at
current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the
Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates
are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June
30, 1998 LIBOR rates were set at 5.69%. In June 1998, the Company entered into a
three-year interest rate cap for $64 million of its senior debt under the Bank
Credit Agreement. The cap effectively converts a portion of the Company's
floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates
are set above 6.75%. The principal amount of the cap amortizes from $64 million
to $32 million on a quarterly basis over the three-year term.
CASH BONUS PLAN
In connection with the Acquisition, the Predecessor established a $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering certain third-party
contractors who have contributed to the past success of the Predecessor. During
the year ended June 30, 1998, $7.8 million of this amount was paid to eligible
participants and the remaining $17.6 million will be made in nine equal future
quarterly installments.
17
<PAGE>
CAPITAL EXPENDITURES
The Company's capital expenditures for fiscal 1998 related principally to
improving operating efficiencies and maintaining environmental compliance.
Capital expenditures for year ended June 30, 1998 were $12.5 million, compared
to $7.6 million for the year ended June 30, 1997. The Company expenses
approximately $20 million annually for plant maintenance. These maintenance
costs are not treated as capital expenditures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share," SFAS No. 129 "Disclosure of Information about Capital Structure,"
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
During 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The Company has
adopted the provisions of SFAS No. 128 and SFAS No. 129 with no material
revisions to the disclosure in the financial statements. SFAS No. 130,
SFAS No. 131, and SFAS No. 132 are effective for fiscal years beginning
after December 15, 1997. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will
analyze these pronouncements to determine what, if any, additional
disclosures will be required thereunder.
YEAR 2000 CONVERSION
The Company has recognized the need to ensure that its systems, equipment
and operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company has taken steps to identify areas of risk and has
begun addressing these issues. The Company is currently in the process of
installing an upgraded information technology (IT) system and anticipate that it
will be fully implemented by mid calendar year 1999. The Company made the
decision to upgrade its IT system prior to concerns surrounding the year 2000.
Management believes the full implementation of this IT system will ensure the
Company's financial systems are compliant with the year 2000. The Company is
also evaluating its non-IT systems, consisting primarily of plant processing
equipment, for year 2000 compliance. The Company has not fully quantified these
areas but it is not expected to have a material impact on the Company's
financial position, results of operations or cash flows. In addition to
evaluating our own compliance with the year 2000, the Company is currently
requesting all of our major customers and suppliers to supply us with a status
of their compliance. At this point the Company has not received sufficient
responses to determine our exposure to non-compliance by a third party. The
Company currently does not have a contingency plan for the year 2000.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Part I, Items 1 and 2 of this document include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Although the Company believes that the expectations reflected in such
forward looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in conjunction with the forward looking statements included herein
("Cautionary Disclosures"). Subsequent written or oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Reports of Independent Auditors .................. 20
Financial Statements
Consolidated Balance Sheet ................... 22
Consolidated Statement of Operations ......... 23
Consolidated Statement of Stockholders' Equity 24
Consolidated Statement of Cash Flows ......... 25
Notes to Consolidated Financial Statements ... 26
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Texas Petrochemical Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Texas
Petrochemical Holdings, Inc. and subsidiary (the "Company") as of June 30, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1998 and 1997 and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 4, 1998
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Petrochemical Holdings, Inc.:
We have audited the accompanying combined statements of operations,
stockholders' equity and cash flows of Texas Olefins Company, subsidiaries and
affiliate (Predecessor to Texas Petrochemicals Corporation) for the one month
period ended June 30, 1996 and the twelve month period ended May 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects the combined results of operations and cash
flows of Texas Olefins Company, subsidiaries and affiliate for the one month
period ended June 30, 1996 and the twelve month period May 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the combined financial statements, effective June
1, 1995, the Company changed its method of accounting for impairment of
long-lived assets.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 16, 1996
21
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 956 $ 101
Accounts receivable - trade ............................. 45,298 44,662
Inventories ............................................. 17,210 17,926
Other current assets .................................... 13,636 19,692
--------- ---------
Total current assets ................................. 77,100 82,381
Property, plant and equipment, net .......................... 227,217 239,959
Investments in land held for sale ........................... 2,579 3,886
Investment in and advances to limited partnership ........... 3,035 2,969
Goodwill, net of accumulated amortization of
$10,342 and $4,887 ........................................ 174,143 179,598
Other assets, net ........................................... 13,163 12,748
--------- ---------
Total assets ......................................... $ 497,237 $ 521,541
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Bank overdraft .......................................... $ -- $ 10,157
Accounts payable - trade ................................ 28,000 29,942
Accrued expenses ........................................ 21,787 16,917
Current portion of cash bonus plan liability ............ 7,811 7,811
Current portion of long-term debt ....................... 6,982 6,438
--------- ---------
Total current liabilities ............................ 64,580 71,265
Revolving line of credit .................................... 12,000 12,000
Long-term debt .............................................. 330,814 333,423
Cash bonus plan liability ................................... 9,766 17,573
Deferred income taxes ....................................... 59,806 64,494
Commitments and contingencies (Note 10)
Common stock held by the ESOP ............................... 10,000 10,000
Less: unearned compensation ................................. (6,000) (8,000)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 voting and
100,000 non-voting shares authorized, 527,778
voting shares issued and outstanding ................. 5 5
Additional paid in capital .............................. 36,264 36,264
Accumulated deficit ..................................... (19,998) (15,483)
--------- ---------
Total stockholders' equity ........................... 16,271 20,786
--------- ---------
Total liabilities and stockholders' equity ......... $ 497,237 $ 521,541
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------ -----------------------
ONE TWELVE
YEAR YEAR MONTH MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MAY 31,
1998 1997 1996 1996
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ............................................ $ 514,790 $ 490,246 $ 41,384 $ 455,585
Cost of goods sold .................................. 438,725 436,339 36,392 390,968
Depreciation and amortization ....................... 31,787 29,876 1,277 14,982
--------- --------- -------- ---------
Gross profit ...................................... 44,278 24,031 3,715 49,635
Selling, general and administrative expenses ........ 6,949 5,766 1,283 7,570
--------- --------- -------- ---------
Income from operations ........................ 37,329 18,265 2,432 42,065
Interest expense .................................... 40,533 39,386 76 1,630
Other income (expense)
Loss on disposal of assets and
investment securities, net ..................... (436) -- (280) (3,099)
Impairment of investment in land .................. -- -- -- (12,592)
Other, net ........................................ 993 2,271 (88) (236)
--------- --------- -------- ---------
557 2,271 (368) (15,927)
--------- --------- -------- ---------
Income (loss) before income taxes,
extraordinary loss and minority
interest ..................................... (2,647) (18,850) 1,988 24,508
Provision (benefit) for income taxes ................ 1,868 (4,823) 761 7,903
Income (loss) before extraordinary
loss and minority interest ................... (4,515) (14,027) 1,227 16,605
Extraordinary loss from early extinguishment
of debt, net of tax benefit of $784 ............... -- 1,456 -- --
Minority interest in net loss of
consolidated subsidiary ........................... -- -- 9 143
--------- --------- -------- ---------
Net income (loss) ............................. $ (4,515) $ (15,483) $ 1,236 $ 16,748
========= ========= ======== =========
Pro Forma net income to reflect
income taxes for Affiliate (Note 7) ............... $ 1,236 $ 15,098
======== =========
Basic loss per common share:
Before extraordinary loss ...................... $ (9.86) $ (32.04)
Extraordinary loss ............................. -- (3.33)
--------- ---------
$ (9.86) $ (35.37)
========= =========
Weighted average shares outstanding ................. 457,778 437,778
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL CLASS A CLASS B AFFILIATE EARNINGS LOSS ON
COMMON PAID IN COMMON COMMON COMMON (ACCUMULATED) INVESTMENT TREASURY
STOCK CAPITAL STOCK STOCK STOCK (DEFICIT) SECURITIES STOCK TOTAL
-------- ------------ --------- --------- ---------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, May 31, 1995 .......... $ 200 $ 5,021 $ 1,000 $ 161,170 $(3,651) $ (468) $163,272
Net income ..................... 16,749 16,749
Redemption of Class A & B
Common ....................... (95,440) (95,440)
Sale of treasury stock ......... 22,600 22,600
Dividends ...................... (16,526) (16,526)
Net change in unrealized loss on
investment securities ........ 3,007 3,007
Cancellation of Class B Common . (1,214) (71,626) 72,840
Cancellation of Class B Common . (7) (461) 468
Redemption and cancellation of
Affiliate common stock ...... (1,000) (1,000)
-------- -------- ------ --------- ------- -------- --------
Balance, May 31, 1996 .......... 200 3,800 -- 89,306 (644) -- 92,662
Net income ..................... 1,236 1,236
Net change in unrealized loss on
investment securities ...... (744) (744)
Liquidating dividend to
affiliate shareholders ..... (677) (677)
-------- -------- ------ --------- ------- -------- --------
Balance, June 30, 1996 ......... 200 3,800 -- 89,865 (1,388) -- 92,477
THE COMPANY:
Adjustments due to Acquisition . $ 5 $ 36,264 (200) (3,800) -- (89,865) 1,388 -- (56,208)
Net loss ....................... (15,483) (15,483)
---- -------- ------- -------- -------- --------- ------- -------- --------
Balance, June 30, 1997 ......... 5 $ 36,264 -- -- -- (15,483) -- -- 20,786
Net loss ....................... (4,515) (4,515)
---- -------- ------- -------- -------- --------- ------- -------- --------
Balance June 30, 1998 .......... $ 5 $ 36,264 $ -- $ -- $ -- $(19,998) $ -- $ -- $ 16,271
======== ======== ======== ========= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------- ----------------------
ONE TWELVE
YEAR YEAR MONTH MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MAY 31,
1998 1997 1996 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................ $ (4,515) $ (15,483) $ 1,236 $ 16,748
Adjustments to reconcile net income (loss)
to cash flow from operating activities:
Extraordinary loss ....................... -- 1,456 -- --
Impairment of investment in land ......... -- -- -- 12,592
Depreciation of fixed assets ............. 25,208 24,810 1,259 14,768
Amortization of intangibles .............. 6,579 5,066 18 214
Amortization of debt issue costs
and deferred premium .................... 5,902 5,664 -- --
Deferred income taxes .................... (3,334) (2,897) (237) (5,829)
Earnings from limited partnership ........ (476) (670) 190 202
Change in:
Accounts receivable .................... (636) (9,382) 7,723 1,593
Inventories ............................ 716 (5,993) 3,069 2,230
Other assets ........................... 1,839 (6,381) 1,424 (3,616)
Accounts payable, accrueds and other ... 3,728 2,051 (768) 5,597
-------- --------- -------- --------
Net cash provided by
(used in) operating activities ....... 35,011 (1,759) 13,914 44,499
Cash flows from investing activities:
Capital expenditures ..................... (12,466) (7,634) (1,997) (5,462)
Proceeds from asset sales ................ 871 4,754 -- --
Acquisition of the Company, net
of cash acquired ........................ -- (366,277) -- --
Distribution received from partnership ... 410 525 -- --
Purchase of investment securities ........ -- -- -- (19,138)
Proceeds from sale of Predecessor assets . -- 16,288 702 32,821
-------- --------- -------- --------
Net cash provided by (used in)
investing activities ................. (11,185) (352,344) (1,295) 8,221
Cash flows from financing activities:
Bank overdraft ........................... (10,157) 10,157 (12,382) 12,382
Net borrowings on revolving line of credit -- (1,000) 3,000 10,000
Proceeds from issuance of long-term debt . 3,192 398,000 -- --
Payments on long-term debt ............... (9,706) (62,219) -- (1,022)
Cash bonus plan payments ................. (7,807) (9,406) -- --
Debt issuance and organizational costs ... (493) (16,304) -- --
Proceeds for sale of common stock, net .. -- 32,976 -- --
Reduction in note receivable from ESOP ... 2,000 2,000 -- --
Dividends paid ........................... -- -- -- (16,526)
Predecessor common stock transactions .... -- -- -- (73,840)
-------- --------- -------- --------
Net cash provided by (used in)
financing activities ................. (22,971) 354,204 (9,382) (69,006)
-------- --------- -------- --------
Net increase (decrease) in cash
and cash equivalents ....................... 855 101 3,237 (16,286)
Cash and cash equivalents, beginning ........ 101 -- 1,543 17,829
-------- --------- -------- --------
Cash and cash equivalents, ending ........... $ 956 $ 101 $ 4,780 $ 1,543
======== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE ACQUISITION
On July 1, 1996, Texas Olefins Company ("TOC"), Texas Petrochemicals
Corporation and a raw material supply contract of Clarkston Corporation (the
"Affiliate") were acquired for approximately $371 million in a series of
transactions (the "Acquisition"). After the transactions, TOC was merged with
and into Texas Petrochemicals Corporation with Texas Petrochemicals Corporation
becoming a 100% owned subsidiary of Texas Petrochemicals Holdings, Inc. In
connection with the Acquisition, Texas Petrochemicals Corporation issued $175
million of Senior Subordinated Notes due 2006 (the "Subordinated Notes") and
borrowed $140 million under the Bank Credit Agreement. Texas Petrochemical
Holdings, Inc. issued $57.7 million in Discount Notes due 2007 (the "Discount
Notes") for net proceeds of $30 million and sold $43.8 million in common stock,
$10 million of which was financed under the Bank Credit Agreement. The combined
proceeds from the issuance of debt and common stock were used to finance the
Acquisition. On the closing date of the Acquisition, prior to closing, TOC sold
to the previous majority shareholder of TOC for $7.8 million in cash a ranch of
approximately 1,900 acres and the livestock and personalty thereon and 80% of
the outstanding capital stock of The Texas Falls Corporation ("The Falls") owned
by TOC. In June 1996, the Affiliate was dissolved and a $677,000 liquidating
dividend was declared to its shareholders.
The sources and applications of funds required to consummate the Acquisition
are summarized below.
AMOUNT
(IN MILLIONS)
-------------
Sources of Funds:
Bank Credit Agreement ................... $140
Subordinated Notes ...................... 175
Discount Notes .......................... 30
Sales of common stock ................... 34
----
Total ............................... $379
====
Uses of Funds:
Acquisition(1) .......................... $363
Fees and expenses(2) .................... 16
----
Total ............................... $379
====
- ---------------
(1) Acquisition cost is net of cash received from the sale of the Texas Falls
Corporation and the Ranch for combined proceeds of $7.8 million
(2) Represents underwriting fees, legal, accounting and other professional fees
payable in connection with the financing of the Acquisition.
The Acquisition was accounted for using the purchase method of accounting
and, therefore, the consolidated financial statements for the year ended June
30, 1997 reflect the acquisition cost allocated to the net assets acquired based
on their estimated fair values as of July 1, 1996. The fair value of tangible
assets acquired, net of liabilities assumed, was $179 million. The balance of
the acquisition cost, $184 million, was recorded as goodwill and is being
amortized over 40 years utilizing the straight-line method.
26
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following unaudited pro forma combined statement of income assumes the
Acquisition occurred on June 1, 1995. The pro forma combined statement of income
reflects several adjusting entries, including but not limited to, increased
depreciation and amortization as a result of the increased basis in fixed assets
and goodwill and increased interest expense from the incurrance of additional
debt. The results are not necessarily indicative of the results, which would
actually have occurred if the purchase had taken place at June 1, 1995. Amounts
are in millions, except share amounts.
TWELVE
MONTHS ENDED
MAY 31, 1996
Revenues ......................................... $ 454.2
Cost of goods sold ............................... 367.3
Depreciation and amortization .................... 36.3
--------
Gross profit ................................. 50.6
Selling, general and administrative .............. 12.7
--------
Income from operations ................... 37.9
Interest expense ................................. 36.1
Other expense:
Loss on disposal of assets and
investment securities, net .................. (3.1)
Impairment of investment in land ............. (12.6)
Other, net ................................... 0.1
--------
(15.6)
--------
Loss before income taxes ................. (13.8)
Provision for income taxes ....................... --
--------
Net loss ................................. $ (13.8)
========
Loss per share ........................... $ (32.26)
========
Weighted average shares outstanding ...... 427,778
========
2. NATURE OF OPERATIONS
The Company through its facility in Houston, Texas is the largest producer
of butadiene and butene-1, and the third largest producer of methyl
tertiary-butyl ether ("MTBE"), in North America, in terms of production
capacity. In addition, the Company is the sole producer of diisobutylene and
isobutylene concentrate in the United States and is the largest domestic
merchant supplier of high purity isobutylene to the chemical market. The
Company's products include: (i) butadiene, primarily used to produce synthetic
rubber; (ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii)
n-butylenes (butene-1 and butene-2), used in the manufacture of plastic resins,
fuel additives and synthetic alcohols; and (iv) specialty isobutylenes,
primarily used in the production of specialty rubbers, lubricant additives,
detergents and coatings.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. The Company purchases a significant portion of its crude butadiene
requirements at prices, which are adjusted based on the Company's selling price
of butadiene as well as the cost of natural gas used to produce butadiene,
thereby providing the Company with a fixed profit on such sales. Methanol and
isobutane are purchased at prices linked to prevailing market prices.
27
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the years ended June 30,
1998 and 1997 include the accounts of Texas Petrochemicals Holdings, Inc. and
its wholly owned subsidiary, TPC Holding Corp., (collectively referred to as)
the "Company". The financial statements for the periods prior to July 1, 1996
include the combined presentation of the accounts of TOC, Texas Petrochemicals
Corporation, The Falls and the Affiliate, (collectively referred to as) the
"Predecessor". TOC was merged with and into Texas Petrochemicals Corporation in
conjunction with the Acquisition described in Note 1. The minority interest
reflected in the accompanying Predecessor financial statements reflects
approximately 20% of the common stock of The Falls not owned by the Company.
CHANGE IN FISCAL YEAR END
In June 1996 the Company's Board of Directors approved a change in the
Company's fiscal year end to June 30 from May 31. Accordingly, the accompanying
combined financial statements include results of operations and cash flows for
the one month transition period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Management has classified all investments as
available-for-sale. Cost is determined by specific identification. Purchases and
sales are reflected on a trade date basis. Investment securities are carried at
fair value with any unrealized gains or losses reported as a component of
stockholders' equity, net of tax.
INVENTORIES
Inventories consist of raw materials, finished goods and chemicals used in
processing and are valued at the lower of average cost or market.
The Company may enter into product exchange agreements with suppliers
whereby certain inventories are exchanged for raw materials. These exchanges are
recorded at the lower of cost or market. Any resulting gains or losses from the
utilization of these exchanges are reflected in cost of chemical products sold.
Balances related to quantities due to or payable by the Company are included in
inventory.
28
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs for
major units of the manufacturing facilities are capitalized and amortized over
the life of the turnaround. Maintenance and repairs are charged to expense as
incurred while significant improvements are capitalized. Upon retirement or sale
of an asset, the asset and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations.
DEPRECIATION
Depreciation of property, plant and equipment is computed using the
straight-line method over their estimated useful lives ranging from 3 to 31
years, with the plants being depreciated over 10 years.
DEBT ISSUE COSTS AND OTHER
Debt issue costs relating to the Company's long-term debt are amortized to
interest expense over the scheduled maturity of debt utilizing the effective
interest method. Unamortized debt issue costs relating to long-term debt retired
prior to its scheduled maturity are charged off as an extraordinary item. Other
assets include patents and catalysts, which are amortized using the
straight-line method over their useful lives ranging from 2 to 7 years.
IMPAIRMENT OF ASSETS
Prior to June 1, 1995, the Company recognized impairment of investments in
land and property, plant and equipment at the time when a decline in value of an
asset was determined to be permanent. Effective June 1, 1995, the Company
adopted SFAS No. 121, "Impairment of Long-Lived Assets and Assets to be Disposed
of." During the twelve months ended May 31, 1996, the Company evaluated the
carrying value of its investment in land in light of the possible sale of these
assets in the foreseeable future and considering the criteria of SFAS No. 121,
determined that an impairment write-down was necessary. As a result, the Company
recorded a provision for estimated impairment of $12.6 million, with an
associated tax benefit of $4.7 million, to write-down certain investments in
land to estimated fair market value. Actual sales proceeds from investments in
land may differ from the carrying amounts.
REVENUE RECOGNITION
The Company recognizes revenue from sales of refined products in the period
of delivery.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred taxes be provided at
enacted tax rates on temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes.
29
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Affiliate of the Predecessor elected for federal tax purposes to be
taxed under provisions of Subchapter S of the Internal Revenue Code. This
election required the stockholders to include the Affiliate's net earnings,
losses and credits in their own income for tax purposes. Accordingly, the
Affiliate generally was not liable for federal income taxes and no provision for
federal income taxes is included in the accompanying financial statements. For
the periods prior to July 1, 1996, pro forma net income reflects the effect on
the combined company as if the Affiliate was a taxable entity for income tax
purposes. The Affiliate's articles of incorporation required its board of
directors to declare a payment of a cash dividend to its shareholders of no less
than 110% of the maximum individual federal income tax rate under the Internal
Revenue Code for each calendar year, payable within 30 days after the Affiliate
files its tax return.
EARNINGS PER SHARE
Income (loss) per share for fiscal years 1998 and 1997 has been computed
using a weighted average shares outstanding of 457,778 and 437,778,
respectively. The weighted average shares outstanding used in the computation of
earnings (loss) per share are net of 60,000 and 80,000 shares held by the
Employee Stock Ownership Plan that are not allocated to employees as of June 30,
1998 and 1997, respectively. The effect of options was not dilutive for fiscal
years 1998 and 1997 for purposes of calculating diluted earnings per share.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share," SFAS No. 129 "Disclosure of Information about Capital Structure," SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." During 1998, the FASB issued
SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement
Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has adopted the provisions of SFAS No. 128 and SFAS No.
129 with no material revisions to the disclosure in the financial statements.
SFAS No. 130, SFAS No. 131, and SFAS No. 132 are effective for fiscal years
beginning after December 15, 1997. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will analyze
these pronouncements to determine what, if any, additional disclosures will be
required thereunder.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
30
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENT SECURITIES
On July 1, 1996 in connection with the Acquisition, all of the Predecessor's
equity securities were sold at their unamortized cost. As of June 30, 1996 the
Predecessor held $6.8 million of equity securities with an unamortized cost of
$9.0 million and gross unrealized losses of $2.2 million. Unrealized losses of
$0.6 million and $1.4 million (net of deferred tax) related to these securities
is recorded as a component of stockholders' equity for the twelve months ended
May 31, 1996 and the one month ended June 30, 1996, respectively. During the
twelve months ended May 31, 1996 and the one month ended June 30, 1996, gross
realized gains of approximately $1.9 million and $0, respectively, and gross
realized losses of approximately $5.0 million and $0.3 million, respectively,
were recognized on the sale of securities.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
JUNE 30, JUNE 30,
1998 1997
---------- ----------
Finished goods $ 4,701 $ 8,500
Raw materials 10,415 7,504
Chemicals and supplies 2,094 1,922
-------- --------
$ 17,210 $ 17,926
======== ========
PROPERTY, PLANT AND EQUIPMENT:
JUNE 30, JUNE 30,
1998 1997
-------- --------
Chemical plants $260,808 $259,293
Construction in progress 13,624 3,047
Other 2,308 1,934
-------- --------
276,740 264,274
Less accumulated depreciation, depletion
and amortization 49,523 24,315
-------- --------
$227,217 $239,959
======== ========
31
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS),
CONTINUED
OTHER ASSETS:
JUNE 30, JUNE 30,
1998 1997
--------- ---------
Debt issue costs $ 13,984 $ 13,491
Organizational costs 573 573
Intangibles and other 4,502 2,000
-------- --------
19,059 16,064
Less accumulated amortization 5,896 3,316
-------- --------
$ 13,163 $ 12,748
======== ========
ACCRUED EXPENSES:
JUNE 30, JUNE 30,
1998 1997
-------- --------
Accrued interest $ 14,581 $ 13,203
Property and sales taxes 2,836 2,866
Federal and state income taxes 3,629 135
Other 741 713
-------- --------
$ 21,787 $ 16,917
======== ========
6. LONG-TERM DEBT
JUNE 30, JUNE 30,
1998 1997
--------- --------
Bank Credit Agreement:
Term A Loan $ 21,003 $ 25,781
Term B Loan 42,393 44,000
ESOP Loan 6,000 8,000
Revolving Credit Loans 12,000 12,000
Senior Subordinated Notes 225,000 225,000
Discount Notes 38,958 34,187
Deferred premium on Senior Subordinated Notes 2,571 2,893
Long-term financing 1,871 -
-------- --------
349,796 351,861
Less current maturities 6,982 6,438
-------- --------
Long-term debt $342,814 $345,423
======== ========
32
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Bank Credit Agreement provided for term loans in the amount of $130
million, an ESOP loan of $10 million, and a revolving credit facility of up to
$40 million. Quarterly principal and interest payments are made under the Bank
Credit Agreement. The final payments under the ESOP Loan, Term A Loan and Term B
Loan are due on June 30, 2001, December 31, 2002 and June 30, 2004,
respectively. The Revolving Credit Loan facility is currently scheduled to
expire on December 31, 2002. The debt under the Bank Credit Agreement bears
interest, at the option of the borrower, based on the LIBOR rate plus a margin
(2.5% and 3% at June 30, 1998) or the greater of the prime rate and the federal
funds rate plus 1/2% plus a margin (1.5% at June 30, 1998). Substantially all
assets of the Company are pledged as collateral under the Bank Credit Agreement.
The Senior Subordinated Notes are due 2006 and bear interest at 11 1/8% payable
semiannually on January 1 and July 1. The Discount Notes are due 2007 and bear
interest at 13 1/2% payable semiannually on January 1 and July 1 beginning 2002.
The Bank Credit Agreement, the Senior Subordinated Notes and the Discount Notes
include certain restrictive covenants, which include but are not limited to,
limitations on capital expenditures, indebtedness, investments and sales of
assets and subsidiary stock. Additionally, the Bank Credit Agreement requires
the Company to maintain certain financial ratios. On June 30, 1998 the Company
obtained an amendment to the Bank Credit Agreement to update the financial
ratios relating to fixed charge coverage and debt to EBITDA for fiscal 1999 and
part of fiscal 2000.
The fair value of the Senior Subordinated Notes, based on quoted market
prices, was approximately $244 million and $242 million as of June 30, 1998 and
1997, respectively. There currently is not an active market for the Discount
Notes, therefore, the Company estimated that the fair value, based on current
interest rates available for the Company and similar debt instruments, was
approximately $45 million and $37 million as of June 30, 1998 and 1997,
respectively. The long-term debt under the Bank Credit Agreement carries a
floating interest rate, therefore, the Company estimates that the carrying
amount of such debt was not materially different from its fair value as of June
30, 1998 and 1997.
In February 1998, the Company entered into a three-year swap agreement for
$125 million of its Senior Subordinated Notes. The swap agreement effectively
converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a
floating debt with a structured collar. Under the agreement the Company's
interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If
LIBOR rates are set above 6.75% the Company's interest rate is floating at
current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the
Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates
are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June
30, 1998 LIBOR rates were set at 5.69%. In June 1998, the Company entered into a
three-year interest rate cap for $64 million of its senior debt under the Bank
Credit Agreement. The cap effectively converts a portion of the Company's
floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates
are set above 6.75%. The principal amount of the cap amortizes from $64 million
to $32 million on a quarterly basis over the three-year term.
The net premiums paid for interest rate swap agreements are charged to
expense over the terms of the agreements. The Company is exposed to credit
losses in the event of nonperformance by a counterparty to the derivative
financial instruments. The Company anticipates, however, that the counterparties
will be able to fully satisfy obligations under the contracts. Market risk
arises from changes in interest rates.
33
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate scheduled maturities outstanding debt for the succeeding five
years are as follows:
FISCAL YEAR
-----------
1999 $6,982
2000 7,461
2001 7,486
2002 6,386
2003 30,303
7. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax assets and liability at
June 30, 1998 and June 30, 1997 are as follows (in thousands of dollars):
JUNE 30, JUNE 30,
1998 1997
---------- ----------
Deferred tax asset (liability) - current:
Net operating loss carryforward ............ $ -- $ 1,308
Cash bonus plan ............................ 2,756 2,756
Turnaround costs ........................... (443) --
Accrued liabilities and other .............. (49) (446)
-------- --------
$ 2,264 $ 3,618
======== ========
Deferred tax asset (liability) - noncurrent:
Investment in land ......................... $ 4,813 $ 4,660
Cash bonus plan ............................ 3,466 6,200
Interest ................................... 3,135 1,465
Property, plant and equipment .............. (71,000) (76,819)
Other ...................................... (220) --
-------- --------
$(59,806) $(64,494)
======== ========
The current deferred tax asset is included in other current assets in the
accompanying balance sheet. The provision for federal and state income taxes is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------- ---------------------
ONE TWELVE
YEAR YEAR MONTH MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MAY 31,
1998 1997 1996 1996
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal ......................... $ 4,259 $ (508) $ 880 $ 12,150
State ........................... 943 63 118 1,582
------- ------- -------- --------
5,202 (445) 998 13,732
------- ------- -------- --------
Deferred:
Federal ......................... (3,334) (4,378) (210) (5,461)
State ........................... -- -- (27) (368)
------- ------- -------- --------
(3,334) (4,378) (237) (5,829)
------- ------- -------- --------
Total provision (benefit)
for income taxes ........... $ 1,868 $(4,823) $ 761 $ 7,903
======= ======= ======== ========
Pro Forma income tax provision $ 761 $ 9,553
======== ========
</TABLE>
34
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Pro Forma income tax provision that the income of the Affiliate, which is a
Subchapter S Corporation and accordingly pays no federal income tax, was taxable
to the Predecessor based on the Predecessor's effective tax rate.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income from continuing operations. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------- -------------------
ONE TWELVE
YEAR YEAR MONTH MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MAY 31,
1998 1997 1996 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate ........ 35% 35% 35% 35%
Computed "expected" federal income tax$ .. (926) $(6,596) $696 $ 8,578
Increase (decrease) in tax resulting from:
Affiliate earnings not subject to
federal income tax ................. -- (1,651)
State income taxes, net of
federal benefit .................... 612 41 59 789
Other, net ........................... 273 22 6 280
Amortization of goodwill and other ... 1,909 1,710 -- (93)
------- ------- ---- -------
Provision (benefit) for income taxes ..... $ 1,868 $(4,823) $761 $ 7,903
======= ======= ==== =======
</TABLE>
8. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP
The Company and Hollywood Marine, Inc. formed a limited partnership,
Hollywood/Texas Olefins, Ltd., to operate four barges capable of transporting
chemicals. The Company is a 50% limited partner in the limited partnership. The
Company accounts for this investment under the equity method and records its
portion of the limited partnership's net income as other income in the
accompanying statement of operations. Summarized financial information of the
partnership has not been presented because the Company's investment in and its
proportionate share of the partnership's operations are not material.
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
COMPANY PREDECESSOR
------------------------ ------------------------
ONE TWELVE
YEAR YEAR MONTH MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MAY 31,
1998 1997 1996 1996
--------- ---------- ----------- -------------
Interest ............ $33,735 $20,600 $ 62 $ 2,330
Income taxes ........ 1,641 967 877 14,756
35
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases tank cars under noncancelable operating leases. Under the
terms of the lease agreements, the Company is reimbursed by customers at a fixed
rate per mile, based on the distance the tank cars travel. Reimbursements were
approximately $0.8 million, $0.8 million, $0.04 million and $0.8 million, for
the years ended June 30, 1998 and 1997, for the one-month period ended June 30,
1996 and for the twelve months ended May 31, 1996, respectively. The Company is
also obligated under an operating lease to Hollywood/Texas Olefins, Ltd. for the
rental of one barge.
Total rent expense was approximately $3.6 million, $3.9 million, $0.4
million and $4.8 million (net of reimbursements described above and including
$0.7 million, $1.8 million, $0.2 million and $2.0 million for the rental of
barges) for the years ended June 30, 1998 and 1997, for the one month period
ended June 30, 1996 and for the twelve months ended May 31, 1996, respectively.
Future minimum lease payments at June 30, 1998 are as follows (in thousands of
dollars):
FISCAL YEAR
-----------
1999 $ 3,945
2000 3,392
2001 2,722
2002 1,890
2003 492
PURCHASE COMMITMENTS
The Company has purchase commitments incident to the ordinary conduct of
business. The prices of such purchase commitments are based on formulas, which
are determined from the prevailing market rate for such products. These
commitments generally have cancellation provisions given proper notification.
LITIGATION
The Company is involved in various routine legal proceedings which are
incidental to the business. Management of the Company is vigorously defending
such matters and is of the opinion that their ultimate resolution will not have
a material adverse impact on the Company's financial position, results of
operations or cash flows.
36
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency, the U.S.
Coast Guard, the Army Corps of Engineers, the Texas Natural Resource
Conservation Commission, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect the cost of compliance
with existing environmental laws will have a material adverse effect on the
Company's financial condition, results of operations or cash flows, there can be
no assurance that future legislation, regulation or judicial or administrative
decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex, has
indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation. The Company believes that
it has meritorious defenses to Petro-Tex's claim and intends to contest the
claim vigorously. Although no on-site contamination has been identified as
requiring remediation, management believes that certain areas of the Houston
facility were historically used for waste disposal. Based on limited, currently
available information about these waste disposal areas and their contents, the
Company believes that, if such remediation becomes necessary, any remediation
costs would not have a material adverse effect on the Company's financial
condition or results of operations. The Petro-Tex indemnity does not extend to
these on-site waste disposal areas or their contents.
37
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PREDECESSOR COMMITMENTS
During 1996, the Predecessor's Board of Directors approved the cancellation
of all of the following stock purchase agreements, stock option agreements and
salary continuation agreements in anticipation of the Acquisition.
STOCK PURCHASE AGREEMENTS
The Predecessor's Board of Directors approved a stock purchase agreement with
certain officers who own 185,000 shares of the Predecessor's outstanding Class A
common stock and 1,081,670 shares of the Predecessor's outstanding Class B
common stock. Under the terms of this agreement in the event any of these
officers ceases full time employment with the Predecessor or in the event of the
stockholder's death, the Predecessor must redeem all of the stockholder's shares
at a redemption price of $60 per share. This agreement superseded the previous
stock purchase agreements of the Predecessor which are described in the
following paragraphs.
The Predecessor entered into a stock purchase agreement with a certain
minority stockholder who owns 20,000 shares of the Predecessor's outstanding
Class A common stock and 80,000 shares of the Predecessor's outstanding Class B
common stock. Under the terms of this agreement, in the event of the
stockholder's death, the Predecessor must redeem all shares owned by the
deceased stockholder at a formula price, which is adjusted annually. At May 31,
1995, the formula price per share was approximately $58.
The Predecessor entered into a death benefit agreement with an officer of
the Predecessor who owns 660,000 shares of Class B common stock of the
Predecessor. This agreement provides that in the event of the death of the
officer, the Predecessor is obligated to redeem the shares at a price of $60 per
share with twenty-five percent of the purchase price payable at closing and the
balance payable in five equal annual installments plus interest at the rate of
eight percent per annum. This agreement replaces a previous agreement that
obligated the Predecessor to redeem the shares in the event of the death of the
officer at a price of $80 per share.
The Predecessor entered into a stock purchase agreement with certain of its
minority stockholders who own 171,000 shares of the Predecessor's outstanding
common stock. Under the terms of this agreement, such stockholders may sell
their shares to the Predecessor at a formula price, which is adjusted annually.
Under this agreement, the Predecessor is obligated to redeem the shares in the
event of the death of the stockholder at the formula price.
At May 31, 1995, the formula price per share was approximately $54.
The Predecessor also entered into a Section 303 stock purchase agreement
with an officer of the Predecessor who owns 85,000 shares of the Predecessor's
outstanding common stock. This agreement allows for the officer's estate to
require the Predecessor to redeem the necessary shares so as to pay estate taxes
and funeral and administrative expenses upon the death of the officer. Under the
terms of this agreement, the redemption price per share will be based upon the
value of the shares as reflected on the federal estate tax return.
38
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Additionally, the Predecessor entered into separate stock purchase
agreements with an officer of the Predecessor and his spouse who own 500,000
shares of the Predecessor's outstanding common stock as part of a community
estate. The agreement with the officer requires the Predecessor to redeem
250,000 shares from the community estate upon the officer's death at a price of
$90 per share with twenty five percent of the redemption price payable at
closing and the balance payable in five annual installments plus interest at the
rate of eight percent per annum. The agreement with the officer's spouse allows
her to require the Predecessor to redeem the 250,000 shares from the community
estate not redeemed as part of the officer's agreement for a period of one year
subsequent to the officer's death at the same price and payable in the same
manner as set forth in the officer's agreement. Additionally, the spouse's
agreement requires the Predecessor to redeem 250,000 shares of the stock from
the community estate in the event that she predeceases the officer at a price of
$90 per share with sixty percent of the redemption price payable at closing and
the balance payable in thirty-six equal monthly installments plus interest at
the rate of eight percent per annum.
All of the Affiliate's common stock is subject to a stock purchase
agreement. Under the terms of the stock purchase agreement, the Affiliate is
obligated to redeem all of a stockholder's shares in the event of death and has
an option to redeem all of a stockholder's shares in certain other instances.
The redemption price is equal to the Affiliate's adjusted book value, as defined
in the agreement, divided by the number of outstanding shares. At May 31, 1995,
the redemption price per share was $8.15. Of the total redemption amount, 25% is
to be paid in cash with the remaining balance to be paid in 42 equal monthly
installments as evidenced by an interest bearing promissory note.
STOCK OPTION AGREEMENTS
The Predecessor entered into stock option agreements with two of its
officers, which granted them the option to purchase 100,000 shares of common
stock. The option purchase price for the shares is $40 per share. At May 31,
1995, 30,000 shares were exercisable. During the fiscal year ended May 31, 1994,
one of the officers forfeited his option to purchase 50,000 shares of common
stock. In the event the option is exercised, the Predecessor and the officers
will enter into stock purchase agreements. Under the terms of the agreement,
transfer of the stock is restricted and only the Predecessor, at its option, may
redeem the stock. However, upon death of the officer, the Predecessor is
obligated to redeem the officer's shares. In all instances the redemption price
will be the greater of the formula price in the agreement or $40 per share. At
May 31, 1995 the formula price was approximately $54 per share.
SALARY CONTINUATION AGREEMENTS
The Predecessor entered into salary continuation agreements with three of
its officers. The agreements provide that if the officer is an employee of the
Predecessor upon death, an amount ranging from $10,000 to $25,000 would be
payable monthly to his estate for a period of five years.
39
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. EMPLOYEE BENEFITS
PROFIT SHARING PLAN
The Company has a noncontributory profit sharing plan that covers all
full-time employees that have completed one year or more of service. Employees
can contribute up to 10% of their base compensation to a tax deferred fund which
is matched by the Company at the rate of $.25 per one dollar contributed by the
employee up to 6% of the employee's base compensation. The Company's expense to
match employee contributions was $167,634, $169,591, $14,786 and $195,627 for
the years ended June 30, 1998 and 1997, for the one month period ended June 30,
1996 and for the twelve month period ended May 31, 1996, respectively.
Additionally, the Company made additional discretionary contributions to the
plan which amounted to approximately $2.1 million, $1.1 million, $0.2 million
and $2.4 million for the years ended June 30, 1998 and 1997, for the one month
period ended June 30, 1996 and for the twelve month period ended May 31, 1996,
respectively. The Company's contributions vest with the employee at a rate of
20% per year.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, the Company established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees of the Company. The ESOP borrowed $10 million under the Bank Credit
Agreement to purchase 100,000 shares of the Company's Common Stock at the
closing of the Acquisition. The shares of Common Stock purchased by the ESOP
were pledged as security for the ESOP Loan, and such shares will be released and
allocated to ESOP participants' accounts as the ESOP Loan is discharged. For
employees whose employment commenced prior to October 1, 1996 and who have
attained 21 years, participation begins as of the Acquisition date or the date
of commencement of the participant's employment. A participant's ESOP account
vests at the rate of 20% per year. The Company's contributions to the ESOP,
which are used to retire principal and pay interest on the loan is reported as
compensation expense. Principal and interest payments made for the years ended
June 30, 1998 and 1997 amounted to $2.6 million and $2.7 million, respectively.
The common stock held by the Employee Stock Ownership Plan and the related
unearned compensation is reported between liabilities and permanent
stockholders' equity in a manner similar to redeemable preferred stock as the
employees have an option to put the shares of the Company. As of June 30, 1998,
40,000 shares has been allocated to employees.
STOCK OPTION PLAN
In October 1996, the Company approved the Stock Option Plan (the "Plan") to
reserve up to 27,778 shares of Common Stock to certain officers, directors and
key employees of the Company. The term of the options issued under the Plan
cannot exceed ten years from the date of grant. The options vest ratably over a
three-year period from the date of grant and are exercisable at $100 per share.
In April 1998 the Company amended the Plan to reserve up to an additional 42,000
shares of Common Stock under the plan, subject of shareholder approval. Stock
option activity under the Plan was as follows:
40
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NUMBER OF
SHARES
-----------
Balance July 1, 1996 ................. --
Granted .............................. 27,778
Exercised ............................ --
Canceled ............................. --
-------
Balance June 30, 1997 ................ 27,778
Granted .............................. 11,500
Exercised ............................ --
Canceled ............................. (1,000)
-------
Balance June 30, 1998 ................ 38,278
=======
The Company applies APB 25 and related Interpretations in accounting for the
Plan. There has been no compensation cost recognized by the Company associated
with the Plan as the exercise price of the options at the dates of measurement
were equivalent to the estimated fair value of the common stock on that date.
Had compensation cost for the Plan been determined based on the method
consistent with SFAS 123, the Company's net loss and net loss per share for the
years ended June 30, 1998 and 1997 would have been unchanged on a pro forma
basis.
CASH BONUS PLAN LIABILITY
In connection with the Acquisition, the Predecessor established the $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering the employees of certain
third-party contractors who have contributed to the past success of the
Predecessor. All participants of the plan as of July 2, 1996 were distributed
10% of the cash bonus in August 1996, and the remaining amount is to be paid in
sixteen quarterly installments which began in October 1996.
12. RELATED PARTY TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and
Corporate Development (Mr. Stutts) in the amount of $200,000 of which $145,129
remained outstanding as of September 24, 1998. The proceeds from the loan were
utilized to purchase outstanding shares of the Company's common stock at fair
market value. The loan carries an interest rate of 7%. During fiscal 1998 the
Company made payments totaling $500,000 to a consulting firm (ENPAL) whose
majority shareholder is also an outside director and shareholder of the Company
(Mr. Cain). The Chairman of the Company (Mr. McMinn) receives annual
compensation of $150,000 for consulting services provided to the Company and
reimbursements of approximately $25,000 per year for office expenses. Prior to
the Acquisition, the Predecessor made contributions from time to time to a
charitable organization that is an affiliate of the Predecessor.
41
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the years ended June 30, 1998 and 1997, the one
month period ended June 30, 1996 and the twelve month period ended May 31, 1996
approximately 41%, 41%, 46% and 50%, respectively, of the Company's sales were
to four customers. The Company had two customers, which represented 13% and 15%
of sales during the year ended June 30, 1998, 11% and 17% of sales during the
year ended June 30, 1997, 14% and 16% of sales during the one month period ended
June 30, 1996, and 16% and 19% of sales during the twelve months ended May 31,
1996. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral for accounts receivable. The Company's
credit losses have been minimal.
The Company maintains its cash deposits and short-term investments with a
major bank and a financial services company which at certain times exceed the
federally insured limits. Management assesses the financial condition of these
institutions and believes that any possible credit loss is minimal.
14. FINANCIAL INSTRUMENTS
At June 30, 1998 the Company estimated that the carrying value and fair
value of its financial instruments, other than long-term debt (See Note 6), were
approximately equal due to the short-term nature of the instruments. Such
instruments include cash and cash equivalents, accounts receivable and accounts
payable. The Company enters into certain derivative financial instruments as
part of its interest rate risk management. Interest rate swaps, caps, collars
and floors are classified as matched transactions. The differential to be paid
or received as interest rates change is accrued and recognized as an adjustment
to interest expense.
The fair value of derivative financial instruments are the amounts at which
they could be settled base on estimates from dealers. As of June 30, 1998, the
carrying amounts and estimated fair values of derivative financial instruments
were not significant.
42
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL GUARANTOR INFORMATION
TPC Holding Corp. a wholly owned subsidiary of Texas Petrochemical Holdings,
Inc. has fully and unconditionally guaranteed, on a joint and several basis,
Texas Petrochemical Holdings, Inc's. obligations relative to the Discount Notes
due 2007 in an Event of Default. TPC Holding Corp. conducts its operations
through its subsidiaries and is dependent upon distribution from these
subsidiaries as its source of cash flow. Management has determined that
separate, full financial statements of TPC Holding Corp. ("Guarantor") would not
be material to investors and such financial statements are not provided.
Supplemental combining financial information of Texas Petrochemical Holdings,
Inc. is presented below:
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ -- $ -- $ 956 $ -- $ 956
Accounts receivable - trade ......................... 45,298 45,298
Inventories ......................................... 17,210 17,210
Other current assets ................................ 2,850 10,786 13,636
--------- --------- --------- --------- ---------
Total current assets ............................. 2,850 74,250 77,100
Property, plant and equipment, net ...................... 227,217 227,217
Investments in land held for sale ....................... 2,579 2,579
Investment in and advances to limited partnership ....... 3,035 3,035
Goodwill, net ........................................... 174,143 174,143
Other assets, net of accumulated amortization ........... 484 12,679 13,163
Consolidated subsidiaries ............................... 55,679 55,679 (111,358) --
--------- --------- --------- --------- ---------
Total assets ..................................... $ 59,013 $ 55,679 $ 493,903 $(111,358) $ 497,237
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Bank overdraft ...................................... $ -- $ -- $ -- $ -- $ --
Accounts payable - trade ............................ 28,000 28,000
Accrued expenses .................................... 2,919 18,868 21,787
Current portion of cash bonus plan .................. 7,811 7,811
Current portion of long-term debt ................... 6,982 6,982
--------- --------- --------- --------- ---------
Total current liabilities ........................ 2,919 61,661 64,580
Revolving line of credit ................................ 12,000 12,000
Long-term debt .......................................... 38,958 291,856 330,814
Cash bonus plan ......................................... 9,766 9,766
Deferred income taxes ................................... (3,135) 62,941 59,806
Common stock held by the ESOP ........................... 10,000 10,000
Less: unearned compensation ............................. (6,000) (6,000)
Stockholders' equity:
Common Stock ........................................ 5 4,162 (4,162) 5
Additional paid in capital .......................... 36,264 69,805 71,643 (141,448) 36,264
Accumulated deficit ................................. (19,998) (14,126) (14,126) 28,252 (19,998)
Note receivable from ESOP ........................... (6,000) 6,000 --
--------- --------- --------- --------- ---------
Total stockholders' equity ....................... 16,271 55,679 55,679 (111,358) 16,271
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ..... $ 59,013 $ 55,679 $ 493,903 $(111,358) $ 497,237
========= ========= ========= ========= =========
</TABLE>
43
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
----------- ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ -- $ -- $ 101 $ -- $ 101
Accounts receivable - trade ................... 44,662 44,662
Inventories ................................... 17,926 17,926
Other current assets .......................... 10 19,682 19,692
--------- --------- --------- --------- ---------
Total current assets ....................... 10 82,371 82,381
Property, plant and equipment, net ................ 239,959 239,959
Investments in land held for sale ................. 3,886 3,886
Investment in and advances to limited partnership . 2,969 2,969
Goodwill, net ..................................... 179,598 179,598
Other assets, net of accumulated amortization ..... 423 12,325 12,748
Consolidated subsidiaries ......................... 55,075 55,075 (110,150) --
--------- --------- --------- --------- ---------
Total assets ............................... $ 55,508 $ 55,075 $ 521,108 $(110,150) $ 521,541
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................ $ -- $ -- $ 10,157 $ -- $ 10,157
Accounts payable - trade ...................... 29,942 29,942
Accrued expenses .............................. 16,917 16,917
Current portion of cash bonus plan ............ 7,811 7,811
Current portion of long-term debt ............. 6,438 6,438
--------- --------- --------- --------- ---------
Total current liabilities .................. 71,265 71,265
Revolving line of credit .......................... 12,000 12,000
Long-term debt .................................... 34,187 299,236 333,423
Cash bonus plan ................................... 17,573 17,573
Deferred income taxes ............................. (1,465) 65,959 64,494
Common stock held by the ESOP ..................... 10,000 10,000
Less: unearned compensation ....................... (8,000) (8,000)
Stockholders' equity:
Common Stock .................................. 5 4,162 (4,162) 5
Additional paid in capital .................... 36,264 67,804 71,642 (139,446) 36,264
Accumulated deficit ........................... (15,483) (12,729) (12,729) 25,458 (15,483)
Note receivable from ESOP ..................... (8,000) 8,000 --
--------- --------- --------- --------- ---------
Total stockholders' equity ................. 20,786 55,075 55,075 (110,150) 20,786
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 55,508 $ 55,075 $ 521,108 $(110,150) $ 521,541
========= ========= ========= ========= =========
</TABLE>
44
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Year Ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
----------- ----------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues ................................... $ -- $ -- $ 514,790 $ -- $ 514,790
Cost of goods sold ......................... 438,725 438,725
Depreciation and amortization .............. 31,787 31,787
--------- --------- --------- ------ ---------
Gross profit ........................... 44,278 44,278
Selling, general and administrative expenses 61 6,888 6,949
--------- --------- --------- ------ ---------
Income (loss) from operations ...... (61) 37,390 37,329
Interest expense ........................... 4,813 35,720 40,533
Other income (expense):
Loss on disposal of non-plant assets ... (436) (436)
Other, net ............................. 993 993
--------- ---------
557 557
--------- --------- --------- ------ ---------
Income (loss) before income taxes .. (4,874) 2,227 (2,647)
Provision (benefit) for income taxes ... (1,756) 3,624 1,868
Equity in net income of subsidiaries ....... 1,397 1,397 (2,794) --
--------- --------- --------- ------ ---------
Net income (loss) .................. $ (4,515) $ (1,397) $ (1,397) $2,794 $ (4,515)
========= ========= ========= ====== =========
</TABLE>
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Year Ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
----------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................... $ -- $ -- $ 490,246 $ -- $ 490,246
Cost of goods sold ......................... 436,339 436,339
Depreciation and amortization .............. 29,876 29,876
--------- ---------
Gross profit ........................... 24,031 24,031
Selling, general and administrative expenses 6 5,760 5,766
--------- --------- --------- ------- ---------
Income (loss) from operations ...... (6) 18,271 18,265
Interest expense ........................... 4,229 35,157 39,386
Other income ............................... 2,271 2,271
--------- --------- --------- ------- ---------
Income (loss) before income taxes .. (4,235) (14,615) (18,850)
Benefit for income taxes ................... (1,481) (3,342) (4,823)
Extraordinary loss, net .................... 1,456 1,456
Equity in net loss of subsidiaries ......... 12,729 12,729 (25,458) --
--------- --------- --------- ------- ---------
Net loss ........................... $ (15,483) $ (12,729) $ (12,729) $25,458 $ (15,483)
========= ========= ========= ======= =========
</TABLE>
45
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Year Ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- ---------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................. $ (4,515) $ (1,397) $ (1,397) $2,794 $ (4,515)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets ................... 25,208 25,208
Amortization of goodwill and other assets ...... 6,579 6,579
Amortization of debt issue costs ............... 4,813 1,089 5,902
Earnings from limited partnership .............. (476) (476)
Deferred income taxes .......................... (1,654) (1,680) (3,334)
Change in:
Accounts receivable .......................... (636) (636)
Inventories .................................. 716 716
Other assets ................................. (4) 1,843 1,839
Accounts payable, accrueds and other ......... 67 3,661 3,728
-------- -------- -------- ------ --------
Net cash provided by operating activities . (1,293) (1,397) 34,907 2,794 35,011
Cash flows from investing activities:
Capital expenditures ........................... (12,466) (12,466)
Proceeds from the sale of non-plant assets ..... 871 871
Distribution from limited partnership .......... 410 410
-------- -------- -------- ------ --------
Net cash used in investing activities ..... (11,185) (11,185)
Cash flows from financing activities:
Change in bank overdraft ....................... (10,157) (10,157)
Net repayments under revolver .................. -- --
Proceeds from issuance of long-term debt ....... 3,192 3,192
Payments on long-term debt ..................... (9,706) (9,706)
Payment of cash bonus plan ..................... (7,807) (7,807)
Debt issuance costs ............................ (104) (389) (493)
Reduction in note receivable from ESOP ......... 2,000 2,000
-------- -------- -------- ------ --------
Net cash used in financing activities ..... (104) (22,867) (22,971)
-------- -------- -------- ------ --------
Net increase (decrease) in cash and cash equivalents (1,397) (1,397) 855 2,794 855
Cash and cash equivalents, at beginning of period .. 101 101
-------- -------- -------- ------ --------
Cash and cash equivalents, at end of period ........ $ (1,397) $ (1,397) $ 956 $2,794 $ 956
======== ======== ======== ====== ========
</TABLE>
46
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Year Ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
---------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ....................................... $ (15,483) $ (12,729) $ (12,729) $25,458 $(15,483)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary loss, net ........................ 1,456 1,456
Depreciation of fixed assets ................... 24,810 24,810
Amortization of goodwill and other assets ...... 5,066 5,066
Amortization of debt issue costs ............... 4,229 1,435 5,664
Earnings from limited partnership .............. (670) (670)
Deferred income taxes .......................... (2,897) (2,897)
Change in:
Accounts receivable .......................... (9,382) (9,382)
Inventories .................................. (5,993) (5,993)
Other assets ................................. (1,475) (4,906) (6,381)
Accounts payable, accrueds and other ......... 2,051 2,051
--------- --------- --------- ------- --------
Net cash used in operating activities ..... (12,729) (12,729) (1,759) 25,458 (1,759)
Cash flows from investing activities:
Capital expenditures ........................... (7,634) (7,634)
Proceeds from the sale of non-plant assets ..... 4,754 4,754
Distribution from limited partnership .......... 525 525
Acquisition of the Company ..................... (366,277) (366,277)
Proceeds from sale of Predecessor assets ....... 16,288 16,288
--------- --------- --------- ------- --------
Net cash used in investing activities ..... (352,344) (352,344)
Cash flows from financing activities:
Change in bank overdraft ....................... 10,157 10,157
Net repayments under revolver .................. (1,000) (1,000)
Proceeds from issuance of long-term debt ....... 30,000 368,000 398,000
Payments on long-term debt ..................... (62,219) (62,219)
Payment of cash bonus plan ..................... (9,406) (9,406)
Debt issuance and organization costs ........... (465) (15,839) (16,304)
Reduction in note receivable from ESOP ......... 2,000 2,000
Proceeds from sale of common stock ............. 32,976 32,976
Cash contribution to subsidiary ................ (62,511) 62,511
--------- --------- --------- ------- --------
Net cash provided by (used in)
financing activities ................... -- 354,204 354,204
--------- --------- --------- ------- --------
Net increase (decrease) in cash and cash equivalents (12,729) (12,729) 101 25,458 101
Cash and cash equivalents, at beginning of period
--------- --------- --------- ------- --------
Cash and cash equivalents, at end of period ........ $ (12,729) $ (12,729) $ 101 $25,458 $ 101
========= ========= ========= ======= ========
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DIAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director is elected for a one year
term or until such person's successor is duly elected and qualified.
Years of
service with the
Company
NAME AGE POSITION OR ITS PREDECESSORS
- ---- --- -------- -------------------
Gordon A. Cain 86 Director 14
Hunter W. Henry Jr. 70 Director -
William R. Huff 48 Director 2
William A. McMinn 68 Director and Chairman 14
Steve A. Nordaker 51 Director 1
Gary L. Rosenthal 49 Director -
Susan O. Rheney 39 Director 2
John T. Shelton 67 Director 14
B. W. Waycaster 59 Director, President and
Chief Executive Officer 5
Bill R. McNeese 64 Vice President, Operations 10
H.E. Sebastian 54 Vice President, Marketing -
Carl S. Stutts 51 Vice President, Finance and
Corporate Development -
Ronald W. Woliver 58 Vice President, Market Development 29
Stephen R. Wright 50 Vice President, Secretary and
General Counsel 2
Mr. Cain is Chairman of the Board of Agennix Inc. and of Lexicon Genetics,
Inc., biotechnology companies. From August 1982 until his retirement in December
31, 1992, he was Chairman of the Board of The Sterling Group, Inc. ("Sterling").
Mr. Cain was the Chairman of the Board of Sterling Chemicals, Inc. from 1986
until it was sold in August 1996 and was on the Board of Directors of Arcadian
Corporation from May 1989 until it was sold in April 1997. Prior to organizing
Sterling, Mr. Cain was involved in the purchase of a variety of businesses and
provided consulting services to these and other companies. Mr. Cain was also
Chairman of the Board of UltraAir, Inc. from 1991 to 1994, Chairman of the Board
of Cain Chemical Inc. from its organization in March 1987 until its acquisition
by Occidental Petroleum Corporation in May 1988 and the Chairman of the Board of
Vista Chemical Company from 1984 until 1986.
48
<PAGE>
Mr. Henry has held various manufacturing management positions in Dow
Chemical Company, including Vice President - Business Operations for Latin
America, Vice President - Manufacturing Dow Badische, General Manager - Michigan
Division, President - Dow Brazil, President - Dow USA and Executive Vice
President of Dow Chemical Company (1982 - 1988). Mr. Henry was on Dow's board
from 1979 to 1993 and has served on the Executive, Compensation, Health and
Safety Committees and as Chairman of the Finance and Investment Policy
Committee. Mr. Henry also served as Chairman of the Board of Dowell
Schlumberger, 1985 - 1988.
Mr. Huff is President of the General Manager of WRH Partners, L.L.C., the
General Partner of The Huff Alternative Income Fund, L.P. (the "Huff Fund"). He
also has been President of one of the general managers of W.R. Huff Asset
Management Co., L.L.C., an investment management firm, since 1984. Mr. Huff
serves on the Board of Directors as the designee of the Huff Fund.
Mr. McMinn has been Chairman of the Board of the Company since 1996. He was
Corporate Vice President and Manager of the Industrial Chemical Group of FMC
Corporation, a manufacturer of machinery and chemical products, from 1973
through 1985. He became President and Chief Executive Officer of Cain Chemical
Inc., a producer of petrochemicals, in 1987 and served in that capacity until
its acquisition by Occidental Petroleum in May 1988. He became Chairman of the
Board of Directors of Arcadian Corporation in August 1990 and served in that
capacity until it was sold in April 1997.
Mr. Nordaker has been a Managing Director of Chase Securities since August
1995. From 1982 to 1995, he was a Group Manager at Texas Commerce Bank National
Association and, in addition, served in several capacities at Texas Commerce
Bank in the Energy Group, including Section Manager and Division Manager. From
May 1977 to March 1982, Mr. Nordaker was a Manager of Projects for The Frantz
Company, an engineering consulting firm servicing the oil refinery and
petrochemical industry. Prior thereto, he was a chemical engineer with Universal
Oil Products. Mr. Nordaker serves on the Board of Directors as the Designee of
Chase Venture, an affiliate of Chase Securities.
Ms. Rheney has been a principal of The Sterling Group, Inc. since February
1992. She worked as an independent financial consultant from December 1990 to
January 1992. Prior to that time, from June 1987 to November 1990, she was an
associate at Sterling. Ms. Rheney is also a director of AXIA Group, Inc.
Mr. Rosenthal serves as President of Heaney Rosenthal, Inc., which focuses
on investment, acquisition and advice to various businesses. Mr. Rosenthal
served as Chairman of the Board (1990 - 1994) and CEO (1994) of Wheatley TXT
Corp. He serves a Chairman of the Board of Diamond Products International, Inc.
and since July 1998 has served as Chairman of the Board of AXIA Group, Inc.
Mr. Shelton has been Vice Chairman of the Board, Executive Vice President
and Chief Operations Officer of the Company since 1983. Prior thereto, Mr.
Shelton held various positions in the chemicals industry including Vice
President - Manufacturing of Oxirane Corporation and Manager -
Manufacturing/Engineering of Atlantic Richfield Company.
Mr. Waycaster has been President and Chief Executive Officer of the Company
since 1992. Prior thereto, Mr. Waycaster spent 27 years with The Dow Chemical
Company and was serving as Vice President of the Hydro-Carbon and Resources
division when he left to join the Company.
49
<PAGE>
Mr. McNeese has been Vice President - Operations of the Company since 1992.
He joined the Company in 1986 and has held positions in manufacturing,
production and utilities. From 1984 to 1986, Mr. McNeese served as General
Manager- Operations of Engineering for Paktank Corporation. Prior thereto, Mr.
McNeese held various positions in a number of Atlantic Richfield Company
businesses. Mr. McNeese has over 30 years of experience in the chemicals
industry.
Mr. Sebastian joined the Company in March 1998 after performing consulting
activities in chemical and oil products marketing, operations and logistics,
specializing in buying and selling physical assets and companies. Prior to that,
he was Executive Vice President of Commonwealth Oil Refining Company and a
Co-Founder of Arochem Corporation, both with refinery and petrochemical
operations in Puerto Rico. He also brings extensive marketing and trading
experience from Exxon Chemical Company and Phibro Energy.
Mr. Stutts joined the Company in April 1998 as Vice President of Finance
and Corporate Development. Previously, he was a general partner of Columbine
Venture Funds, an institutional venture capital fund focusing on investments in
early stage companies. From 1971 to 1988 he held various management positions in
Tenneco, Inc. and its subsidiary companies.
Mr. Woliver has been Vice President - Marketing of the Company since 1976.
He joined Petro-Tex Chemical Corporation in 1968 and has held various marketing
positions in the United States and in Brussels.
Mr. Wright joined the Company in August 1996 as Vice President and General
Counsel. From January 1996 until he joined the Company, Mr. Wright was engaged
in the private practice of law, either as a sole practitioner or of counsel to
Andrews & Kurth, L.L.P. For over five years prior thereto, Mr. Wright was the
Vice President and General Counsel or the Senior Vice President and General
Counsel of Destec Energy, Inc.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company receive an
annual retainer of $15,000 and a fee of $500 for each meeting of the Board or
any committee thereof that they attend. Directors who are also employees of the
Company do not receive Director compensation.
50
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the five most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of May 31, 1996 (the "Named Executive Officers") for
services rendered in all capacities to the Company for the years ended June 30,
1998 and 1997, the twelve months ended May 31, 1996.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2)
- --------------------------- ------ -------- --------
B. W. Waycaster, President and 1998 $300,000 $507,186
Chief Executive Officer 1997 300,000 326,787
1996 300,000 2,899,100
Ronald W. Woliver, Vice
President, Marketing 1998 $180,000 $ 281,138
1997 180,000 127,393
1996 180,000 1,012,300
Stephen R. Wright, Vice
President, Secretary and 1998 $180,000 $ 281,138
General Counsel 1997 165,000 50,104
Bill R. McNeese, Vice President,
Operations 1998 $150,000 $ 236,251
1997 148,500 63,869
1996 132,000 72,293
H.E. Sebastian 1998 $58,333 $ 19,779
Vice President, Marketing
Carl S. Stutts, Vice President, 1998 $41,761 $ 50,000
Finance and Corporate Development
- --------------
(1) None of the executive officers has received perquisites, the value of which
exceeded the lesser of $50,000 or 10% of the salary and bonus of such executive
officer.
(2) Includes 401(k) contributions in 1996 of $21,149 for Mr. McNeese and $50,000
for issuance of common stock to Mr. Stutts in 1998.
51
<PAGE>
The following table sets forth the number of options to purchase shares of
the Company's Common Stock that have been granted during the fiscal year ended
June 30, 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------- ANNUAL RATES
% OF TOTAL OF STOCK PRICE
OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED GRANTED TO PRICE EXPIRATION OPTION TERM(3)
(NO. OF SHARES)(1) EMPLOYEES(2) PER SHARE DATE 5% 10%
------------- --------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
H.E. Sebastian ... 5,000 13.1% $ 100 03/11/2008 314,447 796,871
Carl S. Stutts ... 5,000 13.1% 100 04/14/2008 314,447 796,871
- ---------------
</TABLE>
(1)The options reported in this column consist of Non-Qualified Options granted
under Option Agreements between the Company and each of the Named Executive
Officers. The options will become exercisable on each of the first, second
and third anniversaries of the date of grant with respect to one-third of the
shares subject to the option.
(2)Based on outstanding options to purchase an aggregate of 38,278 shares of
Common Stock.
(3)The dollar amounts in these columns are the result of calculations at the 5%
and 10% appreciation rates set by the Commission and, therefore, are not
intended to forecast possible future appreciation, if any, in the price of
the Common Stock. In order to realize the potential values set forth in the
5% and 10% columns of this table, the per share price of the Common Stock
would be $163 and $259, respectively, or 63% and 159%, respectively, above
the base exercise price. Because the Common Stock is not currently trade,
these amounts were calculated based on the assumption that the fair market
value of one share of Common Stock on the date of grant was equal to the
exercise price.
The following table sets forth the number and dollar value of exercised and
unexercised options held by each of the Named Executive Officers at June 30,
1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1998 JUNE 30, 1998
--------------------------- ---------------------------
EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
----------- --------------- ---------------------------
B.W. Waycaster 1,143 2,105 - -
Bill R. McNeese 500 1,000 - -
H.E. Sebastian - 5,000 - -
Carl S. Stutts - 5,000 - -
Ronald W. Woliver 500 1,000 - -
Stephen R. Wright 450 900 - -
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 1, 1998, the number and
percentage of the outstanding shares of Common Stock beneficially owned by (a)
each person known by the Company to beneficially own more than 5% of such stock,
(b) each director of the Company, (c) each of the Named Executive Officers of
the Company, and (d) all directors and executive officers of the Company as a
group.
AMOUNT AND NATURE % OF
OF BENEFICIAL OWNERSHIP OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
- ------------------------------------ --------------- ------------
Gordon A. Cain 69,000 13.1%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
William R. Huff - -
67 Park Place
Morristown, New Jersey 07960
William A. McMinn 11,666(1) 2.2%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese 2,500(2) 0.5%
Three Riverway, Suite 1500
Houston, Texas 77056
Steve A. Nordaker - -
707 Travis, 7th Floor
Houston, TX 77002
Susan O. Rheney 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
H.E. Sebastian 1,000 0.2%
Two Penn Plaza, 22nd Floor
New York, NY 10121
John T. Shelton 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Carl S. Stutts 2,500 0.5%
3810 Swartmore Street
Houston, TX 77056
B. W. Waycaster 41,143(3) 7.8%
Three Riverway, Suite 1500
Houston, Texas 77056
Ronald W. Woliver 10,500(4) 2.0%
Three Riverway, Suite 1500
Houston, Texas 77056
Stephen R. Wright 2,100(5) 0.4%
Three Riverway, Suite 1500
Houston, Texas 77056
All directors and Named Executive
Officers as a group (12 persons) 155,409 29.2%
Texas Petrochemicals Corporation ESOP 100,000 18.9%
Capital Southwest Corporation 30,000 5.7%
12900 Preston Road, Suite 700
Dallas, Texas 75230
Chase Venture Capital Associates, L.P. 60,000 11.4%
380 Madison Avenue
New York, New York 10017
The Huff Alternative Income Fund, L.P. 57,778 10.9%
67 Park Place
Morristown, New Jersey 07960
- -----------------
(1) Includes 1,666 shares subject to options excercisable as of June 30, 1998.
(2) Includes 500 shares subject to options excercisable as of June 30, 1998.
(3) Includes 1,143 shares subject to options excercisable as of June 30, 1998.
(4) Includes 500 shares subject to options excercisable as of June 30, 1998.
(5) Includes 450 shares subject to options excercisable as of June 30, 1998.
53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and
Corporate Development (Mr. Stutts) in the amount of $200,000 of which $145,129
remained outstanding as of September 24, 1998. The proceeds from the loan were
utilized to purchase outstanding shares of the Company's common stock at fair
market value. The loan carries an interest rate of 7%. During fiscal 1998 the
Company made payments totaling $500,000 to a consulting firm (ENPAL) whose
majority shareholder is also an outside director and shareholder of the Company
(Mr. Cain). The Chairman of the Company (Mr. McMinn) receives annual
compensation of $150,000 for consulting services provided to the Company and
reimbursements of approximately $25,000 per year for office expenses. Prior to
the Acquisition, the Predecessor made contributions from time to time to a
charitable organization that is an affiliate of the Predecessor.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Financial Statement Schedules
Not applicable
(c) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
June 30, 1998.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEXAS PETROCHEMICAL HOLDINGS, INC.
(Registrant)
By:/s/ B.W. WAYCASTER
(Signature)
B.W. Waycaster
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
to be signed below by the following persons on behalf of the registrant in the
indicated capacities on September 24, 1998.
/s/WILLIAM A. MCMINN Chairman
William A. McMinn
/s/ B.W. WAYCASTER Director, President and Chief Executive Officer
B.W. Waycaster
/s/ GORDON A. CAIN Director
Gordon A. Cain
/s/HUNTER W. HENRY JR. Director
Hunter W. Henry Jr.
/s/WILLIAM R. HUFF Director
William R. Huff
/s/STEVE A. NORDAKER Director
Steve A. Nordaker
/s/SUSAN O. RHENEY Director
Susan O. Rheney
/s/GARY L. ROSENTHAL Director
Gary L. Rosenthal
/s/JOHN T. SHELTON Director
John T. Shelton
55
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 6/30/98 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 756
<SECURITIES> 0
<RECEIVABLES> 45,298
<ALLOWANCES> 0
<INVENTORY> 17,210
<CURRENT-ASSETS> 13,636
<PP&E> 227,217
<DEPRECIATION> 49,523
<TOTAL-ASSETS> 497,237
<CURRENT-LIABILITIES> 64,580
<BONDS> 263,958
0
0
<COMMON> 5
<OTHER-SE> 16,266
<TOTAL-LIABILITY-AND-EQUITY> 497,237
<SALES> 514,790
<TOTAL-REVENUES> 514,790
<CGS> 438,725
<TOTAL-COSTS> 477,461
<OTHER-EXPENSES> (557)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,533
<INCOME-PRETAX> (2,647)
<INCOME-TAX> 1,868
<INCOME-CONTINUING> (4,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,515)
<EPS-PRIMARY> (9.86)
<EPS-DILUTED> 0
</TABLE>