AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1998
REGISTRATION NO. 333-37811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TEXAS PETROCHEMICAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2869 76-0504002
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
AND AFFILIATE GUARANTOR
TPC HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0504006
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
STEPHEN R. WRIGHT
THREE RIVERWAY, SUITE 1500 THREE RIVERWAY, SUITE 1500
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 627-7474 (713) 627-7474
(ADDRESS, INCLUDING ZIP CODE, AND (ADDRESS, INCLUDING ZIP CODE,
TELEPHONE NUMBER, INCLUDING AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S AREA CODE, OF REGISTRANT'S AGENT
PRINCIPAL EXECUTIVE OFFICES) FOR SERVICE OF PROCESS)
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COPY TO:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
SOUTH TOWER PENNZOIL PLACE, SUITE 2900
711 LOUISIANA STREET
HOUSTON, TEXAS 77002-2781
(713) 223-2900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE OFFERED BE REGISTERED PER UNIT(2) OFFERING PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$520.38(3) per
13.5% Senior Discount Notes due 2007............. $57,650,103.55(1) $1,000(1) $30,000,000 $9,091
- ----------------------------------------------------------------------------------------------------------------------------
Guarantees of 13.5% Senior Discount Notes due
2007(4)........................................ -- -- -- --
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(1) Principal amount at maturity.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(3) Represents the initial issue amount.
(4) No additional consideration will be paid by the recipients of the 13.5%
Senior Discount Notes due 2007 for the Guarantees. Pursuant to Rule 457(n)
under the Securities Act, no separate fee is payable for the Guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 26, 1998
TEXAS PETROCHEMICAL HOLDINGS, INC.
$57,650,103.55 OF
13.5% SENIOR DISCOUNT NOTES DUE 2007
FULLY AND UNCONDITIONALLY GUARANTEED BY TPC HOLDING CORP.
The 13.5% Senior Discount Notes due 2007 (the "Discount Notes") were
issued by Texas Petrochemical Holdings, Inc. ("Holdings" and together with its
subsidiaries on a consolidated basis, the "Company") pursuant to the Discount
Notes Indenture (as defined under "Description of the Discount
Notes -- General"). As of the date of this Prospectus, there are $57,650,103.55
aggregate principal amount at final maturity of the Discount Notes outstanding.
The Discount Notes are unsecured senior Indebtedness of Holdings ranking
PARI PASSU with other unsecured senior Indebtedness of Holdings. Holdings
conducts its operations through its subsidiaries and as a result is dependent
upon the transfer of funds by its subsidiaries to make payment on the Discount
Notes. The Discount Notes are guaranteed by Holdings' subsidiary, TPC Holding
Corp. ("TPC Holding"), which as a holding company is also dependent upon the
transfer of funds by its subsidiaries to make payment on the Discount Notes as
guarantor. The Discount Notes and TPC Holding's guarantee are effectively
subordinated to secured indebtedness of Holdings, including Holdings' guaranty
of the Indebtedness of its subsidiary, Texas Petrochemicals Corporation
("TPC"), under the Bank Credit Agreement (as defined under "Description of
the Bank Credit Agreement"), and to all indebtedness and other liabilities of
TPC and its subsidiaries. As of March 3, 1998, the aggregate amount of senior
Indebtedness of Holdings (other than the Discount Notes) was $96.0 million,
consisting of Holdings' guaranty of TPC's Indebtedness under the Bank Credit
Agreement, and the aggregate amount of Indebtedness and other obligations of
Holdings and its subsidiaries was approximately $363.3 million. Because the
Discount Notes do not accrue cash interest prior to July 1, 2001, the Discount
Notes are not suitable investments for investors seeking current income.
The initial issue amount of each Discount Note was $520.38 per $1,000
principal amount at maturity (52% of the principal amount at maturity),
representing a yield to maturity of 13.5% (computed on a semi-annual bond
equivalent basis) calculated from July 1, 1996. Cash interest will not accrue on
the Discount Notes prior to July 1, 2001, at which time cash interest will
accrue on the Discount Notes at a rate of 13.5% PER ANNUM. Interest on the
Discount Notes is payable semi-annually on January 1 and July 1 of each year,
commencing January 1, 2002. Except as described below, the Discount Notes are
not redeemable at the option of Holdings prior to July 1, 2001. Thereafter, the
Discount Notes will be redeemable, in whole or in part, at the option of
Holdings, at the redemption prices set forth herein together with accrued and
unpaid interest, if any, to the date of redemption. In addition, up to 30% of
the aggregate Accreted Value (as defined under "Description of the Discount
Notes -- Certain Definitions") of the Discount Notes may be redeemed at any
time prior to July 1, 1998, at the option of Holdings, from the net proceeds of
any Public Equity Offering following which there is a Public Market (as such
terms are defined under "Description of the Discount Notes -- Certain
Definitions") at a redemption price equal to 113.5% of the Accreted Value
thereof, together with accrued and unpaid interest, if any, to the redemption
date. Upon the occurrence of a Change of Control (as defined under "Description
of the Discount Notes -- Certain Definitions"), each holder of Discount Notes
may require Holdings to purchase all or a portion of such holder's Discount
Notes at a purchase price in cash equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase. For
a more complete description of the Discount Notes, see "Description of the
Discount Notes."
This Prospectus is being used by The Huff Alternative Income Fund, L.P.
(the "Huff Fund") in connection with offers and sales of the Discount Notes in
the over-the-counter market, in private transactions, or otherwise at negotiated
prices related to prevailing market prices at the time of sale. The Company will
not receive any proceeds from the sale of the Discount Notes by the Huff Fund.
See "Plan of Distribution."
Promptly following the Company's filing of quarterly reports or other
documents, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Company will attach such documents as
appendices to include as part of this Prospectus.
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SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
DISCOUNT NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is ____________, 1998.
<PAGE>
AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass any and all
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to,
among other things, the Discount Notes offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company and the Discount Notes, reference is
hereby made to the Registration Statement and such exhibits and schedules filed
as a part thereof, which may be inspected, without charge, at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission, upon payment of prescribed fees. The Commission
maintains a Web site that contains reports and information regarding registrants
that file electronically with the Commission at Web site (http://www.sec.gov).
Pursuant to the Discount Notes Indenture, so long as any of the Discount
Notes are outstanding, whether or not Holdings is subject to the reporting
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), Holdings is obligated to send to the Huff
Fund and to Fleet National Bank, as trustee under the Discount Notes Indenture,
the annual reports, quarterly reports and other documents that Holdings would
have been required to file with the Commission pursuant to Section 13(a) or
15(d) if Holdings were subject to such reporting requirements.
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<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR THE
PERIODS PRIOR TO JULY 1, 1996, THE FINANCIAL STATEMENTS AND OTHER INFORMATION
SET FORTH HEREIN COMBINE THE HISTORICAL RESULTS OF TEXAS OLEFINS COMPANY, A
TEXAS CORPORATION ("TOC"), ITS SUBSIDIARIES AND CLARKSTON CORPORATION
("CLARKSTON"). UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM
"COMPANY" REFERS TO TOC AND ITS SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE
ACQUISITION (AS DEFINED), AND TO HOLDINGS AND ITS SUBSIDIARIES FOLLOWING THE
CONSUMMATION OF THE ACQUISITION. TOC WAS MERGED WITH AND INTO TEXAS
PETROCHEMICALS CORPORATION, A TEXAS CORPORATION ("TPC"), IN CONNECTION WITH
THE ACQUISITION. TPC IS A WHOLLY-OWNED SUBSIDIARY OF TPC HOLDING CORP., A
DELAWARE CORPORATION ("TPC HOLDING"), WHICH IS A WHOLLY-OWNED SUBSIDIARY OF
HOLDINGS. TPC CONDUCTS THE PRINCIPAL BUSINESS OF THE COMPANY. ALL REFERENCES TO
FISCAL YEARS IN THIS PROSPECTUS UP TO AND INCLUDING FISCAL 1995 REFER TO THE
FISCAL YEARS ENDED MAY 31 IN THE CALENDAR YEARS INDICATED. THE COMPANY HAS
CHANGED ITS FISCAL YEAR END TO JUNE 30 AND INFORMATION FOR FISCAL YEARS ENDED
SUBSEQUENT TO MAY 31, 1995 IS SO PRESENTED. ALL REFERENCES IN THIS PROSPECTUS TO
THE COMPANY'S CAPACITY TO PRODUCE CERTAIN PRODUCTS REFLECT PRODUCTION LEVELS
ACHIEVABLE IF PLANT OPERATIONS ARE DEDICATED TO MAXIMIZING OUTPUT OF THAT
PARTICULAR PRODUCT, WHICH EXCEEDS ACTUAL CAPACITY AVAILABLE UNDER TYPICAL
MULTI-PRODUCT PRODUCTION CONFIGURATIONS. UNLESS OTHERWISE INDICATED, INDUSTRY
DATA CONTAINED HEREIN, OTHER THAN WITH RESPECT TO THE COMPANY, IS DERIVED FROM
PUBLICLY AVAILABLE INDUSTRY TRADE JOURNALS AND OTHER PUBLICLY AVAILABLE INDUSTRY
SOURCES, WHICH THE COMPANY HAS NOT INDEPENDENTLY VERIFIED BUT WHICH THE COMPANY
BELIEVES TO BE RELIABLE.
THE COMPANY
The Company 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
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. For the year ended June 30, 1997, and the
twelve months ended May 31, 1996, butadiene represented 27% and 25% of the
Company's total revenues, respectively, MTBE represented 47% and 41%,
respectively, n-butylenes 10% and 11%, respectively, specialty isobutylenes 13%
and 16%, respectively, and other revenues the remaining 3% and 7%, respectively.
The Company's revenues for the year ended June 30, 1997, the twelve months ended
May 31, 1996 and the one month ended June 30, 1996 were $490.2 million, $455.6
million and $41.4 million, respectively, and EBITDA (as defined) for the year
ended June 30, 1997, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 were $50.4 million, $57.0 million and $3.7 million,
respectively.
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 ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. 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.
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
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<PAGE>
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 processorin North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term 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 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,
reformulated gasoline ("RFG") and is used in over 30% of the U.S. gasoline
pool. MTBE is produced by reacting methanol and isobutylene, and the Company's
ability to produce isobutylene by three alternative methods enables it to
produce MTBE by the most economical processes available to the Company. In
addition, the Company has the ability to add incremental capacity to capitalize
on expected future growth, at a significantly lower cost than the cost of adding
new 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 sells MTBE to oil refiners and gasoline
producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and
CITGO Petroleum Corporation on both a contract and spot basis at prices linked
to prevailing market prices.
The Company is the leading producer of high margin 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. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes.
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. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally to produce MTBE for sale in the spot
market. The Company maintains the production flexibility to upgrade n-butylenes
contained in crude butadiene streams to either isobutylene or butene-1 using its
patented skeletal isomerization process ("SKIP"). This flexibility allows the
Company to meet its customers' needs through the most economical process, to
produce additional products and to capitalize on favorable market conditions.
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
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
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.
4
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BACKGROUND INFORMATION
Holdings, TPC Holding, and TPC Finance Corp., a Texas corporation ("Finance
Co."), were organized in May 1996 to effect the acquisition (the "Acquisition")
of TOC and its subsidiaries, including TPC, and to assume a raw materials supply
contract from Clarkston. On July 1, 1996, Holdings issued and sold $43.8 million
of its common stock ("Common Stock") to an investor group led by Gordon A. Cain
and The Sterling Group, Inc. ("Sterling"), issued $6.2 million of its Common
Stock for the shares contributed by certain shareholders of TOC and TPC, sold a
sufficient amount of the Discount Notes and Common Stock, as an investment unit
(the "Units") to the Huff Fund to raise $30 million in gross proceeds, and
contributed the net proceeds thereof to TPC Holding. Finance Co. borrowed
approximately $140.0 million under the Bank Credit Agreement and received
approximately $169 million in net proceeds from the sale at such time of $175
million aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006
(the "Original Notes") and loaned the combined net proceeds to TPC Holding. TPC
Holding used the capital contributions received from Holdings, cash on hand and
the proceeds of the loan from Finance Co. to effect the Acquisition pursuant to
a stock purchase agreement dated as of May 14, 1996 (the "Stock Purchase
Agreement"), to fund the ESOP (as defined) and pay fees and expenses in
connection with the transactions associated with the Acquisition. TOC and
Finance Co. then merged into TPC.
As a result of the foregoing, Holdings is the primary obligor on the
Discount Notes, and TPC is the primary obligor on the Original Notes and the
loans made pursuant to the Bank Credit Agreement, is a wholly-owned subsidiary
of TPC Holding (which in turn is wholly-owned by Holdings) and operates the
principal business of the Company. Holdings has guaranteed TPC's obligations
under the Bank Credit Agreement. The Discount Notes and the Common Stock which
constituted the Units became separately transferable immediately following the
Acquisition.
On March 13, 1997, TPC issued and sold $50,000,000 aggregate principal
amount of 11 1/8% Series B Senior Subordinated Notes due 2006 (the "Notes"),
the proceeds of which were used to, among other things, reduce TPC's
indebtedness under the Bank Credit Agreement. The Original Notes and the Notes
were issued under indentures referred to herein collectively as the "Notes
Indenture."
This prospectus has been prepared for use by the Huff Fund in connection
with offers and sales of the Discount Notes.
5
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THE DISCOUNT NOTES
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<CAPTION>
<S> <C>
Discount Notes....................... $57,650,103.55 aggregate principal amount at final maturity of 13.5%
Senior Discount Notes due 2007.
Maturity Date........................ July 1, 2007.
Interest Payment Dates............... January 1 and July 1 of each year after July 1, 2001.
Optional Redemption.................. Except as described below, Holdings may not redeem the Discount Notes
prior to July 1, 2001. On or after such date, Holdings may redeem the
Discount Notes, in whole or in part, at any time at the redemption
prices set forth herein plus accrued interest, if any, to the date of
redemption. In addition, up to 30% of the aggregate Accreted Value of
the Discount Notes may be redeemed at any time prior to July 1, 1998, at
the option of Holdings, with the net proceeds of any Public Equity
Offering following which there is a Public Market at a redemption price
equal to 113.5% of the Accreted Value thereof, together with accrued and
unpaid interest, if any, to the date of redemption.
Change of Control.................... Upon the occurrence of a Change of Control, each holder will have the
right to require Holdings to make an offer to purchase the Discount
Notes at a price in cash equal to 101% of the principal amount thereof
to July 1, 2001 and face principal amount of the Discount Notes after
July 1, 2001, in each case plus accrued and unpaid interest to the date
of purchase. See "Description of the Discount Notes -- Change of
Control."
Ranking.............................. The Discount Notes are senior unsecured obligations of Holdings, senior
in right of payment to subordinated Indebtedness of Holdings, including
Holdings' guarantee of the Notes. The Discount Notes rank PARI PASSU in
right of payment with other senior unsecured Indebtedness of Holdings.
The Discount Notes are effectively subordinated to secured indebtedness
of Holdings, including Holdings' guarantee of Indebtedness of TPC under
the Bank Credit Agreement, as to the assets of Holdings securing such
Indebtedness, and to all Indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of
Holdings' subsidiaries. As of March 3, 1998, (i) Holdings had
approximately $96.0 million of secured senior Indebtedness outstanding
(consisting of Holdings' guarantee of the Company's Indebtedness under
the Bank Credit Agreement), $37.0 million of senior unsecured
Indebtedness outstanding (consisting of the portion of the issue price
of the Units allocated for accounting purposes to the Discount Notes)
and (ii) Holdings' subsidiaries had approximately $326.3 million of
Indebtedness outstanding (including the Notes). Substantially all of the
operations of Holdings will be conducted through its subsidiaries and,
therefore, Holdings will be dependent upon the cash flow of its
subsidiaries to meet its obligations, including its obligations under
the Discount Notes. See "Description of the Discount Notes."
Restrictive Covenants................ The Discount Notes Indenture (as defined under "Description of the
Discount Notes -- General") contains certain covenants that, among
other things, limit the ability of Holdings and/or its Restricted
Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii) make
investments, (iv) enter into transactions with affiliates, (v) make
certain asset dispositions, and (vi) merge or consolidate with, or
transfer substantially all of its assets to, another person. The
Discount Notes Indenture also limits the ability of Holdings' Re-
stricted Subsidiaries to issue Capital Stock (as defined) and to create
restrictions on the ability of such Restricted Subsidiaries to pay
dividends or make any other distributions. In addition, Holdings is
obligated, under certain circumstances, to offer to repurchase the
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Discount Notes at a purchase price equal to 100% of their Accreted Value
(without premium), plus accrued and unpaid interest, if any, in
accordance with the procedures set forth in the Discount Notes
Indenture. However, all of these limitations and prohibitions will be
subject to a number of important qualifications. See "Description of
the Discount Notes -- Certain Covenants."
Tax Consequences..................... Holdings has received an opinion of counsel regarding the material
federal income tax consequences relevant to the purchase, ownership and
disposition of the Discount Notes. See "Material Federal Income Tax
Considerations."
Guarantee............................ TPC Holding fully and unconditionally guarantees the due and punctual
payment of the principal of, interest on and all other amounts payable
under the Discount Notes when they become due and payable, whether upon
maturity, upon acceleration, by call for redemption, upon repurchase or
purchase pursuant to a Change of Control or Asset Disposition or
otherwise. The guarantee will not be discharged with respect to any
Discount Note except by payment in full of principal, interest and all
other amounts payable.
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RECENT DEVELOPMENTS
Holdings requested and obtained from the current holder of the entire
principal amount of the Discount Notes a waiver, for a single transaction, of
the requirements under Section 10.09(a)(ii) and (iii) of the Discount Notes
Indenture to the extent such requirements would not be met by the investment by
a Restricted Subsidiary of Holdings of up to $1,000 for a 50% interest in a
corporation organized to conduct certain business in Venezuela. Section 10.09 of
the Discount Notes Indenture states that the Company shall not permit any
Restricted Subsidiary to make a Restricted Payment unless certain tests are met.
The proposed investment of up to $1,000 in a corporation organized to conduct
certain business in Venezuela would constitute a Restricted Payment and as a
result the tests under Section 10.09 must be met or an exemption must be
available. Because the Company could not meet the tests under Section 10.09 and
an exemption was not available, the Company sought and obtained a waiver of
Section 10.09(a)(ii) and (iii) of the Discount Notes Indenture. See
"Description of the Discount Notes -- Certain Covenants -- Limitation on
Restricted Payments" and "Description of the Discount Notes -- Certain
Definitions -- Restricted Payment."
RISK FACTORS
Prospective purchasers of the Discount Notes should consider carefully the
information set forth under the caption "Risk Factors" and all other
information set forth in this Prospectus before making any investment in the
Discount Notes.
SUMMARY SELECTED FINANCIAL AND OTHER INFORMATION
The summary selected financial information set forth below has been derived
from the combined financial statements of TOC, its subsidiaries and Clarkston
for the period prior to July 1, 1996 (the "Predecessor") and from the
consolidated financial statements of the Company since July 1, 1996, and should
be read in conjunction with, and is qualified in its entirety by reference to,
financial statements which appear elsewhere in this Prospectus and their
accompanying notes. Such combined financial information is combined to reflect
the assumption by the Company of a raw material supply contract. The combined
financial information set forth below for each of the years in the three-year
period ended May 31, 1995, the twelve month period ended May 31, 1996 and the
one-month period ended June 30, 1996 has been derived from the financial
statements of TOC, its subsidiaries and Clarkston, which were audited by Coopers
& Lybrand L.L.P., independent auditors for such entities. The consolidated
financial statements for the year ended June 30, 1997 were audited by Deloitte &
Touche LLP. The results of the one-month and interim periods are not necessarily
indicative of the results of the entire year or any other period. The
information presented below should be read in conjunction with the consolidated
financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Selected Financial Information and the related notes
thereto included elsewhere herein.
7
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------- ------------------------------------------
TWELVE ONE
MONTHS MONTH SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------- ------- -------- JUNE 30, ------------- -------------
1993 1994 1995 1996 1996 1997 1996 1997
--------- --------- --------- ------- -------- ---------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............ $ 410.7 $ 352.4 $ 474.7 $ 455.6 $ 41.4 $490.2 $ 246.7 $ 276.5
Cost of goods
sold(1)............. 347.8 279.0 404.8 391.0 36.4 436.0 217.9 235.8
Depreciation and
amortization...... 12.6 13.6 14.3 15.0 1.3 29.8 15.9 15.5
--------- --------- --------- ------- -------- ---------- ------------- -------------
Gross profit(1)..... 50.3 59.8 55.6 49.6 3.7 24.4 12.9 25.2
Selling, general and
administrative
expenses(1)....... 7.4 6.5 8.1 7.6 1.3 6.1 2.8 3.2
--------- --------- --------- ------- -------- ---------- ------------- -------------
Income from
operations........ 42.9 53.3 47.5 42.0 2.4 18.3 10.1 22.0
Interest income
(expense), net.... (0.6) (0.2) 0.7 (1.6) (0.1) (39.4) (19.4) (20.1)
Other income
(expense)(2)...... (1.2) (0.8) 1.1 (15.9) (0.3) 2.3 1.5 0.0
--------- --------- --------- ------- -------- ---------- ------------- -------------
Income (loss) before
income taxes and
minority
interest.......... 41.1 52.3 49.3 24.5 2.0 (18.8) (7.8) 1.9
Provision (benefit)
for income taxes.. 13.0 18.4 16.9 7.9 0.8 (4.8) (1.6) 1.6
Extraordinary
loss.............. -- -- -- -- -- 1.5 -- --
Minority interest in
net loss of
consolidated
subsidiary........ -- -- 0.1 0.1 -- -- -- --
--------- --------- --------- ------- -------- ---------- ------------- -------------
Net income (loss)... $ 28.1 $ 33.9 $ 32.5 $ 16.7 $ 1.2 $(15.5) $ (6.2) $ 0.3
========= ========= ========= ======= ======== ========== ============= =============
OPERATING DATA:
Revenues by product:
Butadiene(3)... $ 81.3 $ 68.7 $ 106.2 $ 112.6 $ 10.2 $130.9 $ 62.6 $ 72.6
MTBE........... 211.0 175.2 199.1 187.4 21.0 230.3 128.1 125.8
n-Butylenes.... 21.7 28.1 42.7 48.2 3.2 49.4 21.5 32.5
Specialty
Isobutylenes... 54.8 59.9 75.5 74.5 5.5 62.3 25.9 37.4
Other(4)....... 41.9 20.5 51.2 32.9 1.5 17.3 8.6 8.2
Sales volumes (in
millions of
pounds):
Butadiene...... 556.2 484.4 580.8 622.6 64.6 750.3 356.4 402.3
MTBE(5)........ 225.1 194.8 211.1 219.8 26.6 274.1 150.3 141.3
n-Butylenes.... 114.7 150.8 245.9 284.6 17.1 266.4 115.5 178.3
Specialty
Isobutylenes... 309.0 312.2 398.0 368.2 23.0 275.7 100.8 178.7
PREDECESSOR COMPANY
----------------------------------------- ----------------------
JUNE
MAY 31, JUNE 30, 30, DECEMBER 31,
------------------------------- -------- ------- ------------
1993 1994 1995 1996 1997 1997
--------- --------- --------- -------- ------- ------------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ 12.6 $ 11.1
Property, plant and equipment, net... 101.6 95.9 90.1 81.8 240.0 231.9
Total assets......................... 194.1 214.6 230.7 167.9 523.0 517.1
Long-term debt (including current
portion)........................... 10.9 11.0 -- 13.0 351.9 344.2
Total stockholders' equity........... 128.2 140.4 163.3 92.5 22.8 24.1
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
8
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------- --------------------------------------
TWELVE ONE
MONTHS MONTH SIX SIX
ENDED ENDED YEAR MONTHS ENDED MONTHS ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, ENDED DECEMBER 31, DECEMBER 31,
------------------------------- ------- -------- JUNE 30, ------------ ------------
1993 1994 1995 1996 1996 1997 1996 1997
--------- --------- --------- ------- -------- -------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................ $ 55.5 $ 66.9 $ 61.8 $57.0 $3.7 $ 50.4 $ 27.5 $ 38.0
Capital expenditures................. 12.0 12.5 8.7 5.5 2.0 7.6 5.2 4.5
Net cash provided by (used in)
operating activities............... 44.5 30.2 50.3 44.5 13.9 (1.8) (0.1) 21.7
Net cash provided by (used in)
investing activities............... (7.2) (5.3) (25.9) 8.2 (1.3) (352.3) (353.6) (3.4)
Net cash provided by (used in)
financing activities............... (29.9) (17.6) (23.3) (69.0) (9.4) 354.2 353.9 (18.3)
Cash dividends....................... 23.7 21.4 6.2 16.5 -- -- -- --
</TABLE>
- ------------
(1) The Company classifies variable compensation paid to employees as cost of
goods sold. Previously, the Company had classified this cost as selling,
general and administrative expenses. The Company has made reclassifications
to the prior periods in order to conform to the current period presentation.
(2) Includes dividend income, charitable contributions, gain (loss) on disposal
of assets and investment securities, net, and other, net. For the twelve
months ended May 31, 1996, other expense includes an impairment of
investment in land of $12.6 million.
(3) Approximately 95% of the Company's butadiene sales are under fixed profit
contracts with suppliers of crude butadiene.
(4) Includes Clarkston's trading revenues from third parties (for the periods
prior to July 1, 1996), utility revenues, revenues realized from the
Company's terminalling facilities and sales of chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income before income taxes, extraordinary loss and
minority interest before taking into consideration interest expense,
depreciation and amortization and certain other non-recurring charges.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be construed
by an investor as an alternative to income from operations (as determined in
accordance with generally accepted accounting principles), as an indicator
of the operating performance of the Company or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
9
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PURCHASERS OF THE
DISCOUNT NOTES OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET
FORTH BELOW.
DEPENDENCE ON SUBSIDIARY CASH FLOW
Holdings, through TPC Holding, owns all the outstanding common stock of
TPC. As a holding company without significant assets other than its indirect
ownership of all of the common stock of TPC, Holdings' ability to meet its cash
obligations, including debt service on the Discount Notes, is dependent upon the
cash flow of its subsidiaries and the transfer of funds by its subsidiaries in
the form of loans, dividends or otherwise. In addition, the Bank Credit
Agreement and the Notes Indenture contain limitations on the ability of such
subsidiaries to pay dividends or make loans or advances to Holdings. Similarly,
TPC Holding, guarantor of the Discount Notes, has no independent operations and
is dependent upon distributions from TPC. As a result, TPC Holding, as guarantor
of the Discount Notes, may not be able to make timely or sufficient payment upon
the Discount Notes.
EFFECTIVE SUBORDINATION
Because Holdings is a holding company that conducts its business through
its subsidiaries, the Discount Notes will be effectively subordinated to all
existing and future liabilities of Holdings' subsidiaries, including trade
payables. Likewise, TPC Holding is a holding company and the guarantee will be
effectively subordinated to all existing and future liabilities of TPC Holding's
subsidiaries, including trade payables. The Discount Notes Indenture limits, but
does not prohibit, the incurrence of additional indebtedness by Holdings and
certain of its subsidiaries. See "Description of the Discount Notes -- Certain
Covenants."
The Discount Notes will not be secured by any of Holdings' assets. Holdings
pledged all of the capital stock of the TPC Holding and TPC to secure borrowings
of TPC under the Bank Credit Agreement. If TPC becomes insolvent or is
liquidated, or if payment under the Bank Credit Agreement is accelerated, the
lenders under the Bank Credit Agreement would be entitled to exercise the
remedies available to a secured lender under applicable law and pursuant to the
Bank Credit Agreement. Accordingly, such lenders will have a prior claim on the
assets of Holdings.
SUBSTANTIAL LEVERAGE
The Company has incurred a significant amount of indebtedness and has
significant debt service requirements. As of December 31, 1997, the Company had
outstanding indebtedness of $344.2 million and the Company's stockholders'
equity was $24.1 million. See "Capitalization" and "Selected Financial
Data." In addition, the Company may incur additional indebtedness in the
future, subject to limitations imposed by its debt instruments including,
without limitation, the Discount Notes Indenture and the Bank Credit Agreement.
TPC is the primary obligor under the Bank Credit Agreement. Holdings has
guaranteed TPC's obligations under the Bank Credit Agreement. TPC also has
additional borrowing capacity on a revolving credit basis under the Bank Credit
Agreement.
The Company's high degree of leverage could have important consequences to
the holders of the Discount Notes, including but not limited to the following:
(i) the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, debt service requirements, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes, including its operations and
future business opportunities; (iii) certain of TPC's borrowings, including
certain borrowings under the Bank Credit Agreement, are at variable rates of
interest, which expose the Company to the risk of increased interest rates; (iv)
the indebtedness outstanding under the Bank Credit Agreement is secured by
substantially all the assets of the Company and will mature prior to the
maturity of the Discount Notes; and (v) the Company's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures could
be limited by its leveraged position and the covenants contained in its debt
instruments, thus
10
<PAGE>
putting the Company at a competitive disadvantage, and the Company may be more
vulnerable to a downturn in general economic conditions or in its business or be
unable to carry out capital spending that is important to its growth and
productivity improvement programs. See "Description of the Bank Credit
Agreement" and "Description of the Discount Notes."
The Company began making scheduled principal payments under the Bank Credit
Agreement commencing on September 30, 1996. See "Description of the Bank Credit
Agreement." The Company's ability to make scheduled payments or to refinance
its obligations with respect to its indebtedness, including the Discount Notes,
will depend on its financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond its control, including interest rates,
unscheduled plant shutdowns, increased operating costs, raw material and product
prices, and regulatory developments. There can be no assurance that TPC will
maintain a level of cash flow from operations sufficient to permit it to make
payments or dividends to Holdings in order for Holdings to pay the scheduled
payments of interest on the Discount Notes.
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital
or restructure or refinance its debt (including the Discount Notes). There can
be no assurance that such alternative measures would be successful or would
permit the Company to meet its scheduled debt service obligations. In the
absence of such operating results and resources, the Company could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet its debt service and other obligations. The Bank
Credit Agreement, the Discount Notes Indenture and the Notes Indenture restrict
the Company's ability to sell assets and use the proceeds therefrom. See
"Description of the Bank Credit Agreement" and "Description of the Discount
Notes." There can be no assurance as to the ability of the Company to
consummate such sales or the proceeds which the Company could realize therefrom
or that such proceeds would be adequate to meet the obligations then due.
In the event that the Company is unable to generate sufficient cash flow
and the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its indebtedness, or if
the Company otherwise fails to comply with the various covenants in the
instruments governing such indebtedness, the Company could be in default under
the terms of the agreements governing such indebtedness, including, without
limitation, each of the Discount Notes Indenture and the Bank Credit Agreement.
In the event of such default, the holders of such indebtedness could elect to
declare all of the funds borrowed thereunder to be due and payable together with
accrued and unpaid interest, the lenders under the Bank Credit Agreement could
elect to terminate their commitments thereunder and the Company could be forced
into bankruptcy or liquidation. Any default under the agreements governing the
indebtedness of the Company could have a significant adverse effect on the
Company's ability to pay principal, premium, if any, and interest on the
Discount Notes and on the market value of the Discount Notes. See "Description
of the Discount Notes" and "Description of the Bank Credit Agreement."
RESTRICTIVE FINANCING COVENANTS AND CROSS-DEFAULT RISKS
The Bank Credit Agreement contains a number of significant covenants that,
among other things, restricts the ability of the Company to dispose of assets or
merge, incur additional indebtedness, incur guarantee obligations, repay certain
outstanding indebtedness or amend the Discount Notes Indenture or the Notes
Indenture, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, make capital expenditures or engage in certain
transactions with affiliates, and otherwise restrict corporate activities. The
Bank Credit Agreement allows, however, TPC to make payments or dividends to
Holdings commencing fiscal year 2002 to be used by Holdings solely for scheduled
payments of interest on the Discount Notes. In addition, under the Bank Credit
Agreement, the Company is required to comply with specified financial ratios and
tests, including a limitation on capital expenditures, an EBITDA to fixed
charges ratio, a minimum net worth test, a total debt to EBITDA ratio, and a
current ratio. The Company received waivers of compliance with its total debt to
EBITDA ratio as of December 31, 1996, March 31, 1997 and June 30, 1997. The
Company also obtained amendments to the Bank Credit Agreement as of March 31,
1997 and
11
<PAGE>
June 30, 1997 to update these financial ratios. See "Description of the Bank
Credit Agreement." The Discount Notes Indenture also contains a number of
restrictive covenants. See "Description of the Discount Notes -- Certain
Covenants."
The Company's ability to comply with the covenants and restrictions
contained in the Bank Credit Agreement, the Discount Notes Indenture, or the
Notes Indenture may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the Bank Credit
Agreement, the Discount Notes Indenture, or the Notes Indenture, which would
permit the lenders under the Bank Credit Agreement or the holders of Original
Notes, Notes or the Discount Notes, as the case may be, to declare all amounts
outstanding thereunder to be due and payable, together with accrued and unpaid
interest, and the commitments of the lenders under the Bank Credit Agreement to
make further extensions of credit could be terminated. In addition, in the event
of a default under the Bank Credit Agreement, in certain circumstances the
lenders under the Bank Credit Agreement could elect to prevent the Company from
making any payments on the Discount Notes. See "Description of the Discount
Notes -- Ranking." If the Company were unable to repay its indebtedness to the
lenders under the Bank Credit Agreement, such lenders could proceed against the
collateral securing such indebtedness as described under "Description of the
Bank Credit Agreement." There can be no assurance that in the event of any such
default the Company will have adequate resources to repay in full principal,
premium, if any, and interest on the Discount Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined under "Description
of the Discount Notes -- Certain Definitions"), the Company is required to
offer to purchase all of the outstanding Discount Notes at a price equal to 101%
of the principal amount thereof at the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase. The occurrence of certain of the
events which would constitute a Change of Control constitutes a default under
the Bank Credit Agreement. In addition, the Bank Credit Agreement prohibits the
purchase of the Discount Notes by the Company in the event of a Change of
Control, unless and until such time as the indebtedness under the Bank Credit
Agreement is repaid in full. The Company's failure to purchase the Discount
Notes in such instance would result in a default under the Discount Notes
Indenture and the Bank Credit Agreement. The inability to repay the indebtedness
under the Bank Credit Agreement, if accelerated, would also constitute an event
of default under the Discount Notes Indenture, which could have materially
adverse consequences to the Company and to the holders of the Discount Notes. In
the event of a Change of Control, there can be no assurance that the Company
would have sufficient assets to satisfy all of its obligations under the Bank
Credit Agreement and the Discount Notes. See "Description of the Discount
Notes -- Change of Control" and "Description of the Bank Credit Agreement."
CYCLICAL INDUSTRIES
The Company's primary business consists of the production of butadiene,
MTBE, n-butylenes and specialty isobutylenes. The prices of certain of these
products have historically been cyclical and have been sensitive to overall
production capacity relative to demand, the availability and price of feedstocks
and the level of general business activity. In the past, certain of these
products have experienced market shortages, accompanied by relatively high
prices, and periods of oversupply, accompanied by relatively low prices.
While the Company has achieved relatively stable profitability on its sales
of butadiene due to the nature of the supply contracts under which it purchases
crude butadiene, industry profitability for MTBE has fluctuated considerably
over the past several years. In the early 1990s, considerable additional
production capacity was installed in the U.S. in anticipation of demand for MTBE
created by the Federal Clean Air Act Amendments of 1990 ("CAAA"). This demand
did not completely materialize due to states opting-out of the programs
promulgated by the CAAA as well as less than anticipated demand in states not
required to comply with such programs, resulting in an industry overcapacity
condition that has resulted in lower average selling prices and margins.
12
<PAGE>
HIGHLY COMPETITIVE INDUSTRY
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors 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. Furthermore, petroleum-rich countries have recently become more
significant participants in the petrochemical industry and may expand such role
significantly in the future. Any of these developments could have a negative
impact on the Company's financial position, results of operations and cash
flows. See "Business -- Competition."
DEPENDENCE ON KEY CUSTOMERS
Certain of the Company's largest customers account for a significant
percentage of the Company's sales. In the year ended June 30, 1997 approximately
41% of the Company's sales were made to four customers. In addition, in the year
ended June 30, 1997 approximately 16.7% of the Company's total revenues were
derived from a single customer and 11.4% of the Company's total revenues were
derived from an additional single customer. Although the Company believes its
relationships with its largest customers are good, the loss of a significant
customer or a number of significant customers would have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. There can be no assurance that the historic levels of business from these
customers or the Company's ability to replace a lost customer will be maintained
in the future.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive Federal, state and local
laws, regulations and decrees governing, among other things, emissions to air,
discharges to waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. The Company's production facilities
require operating permits that are subject to revocation, modification and
renewal, violations of which may provide for substantial fines and civil or
criminal sanctions. The operation of any chemical manufacturing plant entails
risk of adverse environmental effect, including exposure to chemical products
and by-products from the Company's operations, and there can be no assurance
that material costs or liabilities will not be incurred to rectify any such
damage. In addition, potentially significant expenditures could be required in
order to comply with environmental, health and safety laws and regulations that
may be adopted or imposed in the future. To meet changing licensing and
regulatory standards, the Company may be required to make additional significant
site or operational modifications, potentially involving substantial
expenditures or the reduction or suspension of certain operations. See
"-- Dependence on Single Facility" and "Business -- Environmental
Regulation."
PRICE VOLATILITY OF PETROCHEMICAL FEEDSTOCKS
The Company uses large amounts of petrochemical feedstocks in the
manufacturing of its chemical products. While the Company tries to match cost
increases with corresponding price increases, there may be periods of time
during which increases in feedstock prices are not recovered by the Company due
to an inability to increase the selling prices of its products because of
weakness in demand for, or oversupply of, such products.
The principal raw material feedstocks purchased by the Company are crude
butadiene, isobutane and methanol. A number of the Company's raw material
suppliers provide the Company with a significant amount of its raw materials,
and if one significant supplier or a number of significant suppliers were unable
to meet their obligations under present supply arrangements, or if such
arrangements could not be renewed upon expiration, the Company could be required
to incur increased costs for its raw materials. The ability to pass on increases
in raw material prices to the Company's customers is, to a large extent,
dependent on
13
<PAGE>
market conditions. There may be periods of time in which increases in feedstock
prices are not recovered by the Company due to an inability to increase the
selling prices of its products because of weakness in demand for, or oversupply
of, such products, and therefore, certain increases in raw materials prices may
have a material adverse effect on the operations of the Company.
DEPENDENCE ON SINGLE FACILITY; LIMITED INSURANCE COVERAGE
The Company has one major operating facility located approximately one mile
from the Houston Ship Channel. The loss or shutdown of operations over an
extended period of time at such facility would have a material adverse effect on
the Company. The Company's operations are subject to the usual hazards
associated with chemical manufacturing and the related storage and
transportation of feedstocks, products and wastes, including explosions, fires,
inclement weather and natural disasters, mechanical failure, unscheduled
downtime, transportation interruptions, chemical spills, discharges or releases
of toxic or hazardous substances or gases and other environmental risks, such as
required remediation of contamination. These hazards can cause personal injury
and loss of life, severe damage to or destruction of property and equipment and
environmental damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. The Company maintains property,
business interruption and casualty insurance at levels which it believes are in
accordance with customary industry practice, but there can be no assurance that
the Company will not incur losses beyond the limits or outside the coverage of
its insurance.
FACTORS AFFECTING DEMAND FOR MTBE
One of the Company's core products is MTBE, an oxygenate and octane
enhancer used in reformulated gasoline. The CAAA mandates numerous comprehensive
specifications for motor vehicle fuel, including minimum oxygen content and
reduced emissions of ozone precursors. Future demand for MTBE will depend on,
among other things, the degree to which the CAAA is implemented and enforced,
the possible adoption of additional legislation, the degree to which existing
ozone non-attainment areas come into compliance with air quality standards, the
degree to which gasoline suppliers can isolate ozone non-attainment areas where
the use of oxygenates is not required and the results of ongoing and any future
scientific studies regarding the health effects of oxygenates added to gasoline.
In addition, although the Company expects that there will be a continued market
preference and governmental support for MTBE, it is possible that alternative
oxygenates or octane enhancers could make inroads into MTBE's market share.
Recently there have been legislative initiatives to eliminate the use of MTBE as
a fuel additive in certain geographic areas. To date such initiatives have not
been successful. The Company cannot predict whether such legislation will be
reintroduced, or if it would be enacted if reintroduced; however, the
elimination of MTBE as a fuel additive in major markets could have a material
adverse effect on the Company. See "Business -- Industry Overview -- MTBE" and
"Business -- Environmental Regulation."
REGULATION OF EXPOSURE TO BUTADIENE
Butadiene is a known carcinogen in laboratory animals at high doses and is
being studied for its potential adverse health effects. Effective February 1997,
the Occupational Safety and Health Administration lowered substantially the
employee permissible exposure limit for butadiene. Although the Company believes
that it is in compliance with the new regulatory limit and may maintain
compliance without incurring significant costs, there can be no assurance that
future scientific studies regarding the health effects of butadiene or any other
product handled by the Company will not result in more stringent regulations or
in restrictions on the use of, or exposure to, such products. See
"Business -- Environmental Regulation."
ORIGINAL ISSUE DISCOUNT OF DISCOUNT NOTES
The Discount Notes were issued at a substantial discount from their
principal amount at final maturity. Consequently, although cash interest will
not accrue on the Discount Notes prior to July 1, 2001, and there will be no
periodic payments of cash interest on the Discount Notes prior to January 1,
2002, original issue discount will be included as interest on an accrual basis
in the gross income of a holder of Discount Notes, for federal income tax
purposes, in advance of the receipt of cash payments on the Discount Notes. See
14
<PAGE>
"Material Federal Income Tax Considerations" for a more detailed discussion of
the federal income tax consequences to the holders of the Discount Notes
regarding the purchase, ownership and disposition of the Discount Notes.
If a bankruptcy case is commenced by or against Holdings under the United
States Bankruptcy Code after the issuance of the Discount Notes, the claim of a
holder of Discount Notes with respect to the principal amount thereof may be
limited to an amount equal to the sum of (i) the portion of the initial issue
price of the Units allocated, for federal income tax purposes, to the Discount
Notes and (ii) that portion of the original issue discount which is not deemed
to constitute "unmatured interest" for purposes of the United States
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing would constitute "unmatured interest."
LACK OF PUBLIC MARKET FOR THE DISCOUNT NOTES
There is no public market for the Discount Notes. Holdings does not expect
a trading market in the Discount Notes to develop. No broker-dealer presently
intends to make a market in the Discount Notes. No assurances can be given as to
the liquidity of or trading market for the Discount Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Discount
Notes by the selling security holder.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. The information set forth below should be read in conjunction
with the "Selected Financial Data" and the Company's Consolidated Financial
Statements and related notes thereto included elsewhere herein.
AS OF
DECEMBER 31, 1997
-----------------
(UNAUDITED)
Cash and investment securities....... $ 0.1
========
Long-term debt, including current
maturities:
Discount Notes.................. $ 36.5
Existing revolving line of
credit......................... 5.0
Tranche A Term Loan............. 22.5
Tranche B Term Loan............. 42.9
ESOP Term Loan.................. 7.0
Original Notes.................. 175.0
Notes........................... 52.7
Long-term financing............. 2.6
--------
Total long-term debt,
including current
maturities.............. 344.2
Common stock held by ESOP............ 7.0
Less -- Note receivable
from ESOP............... (7.0)
Total stockholders'
equity.................. 24.1
--------
Total
capitalization.... $ 368.3
========
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
combined financial statements of TOC, its subsidiaries and Clarkston for periods
prior to July 1, 1996 and from the consolidated financial statements of the
Company since July 1, 1996, and should be read in conjunction with, and is
qualified in its entirety by reference to, financial statements which appear
elsewhere in this Prospectus and their accompanying notes. Such combined
financial information is combined to reflect the assumption by the Company of a
raw material supply contract. The combined financial information set forth below
for each of the years in the three-year period ended May 31, 1995, the
twelve-month period ended May 31, 1996 and the one-month period ended June 30,
1996 has been derived from the financial statements of TOC, its subsidiaries and
Clarkston, which were audited by Coopers & Lybrand L.L.P., independent auditors
for such entities. The consolidated financial information of the Company set
forth below for the year ended June 30, 1997 was audited by Deloitte & Touche
LLP. The results of the one month and interim periods are not necessarily
indicative of the results of the entire year or any other period. The
information presented below should be read in conjunction with the combined
financial statements of TOC, its subsidiaries and Clarkston, the consolidated
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------- --------------------------
TWELVE ONE
MONTHS MONTH YEAR SIX
ENDED ENDED ENDED MONTHS ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, JUNE 30, DECEMBER 31,
------------------------------- ------- -------- ----------- ------------
1993 1994 1995 1996 1996 1997 1996
--------- --------- --------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4 $ 490.2 $246.7
Cost of goods sold(1)................ 347.8 279.0 404.8 391.0 36.4 436.0 217.9
Depreciation and amortization........ 12.6 13.6 14.3 15.0 1.3 29.8 15.9
--------- --------- --------- ------- -------- ----------- ------------
Gross profit(1)...................... 50.3 59.8 55.6 49.6 3.7 24.4 12.9
Selling, general and administrative
expenses(1)........................ 7.4 6.5 8.1 7.6 1.3 6.1 2.8
--------- --------- --------- ------- -------- ----------- ------------
Income from operations............... 42.9 53.3 47.5 42.0 2.4 18.3 10.1
Interest income (expense), net....... (0.6) (0.2) 0.7 (1.6 ) (0.1) (39.4) (19.4)
Other income (expense)(2)............ (1.2) (0.8) 1.1 (15.9 ) (0.3) 2.3 1.5
--------- --------- --------- ------- -------- ----------- ------------
Income (loss) before income taxes and
minority interest.................. 41.1 52.3 49.3 24.5 2.0 (18.8) (7.8)
Provision (benefit) for income
taxes.............................. 13.0 18.4 16.9 7.9 0.8 (4.8) (1.6)
Extraordinary loss................... -- -- -- -- -- 1.5 --
Minority interest in net loss of
consolidated subsidiary............ -- -- 0.1 0.1 -- -- --
--------- --------- --------- ------- -------- ----------- ------------
Net income (loss).................... $ 28.1 $ 33.9 $ 32.5 $ 16.7 $ 1.2 $ (15.5) $ (6.2)
========= ========= ========= ======= ======== =========== ============
OPERATING DATA:
Revenues by product:
Butadiene(3).................... $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2 $ 130.9 $ 62.6
MTBE............................ 211.0 175.2 199.1 187.4 21.0 230.3 128.1
n-Butylenes..................... 21.7 28.1 42.7 48.2 3.2 49.4 21.5
Specialty Isobutylenes.......... 54.8 59.9 75.5 74.5 5.5 62.3 25.9
Other(4)........................ 41.9 20.5 51.2 32.9 1.5 17.3 8.6
Sales volumes (in millions of
pounds):
Butadiene....................... 556.2 484.4 580.8 622.6 64.6 750.3 356.4
MTBE(5)......................... 225.1 194.8 211.1 219.8 26.6 274.1 150.3
n-Butylenes..................... 114.7 150.8 245.9 284.6 17.1 266.4 115.5
Specialty Isobutylenes.......... 309.0 312.2 398.0 368.2 23.0 275.7 100.8
</TABLE>
SIX
MONTHS ENDED
DECEMBER 31,
------------
1997
------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $276.5
Cost of goods sold(1)................ 235.8
Depreciation and amortization........ 15.5
------------
Gross profit(1)...................... 25.2
Selling, general and administrative
expenses(1)........................ 3.2
------------
Income from operations............... 22.0
Interest income (expense), net....... (20.1)
Other income (expense)(2)............ 0.0
------------
Income (loss) before income taxes and
minority interest.................. 1.9
Provision (benefit) for income
taxes.............................. 1.6
Extraordinary loss................... --
Minority interest in net loss of
consolidated subsidiary............ --
------------
Net income (loss).................... $ 0.3
============
OPERATING DATA:
Revenues by product:
Butadiene(3).................... $ 72.6
MTBE............................ 125.8
n-Butylenes..................... 32.5
Specialty Isobutylenes.......... 37.4
Other(4)........................ 8.2
Sales volumes (in millions of
pounds):
Butadiene....................... 402.3
MTBE(5)......................... 141.3
n-Butylenes..................... 178.3
Specialty Isobutylenes.......... 178.7
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------ COMPANY
MAY 31, ------------------------
------------------------------- JUNE 30, JUNE 30, DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN MILLIONS)
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ 12.6 $ 11.1
Property, plant and equipment, net... 101.6 95.9 90.1 81.8 240.0 231.9
Total assets......................... 194.1 214.6 230.7 167.9 523.0 517.1
Long-term debt (including current
portion)........................... 10.9 11.0 -- 13.0 351.9 344.2
Total stockholders' equity........... 128.2 140.4 163.3 92.5 22.8 24.1
PREDECESSOR COMPANY
---------------------------------------------------- ------------------------
TWELVE ONE
MONTHS MONTH YEAR SIX
ENDED ENDED ENDED MONTHS ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, JUNE 30, DECEMBER 31,
------------------------------- -------- -------- -------- -------------
1993 1994 1995 1996 1996 1997 1996
--------- --------- --------- -------- -------- -------- -------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
OTHER DATA:
EBITDA(6)............................ $ 55.5 $ 66.9 $ 61.8 $ 57.0 $ 3.7 $ 50.4 $ 27.5
Capital expenditures................. 12.0 12.5 8.7 5.5 2.0 7.6 5.2
Net cash provided by operating
activities......................... 44.5 30.2 50.3 44.5 13.9 (1.8 ) (0.1)
Net cash provided by (used in)
investing
activities......................... (7.2) (5.3) (25.9) 8.2 (1.3) (352.3 ) (353.6)
Net cash used in financing
activities......................... (29.9) (17.6) (23.3) (69.0) (9.4) 354.2 353.9
Cash dividends....................... 23.7 21.4 6.2 16.5 -- -- --
Ratio of earnings to fixed
charges(7)......................... 16.1x 26.0x 26.3x 7.2x 9.4x -- --
</TABLE>
SIX
MONTHS ENDED
DECEMBER 31,
-------------
1997
-------------
(UNAUDITED)
OTHER DATA:
EBITDA(6)............................ $38.0
Capital expenditures................. 4.5
Net cash provided by operating
activities......................... 21.7
Net cash provided by (used in)
investing
activities......................... (3.4)
Net cash used in financing
activities......................... (18.3)
Cash dividends....................... --
Ratio of earnings to fixed
charges(7)......................... 1.1x
- ------------
(1) The Company classifies variable compensation paid to employees as cost of
goods sold. Previously, the Company has classified this cost as selling,
general and administrative expenses. The Company has made reclassifications
to the prior periods in order to conform to the current period
presentation.
(2) Includes dividend income, charitable contributions, gain (loss) on disposal
of assets and investment securities, net, and other, net. For the twelve
months ended May 31, 1996, other expense includes an impairment of
investment in land of $12.6 million.
(3) Approximately 95% of the Company's butadiene sales are under fixed profit
contracts with suppliers of crude butadiene.
(4) Includes Clarkston's trading revenues from third parties (for the periods
prior to July 1, 1996), utility revenues, revenues realized from the
Company's terminalling facilities and sales of chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income before income taxes, extraordinary loss and
minority interest before taking into consideration interest expenses,
depreciation and amortization and certain other non-recurring charges.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be construed
by an investor as an alternative to income from operations (as determined in
accordance with generally accepted accounting principles), as an indicator
of the operating performance of the Company or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
(7) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the twelve months
ended May 31, 1996, income before taxes and minority interest includes a
$12.6 million non-cash provision for the impairment of certain non-strategic
properties which TPC intends to sell. For the year ended June 30, 1997 and
the six months ended December 31, 1996, earnings were insufficient to cover
fixed charges by the amount of $18.8 million and $7.8 million, respectively.
18
<PAGE>
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 CAAA, 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. The Company's margins in
fiscal 1997 were negatively impacted by the higher cost of raw materials. The
cost of raw materials moderated at the end of the fiscal year and returned to
more historical levels.
REVENUES
The Company's revenues are primarily 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: (i) historical revenues and the percentages of historical
revenues by product; (ii) volume of products sold; and (iii) average selling
prices for such products, exclusive of tolling fees, in each case for the year
ended May 31, 1995, the twelve-month period ended May 31, 1996, the one-month
period ended June 30, 1996, the year-ended June 30, 1997 and the six months
ended December 31, 1996 and 1997.
REVENUES
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR -------------------------------
---------------------------------------------------------------- SIX
TWELVE MONTHS MONTHS
ONE MONTH YEAR ENDED
YEAR ENDED ENDED ENDED ENDED DECEMBER
MAY 31, MAY 31, JUNE 30, JUNE 30, 31,
-------------------- -------------------- -------------------- -------------------- ---------
1995 1996 1996 1997 1996
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Butadiene............... $ 106.2 22% $ 112.6 25% $ 10.2 25% $ 130.9 27% $ 62.6
MTBE.................... 199.1 42 187.4 41 21.0 50 230.3 47 128.1
n-Butylenes............. 42.7 9 48.2 11 3.2 8 49.4 10 21.5
Specialty
Isobutylenes.......... 75.5 16 74.5 16 5.5 13 62.3 13 25.9
Other(1)................ 51.2 11 32.9 7 1.5 4 17.3 3 8.6
--------- --- --------- --- --------- --- --------- --- ---------
Total............... $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 490.2 100% $ 246.7
========= === ========= === ========= === ========= === =========
</TABLE>
SIX MONTHS
ENDED
DECEMBER 31,
--------------------
1997
--------------------
Butadiene............... 25% $ 72.6 26%
MTBE.................... 52 125.8 45
n-Butylenes............. 9 32.5 12
Specialty
Isobutylenes.......... 11 37.4 14
Other(1)................ 3 8.2 3
--- --------- ---
Total............... 100% $ 276.5 100%
=== ========= ===
- ------------
(1) Includes Clarkston's trading revenues from third parties, utility revenues,
revenues realized from the Company's terminalling facilities and sales of
chemical by-products to third parties.
19
<PAGE>
SALES VOLUMES
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------- ----------------------------------------
TWELVE MONTHS ONE MONTH YEAR SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
---------- ------------- ---------- -------- ------------ ------------
1995 1996 1996 1997 1996 1997
---------- ------------- ---------- -------- ------------ ------------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C> <C> <C>
Butadiene............................... 580.8 622.6 64.6 750.3 356.4 402.3
MTBE(1)................................. 211.1 219.8 26.6 274.1 150.3 141.3
n-Butylenes............................. 245.9 284.6 17.1 266.4 115.5 178.3
Specialty Isobutylenes.................. 398.0 368.2 23.0 275.7 100.8 178.7
</TABLE>
- ------------
(1) Volumes in millions of gallons.
AVERAGE SELLING PRICES
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------- ----------------------------------------
TWELVE MONTHS ONE MONTH YEAR SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
---------- ------------- ---------- -------- ------------ ------------
1995 1996 1996 1997 1996 1997
---------- ------------- ---------- -------- ------------ ------------
(DOLLARS PER POUND, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C> <C> <C>
Butadiene............................ $ 0.21 $0.20 $ 0.18 $ 0.19 $ 0.19 $ 0.20
MTBE(1).............................. 0.94 0.85 0.80 0.84 0.85 0.89
n-Butylenes(2)....................... 0.17 0.17 0.19 0.20 0.20 0.18
Specialty Isobutylenes(2)............ 0.19 0.20 0.24 0.23 0.22 0.21
</TABLE>
- ------------
(1) Prices in dollars per gallon.
(2) Weighted average of the products under these categories.
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 ENDED ENDED YEAR ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30,
-------------------- -------------------- -------------------- --------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Revenues................................ $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 490.2 100%
Cost of goods sold...................... 404.8 85 391.0 86 36.4 88 436.0 89
Depreciation and amortization........... 14.3 3 15.0 3 1.3 3 29.8 6
--------- --- --------- --- --------- --- --------- ---
Gross profit............................ 55.6 12 49.6 11 3.7 9 24.4 5
Selling, general and administrative
expenses.............................. 8.1 2 7.6 2 1.3 3 6.1 1
--------- --- --------- --- --------- --- --------- ---
Income from operations.................. $ 47.5 10% $ 42.0 9% $ 2.4 6% $ 18.3 4%
========= === ========= === ========= === ========= ===
</TABLE>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------
1996 1997
---------------- ---------------
Revenues................................ $ 246.7 100% $ 276.5 100%
Cost of goods sold...................... 217.9 88 235.8 85
Depreciation and amortization........... 15.9 7 15.5 6
--------- --- --------- ---
Gross profit............................ 12.9 5 25.2 9
Selling, general and administrative
expenses.............................. 2.8 1 3.2 1
--------- --- --------- ---
Income from operations.................. $ 10.1 4% $ 22.0 8%
========= === ========= ===
- ------------
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1996
REVENUES
The Company's revenues increased by approximately 12%, or $29.8 million, to
$276.5 million for the six months ended December 31, 1997 from $246.7 million
for the six months ended December 31, 1996. Butadiene sales revenues increased
approximately 16% as a result of higher sales volumes. Butadiene sales continue
to remain strong as a result of market demand and increased production levels.
MTBE sales revenues were lower as a result of lower sales volumes during the
current period partially offset by higher sales prices. Sales volumes of MTBE
are lower due to the shift in isobutylene production, an intermediate
20
<PAGE>
feedstock, to the production of isobutylene concentrate. Sales volumes of
isobutylene concentrate have returned to more historical levels due to
improvements in market fundamentals. Sales of high-purity isobutylene and
diisobutylene were relatively unchanged. N-butylene sales revenue increased
significantly due to higher sales volumes. 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 the chemical market also
increased during the current year.
GROSS PROFIT
Gross profit increased by approximately 95%, or $12.3 million, to $25.2
million for the six months ended December 31, 1997 from $12.9 million for the
six months ended December 31, 1996. Gross margin during this period increased to
9.1% from 5.2%. This increase was primarily attributable to higher MTBE margins
and increased sales volumes of n-butylenes and specialty isobutylenes. MTBE
average sales prices were higher during the current period compared to the prior
period due to a shortage of prompt MTBE bbls. in the market and a strong driving
season. MTBE margins also improved as a result of lower feedstock costs.
INCOME FROM OPERATIONS
Income from operations increased by approximately 118%, or $11.9 million,
to $22.0 million for the six months ended December 31, 1997 from $10.1 million
for the six months ended December 31, 1996. Operating margin during this period
increased to 8.0% from 4.1%. This increase in income from operations and
operating margin was primarily due to the same factors contributing to the
increase in gross profit and gross margin described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately $0.4
million, to $3.2 million for the six months ended December 31, 1997 from $2.8
million for the six months ended December 31, 1996. The increase in selling,
general and administrative expenses was associated with increased business
development activity in the current period.
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
volume of specialty isobutylenes.
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
volume 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 MBTE in the market remained strong, allowing the Company 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 in the
current year compared to the prior. The increases were the result of
21
<PAGE>
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 alternative feedstocks entering 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 occurred 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 due to 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 $25.2 million, to $24.4
million 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 5.0% from
10.9%. The decrease was primarily attributable to lower margins on MTBE and
specialty isobutylene sales. MTBE margins were adversely affected by higher
feedstock costs. Average isobutane and methanol prices were approximately 13%
and 25% higher, respectively, than in the prior year. In December 1996, as a
result of the decline in MTBE margins, the Company shut down for 52 days its
Dehydro-1 unit which has 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 fiscal 1997. Gross
profits from sales of butadiene and butene-1 increased over the prior year,
along with lower variable compensation paid to employees, and were used to
offset partially the above referenced decrease. Gross profit was also negatively
impacted by increased depreciation and amortization expense during fiscal 1997
as a result of the increased basis in fixed assets and goodwill from the
Acquisition.
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.
22
<PAGE>
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.
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
REVENUES
The Company's revenues decreased by approximately 4%, or $19.1 million, to
$455.6 million for the twelve months ended May 31, 1996 from $474.7 million for
the year ended May 31, 1995. This decrease was primarily attributable to
decreased selling prices for butadiene, MTBE and n-butylenes, as well as
decreased sales volumes for specialty isobutylenes and a decrease in other
revenues, partially offset by increased selling prices of specialty isobutylenes
as well as increased sales volumes of butadiene, MTBE and n-butylenes.
Butadiene revenues increased by approximately 6%, or $6.4 million, to
$112.6 million for the twelve months ended May 31, 1996 from $106.2 million for
the year ended May 31, 1995. This increase was primarily attributable to an
increase in sales volumes of approximately 7%, or 41.8 million pounds, as a
result of increased contractual volumes sold at then current prices to a major
customer as the Company gained a larger share of this customer's business and as
this customer increased its requirements. In addition, sales prices decreased
slightly due to customers drawing down inventory thereby decreasing overall
product demand.
MTBE revenues decreased by approximately 6%, or $11.7 million, to $187.4
million for the twelve months ended May 31, 1996 from $199.1 million for the
year ended May 31, 1995. This decrease was primarily attributable to a decrease
in selling prices due to the expiration of significant sales contracts in which
pricing was based on a fixed profit above cost, in accordance with industry
trends. In addition, sales volumes increased by approximately 4%, or 8.7 million
gallons, due to the full year implementation of mandated oxygenate requirements.
n-Butylenes revenues increased by approximately 13%, or $5.5 million, to
$48.2 million for the twelve months ended May 31, 1996 from $42.7 million for
the year ended May 31, 1995. This increase was attributable to increased sales
volumes of approximately 16%, or 38.7 million pounds, as the Company expanded
its customer base and increased its contractual volumes to a significant
existing customer. A decrease in average selling prices resulted from the
Company matching competitors' pricing for certain products, which partially
offset the increase in sales volumes.
Specialty isobutylenes revenues decreased by approximately 1%, or $1.0
million, to $74.5 million for the twelve months ended May 31, 1996 from $75.5
million for the year ended May 31, 1995. This decrease was the result of a major
specialty isobutylene customer increasing purchases of a low price specialty
isobutylene product from a competing supplier offering an alternate, lower
purity product during this period. The Company offset a portion of these lower
volumes by sales of higher priced specialty isobutylene products to other
customers at prices which were lower than prevailing contract prices.
Other revenues decreased by approximately 36%, or $18.3 million, to $32.9
million for the twelve months ended May 31, 1996, from $51.2 million for the
year ended May 31, 1995. This decrease was primarily due to a $17.5 million
decrease in sales from Clarkston to third parties due to reduced n-butane and
isobutane trading activity.
23
<PAGE>
GROSS PROFIT
Gross profit decreased by approximately 11%, or $6.0 million, to $49.6
million for the twelve months ended May 31, 1996 from $55.6 million for the year
ended May 31, 1995. Gross margin during this period decreased slightly to 10.9%
from 11.7%. The decline in gross profit was primarily attributable to a one-time
10% salary increase for employees included in cost of goods sold, higher
variable compensation paid to employees, and to an additional $3 million
increase in cost of goods sold resulting from a scheduled maintenance shutdown
on one of the Company's dehydrogenation units and the write-off of capitalized
dehydrogenation catalyst costs, which resulted from an unscheduled shutdown. In
addition, depreciation and amortization increased slightly related to new
capital investments. These cost increases were partially offset by a decrease in
raw material methanol costs and a decrease in costs associated with Clarkston's
third party trading activities during this period.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 12%, or $5.5 million, to
$42.0 million for the twelve months ended May 31, 1996 from $47.5 million for
the year ended May 31, 1995. Operating margin during this period declined to
9.2% from 10.0%. This decrease in income from operations and operating margin
was primarily due to the same factors contributing to the declines in gross
profit and gross margin described above. See "-- Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1996
Net cash provided by (used in) operating activities was $21.7 million for
the six months ended December 31, 1997 compared to $(0.1) million for the six
months ended December 31, 1996. The change of $21.8 million was attributable to
increased profitability offset by changes in working capital as a result of
timing differences in receipts and disbursements of cash. Net cash used in
investing activities was $3.4 million for the six months ended December 31, 1997
compared to $353.6 million for the six months ended December 31, 1996. The
decrease of $350.2 million was attributable to the Acquisition of the Company
during the prior year. Net cash provided by (used in) financing activities was
$(18.3) million for the six months ended December 31, 1997 compared to $353.9
million for the six months ended December 31, 1996. The change of $372.2 million
was attributable to the financing of the Acquisition of the Company during the
prior year.
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
on July 1, 1996, partially offset by proceeds from the sale of non-plant assets
and Company 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 an
investment from Holdings, 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
24
<PAGE>
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.
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
Net cash provided by operating activities was $44.5 million for the twelve
months ended May 31, 1996 compared to $50.3 million for the year ended May 31,
1995. This decrease of $5.8 million was primarily attributable to a decrease in
net income adjusted for non-cash items and a decrease in changes in working
capital. Net cash provided by investing activities was $8.2 million for the
twelve months ended May 31, 1996 compared to net cash used in investing
activities of $25.9 million for the year ended May 31, 1995. This change of
$34.1 million was due to decreases in capital expenditures, an increase in
proceeds from the sales of investment securities and a decrease in purchases of
investment securities. Net cash used in financing activities was $69.0 million
for the twelve months ended May 31, 1996 compared to $23.3 million for the year
ended May 31, 1995. This increase of $45.7 million was primarily due to the
purchase by the Company of common stock for a total consideration of $95.4
million in August 1995 and an increase in dividends and distributions paid,
partially offset by the sale by the Company of common stock to certain officers
of the Company for $22.6 million and decreased repayments under revolving credit
lines.
LIQUIDITY
The Company's liquidity needs arise primarily from principal and interest
payments under the $140 million Bank Credit Agreement and $175 million principal
amount of Original Notes incurred in connection with the Acquisition, as well as
the $50 million principal amount of Notes, the net proceeds of which were used
to reduce indebtedness under the Bank Credit Agreement. 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 only $5 million was in use at
December 31, 1997, to provide adequate funds for ongoing operations, working
capital, planned capital expenditures and debt service during the terms of such
Revolving Credit Facility. The Company believes that the availability of funds
under the Revolving Credit Facility are sufficient to cover any current
liquidity needs which could arise as a result of negative working capital. The
Company's ability to borrow is limited by the terms of the Bank Credit Agreement
and the Notes Indenture and the Discount Notes Indenture. The Bank Credit
Agreement, the Original Notes, the 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 July 31, 1997 the Company obtained an
amendment to the Bank Credit Agreement to waive the debt to EBITDA ratio at June
30, 1997 and to update the financial ratios relating to fixed charge coverage
and debt to EBITDA for fiscal 1998. See "Risk Factors -- "Restrictive
Financing Covenants," "Description of the Bank Credit Agreement" and
"Description of the Discount Notes."
CASH BONUS PLAN
In connection with the Acquisition, the Company established the $35 million
Cash Bonus Plan covering substantially all employees of the Company (or certain
affiliates of the Company) and covering the employees of certain third-party
contractors who have contributed to the success of the Company. 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.
25
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures for the six months ended December 31, 1997 were $4.5
million. These expenditures relate principally to improving operating
efficiencies and maintaining environmental compliance. The Company is planning
capital projects for the remainder of fiscal 1998 in the areas of process
automation, operating efficiencies, system integration and environmental
compliance. The Company anticipates capital expenditures for fiscal 1998 to be
approximately $14 million. Capital expenditures for the year ended June 30, 1997
were $7.6 million, compared to $5.5 million for the twelve months ended May 31,
1996 and $8.7 million for the year ended May 31, 1995. The Company's capital
expenditures for fiscal 1997 related principally to improving operating
efficiencies and maintaining environmental compliance (including the
installation of an environmentally superior waste-heat boiler in one of the
Company's dehydrogenation units). 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 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." SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. SFAS No. 129 is effective for periods ending after December
15, 1997. SFAS No. 130 and SFAS 131 are effective for fiscal years beginning
after December 15, 1997. Adoption of these pronouncements is not expected to
have a material effect on the Company's financial position, results of
operations or cash flows.
OTHER
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (the "Standard"). The Standard requires, among
other things, that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. During 1996, the Company evaluated the carrying value of its
investments in land in light of the possible sale of these assets in the
foreseeable future and considering the criteria in the Standard, determined that
an impairment write-down was necessary. Prior to 1996, the Company did not
consider the decline in the fair value of those assets, which was below the
Company's cost, to be a permanent decline. During the twelve months ended May
31, 1996 the Company adopted the Standard and as a result recorded a provision
of $12,592,112, with an associated tax benefit of $4,660,000, to write down
certain properties to estimated fair market value. As of September 30, 1997 the
Company still holds two properties and is marketing these properties for sale.
The carrying value of the properties at September 30, 1997 was $2.6 million.
There have been no changes in the market to indicate that further revisions to
the carrying value of these assets is necessary.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Part 1, Items 1 and 2 of this document include forward-looking statements.
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.
26
<PAGE>
BUSINESS
GENERAL
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. For the year ended June 30, 1997, and the twelve months
ended May 31, 1996, butadiene represented 27% and 25% of the Company's total
revenues, respectively, MTBE represented 47% and 41%, n-butylenes 10% and 11%,
respectively, specialty isobutylenes 13% and 16%, respectively and other
revenues the remaining 3% and 7%, respectively. The Company's revenues for the
year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 were $490.2 million, $455.6 million and $41.4 million,
respectively, and EBITDA (as defined) for the year ended June 30, 1997, the
twelve months ended May 31, 1996 and the one month ended June 30, 1996 were
$50.4 million, $57.0 million and $3.7 million, respectively.
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 ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. 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.
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-term 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 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, and the Company's ability to produce isobutylene by
three alternative methods enables it to produce MTBE by the most economical
processes 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 root, 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 sells MTBE to oil refiners and gasoline producers, including Mobil Oil
Corporation, Lyondell Petrochemical Company and CITGO Petroleum Corporation on
both a contract and spot basis at prices linked to prevailing market prices.
The Company is the leading producer of high margin 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. The
Company's principal
27
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customers for n-butylenes include Union Carbide Corporation, The Dow Chemical
Company, NOVA Chemicals Ltd., Shell Chemical Company and Lyondell Petrochemical
Company. The Company's principal customers for specialty isobutylenes include
Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc Inc., The Lubrizol
Corporation and Schenectady International, Inc. Historically, the profitability
of the Company's n-butylenes sales has been relatively stable as the majority of
the sales of these products are made under contracts which link their selling
prices to the prices of products (principally gasoline and butanes) whose prices
fluctuate closely with those of the raw materials used to manufacture
n-butylenes and specialty isobutylenes.
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. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally, to produce MTBE for sale in the spot
market. In addition, the Company maintains the production flexibility to upgrade
n-butylenes contained in crude butadiene streams to either isobutylene or
butene-1 using its patented SKIP process. This flexibility allows the Company to
meet its customers' needs through the most economical process, to produce
additional products and to capitalize on favorable market conditions.
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
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
the Company acquired from Tenneco, Inc. the assets (principally comprised of the
Houston facility) of Petro-TexChemical Corporation ("Petro-Tex"), the prior
owner of the Company's manufacturing facility.
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 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 proportion of its sales made 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. While the Company currently has no plans to
increase its production capacity, it continuously evaluates these strategic
options in light of prevailing market conditions. In addition, the Company
believes that its ability to add low-cost incremental capacity acts as a
deterrent to other producers and new entrants considering capacity expansions.
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
28
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butadiene supply. In addition, announced butadiene capacity expansions by other
U.S. producers are minimal. The Company believes that growth in global demand
for butadiene will be consistent with gross domestic product growth based on
increased tire production and potential substitution of synthetic rubber for
natural rubber.
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 the 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.
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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The following table summarizes the Company's products.
<TABLE>
<CAPTION>
REVENUES FOR
YEAR ENDED INTERMEDIATE
COMPANY PRODUCT JUNE 30, 1997 CHEMICAL PRODUCTS PRINCIPAL APPLICATIONS
- ------------------------------------ ---------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
BUTADIENE $ 130.9 Styrene-Butadiene Rubber Tires, gaskets, pipes and hoses
Styrene-Butadiene Latex Paints, adhesives and paper coatings
Acrylonitrile Butadiene High-performance plastics
Styrene
Polybutadiene Rubber Tires
Hexamethylenediamine Nylon
MTBE $ 230.3 Reduces automotive emissions and
improves engine performance
N-BUTYLENES $ 49.4
Butene-1 High Density and Linear Low Trash bags, film wrap, pipe and
Density Polyethylene plastic containers
Butylene Oxide Detergent packages used in new
gasoline formulations to improve
engine performance
Butene-2 SEC-Butyl and other Alcohols Used in the production of coatings,
adhesives and plasticizers
SPECIALTY
ISOBUTYLENES $ 62.3
Isobutylene
Concentrate Butyl Rubber High-performance synthetic rubbers
used in tires
Polybutenes Lubricant additives
High Purity
Isobutylene Butyl Rubber High-performance synthetic rubbers
used in tires
Alkylphenols Resins and antioxidants
Agricultural Intermediates Herbicides and insecticides
Hydrocarbon Resins Sealants, paints, coatings and rubber
chemicals
Sulfurized Isobutylene Synthetic lubricant oils
Diisobutylene Alkylphenols Phenolic resins, tackifier and ink
resins, surfactants
Rubber Chemicals Specialty additives
Dispersants Lubricant oil additives
Polycarboxylate Polymers Water treatment, detergent and
mineral processing chemicals
</TABLE>
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INDUSTRY OVERVIEW
BUTADIENE. Butadiene is an important raw material used in the production
of a number of products, including styrene-butadiene rubber ("SBR"),
polybutadiene rubber, styrene-butadiene ("SB") latex, acrylonitrile butadiene
styrene ("ABS") and hexamethylenediamine ("HMDA"). These products are
utilized in the manufacture of tires and other rubber products, engineered
plastics, nylon fibers and other uses.
Demand for butadiene depends to a large extent on trends in the housing and
automotive sectors, principally the replacement tire market. The tire
replacement market has historically been less cyclical than the market for
original equipment tires and accounts for approximately 75% of all U.S. car and
commercial vehicle tire production. The Company expects continued growth in
butadiene end-use demand over the next several years consistent with global
gross domestic product growth. The Company believes that U.S. tire production
could increase as a result of higher volumes of domestic automobile production
due to foreign "transplant" production.
The most important butadiene derivative is SBR, which is primarily used in
the manufacture of tires, gaskets and hoses. Since 1990, the demand for SBR has
increased at a compound annual growth rate of approximately 3%. Although SBR
markets are mature, the Company expects that demand for higher performance tires
and truck tires may contribute to growth in demand for SBR at higher than
historical levels.
Polybutadiene rubber provides higher abrasion resistance than other rubbers
which makes it preferential for high performance tires, plastics applications
and other heavy duty uses. Other types of synthetic rubber produced from
butadiene include polychloroprene rubber, used in wire and cable applications,
and nitrile rubber, which, due to its high tensile strength and abrasion
resistance, is used in specialty applications, such as hoses, tubes and belts.
Butadiene derivatives which are not used to produce synthetic rubber
primarily consist of HMDA, SB latex and ABS. Historically, demand for these
products has generally reflected global gross domestic product growth. HMDA is
an intermediate in the production of nylon fiber. SB latex demand is driven by
its use in paints, adhesives and paper coatings. ABS resins are used in the
production of high-performance plastics with a wide range of applications in the
automotive, appliance and electronics industries.
Butadiene producers are currently operating at historically high rates and
the Company believes that no new capacity is expected to come on-line in the
U.S. in the next five years. Management believes that the Company's existing
capacity and low-cost expansion alternatives act as an effective deterrent to
the construction of new facilities by others in the United States.
The major source of supply for butadiene is extraction from crude
butadiene, a by-product of ethylene production. In the U.S., volumes of crude
butadiene from ethylene facilities are inadequate to meet domestic demand. The
U.S. imports a large portion of its requirements of butadiene and crude
butadiene, especially from Western Europe, where most ethylene facilities use
feedstocks which result in the production of proportionately more crude
butadiene than in the U.S. Historically, the price of butadiene has been
determined by supply, which is influenced by the amount of ethylene produced and
the availability of crude butadiene, and butadiene demand, which is determined
by demand for end-use products, such as tires, engineered plastics and nylon
fibers.
MTBE. MTBE has been one of the fastest growing petrochemicals, in terms of
volume, during the past fifteen years, with global production rising from
approximately 15,000 barrels per day in 1980 to approximately 382,000 barrels
per day in 1995. MTBE's dramatic growth has been a result of two significant
factors. First, MTBE has a high octane rating, which makes it a valuable
gasoline blendstock for adding octane to gasoline. Second, MTBE contains a high
percentage weight (approximately 18%) of oxygen. Its high oxygen level, which
results in improved combustion and reduces the level of carbon monoxide and
ozone-depleting emissions from automobile engines, contributes to MTBE's use as
a blending agent in oxygenated and reformulated gasolines. These properties and
its large scale global production capacity have made it the preferred oxygenate
and a major component of RFG in the U.S.
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<PAGE>
The use of lead additives in gasoline declined dramatically during the
1980s as a result of environmental legislation. Following such legislation,
octane needs increased, which increased world MTBE use considerably. The passage
of the CAAA in 1990 in the U.S. has caused another round of MTBE production
capacity additions and blending use increases during the past four years.
The two programs mandated by the CAAA which have the most significant
effect on the MTBE market are the oxygenated gasoline and the RFG programs. The
oxygenated gasoline program was initiated in 1992, with the goal of reducing
winter carbon monoxide emissions. With the implementation of the RFG program in
1995, the use of RFG was required in the nine major urban areas with the most
severe ozone pollution. High RFG prices and public health concerns, particularly
in cold weather climates, kept MTBE use below the levels that had been
anticipated in the industry at the time of the passage of the CAAA. Despite the
problems with the implementation of the CAAA, the Company expects continued
growth in the use of MTBE, although at slower rates than in the 1980s as the
regulations requiring "cleaner" gasoline have, in large measure, gone into
effect in the U.S. The Company anticipates that higher rates of growth in MTBE
use will continue to prevail in certain regions of the U.S. and internationally,
due to consumer preference or where RFG use is now optional but may be required
by state or local governments. For example, California has mandated greater
usage of oxygenates in a gasoline reformulated for use in that state, and the
use of lead in gasoline continues to decline in certain European, South American
and Far Eastern countries. The Company also expects new capacity expansions to
be minimal over the next several years due to current industry overcapacity as a
result of large increases in U.S. production capacity in the early 1990s in
anticipation of the implementation of the CAAA programs.
MTBE pricing is primarily determined by the price of RFG due to its value
as an octane enhancer and as an oxygenate. The price difference between regular
unleaded and higher octane, premium unleaded gasoline provides a valuation for
octane from which the value of MTBE as an octane enhancer can be derived. At
various times, depending on the supply and demand for MTBE, MTBE pricing enjoys
a premium over this octane value, reflecting its value as an oxygenate. MTBE
pricing is relatively volatile. The MTBE market has experienced alternating
periods of tight supply and rising prices and profit margins, followed by
periods of capacity additions resulting in oversupply and declining prices and
margins. Historically, MTBE was sold in the U.S. under sales contracts which
allowed suppliers to recover raw material costs and earn a fixed profit. Sales
prices under these contracts were higher than the then prevailing spot prices.
Prices decreased substantially from 1985 to 1986 based on low gasoline prices.
As gasoline prices recovered in 1988 and 1989, MTBE prices followed. Prices
increased substantially prior to and during the Persian Gulf war beginning in
late 1990, although prices fell back sharply from 1991 to 1993 as supply
outpaced demand. MTBE prices increased in 1994 due to high methanol prices (that
were passed on to users) until methanol prices decreased significantly in the
first quarter of 1995. More recently, MTBE prices have rebounded from their 1995
lows as a result of much higher demands from the RFG program.
There are a number of competing oxygenate products to MTBE, including
ethanol, ethyl TERTIARY-butyl ether (ETBE) and TERTIARY-amyl methyl ether
(TAME). However, management believes that MTBE will continue to be the U.S.
gasoline industry's oxygenate of choice due to a number of factors, including
price, available capacity, chemical properties and the EPA's CAAA rules
regarding minimum oxygen content in fuels.
BUTENE-1. 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. Comonomers are added to polyethylene to
improve characteristics such as tear and crack resistance. The Company expects
global HDPE and LLDPE demand to increase at an annual compound growth rate of 6%
and 14%, between 1994 and 1999, respectively. In the U.S., butene-1 is facing
increased competition from other comonomers such as hexene-1 which, although
more expensive than butene-1, improves certain properties of polyethylene
resins. The Company believes that butene-1 demand for use in polyethylene will
continue to grow in line with demand for polyethylene. Historically, pricing of
butene-1 has been determined by demand based on its use as a polyethylene
comonomer, and its competitive position with other comonomers such as hexene-1.
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Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations.
BUTENE-2. 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. Due to the high quality of the butene-2 produced by the Company,
it has historically received a higher than market price.
ISOBUTYLENE CONCENTRATE. 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.
HIGH PURITY ISOBUTYLENE. 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 and competes with ARCO Chemical Company and Exxon Chemical
Company.
DIISOBUTYLENE. 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 for
lubricant oil additives, and rubber and processing chemicals. The Company is the
sole U.S. producer of diisobutylene.
PRODUCTION PROCESS
The Company's production operations are based on a number of key factors:
(i) UPGRADING BY-PRODUCT STREAMS: The Company has contracted to purchase
certain volumes of crude butadiene from its suppliers. This volume
determines the Company's ability to produce butadiene and n-butylenes
and also provides some isobutylene (typically 10% of total
isobutylene production) for the production of MTBE and specialty
isobutylenes.
(ii) MAXIMIZING USE OF ISOBUTYLENE: Under normal operating conditions,
the Company maximizes isobutylene production from its
dehydrogenation units. The isobutylene processed is first processed
into specialty isobutylenes to satisfy customer demand, secondly
used to produce MTBE to satisfy contractual demand and thirdly, used
to produce MTBE for sale in the spot market.
(iii) INCREMENTAL PRODUCTION CAPABILITY: The Company has the ability to
augment its isobutylene and butene-1 production by the processing of
butene-2 in its SKIP unit, depending on the relative profitability
from additional isobutylene production (for use in either MTBE or
specialty isobutylenes) or butene-1 sales. In addition, "on
purpose" crude butadiene can be produced from butene-2 using the
OXO-D process, as well as from n-butane using dehydrogenation.
BUTADIENE PRODUCTION PROCESS
The Company has the largest butadiene production and finishing facilities
in North America and has an annual production capacity of 840 million pounds of
butadiene, representing approximately 18% of U.S. and Canadian production
capacity. In the year ended June 30, 1997, the Company sold and toll-processed
750 million pounds of butadiene.
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[CHART SHOWING PRODUCTION OF BUTADIENE]
The Company obtains crude butadiene from three different sources: (i)
purchasing crude butadiene from suppliers; (ii) Oxo-dehydrogenation of
n-butylenes using the Company's patented OXO-D process; and (iii)
dehydrogenation of n-butane.
The Company primarily produces butadiene from purchased crude butadiene,
which is generally the lowest cost method of production. Such crude butadiene is
a by-product of ethylene production.
"On-purpose" crude butadiene production involves the synthesis of crude
butadiene from n-butane and n-butylenes using the Company's OXO-D process and
the Houdry dehydrogenation process. The OXO-D process was developed by the
Company using a proprietary catalyst. The OXO-D unit has an annual capacity to
produce up to 400 million pounds of crude butadiene, which can be processed to
extract butadiene. The Company's dehydrogenation units can produce n-butylenes
(instead of isobutylenes under normal configuration) using the Houdry process,
by switching feedstock from isobutane to n-butane. Such n-butylenes can be used
to produce crude butadiene using the OXO-D process. As this method of production
is relatively expensive and reduces the volume of isobutylene available for MTBE
production, it is used only when butadiene pricing makes it economically
attractive.
The OXO-D unit and its dehydrogenation capabilities give the Company the
only on-purpose butadiene production capability in the U.S. and reinforce the
Company's image with its customers as a reliable source of butadiene under a
wide variety of market conditions.
The Company's manufacturing flexibility is advantageous for two reasons.
First, the Company is not dependent on any particular feedstock to produce
butadiene and it can therefore provide a reliable source of supply under a
variety of market conditions for its customers. Secondly, it permits the Company
to increase butadiene production in favorable market conditions, subject to the
capacity limitations of the Company's finishing facilities.
The Company believes that it is currently the only butadiene producer in
North America with the ability to add significant incremental capacity with
minimal capital expenditures. The Company believes that this acts as a deterrent
to new entrants and other producers considering capacity expansions and will
enable the Company to process increased volumes of crude butadiene from new
ethylene facilities which are currently being built in North America.
The Company also toll processes crude butadiene under contract on behalf of
third parties for a fee which allows the Company to recover its energy
production costs plus a fixed dollar amount. Typically, the Company delivers
finished butadiene to the customer and purchases the other butylenes contained
in the stream, which can be upgraded to higher value uses, such as specialty
isobutylenes, butadiene and n-butylenes.
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MTBE PRODUCTION PROCESS
The Company owns two MTBE units with a combined capacity to produce 25,000
barrels per day, which represents approximately 9% of North American production
capacity. The Company sold an average of 17,873 barrels per day in the year
ended June 30, 1997.
[CHART SHOWING PRODUCTION OF MTBE]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
MTBE is produced by reacting isobutylene and methanol. The Company produces
isobutylene, the principal raw material for MTBE, using any one of three
processes: (i) extraction from raffinate-1, which is produced after butadiene
has been extracted from crude butadiene; (ii) dehydrogenation of purchased
isobutane; and (iii) production from n-butylenes (predominantly butene-2) using
the Company's patented SKIP process. The other primary raw material, methanol,
is purchased from third parties in the spot market and under contract and is
transported to the Company's facility by barge.
Isobutylene is removed from the raffinate-1 stream by processing
raffinate-1 through the Company's MTBE unit. The MTBE reaction is highly
selective and efficiently removes isobutylene from the stream. The stream
remaining is called raffinate-2.
The Company has three dehydrogenation units, two of which have been
completely refurbished and are fully operational. Using these two units, the
Company has the ability to produce a total of 18,000 barrels per day of
isobutylene. The Company estimates that the third dehydrogenation unit, with an
additional capacity of 8,000 barrels per day, could be refurbished at a cost of
approximately $100 million, substantially less than the cost of a new
dehydrogenation unit. This refurbishment would increase the Company's capacity
to produce isobutylene for use either in MTBE or specialty isobutylenes by
approximately one third. The Company currently does not have any plans to
undertake this refurbishment, although this could change depending on market
conditions. The Company has fully paid-up rights to the technology used in its
dehydrogenation units and no royalty or other licensing payments are required.
Isobutane is purchased under long-term contract and supplemented with spot
purchases.
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The Company currently has sufficient additional MTBE capacity to enable it
to take advantage of future expected growth. The Company believes that this
additional capacity gives it a competitive advantage over other producers which
would have to incur greater cost to increase capacity.
The Company's SKIP unit upgrades butene-2 to either butene-1 or isobutylene
depending on requirements. Isobutylene production is normally operated so that a
portion of the isobutylene produced by dehydrogenation is used in the production
of isobutylene concentrate and diisobutylene and the remainder is used to
produce MTBE. In addition, a small amount of MTBE production is used in the
production of high purity isobutylene. The configuration of the plant provides
the flexibility to vary the relative quantities of MTBE and isobutylene products
produced.
N-BUTYLENE PRODUCTION PROCESS
The Company has the largest butene-1 processing capacity in North America
and has an annual production capacity of 275 million pounds of butene-1,
representing approximately 40% of North American production capacity. In the
year ended June 30, 1997 the Company sold 197 million pounds of butene-1 and 34
million pounds of butene-2.
[CHART SHOWING PRODUCTION OF BUTANES, BUTENE-2 and BUTENE-1]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
The Company has the ability to produce butene-1 using two different
processes: (i) fractionation from raffinate-2, which is produced after
isobutylene has been extracted from raffinate-1; and (ii) production from
n-butylenes (predominantly butene-2) using the Company's patented SKIP process.
After the removal of butene-1, the remaining n-butylenes stream (containing
principally butene-2 and n-butane) is either: (i) further purified to butene-2
which the Company sells intermittently based on customer demand; (ii) used as a
feedstock in the Company's SKIP process to produce butene-1 or isobutylene; or
(iii) used as a feedstock in the OXO-D process to produce crude butadiene. The
remaining product stream, containing principally n-butane, is sold to third
parties as a chemical by-product.
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SPECIALTY ISOBUTYLENE PRODUCTION PROCESSES
[CHART SHOWING PRODUCTION OF HIGH PURITY ISOBUTYLENE,
ISOBUTYLENE CONCENTRATE AND DITOSOBUTYLENE]
The Company takes advantage of its isobutylene production and extraction
capabilities to produce high purity isobutylene, isobutylene concentrate and
diisobutylene. The Company is currently the only U.S. producer of isobutylene
concentrate and diisobutylene and it is the largest of three U.S. producers of
high purity isobutylene.
High purity isobutylene is manufactured by "back-cracking" a small
portion of the MTBE product stream into its components, isobutylene and
methanol. The isobutylene produced by this method is of extremely high purity
and the methanol is recycled and used in subsequent MTBE production. The Company
has an annual capacity to convert MTBE into 100 million pounds of high purity
isobutylene, and in the twelve months ended June 30, 1997, it sold 68 million
pounds principally on a contractual basis.
The Company uses its patented dimerization process to produce diisobutylene
and has an annual production capacity of 50 million pounds. In the year ended
June 30, 1997 the Company sold 37 million pounds of diisobutylene principally on
a contractual basis.
Some of the isobutylene produced by the Company is sold as concentrate. The
Company has an annual production capacity of 380 million pounds of isobutylene
concentrate and, in the year ended June 30, 1997, it sold 170 million pounds of
isobutylene concentrate. The Company has been successful in working with
customers to demonstrate the viability of concentrate as an alternative to high
purity isobutylene or lower purity raffinate-1 feedstock. The Company sells
isobutylene concentrate under contracts at prices linked to the cost of
isobutane feedstock and including energy costs and other components of
isobutylene concentrate, plus a fixed profit, as well as on the spot market.
While produced in smaller volumes than the Company's more commodity-type
products, specialty isobutylenes have historically had high margins due to the
niche sales markets for their end-use products.
OTHER OPERATIONS
The Company operates a large scale cogeneration power plant that supplies
electricity and processes 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. There
can be no assurance that
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these agreements will remain in effect beyond their current terms or, if
extended, that the same provisions would continue to apply.
FEEDSTOCK SUPPLY. The Company typically purchases its principal feedstock,
crude butadiene, under contracts which require suppliers to deliver a percentage
(varying from 50% to 100%) of their total crude butadiene production. The price
of crude butadiene to the Company is typically based on the price of its
principal components: butadiene, n-butylenes, isobutylene and n-butane. The
price for the butadiene component of crude butadiene is generally set at the
Company's average selling price for butadiene less a fixed dollar amount, which
includes a variable component for energy costs. The prices for the n-butylene
and isobutylene components of crude butadiene are linked to spot gasoline prices
and the n-butane and isobutane components are linked to spot n-butane prices.
The Company typically purchases methanol under contracts which require the
supplier to deliver minimum volumes of methanol. Methanol is generally purchased
at a discount to the prevailing market price, subject to specified minimum and
maximum price ranges.
The majority of the Company's isobutane is purchased under contract from
EPC Venture, Inc. which provides 450,000 barrels per month. This supplier also
provides storage and pipeline transportation. Isobutane is purchased at the
prevailing average market price for each month.
PRODUCT SALES. The Company's sales contracts typically require customers
to purchase minimum volumes expressed either in absolute terms or as a
percentage of the customer's product needs. Pricing for butadiene is generally
set at a small discount to the recognized U.S. Gulf Coast contract market price,
while MTBE pricing is typically based on the average U.S. Gulf Coast spot market
price. Butene-1 is sold under contracts at prices based on formulae which links
the butene-1 selling price to the price of gasoline. Butene-1 is also sold on
the spot market at prevailing prices. Butene-2 is sold at negotiated market
prices. Pricing for isobutylene concentrate is generally linked to the cost of
its principal raw material, isobutane, and fuel plus a transportation fee and
other components, which are linked to relevant average spot market prices.
Pricing for high purity isobutylene and diisobutylene is typically based on
market prices.
TOLL MANUFACTURING AGREEMENTS. The Company toll processes crude butadiene
under contracts on behalf of third parties, including The Dow Chemical Company,
The Goodyear Tire & Rubber Company and Phillips 66 Company. Typically, the
Company returns butadiene to the customer and purchases the other butylenes and
butanes contained in the crude butadiene stream. The toll process fees allow the
Company to recover its energy production costs plus a fixed dollar amount. In
addition, the Company returns purified butene-1 to certain of its crude
butadiene suppliers under similar arrangements.
OTHER. The Company also provides storage and terminalling services under
contract to certain of its customers at its Baytown and Lake Charles facilities.
COMPETITION
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemical 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
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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.
The Company's primary competitors in the sales of butadiene in the U.S. are
Exxon Chemical Company, Shell Chemical Company, Lyondell Petrochemical Company
and the Huntsman Group. With respect to MTBE, the Company competes primarily
with ARCO Chemical Company, Exxon Chemical Company, Valero Energy Corporation,
Texaco Inc. and Enron Corp. For sales of butene-1 the Company competes primarily
with Exxon Chemical Company, Chevron Chemical Company, Amoco Chemical Company,
Shell Chemical Company and Huls AG. For high purity isobutylene, the Company
competes in the U.S. with ARCO Chemical Company and Exxon Chemical Company.
Although the Company is the only North American producer of isobutylene
concentrate and diisobutylene, diisobutylene is also imported from Japan and
Europe.
SALES AND MARKETING
The majority of the Company's sales are made pursuant to long-term sales
contracts with initial terms ranging from one to five years. The Company enjoys
long-standing relationships with its customers and approximately 85% of its
total sales over each of the last three years were made to the same customers.
The Company believes that its ability to maintain long-term customer contracts
has been facilitated by the extensive market knowledge and experience in the
petrochemical industry of its sales executives as well as the Company's emphasis
on customer relationships. The Company's strategy is to continue to increase
sales to existing customers and to attract new customers by providing
reliability of supply, competitive prices and superior customer service.
CUSTOMERS
The Company's products are generally sold to major refining, chemical and
end-user corporations primarily located in the United States and Canada. The
Company believes that its butadiene customers place significant value on its
ability to provide a reliable domestic supply of butadiene due to its raw
material purchase contracts and its ability to produce butadiene through two
alternative methods. As a result, some of the largest and most established users
of butadiene in the industry have contracted to purchase butadiene from the
Company. Typically, the Company's butadiene sales contracts require these
customers to purchase a percentage of their total requirements from the Company
subject to a minimum volume. Pricing is based on prevailing market prices.
The Company's principal butadiene customers include American Synthetic
Rubber Inc., The Dow Chemical Company, The Goodyear Tire & Rubber Company,
Enichem Elastomers Inc., E.I. du Pont de Nemours and Company and
Bridgestone/Firestone, Inc. In the year ended June 30, 1997, The Goodyear Tire &
Rubber Company accounted for approximately 11.4% of the Company's total
revenues.
The Company's principal MTBE customers include Lyondell Petrochemical
Company, CITGO Petroleum Corporation and Mobil Oil Corporation. In the year
ended June 30, 1997, the Mobil Oil Corporation accounted for approximately 16.7%
of the Company's total revenues.
The Company's principal butene-1 customers include Union Carbide
Corporation, Shell Chemical Company, Lyondell Petrochemical Company, NOVA
Chemicals Ltd. and The Dow Chemical Company. The Company's principal butene-2
customers include Shell Chemical Company.
The Company's principal specialty isobutylene customers include Bayer Inc.,
The Lubrizol Corporation, Schenectady International, Inc., Rhone-Poulenc Inc.
and Mobil Chemical Company Inc.
PATENTS AND LICENSES
The Company presently owns, controls or holds rights to approximately 21
patents. The Company believes that its patents, particularly its patents
relating to the SKIP, OXO-D and diisobutylene production processes, are
important to its business and provide the Company with certain competitive
advantages.
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Accordingly, the Company actively protects existing production process
technologies. The Company's patents relating to (i) the SKIP production
processes expire September 21, 2002, and August 27, 2008; (ii) the OXO-D
production processes expire June 1, 1999, April 23, 2002, February 17, 2004,
April 14, 2004, and (iii) the diisobutylene production processes expire October
23, 2000 and September 4, 2001.
The Company has available for license certain of its patented technologies,
including the SKIP and OXO-D processes, to third parties, though none of the
Company's patents have been licensed to third parties to date. In addition, the
Company licenses certain technologies, including the process by which it
extracts butadiene from crude butadiene, from third parties.
ENVIRONMENTAL REGULATION
The Company's policy is to be in compliance with all applicable
environmental laws. The Company is also committed to Responsible CareT, 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 EPA, the U.S. Coast Guard, the Army
Corps of Engineers, the TNRCC, the Texas General Land Office, the Texas
Department of Health and various local regulatory agencies. The Company holds
all required permits and registrations necessary to comply substantially with
all applicable environmental laws and regulations, including permits and
registrations for wastewater discharges, solid and hazardous waste disposal and
air emissions, and management believes that the Company is in substantial
compliance with all such laws and regulations. While management does not expect
that 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, and
TNRCC has revoked Malone's permits to operate its facilities. It is not known
whether the site will require remediation or at what cost. 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 CAAA and similar requirements of state law. In particular, under
the CAAA, the EPA and 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 CAAA and rules relating to the controls of oxides of nitrogen,
which are known as the Nitrogen Oxides Reasonably Available Control Technology
rules ("NOx RACT Rules").
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The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethyl formamide and
MTBE, which are manufactured, used and/or processed by the Company, have been
identified as HAPs for purposes of regulation under the CAAA. Areas of concern
in the Company's operations for HAPs 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 is in
substantial compliance with the HON Rule.
The NOx RACT Rules require compliance by May 1999. The Company has examined
the rules and believes that the main expenditure required to achieve compliance
will involve 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 $2
million over the next three years.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAAA.
Accordingly, the State of Texas has developed a State Implementation Plan
("SIP") which requires reductions in emissions of ozone precursors, including
volatile organic compounds and NOx, as well as carbon monoxide, in Harris
County. To comply with the SIP, the Company installed new controls at a cost of
approximately $7.8 million. The Company anticipates that, at some time in the
future, the State of Texas may promulgate rules which will require the Company
to modify existing controls or to install additional controls for fugitive air
emissions. The Company estimates that, if these rules are promulgated, it will
incur costs of between $1 million and $2 million in order to modify or install
such controls over a five- or six-year period.
EPA has recently finalized more stringent standards for ozone and
particulate matter. Moreover, the Texas Legislature recently passed legislation
directing TNRCC to develop a plan to address the permitting of so-called
"grandfathered" emissions sources which are unpermitted sources constructed
prior to promulgation of permitting regulations. Because implementing
regulations for these standards have not yet been proposed, the Company cannot
predict whether their impact on the Company's operations will be material.
Title III of the CAAA requires prevention of accidental releases of certain
listed extremely hazardous substances. The EPA's rules implementing portions of
Title III, promulgated on June 20, 1996, will require the Company to conduct a
hazards assessment and develop a risk management plan by June 1999 for each
extremely hazardous substance that the facility manufactures, uses, generates or
processes.
The regulations under Title V of the CAAA, which will require a
facility-wide inventory of emissions sources at the Houston facility and a
single operating permit for the facility's air emissions, have not been
promulgated. Based on a preliminary review of the draft requirements, however,
the Company believes that it will have to undertake substantial efforts to
conduct an emissions source inventory. It may also be required to upgrade its
on-going monitoring program once it has received its operating permit; however,
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 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 these materials pose a
hazard to the health of its employees. There is no requirement to remove these
materials, provided they are properly managed. 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 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.
In February 1996, the EPA issued an order to the Company and Bayer
requiring the companies to resolve the exceedances of their discharge permit
limits for copper and total suspended solids that had occurred since 1992. The
Company believes that these issues have been resolved by raising the limits in
the new discharge permit and by other corrective actions. No penalties were
assessed.
41
<PAGE>
To meet rules expected to be promulgated concerning stormwater runoff, the
Company has budgeted to spend approximately $500,000 by 2000 for additional
stormwater control and collection. The Company has also budgeted $600,000
through fiscal 1999 to purchase 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 effects 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 ("OSTP"), 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 study by the Health Effects Institute, commissioned by the EPA and
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. While the EPA, California and other states are expected to
adopt limits for MTBE levels in drinking water, these limits are not expected to
be overly restrictive since that same OSTP report concluded that drinking water
is "not a major route of exposure" for MTBE. Recently there have been
legislative initiatives to eliminate the use of MTBE as a fuel additive in
certain geographic areas. To date such initiatives have not been successful. The
Company cannot predict whether such legislation will be reintroduced, or if it
would be enacted if reintroduced; however, the elimination of MTBE as a fuel
additive in major markets could have a material adverse effect on the Company.
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 that affected employees will need to use respirators and
that additional emissions controls may be necessary. The Company does not
expect, however, 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 assurances can be given that future studies will not
result in more stringent regulation of butadiene.
EMPLOYEES
As of June 30, 1997, the Company had approximately 319 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 145 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.
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 a storage and terminal facility in
Lake Charles, Louisiana and Linden, New Jersey, and leases tank storage capacity
in
42
<PAGE>
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.
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
statements.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company, TPC Holding and Holdings. Each director
is elected for a one year term or until such person's successor is duly elected
and qualified.
<TABLE>
<CAPTION>
YEARS OF
SERVICE WITH THE
COMPANY
NAME AGE POSITION OR ITS PREDECESSORS
- ------------------------------------- --- ------------------------------------------ -------------------
<S> <C> <C> <C>
Gordon A. Cain....................... 85 Director 13
Hunter W. Henry, Jr. ................ 70 Director --
William R. Huff...................... 47 Director 1
William A. McMinn.................... 67 Director and Chairman 13
Steve A. Nordaker.................... 50 Director 1
Susan O. Rheney...................... 38 Director 1
Gary L. Rosenthal.................... 49 Director --
John T. Shelton...................... 66 Director 13
B. W. Waycaster...................... 58 Director, President and Chief 4
Executive Officer
Ronald W. Woliver.................... 57 Vice President, Product Development 28
Stephen R. Wright.................... 50 Vice President and General Counsel 1
Bill R. McNeese...................... 62 Vice President, Operations 9
Harold E. Sebastian.................. 54 Vice President, Marketing --
</TABLE>
Mr. Cain is Chairman of the Board of Agennix, Inc. and Lexicon Genetics,
Inc., biotechnology companies. From August 1982 until his retirement in December
31, 1992, he was Chairman of the Board of 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 The Sterling Group, Inc.
("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.
Mr. Henry has held various manufacturing positions with The Dow Chemical
Company, including Vice President -- Business Operations for Latin America,
President -- Dow Brazil, President -- Dow USA and executive vice President of
The Dow Chemical Company from 1982-1988. Mr. Henry served on The Dow Chemical
Company's board of directors from 1979 to 1993. Mr. Henry has also served as the
Chairman of the Board for Dowell Schlumberger from 1985-1988. Mr. Henry
currently served as a member of the board of directors of the Mississippi State
University's Foundation Development Board and Institute for Technology
Development.
Mr. Huff is President of Paladin Court Co., Inc., the General Manager of
WRH Partners, L.L.C., which is the General Partner of The Huff Alternative
Income Fund, L.P. (the "Huff Fund"). Since 1984, Mr. Huff also has been
President of Kato-San Corp. which is the General Manager of W.R. Huff Asset
Management Co., L.L.C., an investment management firm. Mr. Huff serves on the
Board of Directors as the designee of the Huff Fund. See "Related
Transactions."
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.
44
<PAGE>
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. See "Related Transactions."
Ms. Rheney has been a principal of Sterling 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 Mail-Well, Inc.
Mr. Rosenthal co-founded and currently serves as President of Heaney
Rosenthal Inc. an investment, acquisition and consulting business. Mr. Rosenthal
was previously a partner with the law firm of Vinson & Elkins, the Senior Vice
President -- Administration for Cain Chemical, and a principal with the Sterling
Group. Mr. Rosenthal also served as Chairman of the Board and CEO for Wheatley
TXT Corp.
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.
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.
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. From 1997 until March 1998,
Mr. Sebastian was the President of Saurus, Inc., a business management
consulting firm with an emphasis on chemical and oil products marketing,
operations and logistics. From 1992 until 1997, Mr. Sebastian was the Executive
Vice President of Commonwealth Oil Refining Company, Inc. where he was
responsible for all operations and marketing. From 1987 to 1992, Mr. Sebastian
was a co-founder and the Executive Vice President of Arochem Corporation, a
refinery and petrochemical company located in Puerto Rico. Prior thereto, Mr.
Sebastian held various positions in the petrochemical industry including Vice
President of International Chemical Trading of Phibro Energy and Marketing
Manager of Exxon Chemical Company.
COMPENSATION OF DIRECTORS
Directors of Holdings and 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. No compensation
is paid to any directors of TPC Holding for attendance at TPC Holding's board
meetings.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the four most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of TPC (the "Named Executive Officers") for services rendered in all
capacities to TPC for the year ended June 30, 1997, the twelve months ended May
31, 1996 and the year ended May 31, 1995.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2)
- ------------------------------------- -------- ---------- ------------
B. W. Waycaster, President and Chief
Executive Officer.................. 1997 $ 300,000 $ 326,787
1996 300,000 2,899,100
1995 300,000 565,300
Ronald W. Woliver, Vice President,
Marketing.......................... 1997 $ 180,000 $ 127,393
1996 180,000 1,012,300
1995 180,000 1,084,900
Stephen R. Wright, Vice President,
General Counsel.................... 1997 $ 165,000 $ 50,104
Claude E. Manning, Chief Financial
Officer............................ 1997 $ 148,500 $ 63,649
1996 132,000 72,966
1995 121,000 100,811
Bill R. McNeese, Vice President,
Operations......................... 1997 $ 148,500 $ 63,869
1996 132,000 72,293
1995 121,000 100,133
- ------------
(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 and 1995 of $21,035 and $24,618,
respectively, for Mr. Manning and $21,149 and $24,440, respectively, for Mr.
McNeese.
EMPLOYMENT AND OTHER AGREEMENTS
In 1992, Mr. Waycaster entered into an employment agreement with TOC and
TPC which provided for an annual base salary of $300,000 and a minimum annual
cash bonus of $300,000. The agreement expired on April 1, 1997. Mr. Waycaster
remains employed with the Company without an employment agreement. In addition,
Mr. Waycaster has entered into a non-competition agreement with TOC and TPC
covering the three-year period following the last date he receives compensation
from the Company.
In connection with his employment, Mr. Waycaster also received a grant of
options to purchase up to 50,000 shares of TPC common stock at a purchase price
of $40 per share. The options were cancelled in connection with the Acquisition.
In 1994, TPC entered into an agreement with each of Mr. Shelton, a director
of the Company, and Mr. Woliver which provides a benefit in the event of death
while an employee of TPC. Provided the individual is survived by his wife, the
death benefit continues monthly for the shorter of the life of the wife (or in
the case of Mr. Woliver, so long as he also has minor children) or 60 months,
and is $10,000 per month with respect to Mr. Shelton and $10,000 per month with
respect to Mr. Woliver. Each agreement terminates on termination of employment
for any reason other than death or disability of the individual.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, Finance Co. established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees, including executive officers, of the Company who satisfy the
requirements described below. The ESOP, which invests primarily in shares of
Common Stock, borrowed $10.0 million from Finance Co. pursuant to a loan (the
"Company ESOP Loan") to
46
<PAGE>
purchase 100,000 shares of Common Stock. Finance Co. funded the Company ESOP
Loan from the ESOP Term Loan. The Company ESOP Loan matures on June 30, 2001,
and bears interest at interest rates based on the Alternative Base Rate (as
defined) or the LIBOR Rate (as defined). The outstanding principal of the
Company ESOP Loan is payable in twenty equal quarterly installments of $500,000
during the period beginning September 30, 1996 and ending June 30, 2001. The
shares of Common Stock purchased by the ESOP were pledged (the "ESOP Pledge")
as security for the Company ESOP Loan, and such shares will be released and
allocated to ESOP participants' accounts as the Company ESOP Loan is discharged.
The Company may make contributions to the ESOP as determined by the Board of
Directors in an amount anticipated to be equal to a certain percentage of the
total annual earnings of all ESOP participants (the "Discretionary
Contributions"). The Company intends to make Discretionary Contributions in
amounts sufficient to enable the ESOP to discharge its indebtedness under the
Company ESOP Loan; however, the Company has no legal obligation to make
Discretionary Contributions. Shares released under the ESOP Pledge are allocated
to each participant based on such participant's base compensation relative to
total base compensation for all ESOP participants. Until the Company ESOP Loan
is paid in full, Discretionary Contributions will be used to pay the outstanding
principal and interest on the Company ESOP Loan. For employees whose employment
commenced prior to October 1, 1996 and who have attained the age of 21 years,
participation begins as of the later to occur of July 1, 1996 or the date of
commencement of the participant's employment. A participant's ESOP account vests
at the rate of 20% per year. Distributions from the ESOP are made in cash or
Common Stock upon a participant's retirement, death, disability or termination
of employment. In the event of retirement, death or disability, the entire
balance of a participant's ESOP account will become distributable without regard
to the ordinary vesting schedule. In the event of termination of employment for
any other reason, the vested portion of a participant's ESOP account will become
distributable and the remaining portion, if any, will be forfeited. If Common
Stock is distributed to a participant, the participant may, within two 60-day
periods, require the Company to purchase all or a portion of such Common Stock
at the fair market value of the Common Stock as determined under the ESOP (the
"Put Options"). The first 60-day period commences on the date the participant
receives a distribution of Common Stock and the second 60-day period commences a
year from such date. If a participant fails to exercise either of the two Put
Options, the participant may transfer the shares of Common Stock only upon
receipt of a bona fide third party offer and only after first offering the
shares to the ESOP and then to the Company. Employees of the Company own
approximately 20% of the outstanding Common Stock through the ESOP after the
Acquisition.
PROFIT SHARING PLAN
Prior to the date of the Acquisition, TPC maintained a Profit Sharing Plan
(the "Profit Sharing Plan") covering substantially all of its employees,
including executive officers. The Profit Sharing Plan is designed to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Each participant has the option to defer taxation of
a portion of such participant's earnings by directing TPC to contribute a
percentage of such earnings to the Profit Sharing Plan. A participant may direct
a minimum of 1% and a maximum of 10% of eligible earnings to the Profit Sharing
Plan, subject to certain limitations set forth in the Internal Revenue Code. TPC
currently makes a matching contribution monthly equal to 25% of the amount of
compensation deferred by each participant in such month, up to 6% of the
participant's base compensation for such month. TPC may also make a
discretionary contribution to the Profit Sharing Plan. Participants' Profit
Sharing Plan accounts become distributable at retirement, upon disability, death
or termination of employment, or under certain circumstances, upon attainment of
age 59. Participants are fully vested at all times in all amounts deferred by
them to the Profit Sharing Plan, and they become vested in the Company's
matching and discretionary contributions under a five-year graded vesting
schedule.
TPC is continuing the Profit Sharing Plan in substantially the same form as
TPC maintained such plan prior to the Acquisition, provided that the
discretionary contribution will be made only if certain levels of earnings
before interest, taxes, depreciation and amortization are satisfied by the
Company in accordance with the Nonqualified Profit Sharing Incentive Plan (as
described below).
47
<PAGE>
CASH BONUS PLAN
Prior to the date of the Acquisition, TPC established the Cash Bonus Plan
covering substantially all employees of TPC (or certain affiliates of TPC) and
covering the employees of certain third-party contractors who have contributed
to the success of TPC (or certain affiliates thereof). Upon the occurrence of a
Change of Control (as defined below), an employee participant as of July 2, 1996
will be distributed a portion of $3,200,000 within forty-five days of the date
of the Change of Control and will be distributed a portion of $1,800,000 plus
interest in each of sixteen quarterly installments following the date of the
Change of Control so long as the employee is an employee of TPC (or certain
successors or affiliates of TPC) on the corresponding quarterly installment
date. Upon the occurrence of a Change of Control, an eligible employee of a
third-party contractor who is providing services to TPC (or certain successors
or affiliates thereof) on July 2, 1996 will be distributed a portion of $300,000
within forty-five days of the date of the Change of Control, and will be
distributed a portion of $168,750 plus interest in each of sixteen quarterly
installments following the date of the Change of Control so long as the employee
of the third-party contractor is providing services to TPC on the corresponding
quarterly installment date. Each participant's allocable share of the bonus
payments to be made under the Cash Bonus Plan is based on a formula which
considers a participant's compensation and length of service with TPC. If a
participant retires, dies, becomes disabled, or whose employment is terminated
without cause after July 2, 1996, such participant's beneficiary or
representative will continue to receive a portion of the bonus payments through
the sixteenth installment payment even though such participant is no longer
employed by TPC or the third-party contractor which is providing services to
TPC. Under the Cash Bonus Plan, a "Change of Control" is deemed to occur when
the outstanding stock of TOC is acquired, or more than 50% of the shares of
TPC's common stock is sold, in a cash tender offer, exchange offer, merger,
third-party private purchase or other means of acquisition, or when
substantially all of the assets of TPC are sold to an unrelated third party. The
Acquisition effected a Change of Control and distributions from the Cash Bonus
Plan have commenced.
STOCK OPTION PLAN
Holdings has established a stock option plan (the "Option Plan"). The
Option Plan is administered by a committee (the "Committee") of the Board of
Directors of Holdings. Option grants under the Option Plan will be permitted to
be made to directors and key employees of Holdings and its subsidiaries,
including the Company, selected by the Committee. The Committee may grant
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code and also will be permitted to grant "nonstatutory options," which
are not intended to conform to Section 422 of the Internal Revenue Code. The
Option Plan will provide for the discretionary grant of options to purchase
shares of Common Stock. The exercise price of incentive stock options shall not
be less than the fair market value of a share of Common Stock on the date of
grant, and the exercise price of nonstatutory options shall not be less than 85%
of the fair market value of a share of Common Stock on the date of grant. The
Committee will be permitted to provide that the options will vest immediately or
in increments. No option will be transferable by a grantee other than upon
death. On the termination of employment or disability of any grantee, any
unvested options will either expire or continue to be exercisable as determined
by the Committee, in its sole discretion. The Option Plan will terminate no
later than 10 years after its adoption; however, any options outstanding upon
termination of the Option Plan will remain in effect until exercised or
terminated pursuant to the terms of the agreement under which they were granted.
A participant in the Option Plan may, upon receiving approval from the
Committee, relinquish all or a portion of such participant's options for an
amount in cash equal to the difference between the fair market value of the
Common Stock corresponding to the options being relinquished on the day of
relinquishment, less the total option price for such corresponding shares.
48
<PAGE>
OPTION GRANTS
The following table sets forth the number of options to purchase shares of
the Company's Common Stock that have been granted to the Named Executive
Officers in the fiscal year ended June 30, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
------------------------- OF STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS EXERCISE OPTION TERM(3)
OPTIONS GRANTED GRANTED TO PRICE EXPIRATION ----------------------
(NO. OF SHARES)(1) EMPLOYEES(2) PER SHARE DATE 5% 10%
------------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
B.W. Waycaster....................... 3,428 12.3% $ 100 10/08/2006 $ 215,585 $ 546,335
Ronald W. Woliver.................... 1,500 5.4 100 10/08/2006 94,334 239,061
Stephen R. Wright.................... 1,350 4.9 100 10/08/2006 84,901 215,155
Claude E. Manning.................... 1,000 3.6 100 10/08/2006 62,889 159,374
Bill R. McNeese...................... 1,500 5.4 100 10/08/2006 94,334 239,061
</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 27,778 shares of
Common Stock.
(3) The dollar amounts under 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
publicly traded, 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 set forth the number of options to purchase shares of
Common Stock held as of June 30, 1997, by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1997 JUNE 30, 1997
------------------------------ ------------------------------
NAME EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
- ------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
B.W. Waycaster....................... -- 3,428 -- $--
Ronald W. Woliver.................... -- 1,500 -- --
Stephen R. Wright.................... -- 1,350 -- --
Claude E. Manning.................... -- 1,000 -- --
Bill R. McNeese...................... -- 1,500 -- --
</TABLE>
NONQUALIFIED PROFIT SHARING INCENTIVE PLAN
The Company has established two separate Nonqualified Profit Sharing
Incentive Plans, both of which will be administered by the Committee. Amounts
paid to employees in cash under the Nonqualified Profit Sharing Incentive Plans
will constitute taxable income in the year received and will be based on the
Company's financial performance for the period commencing on the first day of
the Company's fiscal year and ending on the last day of each fiscal quarter
during such year. One of the Nonqualified Profit Sharing Incentive Plans is only
for officers of the Company who are selected by the Committee (the "Officers'
Plan"). If the Company's EBITDA exceeds certain prescribed levels, the officers
participating in the Officers' Plan will receive distributions in cash from the
Company equal to a certain percentage of EBITDA recommended by the Chief
Executive Officer of the Company and approved by the Committee. Under the other
Nonqualified Profit Sharing Incentive Plan which is for all employees not
participating in the Officers' Plan, if EBITDA exceeds certain prescribed
levels, a percentage of EBITDA will be used: first, to satisfy any required
contributions to the ESOP; second, to satisfy any required matching
contributions to the
49
<PAGE>
Profit Sharing Plan; third, to contribute annually to the Profit Sharing Plan
for the benefit of its participants up to the maximum amount allowable under the
Internal Revenue Code for qualification and deduction purposes; fourth, to
distribute cash to employees in an amount equal to $1.00 multiplied by the
number of base hours an employee worked during a fiscal quarter (up to a maximum
of 520 hours); and fifth, to distribute any remaining excess in cash to
employees based on their base compensation for such period. The Nonqualified
Profit Sharing Incentive Plans will not be qualified under Section 401(a) of the
Internal Revenue Code.
THE SELLING SECURITY HOLDER
The Discount Notes are offered for the account of the Huff Fund. The Huff
Fund owns 10.9% of the Common Stock of Holdings. The Huff Fund is a party to a
Voting Agreement with certain other stockholders of Holdings which results in
the Huff Fund controlling one seat on the Board of Directors of the Company. See
"Related Transactions." Mr. William R. Huff is a Director of the Company, as
the designee of the Huff Fund. Mr. Huff is also President of the General Manager
of WRH Partners, L.L.C., the General Partner of the Huff Fund. See
"Management." The Huff Fund is the holder of the entire principal amount of
the Discount Notes. The Huff Fund will sell the Discount Notes for its own
account from time to time pursuant to this Prospectus as it deems appropriate.
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RELATED TRANSACTIONS
TPC historically engaged in certain raw material purchase transactions with
Clarkston, which prior to the consummation of the Acquisition was owned by
several of the same individuals who were stockholders of TOC and/or TPC. In the
twelve months ended May 31, 1996, TPC made purchases of raw materials from
Clarkston of approximately $113.4 million. As part of the Acquisition, TPC
assumed from Clarkston a contract between Clarkston and a certain supplier for
the purchase of isobutane. In connection with the Acquisition, Clarkston was
dissolved and 80% of the outstanding capital stock owned by TOC of The Texas
Falls Corporation was sold to a prior stockholder of TOC and/or TPC. Messrs.
Shelton, Woliver, Waycaster and a prior stockholder of TOC and/or TPC
collectively own the remaining 20% of the outstanding capital stock of The Texas
Falls Corporation.
Sterling entered into an agreement with Holdings and TPC Holding pursuant
to which Sterling provided consulting and advisory services with respect to the
organization of Holdings, TPC Holding and Finance Co., the structuring of the
transactions associated with the Acquisition, employee benefit and compensation
arrangements and other matters. The agreement also provides that Holdings and
TPC Holding, jointly and severally, indemnify Sterling against liabilities
relating to its services. TPC paid Sterling a one-time transaction fee of
approximately $4.0 million for these services, and reimbursed Sterling for its
expenses. In addition, each of Holdings, TPC Holding and TPC has agreed that if
it or any of its subsidiaries determines within two years of the date of the
agreement to dispose of or acquire any assets or business, to offer its
securities for sale or to raise any debt or equity, either Holdings, TPC
Holding, TPC or the relevant subsidiary will retain Sterling as a consultant
with respect to the transaction, provided that Sterling's fees are on terms no
less favorable to Holdings, TPC Holding, TPC or the relevant subsidiary than
would be available from unaffiliated third parties.
Holdings, TPC Holding and Finance Co. were organized by Sterling for the
purpose of effecting the Acquisition. Ms. Susan Rheney, a principal of Sterling,
and Mr. Gordon A. Cain, are directors of Holdings, TPC Holding and TPC. See
"Management." Mr. Cain and Ms. Rheney purchased 76,150 and 5,000 shares of
Common Stock, respectively, in connection with the Acquisition at a price of
$100 per share, the same price at which all shares were sold in connection with
the Acquisition.
As a matter of policy, the agreement between the Company and Sterling is,
and all future transactions between the Company and its respective directors,
officers and affiliates will be, on terms no less favorable to the Company than
those available from unaffiliated third parties.
Certain stockholders of Holdings, representing a majority of the
outstanding capital stock of Holdings entitled to vote for the election of
directors of Holdings, have entered into a Voting Agreement with Holdings
pursuant to which they have agreed to vote for a designee nominated by the Huff
Fund and a designee nominated by Chase Venture for election to the Board of
Directors of Holdings. As a result of the Voting Agreement, each of the Huff
Fund and Chase Venture have the right to control one seat on the Board of
Directors of the Company.
Chase Securities, an affiliate of Chase Venture, acted as the Initial
Purchaser of the Notes, receiving customary fees.
See "-- Employment and Other Agreements" for a description of Mr.
Waycaster's employment agreement.
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BENEFICIAL OWNERSHIP OF HOLDINGS' COMMON STOCK
The following table sets forth as of December 1, 1997, 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(1)................... -- --
67 Park Place
Morristown, New Jersey 07960
Claude E. Manning.................... 4,333(2) 0.8%
Three Riverway, Suite 1500
Houston, Texas 77056
William A. McMinn.................... 11,666(3) 2.2%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese...................... 2,500(4) 0.5%
Three Riverway, Suite 1500
Houston, Texas 77056
Steve A. Nordaker(5)................. -- --
707 Travis, 7th Floor
Houston, TX 77002
Susan O. Rheney...................... 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
John T. Shelton...................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
B. W. Waycaster...................... 41,142(6) 7.8%
Three Riverway, Suite 1500
Houston, Texas 77056
Ronald W. Woliver.................... 10,500(7) 2.0%
Three Riverway, Suite 1500
Houston, Texas 77056
Stephen R. Wright.................... 1,600(8) 0.3%
Three Riverway, Suite 1500
Houston, Texas 77056
All directors and Named Executive
Officers as a group (11 persons)... 155,741(9) 29.0%
Texas Petrochemicals Corporation
Employee Stock Ownership
Plan(10)........................... 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.(11)(12)....................... 60,000 11.4%
380 Madison Avenue
New York, New York 10017
The Huff Alternative Income Fund,
L.P.(12)........................... 57,778 10.9%
67 Park Place
Morristown, New Jersey 07960
- ------------
(1) Excludes indirect beneficial ownership of 57,778 shares of Common Stock
held by the Huff Fund and reflected elsewhere in the table. Mr. Huff is
President of the general manager of WRH Partners, L.L.C., the general
partner of the Huff Fund.
(2) Includes 333 shares subject to options exercisable October 9, 1997.
(3) Includes 1,666 shares subject to options exercisable October 9, 1997.
(4) Includes 500 shares subject to options exercisable October 9, 1997.
(5) Mr Nordaker disclaims beneficial ownership of any shares of Common Stock
owned by Chase Venture.
(6) Includes 1,142 shares subject to options exercisable October 9, 1997.
(7) Includes 500 shares subject to options exercisable October 9, 1997.
(8) Includes 450 shares subject to options exercisable October 9, 1997.
(9) Includes 4,424 shares subject to options exercisable October 9, 1997.
(10) The trustee of the ESOP (the "ESOP Trustee") will vote all shares of
Common Stock held by the ESOP pursuant to the direction of the Plan
Administrative Committee, except that participants are entitled to direct
the ESOP Trustee to vote the shares of Common Stock allocated to their
accounts with respect to the approval or disapproval of any corporate
merger or consolidation, recapitalization, reclassification, liquidation,
dissolution, sale of substantially all assets of a trade or business or
such similar transaction as may be prescribed in regulations under the
Internal Revenue Code. No shares of Common Stock held by the ESOP have yet
been allocated to participant's accounts.
(11) Chase Venture is an affiliate of Chase Securities.
(12) Certain stockholders of Holdings have entered into the Voting Agreement
with Holdings which results in the Huff Fund and Chase Venture controlling
one seat each on the Company's Board of Directors. See "Related
Transactions."
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DESCRIPTION OF THE BANK CREDIT AGREEMENT
GENERAL
Finance Co. and TPC entered into the Bank Credit Agreement (the "Bank
Credit Agreement") with a syndicate of lenders (the "Lenders"), and Texas
Commerce Bank National Association, as Agent for such Lenders (the "Agent")
and effected the initial borrowings described below on July 1, 1996. The
following description summarizes the material provisions of the Bank Credit
Agreement, but such description does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the provisions of the Bank
Credit Agreement, a copy of which is filed as an exhibit to the Registration
Statement. All capitalized terms in this "Description of the Bank Credit
Agreement" section not defined in this Prospectus have the meanings assigned
thereto in the Bank Credit Agreement. Holdings has guaranteed the obligations of
TPC under the Bank Credit Agreement.
The Bank Credit Agreement provides for secured facilities consisting of (i)
a six and one-half year revolving credit facility providing for up to $40.0
million in revolving loans, a specified portion of which was used for letters of
credit (the "Revolving Credit Facility") and (ii) a term loan facility
providing for $140.0 million in term loans consisting of (x) a six and one-half
year term loan of $85.0 million (the "Tranche A Term Loan"), (y) an eight-year
term loan of $45.0 million (the "Tranche B Term Loan," and, together with the
Tranche A Term Loan, the "Senior Term Loans") and (z) a five-year term loan of
$10.0 million (the "ESOP Term Loan," and, together with the Senior Term Loans,
the "Term Loans").
The Revolving Credit Facility permits, at the option of TPC, the issuance
of letters of credit in principal amounts to be determined thereunder. Loans and
letters of credit under the Revolving Credit Facility are subject to a borrowing
base consisting of 85% of Eligible Accounts and 65% of Eligible Inventory
(collectively, the "Borrowing Base"), provided that at no time shall more than
50% of the Borrowing Base be comprised of 65% of Eligible Inventory.
AMORTIZATION; PREPAYMENTS
The Bank Credit Agreement requires the principal amount of the Senior Term
Loans to be reduced in twelve quarterly principal installments of $2.75 million
beginning on September 30, 1996, four quarterly principal installments of $3.25
million beginning on September 30, 1999, four quarterly principal installments
of $4.0 million beginning on September 30, 2000, four quarterly principal
installments of $4.75 million beginning on September 30, 2001, four quarterly
principal installments of $6.0 million beginning on September 30, 2002, and four
quarterly principal installments of $6.25 million beginning on September 30,
2003. The ESOP Term Loan will be amortized in 20 equal quarterly installment
amounts of $0.5 million during its five-year term.
The Senior Term Loans are subject to mandatory prepayment prior to
September 30 of each fiscal year (commencing in fiscal 1997) in which more than
$75.0 million is outstanding on the Senior Term Loans on or before June 30 of
any year, of an amount equal to 75% of the difference between EBITDA (as
defined) for the prior fiscal year and the sum of certain capital expenditures,
taxes, dividends, interest expense, and principal payments made on the Senior
Term Loans during such prior year, and certain distributions made to TPC Holding
for certain expenses (such difference being the "Excess Cash Flow"), and prior
to September 30 of each year after the Senior Term Loans are reduced to $75.0
million or less, a payment in the amount of 50% of the Excess Cash Flow
generated during the prior fiscal year. All mandatory prepayments are required
to be applied pro rata to each Senior Term Loan based on the outstanding
principal amount of the Senior Terms Loans and pro rata to future scheduled
principal installments. In addition, the Senior Term Loans are further subject
to mandatory prepayment in the amount of any cash proceeds received by the
Company from an offering of its Capital Stock.
The Senior Term Loans may be prepaid on notice at any time without premium
or penalty in a minimum amount of $1.0 million. All optional prepayments of the
Term Loans will be applied pro rata to each Senior Term Loan based on the
outstanding principal amount of the Senior Term Loans unless, at the Company's
option, lenders of the Tranche B Term Loan decline to accept such prepayment, in
which case the amount of prepayment declined shall be applied pro rata to the
Tranche A Term Loan and will be applied pro rata to future scheduled principal
installments.
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The amount available under the Revolving Credit Facility is payable in full
on its maturity date. Additionally, if the aggregate amount of borrowings
outstanding under the Revolving Credit Facility, plus the undrawn face amount of
letters of credit plus unreimbursed drawings on letters of credit, exceeds the
Borrowing Base, an immediate prepayment in an amount to eliminate such excess
will be payable.
Prepayments of Eurodollar borrowings on any day other than the last day of
an interest period will be required to be accompanied by a payment to the
Lenders of all costs, expenses or losses, if any, incurred as a result of such
prepayment.
SECURITY; GUARANTEES
Borrowings under the Revolving Credit Facility and the Term Loans are
guaranteed by Holdings and TPC Holding. The obligations of TPC under the
Revolving Credit Facility and the Term Loans and the obligations under the
guarantees are secured by a first priority lien on the capital stock of TPC
Holding and TPC and on substantially all of the assets of TPC.
INTEREST RATES; LETTER OF CREDIT FEES
The Term Loans and the Revolving Credit Facility bear interest at a rate
per annum, at TPC's option, within the range of either (i) the Alternate Base
Rate to the Alternate Base Rate plus 1.5% or (ii) the LIBOR Rate plus .625% to
the LIBOR Rate plus 2.5%, in each case based upon the ratio of Total Debt (as
defined) to EBITDA for the most recent four-quarter period.
Under the Revolving Credit Facility, fees will be charged for letters of
credit as follows: (i) a fronting fee of 1/8% per annum on the undrawn face
amount of the letters of credit plus (ii) the greater of (x) for each letter of
credit outstanding, the applicable margin for LIBOR Rate Loans, and (y) $500.
FEES, EXPENSES AND COSTS; REVOLVING CREDIT FACILITIES
The terms of the Bank Credit Agreement require the Company to pay the
following fees in connection with the maintenance of borrowings under the
Revolving Credit Facility: (i) commitment fees to be paid to the Lenders in
amounts equal to 1/2% per annum, if the Company's ratio of Total Debt to EBITDA
for the most recent four-quarter period is greater than or equal to 3.0 to 1.0,
and 3/8% if the Company's ratio of Total Debt to EBITDA for the most recent
four-quarter period is less than 3.0 to 1.0, in each case with respect to the
unused commitment under the Revolving Credit Facility payable quarterly in
arrears until such time as it is terminated; and (ii) administration fees
payable annually to the Agent. In addition, the Company paid various
underwriting and arrangement fees and closing costs on July 1, 1996 in
connection with the origination and syndication of the Term Loans and the
Revolving Credit Facility.
The Company also is required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation,
syndication and administration of the Bank Credit Agreement and to reimburse the
Lenders for all reasonable costs and expenses incurred in connection with the
enforcement of their rights in connection with a default or the enforcement of
the Bank Credit Agreement. The Company agreed to indemnify the Agent and the
Lenders and their respective officers, directors, shareholders, employees,
agents and attorneys against certain costs, expenses (including fees and
disbursements of counsel) and liabilities arising out of or relating to the Bank
Credit Agreement, the Stock Purchase Agreement and the transactions contemplated
thereby. Furthermore, the Lenders are entitled to be reimbursed for increases in
reserve requirements, changes in law and circumstances, possible future
illegality of interest options, taxes (other than on gross receipts or income),
possible inability to determine market rate, capital adequacy, and consequential
costs.
COVENANTS
The Bank Credit Agreement contains substantial restrictive covenants
limiting the ability of the Company to, among other things: (i) incur
contractual contingent obligations; (ii) pay subordinated debt or amend
subordinated debt documents without the prior consent of the Lenders; (iii)
create or allow to exist liens or other encumbrances; (iv) transfer assets
outside the Company except for sales and other transfers of inventory or
surplus, immaterial or obsolete assets in the ordinary course of business of the
Company; (v) enter into mergers, consolidations and asset dispositions of all or
substantially all of its properties;
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<PAGE>
(vi) make investments; (vii) extend credit to any entity; (viii) sell, transfer
or otherwise dispose of any class of stock or the voting rights of any
subsidiary of TPC; (ix) enter into transactions with related parties other than
in the ordinary course of business on an arm's-length basis on terms no less
favorable to the Company than those available from third parties; (x) amend
certain agreements, without the prior consent of the Majority Lenders; (xi) make
any material change in the nature of the business conducted by the Company;
(xii) pay cash dividends or redeem shares of capital stock; (xiii) make capital
expenditures; and (xiv) pay dividends or repurchase stock.
In addition, the Bank Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company to: (i) maintain the
existence, qualification and good standing of the Company; (ii) comply in all
material respects with all material applicable laws; (iii) maintain material
rights, franchise agreements, business contracts, patents, trademarks, licenses
and Material Contracts; (iv) deliver certain financial and other information;
(v) maintain specified insurance; and (vi) notify the Lenders of any default
under the Loan Documents and of certain other material events.
Under the Bank Credit Agreement, the Company is required to satisfy the
following financial covenants: (1) a ratio of (a) EBITDA minus cash taxes for
the prior four quarter period to (b) the sum of scheduled principal payments on
the Term Loans for such period, cash interest expense for such period, the
lesser of Scheduled Capital Expenditures for such period and actual capital
expenditures for such period, actual Employee Bonuses paid during such period
and certain distributions to Holdings of at least (i) 1.00 to 1.00 through June
30, 1997; (ii) .8 to 1.00 from July 1, 1997 through September 30, 1997; (iii) .9
to 1.00 from October 1, 1997 through December 31, 1997; (iv) 1.00 to 1.00 from
January 1, 1998 through June 30, 1998; (v) 1.05 to 1.00 from July 1, 1998
through June 30, 1999; and (vi) 1.15 to 1.00 thereafter; (2) a ratio of (a)
Total Debt to (b) EBITDA for the prior four quarter period of no greater than
(a) 7.2 to 1.00 from September 30, 1997 through December 30, 1997, (b) 6.25 to
1.00 from December 31, 1997 through March 30, 1998, (c) 5.75 to 1.00 from March
31, 1998 through June 29, 1998, (d) 4.75 to 1.00 from June 30, 1998 through
September 24, 1998, (e) 3.75 to 1.00 from July 1, 1998 through June 30, 1999,
(f) 3.5 to 1.00 from July 1, 1999 through June 30, 2001, and (g) 3.00 to 1.00
thereafter; (3) a minimum Net Worth of $52,000,000.00 plus 75% of cumulative
positive net income from the closing date and 100% of the proceeds of any equity
offering; and (4) a minimum ratio of Current Assets to Current Liabilities of
1.25 to 1.00. The Company received from the Lenders a waiver of compliance with
its total debt to EBITDA ratio as of December 31, 1996, March 31, 1997, and June
30, 1997.
EVENTS OF DEFAULT
Events of Default under the Bank Credit Agreement include, subject to
applicable notice, grace and cure periods, the following: (i) a default in the
payment when due of any principal, interest or fees under the Bank Credit
Agreement; (ii) a default by the Company under any debt instruments in excess of
$5.0 million, or the occurrence of any event or condition that enables the
holder of such debt to accelerate the maturity thereof; (iii) any material
breach of any representation, warranty or statement in, or failure to perform
any duty or covenant under the Bank Credit Agreement or any of the other Loan
Documents; (iv) commencement of voluntary or involuntary bankruptcy, insolvency
or similar proceedings by or against Holdings, TPC Holding, TPC or any
subsidiary thereof; (v) the Term Loans and the Revolving Credit Facility cease
to be secured by substantially all of the assets of the Company; (vi) material
defaults related to employee benefits plans subject to Title I or IV of the
Employee Retirement Income Security Act of 1974, as amended; (vii) any uninsured
judgment or order in excess of $2.0 million remaining undischarged or unstayed
for longer than certain periods; (viii) a default by the Company in the payment
when due of principal of, interest or premium, if any, on the Original Notes or
the Notes, or the failure to observe, perform or comply with any agreement
beyond any grace period with respect thereto that enables the holder of such
debt to accelerate the maturity thereof or the Company becoming obligated to
redeem, repurchase, or repay all or any portion of any principal, interest or
premium on the Original Notes or the Notes prior to its scheduled payment; (ix)
a default by Holdings in the payment when due of principal of, interest or
premium, if any, on the Discount Notes, or the failure to observe, perform or
comply with any agreement beyond any grace period with respect thereto that
enables the holder of such debt to accelerate the maturity thereof; and (x) the
occurrence of any change of control.
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DESCRIPTION OF THE DISCOUNT NOTES
GENERAL
The Discount Notes were issued under an Indenture dated as of July 1, 1996
(the "Discount Notes Indenture"), between the Company and Fleet National Bank,
as Trustee (the "Trustee").
The following is a summary of the material provisions of the Discount Notes
Indenture and the Discount Notes. Upon effectiveness of the Registration
Statement, the Discount Notes Indenture will be subject to the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The following summary of
certain provisions of the Discount Notes Indenture and the Discount Notes (i) is
a description of such provisions after giving effect to the consummation of the
transactions associated with the Acquisition, and (ii) does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Discount Notes Indenture and the Discount Notes,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust IndentureAct. The Discount Notes Indenture is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. Any
reference to a "Holder" or a "Noteholder" or a "Securityholder" means the
Holders of the Discount Notes.
Principal of, premium, if any, and interest on the Discount Notes are
payable, and the Discount Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York or
the State of Connecticut (which initially shall be the offices of the Trustee,
at Shawmut Trust Company of New York, c/o First Chicago Trust Co. of N.Y., 14
Wall Street, 8th Floor / Window #2, New York, New York 10005 or at 777 Main
Street, Hartford, Connecticut 06115, respectively), except that, at the option
of Holdings, payment of interest may be made by check mailed to the address of
the Holders as such address appears in the Note register.
The Discount Notes are issuable only in fully registered form, without
coupons, in denominations of $1,000 at final maturity and any integral multiple
thereof. No service charge shall be made for any registration of transfer or
exchange of the Discount Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
The Discount Notes will mature on July 1, 2007 and will be limited to
$57,650,103.55 aggregate principal amount at maturity. The Discount Notes are
senior unsecured obligations of Holdings, ranking PARI PASSU in right of payment
with other senior unsecured Indebtedness of Holdings. The Discount Notes are
senior in right of payment to subordinated Indebtedness of Holdings, including
Holdings' guarantee of the Notes. The Discount Notes and TPC Holding's guarantee
are effectively subordinated to secured indebtedness of Holdings, including
Holdings' guarantee of Indebtedness of TPC under the Bank Credit Agreement, as
to the assets of Holdings securing such Indebtedness, and to all Indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of Holdings' Subsidiaries permitted under the Limitation on
Indebtedness covenant described below. Any right of Holdings to receive assets
of any of its Subsidiaries upon the latter's liquidation or reorganization (and
the consequent right of the Discount Note holders to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that Holdings is itself recognized as a creditor
of such Subsidiary, in which case the claims of Holdings or the Discount Note
Holders would still be subordinated to any Indebtedness secured by the assets of
such Subsidiary and to any Indebtedness of such Subsidiary senior to that held
by Holdings. See "Risk Factors-Effective Subordination," "Description of the
Discount Notes" and "Description of the Bank Credit Agreement." As of March
3, 1998, (i) Holdings had approximately $96.0 million of secured senior
Indebtedness outstanding (consisting of Holdings' guarantee of the Company's
Indebtedness under the Bank Credit Agreement), $37.0 million of senior unsecured
Indebtedness outstanding (consisting of the portion of the issue price of the
Units allocated for accounting purposes to the Discount Notes) and (ii)
Holdings' Subsidiaries would have had approximately $326.3 million of
Indebtedness outstanding (including the Notes). Substantially all of the
operations of Holdings will be conducted through its Subsidiaries and,
therefore, Holdings will be dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Discount Notes. See
"Risk Factors -- Dependence on Subsidiary Cash Flow."
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The Discount Notes are being offered at a substantial discount from their
principal amount at maturity. Cash interest will not accrue on the Discount
Notes prior to July 1, 2001. Thereafter, except as otherwise described below,
cash interest on the Discount Notes will be payable at the applicable rate set
forth on the front cover of this Prospectus, semiannually on each January 1 and
July 1, commencing January 1, 2002, to the Person in whose name the Discount
Notes (or any predecessor Discount Note) are registered at the close of business
on the December 15 and June 15 next preceding such interest payment date. Cash
interest will accrue from the most recent interest payment date to which
interest has been paid or duly provided for or, if no interest has been paid or
provided for, from July 1, 2001. TPC Holding fully and unconditionally
guarantees the due and punctual payment of the principal of, interest on and all
other amounts payable under the Discount Notes when they become due and payable,
whether upon maturity, upon acceleration, by call for redemption, upon
repurchase or purchase pursuant to a Change of Control or Asset Disposition or
otherwise. The guarantee will not be discharged with respect to any Discount
Note except by payment in full of principal, interest and all other amounts
payable.
Under the terms of the guarantee executed by Holdings in connection with
the Bank Credit Agreement as in effect on the date of the Discount Notes
Indenture, no payment or distribution of any assets of Holdings of any kind or
character, whether in cash, property or securities (other than Permitted
Securities), may be made by Holdings on account of principal (or premium, if
any) of the Discount Notes or on account of the purchase or redemption or other
acquisition of the Discount Notes prior to the Stated Maturity of the principal
of the Discount Notes until payment in full in cash of all amounts owned under
the Bank Credit Agreement; PROVIDED, HOWEVER,that prior to such payment in full
of all such amounts owed under the Bank Credit Agreement, up to 30% of the
aggregate Accreted Value of the Discount Notes may be redeemed by Holdings on or
prior to July 1, 1998, at the option of Holdings, from the net proceeds of a
Public Equity Offering following which there is a Public Market. See
" -- Redemption -- OPTIONAL REDEMPTION."
REDEMPTION
OPTIONAL REDEMPTION. The Discount Notes are subject to redemption at any
time on or after July 1, 2001, at the option of Holdings, in whole or in part,
upon not less than 30 nor more than 60 days' prior notice in amounts of $1,000
principal amount at final Maturity or an integral multiple thereof at the
following redemption prices (expressed as percentages of the Accreted Value), if
redeemed during the 12-month period beginning July 1 of the year indicated
below:
REDEMPTION
YEAR PRICE
- ------------------------------------- -----------
2001................................. 106.75%
2002................................. 105.75
2003................................. 104.75
2004................................. 103.75
2005 and thereafter.................. 100.00
and thereafter at 100% of the principal amount at final Maturity, in each case
together with accrued and unpaid interest, if any, to the redemption date
(subject to the right of Discount Note Holders on the relevant record dates to
receive interest due on relevant interest payment dates).
Notwithstanding the foregoing, up to 30% of the aggregate Accreted Value of
the Discount Notes are redeemable, at any time, on or prior to July 1, 1998 at
the option of Holdings, within 45 days of the notice of the sale of Qualified
Capital Stock of Holdings or the Company in a Public Equity Offering from the
net proceeds of such sale, following which there is a Public Market, upon not
less than 30 nor more than 60 days' prior notice in amounts of $1,000 principal
amount at final Maturity or an integral multiple thereof at a redemption price
equal to 113.5% of the Accreted Value thereof, together with accrued and unpaid
interest, if any, to the redemption date (subject to the right of Discount Note
Holders on the relevant record date to receive interest due on interest payment
dates). If less than all of the Discount Notes are to be
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redeemed, the Discount Notes Trustee shall select the Discount Notes or the
portion thereof to be redeemed pro rata.
The Bank Credit Agreement prohibits Holdings from making any optional or
mandatory payment of principal, or redemption of, the Discount Notes without the
consent of the Banks, other than the redemption of all of the Discount Notes
from the net proceeds of a Public Equity Offering as described above.
PURCHASE OF DISCOUNT NOTES UPON CHANGE IN CONTROL OR HOLDINGS ASSET SALE.
Each Discount Note Holder will have certain rights to require Holdings to
purchase such Discount Note Holder's Discount Notes upon the occurrence of a
Change in Control. See " -- Purchase of Discount Notes upon a Change in
Control" below. Under certain circumstances, Holdings shall be required to make
an offer to purchase all or a portion of the Discount Notes with proceeds
received in connection with an Asset Sale. See " -- Certain
Covenants -- DISPOSITION OF PROCEEDS OF ASSET SALES" below.
SINKING FUND
The Discount Notes are not entitled to the benefit of any sinking fund.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101% of
the Accreted Value thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 35% of the total voting power of the then outstanding Voting
Stock of Holdings; PROVIDED, HOWEVER, that the Permitted Holders
beneficially own (for purposes of this clause (i), the Permitted Holders
shall be deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent corporation), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the then outstanding Voting Stock of Holdings than such other person and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors (for
the purposes of this clause (i), such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person is the beneficial owner (as
defined in this clause (i)), directly or indirectly, of more than 35% of
the voting power of the Voting Stock of such parent corporation and the
Permitted Holders beneficially own (as defined above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of
Holdings, TPC Holding or TPC (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of Holdings, TPC Holding or TPC, as the case may be, was
approved by a vote of 66 2/3% of the directors of Holdings, TPC Holding or
TPC, as the case may be, then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the Board of Directors of Holdings, TPC Holding or TPC, as the case may
be, then in office;
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(iii) the merger or consolidation of Holdings, TPC Holding or the
Company with or into another Person or the merger of another Person with or
into Holdings, TPC Holding or the Company, or the sale of all or
substantially all the assets of Holdings, TPC Holding or the Company to
another Person (in each case other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of Holdings, TPC Holding or the Company, as applicable, that
are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of Holdings, TPC
Holding or the Company, as applicable, are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation or a parent
corporation that owns all of the capital stock of such corporation that
represent immediately after such transaction, at least 35% of the aggregate
voting power of the Voting Stock of the surviving corporation or such
parent corporation, as the case may be; or
(iv) Holdings directly or indirectly ceases to own 100% of the Capital
Stock of TPC.
Within 30 days following any Change of Control, the Company shall mail a
notice to the Trustee and to each Holder stating: (1) that a Change of Control
has occurred and that such Holder has the right to require the Company to
purchase such Holder's Discount Notes at a purchase price in cash equal to 101%
of the Accreted Value thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 45 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Discount Notes purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Discount Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The use of the terms "all or substantially all" and "substantially as an
entirety" in provisions of the Discount Notes Indenture such as clause (iii) of
the definition of "Change in Control" and under "-- Merger and
Consolidation" has no clearly established meaning under New York law (which
governs the Discount Notes Indenture) and has been the subject of limited
judicial interpretation in few jurisdictions. Accordingly, there may be a degree
of uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person, or a
disposition of such assets "substantially as an entirety," which uncertainty
should be considered by prospective investors in the Discount Notes.
Subject to the limitations discussed below, TPC, TPC Holding or Holdings
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Discount Notes Indenture, but that could increase the amount
of indebtedness outstanding at such time or otherwise affect TPC's, TPC
Holding's or Holdings' capital structure or credit ratings. Restrictions on the
ability of Holdings to incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness"
and "-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries." Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Discount Notes, as the case may
be, then outstanding. Except for the limitations contained in such covenants,
however, the Discount Notes Indenture does not contain any covenants or
provisions that may afford holders of the Discount Notes protection in the event
of a highly leveraged transaction.
If a Change of Control offer is made, there can be no assurance that
Holdings will have available funds sufficient to pay the purchase price for all
of the Discount Notes that might be delivered by holders of the
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Discount Notes seeking to accept the Change of Control offer. The failure of
Holdings to make or consummate the Change of Control offer or pay the purchase
price when due will give the Discount Notes Trustee and the holders of the
Discount Notes the rights described under "-- Events of Default."
The existence of a holder's right to require Holdings to offer to
repurchase such holder's Discount Notes upon a Change of Control may deter a
third party from acquiring Holdings in a transaction which constitutes a Change
of Control.
Holdings' guarantee of TPC's obligations under the Bank Credit Agreement,
under certain circumstances, prohibits Holdings from purchasing any Discount
Notes prior to June 30, 2004, and also provides that the occurrence of certain
change of control events with respect to TPC, TPC Holding and Holdings
constitutes a default thereunder. In the event a Change of Control occurs at a
time when Holdings is prohibited from purchasing Discount Notes, Holdings could
seek the consent of its lenders to the purchase of Discount Notes or could
attempt to refinance the borrowings that contain such prohibition. If Holdings
does not obtain such a consent or repay such borrowings, Holdings will remain
prohibited from purchasing Discount Notes. In such case, Holdings' failure to
purchase tendered Discount Notes would constitute an Event of Default under the
Discount Notes Indenture which would, in turn, constitute a default under the
Bank Credit Agreement.
Future indebtedness of Holdings may contain prohibitions on the occurrence
of certain events that would constitute a Change of Control or require such
indebtedness to be repaid or repurchased upon a Change of Control. Moreover, the
exercise by the holders of their right to require Holdings to repurchase the
Discount Notes could cause a default under such indebtedness, even if the Change
of Control itself does not, due to the financial effect of such repurchase on
Holdings. Finally, Holdings' ability to pay cash to the holders of Discount
Notes following the occurrence of a Change of Control may be limited by
Holdings' then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Discount Notes Indenture relating to
Holdings' obligation to make an offer to repurchase the Discount Notes as a
result of a Change of Control may be waived or modified with the written consent
of the holders of a majority in principal amount of the Discount Notes.
CERTAIN COVENANTS
The Indentures each covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) Holdings shall not, and shall not permit
any of its Restricted Subsidiaries to, Incur, directly or indirectly, and
Indetedness unless, on the date of such Incurrence, the Consolidated Coverage
Ratio of Holdings exceeds 1.75 to 1.0 if such Indebtedness is Incurred from the
Issue Date through June 30, 1999, and 2.0 to 1.0 if such Indebtedness is
Incurred thereafter. Notwithstanding the foregoing, Holdings may Guarantee any
Indebtedness permitted to be Incurred by its Subsidiaries pursuant to the Notes
Indenture and TPC Holding may not directly Incur as primary obligor any
Indebtedness.
(b) Notwithstanding the foregoing paragraph (a), TPC or any Subsidiary of
TPC that is a Restricted Subsidiary may Incur, directly or indirectly, any
Indebtedness if, on the date of such Incurrence, the Consolidated Coverage Ratio
of TPC exceeds 2.0 to 1.0 if such Indebtedness is Incurred from the Issue Date
through June 30, 1999, and 2.25 to 1.0 if such Indebtedness is Incurred
thereafter.
(c) Notwithstanding the foregoing paragraphs (a) and (b), Holdings and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1)
Indebtedness Incurred pursuant to the Term Loan Provisions of the Bank Credit
Agreement or any indenture or term loan provisions of any other credit or loan
agreement in an aggregate principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause (1)
and then outstanding, does not exceed (A) $140.0 million LESS (B) the aggregate
amount of all principal repayments of any such Indebtedness made after the
Original Issue Date (other than any such principal repayments made as a result
of the Refinancing of any such Indebtedness); (2) Indebtedness Incurred pursuant
to the Revolving Credit Provisions of the Bank Credit Agreement or any other
revolving credit facility in a principal amount which, when taken together
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with all letters of credit and the principal amount of all other Indebtedness
Incurred pursuant to this clause (2) and then outstanding does not exceed the
greater of $40.0 million and the sum of (A) 65% of the book value of the
inventory of Holdings and its Restricted Subsidiaries and (B) 85% of the book
value of the accounts receivables of Holdings and its Restricted Subsidiaries;
(3) Indebtedness owed to and held by Holdings or a Wholly Owned Subsidiary;
PROVIDED, HOWEVER, that any subsequent issuance or transfer of any Capital Stock
which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness (other than to
Holdings or another Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issurer; (4) the Discount
Notes, the Security Guarantee, the Original Notes, the Notes or any
Indebtedness, the proceeds of which are used to Refinance the Discount Notes,
the Security Guarantee, the Original Notes or the Notes in whole or in part; (5)
Indebtedness outstanding on the Original Issue Date (other than Indebtedness
described in clause (1), (2), (3) or (4) of this paragraph (c)); (6) Refinancing
Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or
(b) or pursuant to clause (4) or (5) or this clause (6) or pursuant to the
covenant described under "-- Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries" below; (7) Hedging Obligations consisting of Interest
Rate Agreements directly related to Indebtedness permitted to be Incurred by
Holdings or its Restricted Subsidiaries pursuant to the Indenture; (8)
Indebtedness of Holdings or its Restricted Subsidiaries consisting of
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets by Holdings or any Restricted Subsidiary
permitted under the Indenture; (9) Capital Lease Obligations in an aggregate
principal amount not exceeding $7.5 million at any one time outstanding; and
(10) Indebtedness in an aggregate principal amount which, together with all
other Indebtedness of the Company outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (9) above or paragraph
(a) or (b)) does not exceed $15 million at any one time outstanding.
(d) For purposes of determining compliance with the covenant entitled
"-- Limitation on Indebtedness," (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described
above, Holdings, in its sole discretion, will classify such item of Indebtedness
and only be required to include the amount and type of such Indebtedness in one
of the above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. Holdings shall
not permit any Restricted Subsidiary to issue any Preferred Stock except:
(a) Preferred Stock issued to and held by Holdings or a Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness or Preferred Stock (other than to Holdings or a Wholly Owned
Subsidiary) shall be deemed, in each case, to constitute the issuance of
such Preferred Stock by the issuer thereof;
(b) Preferred Stock of a Subsidiary outstanding on or prior to the
date on which such Subsidiary was acquired by Holdings or a Subsidiary of
Holdings (other than Preferred Stock issued in connection with, or to
provide all or any portion of the funds utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by Holdings); provided,
however, that on the date of such acquisition and after giving effect
thereto, either (i) Holdings would have been able to Incur at least $1.00
of additional Indebtedness pursuant to clause (a) of the covenant described
under "-- Limitation on Indebtedness," or (ii) if such Subsidiary is a
Subsidiary of TPC, TPC would have been able to Incur at least $1.00 of
additional Indebtebness pursuant to clause (b) of the covenant described
under " -- Limitation on Indebtedness;"
(c) Preferred Stock outstanding on the Issue Date;
(d) Preferred Stock which is not Disqualified Stock; PROVIDED,
HOWEVER, that such Restricted Subsidiary shall not pay cash dividends on
such Preferred Stock.
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LIMITATION ON LIENS. Neither Holdings nor TPC Holding shall directly or
indirectly, Incur or permit to exist any Lien on any of its properties
(including Capital Stock of a Restricted Subsidiary), whether owned at the Issue
Date or thereafter acquired, other than Permitted Liens, without effectively
providing that the Discount Notes shall be equally and ratably secured with (or
prior to in the case of a Lien securing a Subordinated Obligation of Holdings or
TPC Holding) the obligation so secured.
LIMITATION ON RESTRICTED PAYMENTS. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time of and after giving effect to, the proposed Restricted
Payment: (i) a Default shall have occurred and be continuing (or would result
therefrom); (ii) in the case of a Restricted Payment by Holdings and its
Restricted Subsidiaries other than TPC and its Restricted Subsidiaries, Holdings
is not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph
(a) of the covenant described under "-- Limitation on Indebtedness" and, in
the case of a Restricted Payment by TPC and its Restricted Subsidiaries, TPC is
not able to Incur and an additional $1.00 of Indebtedness pursuant to paragraph
(b) of the covenant described under " -- Limitation on Indebtedness"; or (iii)
the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Notes are originally issued to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit); PROVIDED, HOWEVER, that if the Discount Notes
achieve an Investment Grade Rating as of the end of any fiscal quarter, the
percentage for the fiscal quarter after such fiscal quarter (and for any other
fiscal quarter where, on the first day of such fiscal quarter, the Discount
Notes shall have an Investment Grade Rating) will be 100% of Consolidated Net
Income during each fiscal quarter after such fiscal quarter; PROVIDED FURTHER,
HOWEVER, that if such Restricted Payment is to be made in reliance upon an
additional amount permitted pursuant to the immediately preceding proviso, the
Discount Notes must have an Investment Grade Rating at the time such Restricted
Payment is declared or, if not declared, made; (B) the aggregate Net Cash
Proceeds received by Holdings from the issuance or sale of its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of Holdings and other than an issuance or sale
to an employee stock ownership plan or to a trust established by Holdings or any
of its Subsidiaries for the benefit of their employees); (C) the aggregate Net
Cash Proceeds received by Holdings subsequent to the Issue Date from the issue
or sale of its Capital Stock (other than Disqualified Stock) to an employee
stock ownership plan or a trust established by Holdings or any of its
Subsidiaries for the benefit of their employees; PROVIDED, HOWEVER, that with
respect to any such Net Cash Proceeds received from such an employee stock
ownership plan or trust through the Incurrence of Indebtedness in connection
with such issue or sale of Capital Stock, which Indebtedness also constitutes
Indebtedness of Holdings, such aggregate Net Cash Proceeds shall be limited to
an amount equal to any increase in the Consolidated Net Worth of Holdings
resulting from principal repayments made by such employee stock ownership plan
with respect to such Indebtedness; (D) the amount by which Indebtedness of
Holdings or its Subsidiaries is reduced on Holdings' consolidated balance sheet
upon the conversion or exchange (other than by a Subsidiary of Holdings)
subsequent to the Issue Date, of any Indebtedness of Holdings or its
Subsidiaries for Capital Stock (other than Disqualified Stock) of Holdings (less
the amount of any cash, or the fair value of any other property, distributed by
Holdings or its Subsidiaries upon such conversion or exchange), whether pursuant
to the terms of such Indebtedness or pursuant to an agreement with a creditor to
engage in an equity for debt exchange; (E) an amount equal to the sum of (i) the
net reduction in Investments in Unrestricted Subsidiaries resulting from
dividends, repayments of loans or advances or other transfers of assets, in each
case to Holdings or any Restricted Subsidiary from Unrestricted Subsidiaries,
and (ii) the portion (proportionate to Holdings' equity interest in such
Subsidiary) of the fair market value (as determined in good faith by Holdings'
Board of Directors) of the net assets of an Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Restricted Subsidiary; PROVIDED,
HOWEVER, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by Holdings or any Restricted Subsidiary in such
Unrestricted Subsidiary; (F) to the extent not covered in
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clauses (A) through (E) above, the aggregate net cash proceeds received after
the Issue Date by the Company as capital contributions (other than from any of
its Restricted Subsidiaries) and (G) $7.5 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of
Holdings made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of Holdings (other than (A) Disqualified
Stock, (B) Capital Stock issued or sold to a Subsidiary of Holdings or (C)
Capital Stock issued or sold to an employee stock ownership plan or to a trust
established by Holdings or any of its Subsidiaries for the benefit of their
employees to the extent that such employee stock ownership plan or trust has
Incurred Indebtedness to finance the purchase of such Capital Stock, which
Indebtedness also constitutes Indebtedness of Holdings); PROVIDED, HOWEVER, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations (other than
Disqualified Stock) made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of Holdings which is
permitted to be Incurred pursuant to the covenant described under "--
Limitation on Indebtedness;" PROVIDED, HOWEVER, such new Subordinated
Obligations constitute Refinancing Indebtedness PROVIDED, FURTHER, HOWEVER, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; PROVIDED, HOWEVER, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (iv) a payment
by Holdings to TPC Holding, TPC or any Restricted Subsidiary to the ESOP, to be
used to repurchase, redeem, acquire or retire for value any Capital Stock of
Holdings pursuant to any stockholders' agreement, management equity subscription
plan or agreement, stock option plan or agreement, or other employee plan or
agreement or employee benefit plan in effect as of the Issue Date or such
similar employee plan or agreement or employee benefit plan as may be adopted by
Holdings or TPC from time to time; PROVIDED, HOWEVER, that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Capital Stock shall
not exceed $3,000,000 in any fiscal year; PROVIDED FURTHER, HOWEVER, that such
amount shall be excluded in the calculation of Restricted Payments; (v) a
payment by Holdings, TPC Holding, TPC or an Restricted Subsidiary to the ESOP to
be used to repurchase Capital Stock of Holdings pursuant to the requirements of
the ESOP in an aggregate amount in any fiscal year not to exceed the minimum
amount required to be paid in cash under the ESOP as in effect on the Original
Issue Date; PROVIDED, HOWEVER, that such amount shall be excluded in the
calculation of Restricted Payments; and (vi) a payment pursuant to the Tax
Sharing Agreement; PROVIDED, HOWEVER, that such amounts shall be excluded in the
calculation of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. Holdings shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to Holdings or a Restricted Subsidiary or pay any Indebtedness owed to
Holdings, (b) to make any loans or advances to Holdings or (c) to transfer any
of its property or assets to Holdings, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by Holdings (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by Holdings) and outstanding on such date; (iii) any
encumbrance or restriction pursuant to an agreement effecting a Refinancing of
Indebtedness Incurred pursuant to an agreement referred to in clause (i) or (ii)
of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); PROVIDED, HOWEVER, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any
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such refinancing agreement or amendment are no less favorable to the
Securityholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such agreements; (iv) any such encumbrance or
restriction consisting of customary non-assignment provisions in leases to the
extent such provisions restrict the transfer of the lease or the property leased
thereunder or in purchase money financings; (v) in the case of clause (c) above,
restrictions contained in security agreements or mortgages securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements or mortgages; (vi)
encumbrances or restrictions imposed by operation of applicable law; and (vii)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) Holdings shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) Holdings or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including the value of all non-cash
consideration), as determined in good faith by the Board of Directors of
Holdings, of the shares and assets subject to such Asset Disposition, and at
least 85% of the consideration thereof received by Holdings or such Restricted
Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal
to 100% of the Net Available Cash from such Asset Disposition is applied by
Holdings (or such Restricted Subsidiary, as the case may be) (A) FIRST, (1) in
the case of an Asset Disposition by Holdings or a Restricted Subsidiary of
Holdings other than TPC and its Subsidiaries to the extent Holdings (or such
Restricted Subsidiary) elects (or is required by the terms of any Indebtedness),
to prepay, repay, redeem or purchase (I) Indebtedness of Holdings that is PARI
PASSU with the Discount Notes as required by the terms thereof, and to offer
concurrently with such repayment or repurchase to repay or repurchase any
outstanding Discount Note in the manner described in paragraph (b) below;
PROVIDED, HOWEVER, that the principal amount of Discount Notes which Holdings
shall offer to repay or repurchase pursuant to this clause shall be no less than
the product of (x) the Net Cash Proceeds and (y) a fraction the numerator of
which shall be the aggregate outstanding Accreted Value of the Discount Notes on
the date of such offer and the denominator of which shall be the total of the
aggregate outstanding principal amounts or accreted value of all Indebtedness of
Holdings that is PARI PASSU with the Discount Notes and is entitled to be
repurchased upon such Asset Sale and the aggregate Accreted Value of the
Discount Notes or (II) Indebtedness (other than any Disqualified Stock) of a
Wholly Owned Subsidiary or such Restricted Subsidiary in the case of each of the
foregoing clauses (I) and (II) other than Indebtedness owed to Holdings or an
Affiliate of Holdings other than The Huff Alternative Income Fund, L.P. or any
Affiliate thereof) or, (2) in the case of an Asset Disposition by TPC or its
Restricted Subsidiaries, to the extent TPC or such Restricted Subsidiary elects
(or is required by the terms of any Indebtedness of TPC or such Restricted
Subsidiary), to prepay, repay, redeem or purchase Indebtedness (other than
Disqualified Stock) of the Company or such Restricted Subsidiary (in each case
other than Indebtedness owed to TPC or an Affiliate of TPC), in the case of the
foregoing clauses (1) and (2) within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to the
extent of the balance of such Net Available Cash after application in accordance
with clause (A), to the extent Holdings or a Restricted Subsidiary elects, to
acquire Additional Assets; PROVIDED, HOWEVER, that Holdings or such Restricted
Subsidiary shall be required to commit such Net Available Cash to the
acquisition of Additional Assets within one year from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash (the "Receipt
Date") and shall be required to consummate the acquisition of such Additional
Assets within 18 months from the Receipt Date; (C) THIRD, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A) and (B), to make an offer pursuant to paragraph (b) below to the holders of
the Discount Notes pursuant to and subject to the conditions contained in the
Discount Notes Indenture; and (D) FOURTH, to the extent of the balance of such
Net Available Cash after application in accordance with clauses (A), (B) and (C)
to (x) the acquisition by Holdings or any Wholly Owned Subsidiary or such
Restricted Subsidiary of Additional Assets or (y) the prepayment, repayment or
purchase of Indebtedness (other than any Disqualified Stock) of Holdings (other
than Indebtedness owed to an Affiliate of Holdings) or Indebtedness of any
Subsidiary (other than Indebtedness owed to Holdings or an
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Affiliate of Holdings other than the Huff Alternative Income Fund, L.P., or any
Affiliate thereof), in each case within one year from the later of the receipt
of such Net Available Cash and the date the offer described in clause (b) below
is consummated; PROVIDED, HOWEVER, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above,
Holdings or such Restricted Subsidiary shall retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this paragraph, Holdings and its
Restricted Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $3.5 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments. Notwithstanding the foregoing, any Asset Disposition
which is also an Asset Disposition governed by the Notes Indenture shall satisfy
this convenant if such Asset Disposition is made, and the Net Available Cash
therefrom applied, in accordance with the terms of the Notes Indenture.
Notwithstanding anything contained in this "-- Certain Covenants" section to
the contrary, the Company shall not sell, convey, pledge, hypothecate or
otherwise transfer the Houston Facility substantially as an entirety in one
transaction or a series of related transactions to any Person (other than a
Restricted Subsidiary), except for (i) pledges or security interests granted in
connection with securing Indebtedness borrowed under the Bank Credit Agreement,
and (ii) transactions that comply with the "-- Merger and Consolidation"
covenant described below.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of any Indebtedness of a Restricted
Subsidiary other than TPC Holding and the release of Holdings or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by Holdings or any Restricted Subsidiary
from the transferee that are converted by the Company or such Restricted
Subsidiary into cash within 90 days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
Discount Notes pursuant to clause (a)(ii)(A) or (C) above, Holdings will be
required to purchase Discount Notes tendered pursuant to an offer by Holdings
for the Discount Notes at a purchase price of 100% of their Accreted Value
(without premium) plus accrued but unpaid interest in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Discount Notes Indenture. If the aggregate purchase price of the Discount
Notes tendered pursuant to such offer is less than the Net Available Cash
allotted to the purchase thereof, Holdings will be required to apply the
remaining Net Available Cash in accordance with clause (a)(ii)(D) above.
(c) Holdings shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Discount Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, Holdings shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) Holdings shall not, and shall
not permit any Restricted Subsidiary to, enter into any transaction (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Holdings (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
a comparable transaction on arm's-length dealings with a Person who is not such
an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of
$2.5 million, (i) are set forth in writing and (ii) have been approved by a
majority of the members of the Board of Directors of Holdings having no material
personal financial stake in such Affiliate Transaction and (3) if such Affiliate
Transaction involves an amount in excess of $5 million, have been determined by
a nationally recognized investment banking firm to be fair, from a financial
standpoint, to Holdings or its Restricted Subsidiary, as the case may be.
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(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," or any payment or transaction
specifically excepted from the definition of Restricted Payment, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors of Holdings
or the board of directors of the relevant Restricted Subsidiary, (iii) the grant
of stock options or similar rights to employees and directors of Holdings
pursuant to plans approved by the Board of Directors of Holdings or the board of
directors of the relevant Restricted Subsidiary, (iv) loans or advances to
officers, directors or employees in the ordinary course of business, (v) the
payment of reasonable fees to directors of Holdings and its Restricted
Subsidiaries who are not employees of Holdings or its Restricted Subsidiaries,
(vi) any Affiliate Transaction between Holdings and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries, (vii) the purchase of or the payment of
Indebtedness of or monies owed by Holdings or any of its Restricted Subsidiaries
for goods or materials purchased, or services received, in the ordinary course
of business, (viii) the purchase of or payment of Indebtedness of or monies owed
by Holdings or any of its Restricted Subsidiaries or fees to be paid to Sterling
or any Affiliate of Sterling, in each case pursuant to a written agreement in
existence on the Issue Date, and (ix) the Tax Sharing Agreement and any payments
thereunder, and (x) any Affiliate Transaction among Holdings or any Subsidiary
and The Huff Alternative Income Fund, L.P. or any of its Affiliates pursuant to
agreements in existence on the Issue Date.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Holdings shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to Holdings or a Wholly Owned Subsidiary
or (ii) if, immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary remains a Restricted Subsidiary;
PROVIDED, HOWEVER, that in connection with any such sale or disposition of
Capital Stock Holdings or any such Restricted Subsidiary complies with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock"; PROVIDED, FURTHER, HOWEVER,that in no event may TPC Holding, Holdings
or any Restricted Subsidiary that owns the Houston Facility dispose of its
Capital Stock pursuant to clause (ii).
MERGER AND CONSOLIDATION. Holdings shall not consolidate with or merge
with or into any other corporation or sell, convey, transfer or lease its
properties and assets, in one transaction or a series of transactions,
substantially as an entirety to any Person or group of affiliated Persons or
permit any of its Restricted Subsidiaries to enter into any such transaction or
series of transactions if such transaction or series of transactions would
result in a sale, conveyance, transfer, or lease substantially as an entirety of
the properties and assets of Holdings and its Restricted Subsidiaries on a
consolidated basis to any Person or any group of affiliated Persons, unless: (i)
the resulting, surviving or transferee Person or Persons (the "Successor
Company") shall be in the case of a transaction in which Holdings is a party, a
corporation and, in the case of a transaction in which any Restricted Subsidiary
is a party, a Person organized and existing under the laws of the United States
of America, any State thereof or the District of Columbia and the Successor
Company in the case of a transaction in which Holdings is a party (if not
Holdings) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Discount Notes Trustee, in form satisfactory to the
Discount Notes Trustee, all the obligations of Holdings under the Discount Notes
and the Discount Notes Indenture; (ii) immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such Subsidiary
at the time of such transaction), no Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, in the
case of a sale, conveyance, transfer, or lease pursuant to which Holdings or any
of its Restricted Subsidiaries other than TPC and its Restricted Subsidiaries is
a party, the Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to the first sentence of paragraph (a) of the covenant
described under " -- Certain Covenants -- Limitation on Indebtedness" or, in
the case of a sale, conveyance, transfer, or lease pursuant to which TPC or any
of its Restricted Subsidiaries is a party, the Successor Company would be able
to Incur an additional
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$1.00 of Indebtedness pursuant to the first sentence of paragraph (b) of the
covenant described under " -- Certain Covenants -- Limitation on Indebtedness"
(and in each such case treating any Indebtedness not previously an obligation of
Holdings or any Subsidiary which becomes an obligation of the Successor Company
or any Subsidiary in connection with or as a result of such transaction as
having been Incurred by such Successor Company or such Subsidiary at the time of
such transaction); (iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is not
less than the Consolidated Net Worth of Holdings prior to such transaction minus
any costs incurred in connection with such transaction; and (v) Holdings shall
have delivered to the Discount Notes Trustee an officers' certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Discount Notes Indenture.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to TPC and TPC Holding may merge with and into TPC.
TPC Holding shall not consolidate with or merge with or into any other
Person or convey, transfer or lease its properties and assets, in one
transaction or a series of transactions, substantially as an entirety to any
Person or group of affiliated Persons, unless: (i) The resulting, surviving or
transferee Person (the "TPC Holding Successor Company") shall be a corporation
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and the Successor Company (if not TPC
Holding) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Discount Notes Trustee, in form satisfactory to the
Discount Notes Trustee, all the obligations of TPC Holding under its Guarantee
of the Discount Notes and the Discount Notes Indenture; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness which becomes
an obligation of the TPC Holding Successor Company or any Subsidiary as a result
of such transaction as having been incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred and
be continuing; and (iii) TPC Holding shall have delivered to the Discount Notes
Trustee an officers' certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Discount Notes Indenture. Notwithstanding the foregoing, TPC
Holding may merge with and into either TPC or Holdings.
SEC REPORTS. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, Holdings shall provide the Trustee and Discount Notes Holders with
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Discount Notes Indenture as (i) a
default in the payment of interest on any Discount Note, when due, continued for
30 days, (ii) a default in the payment of principal of any Discount Note, when
due at its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise, (iii) the failure by the Company to comply with
its obligations under "-- Certain Covenants -- Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase Discount Notes) or under
"-- Certain Covenants" under "-- Limitation on Indebtedness,"
"-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries," "-- Limitation on Restricted Payments," "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries," -- "Limitation on
Sales of Assets and Subsidiary Stock," " -- Limitation on Affiliate
Transactions," "Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries," or "-- SEC Reports," (v) the failure by Holdings to
comply for 60 days after notice with its other agreements contained in the
Discount Notes Indenture, (vi) Indebtedness of Holdings or any Significant
Subsidiary is not paid within any applicable grace period after final maturity
or is accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $5 million (the
"cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or
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reorganization of Holdings, or any Significant Subsidiary (the "bankruptcy
provisions") (viii) any judgment or decree for the payment of money in excess
of $5 million is entered against the Company or any Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days after notice (the "judgment default
provision") or (ix) the Security Guarantee shall cease to be, or be asserted in
writing by Holdings or TPC Holding not to be, in effect. However, a default
under clause (iv) or (v) will not constitute an Event of Default until the
Discount Notes Trustee or the holders of 25% in principal amount at final
maturity of the outstanding Discount Notes notify Holdings of the default and
Holdings does not cure such default within the time specified after receipt of
such notice.
If an Event of Default (other than the bankruptcy provisions relating to
Holdings) occurs and is continuing, the applicable Trustee or the holders of at
least 25% in principal amount at final maturity of the outstanding Discount
Notes may declare the principal of and accrued but unpaid interest on all the
Discount Notes to be due and payable. Upon such a declaration, such principal
and interest shall be due and payable immediately. If an Event of Default
relating to the bankruptcy provisions relating to Holdings occurs and is
continuing, the principal of and interest on all the Discount Notes will IPSO
FACTO become and be immediately due and payable without any declaration or other
act on the part of the Discount Notes Trustee or any holders of the Discount
Notes. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Discount Notes may rescind any such acceleration with
respect to the Discount Notes and its consequences.
Subject to the provisions of the Discount Notes Indenture relating to the
duties of the Discount Notes Trustee, in case an Event of Default occurs and is
continuing, such Discount Notes Trustee will be under no obligation to exercise
any of the rights or powers under the applicable Indenture at the request or
direction of any of the holders of the Discount Notes unless such holders have
offered to the Discount Notes Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no holder of a Discount
Note may pursue any remedy with respect to the Discount Notes Indenture or the
Discount Notes unless (i) such holder has previously given the Discount Notes
Trustee notice that an Event of Default is continuing, (ii) holders of at least
25% in principal amount at final maturity of the outstanding Discount Notes have
requested the Discount Notes Trustee to pursue the remedy, (iii) such holders
have offered the Discount Notes Trustee reasonable security or indemnity against
any loss, liability or expense, (iv) the Discount Notes Trustee has not complied
with such request within 60 days after the receipt thereof and the offer of
security or indemnity and (v) the holders of a majority in principal amount at
final maturity of the outstanding Discount Notes have not given the Discount
Notes Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount at final maturity of the outstanding Discount Notes are given the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Discount Notes Trustee or of exercising any trust or power
conferred on the Discount Notes Trustee. The Discount Notes Trustee, however,
may refuse to follow any direction that conflicts with law or the Discount Notes
Indenture or that the Discount Notes Trustee determines is unduly prejudicial to
the rights of any other holder of a Discount Notes, or that would involve the
Discount Notes Trustee in personal liability. A holder's right to individually
institute a suit for enforcement of the payment of principal or interest,
however, is not impaired by the Event of Default provisions.
The Discount Notes Indenture provides that if a Default occurs and is
continuing and is known to the Discount Notes Trustee, such Trustee must mail to
each holder of the Discount Notes notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of or
interest on any Discount Notes, the Discount Notes Trustee may withhold notice
if and so long as the board of directors, the executive committee or a committee
of its trust officers determines that withholding notice is not opposed to the
interest of the holders of the Discount Notes. In addition, Holdings is required
to deliver to the Discount Notes Trustee, within 120 days after the end of each
fiscal year, a certificate indicating whether the signers thereof know of any
Default that occurred during the previous year. Holdings also is required to
deliver to the Discount Notes Trustee, within 30 days after the occurrence
thereof, written notice
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of any event which would constitute certain Defaults, their status and what
action Holdings is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Discount Notes Indenture may be amended
with the consent of the holders of a majority in principal amount at final
maturity of the Discount Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Discount Notes) and any past
default or compliance with any provisions may also be waived with the consent of
the holders of a majority in principal amount at final maturity of the Discount
Notes then outstanding.
Without the consent of each holder of an outstanding Discount Note affected
thereby, no amendment may (i) reduce the amount of Discount Notes whose holders
must consent to an amendment, (ii) reduce the rate of or extend the time for
payment of interest on any Discount Note, (iii) reduce the principal of or
extend the Stated Maturity of any Discount Note, (iv) reduce the premium payable
upon the redemption of any Discount Note or change the time at which any
Discount Note may be redeemed as described under "-- Optional Redemption"
above, (v) make any Discount Note payable in money other than that stated in the
Discount Note, (vi) impair the right of any holder of the Discount Notes to
receive payment of principal of and interest on such holder's Discount Notes on
or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Discount Notes, (vii) make any
change in the amendment provisions which require each holder's consent or in the
waiver provisions or (viii) make any change to the subordination provisions of
the Discount Notes Indenture that would adversely affect the holders of the
Discount Notes.
Without the consent of any holder of the Discount Notes, Holdings and the
Discount Notes Trustee may amend the Discount Notes Indenture to cure any
ambiguity, omission, defect or inconsistency, to provide for the assumption by a
successor corporation of the obligations of Holdings under the Discount Notes
Indenture, to provide for uncertificated Discount Notes in addition to or in
place of certificated Discount Notes (provided that the uncertificated Discount
Notes are issued in registered form for purposes of Section 163(f) of the Code,
or in a manner such that the uncertificated Discount Notes are described in
Section 163(f)(2)(B) of the Code), to add guarantees with respect to the
Discount Notes, to secure the Discount Notes, to add to the covenants of
Holdings for the benefit of the holders of the Discount Notes or to surrender
any right or power conferred upon Holdings, to make any change that does not
adversely affect the rights of any holder of the Discount Notes or to comply
with any requirement of the SEC in connection with the qualification of the
Discount Notes Indenture under the Trust Indenture Act.
The consent of the holders of the Discount Notes is not necessary under the
Discount Notes Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the substance of the
proposed amendment.
After an amendment under the Discount Notes Indenture becomes effective,
the Company is required to mail to holders of the Discount Note a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the Discount Notes, or any defect therein, will not impair or affect
the validity of the amendment.
TRANSFER
The Discount Notes were issued in registered form and will be transferable
only upon the surrender of the Discount Notes being transferred for registration
of transfer. Holdings may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
Holdings at its option at any time may terminate all its obligations under
the Discount Notes, and the Discount Notes Indenture ("legal defeasance"),
except for certain obligations, including those respecting the defeasance trust
and obligations to register the transfer or exchange of the Discount Notes to
replace
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mutilated, destroyed, lost or stolen Discount Notes, and to maintain a registrar
and paying agent in respect of the Discount Notes. In addition, Holdings at its
option at any time may terminate its obligations under "Change of Control" and
under the covenants described under "-- Certain Covenants" (other than the
covenant described under "-- Merger and Consolidation") (and any omission to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Discount Notes), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "-- Defaults" above and the
limitations contained in clauses (iii) and (iv) of the first paragraph under,
"-- Certain Covenants -- Merger and Consolidation" above ("covenant
defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default with respect thereto. If Holdings exercises its covenant
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default specified in clause (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under "-- Defaults" above or because of
the failure of Holdings to comply with clause (iii) or (iv) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Discount Notes Trustee
money or U.S. Government Obligations for the payment of principal of and
interest on the Discount Notes to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivery to the
Discount Notes Trustee of an Opinion of Counsel to the effect that holders of
the Discount Notes will not recognize income, gain or loss for Federal income
tax purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
Fleet National Bank is the Trustee under the Discount Notes Indenture and
has been appointed by Holdings as Registrar and Paying Agent with regard to the
Discount Notes. Such bank may also act as a depository of funds for or makes
loans to, and performs other services for, Holdings or its affiliates in the
ordinary course of business in the future. The corporate trust office of the
Discount Notes Trustee is located at 777 Main Street, Hartford, Connecticut
06115.
The Holders of a majority in aggregate principal amount at final maturity
of the outstanding Discount Notes have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Discount Notes Trustee, or exercising any trust or power conferred on the
Trustee, provided that in each case (i) such direction shall not be in conflict
with any rule of law or with the Discount Notes Indenture, (ii) the Discount
Notes Trustee may take any other action deemed proper by the Trustee which is
not inconsistent with such direction, and (iii) the Trustee need not take any
action which might involve it in personal liability or be unjustly prejudicial
to the Holders not joining in such direction. The Discount Notes Indenture
provides that if an Event of Default occurs (and is not cured), the Discount
Notes Trustee will be required, in the exercise of its power, to use the degree
of care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Discount Notes Trustee will be under no obligation to exercise
any of its rights or powers under the Discount Notes Indenture at the request of
any Holder of Discount Notes, unless such Holder shall have offered to the
Discount Notes Trustee security and indemnity satisfactory to it against any
loss, liability or expense and then only to the extent required by the terms of
the the Discount Notes Indenture. The Discount Notes Trustee may resign from its
duties with respect to the Discount Notes at any time or may be removed by
Holdings. If the Discount Notes Trustee resigns, is removed or becomes incapable
of acting as Discount Notes Trustee or if a vacancy occurs in the office of the
Discount Notes Trustee for any cause, a successor Trustee shall be appointed in
accordance with the provisions of the Discount Notes Indenture.
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If the Discount Notes Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Discount Notes Trustee shall
either eliminate such interest or resign, to the extent and in the manner
provided by, and subject to the provisions of, the Trust Indenture Act and the
Discount Notes Indenture. The Discount Notes Indenture also contains certain
limitations on the right of the Discount Notes Trustee, as a creditor of
Holdings, to obtain payment of claims in certain cases, or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
GOVERNING LAW
The Discount Notes Indenture provides that it and the Discount Notes will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
CERTAIN DEFINITIONS
"Accreted Value" as of any date (the "Specified Date") means, with
respect to each $1,000 principal amount at final maturity of Discount Notes:
(i) if the Specified Date is one of the following dates (each a
"Semi-Annual Accrual Date"), the amount set forth opposite such date
below:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- ------------------------------------- --------------
July 1, 1996.................... $ 520.38
January 1, 1997................. $ 555.51
July 1, 1997.................... $ 593.00
January 1, 1998................. $ 633.03
July 1, 1998.................... $ 675.76
January 1, 1999................. $ 721.37
July 1, 1999.................... $ 770.07
January 1, 2000................. $ 822.05
July 1, 2000.................... $ 877.53
January 1, 2001................. $ 936.77
July 1, 2001.................... $ 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (i) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding
Semi-Annual Accrual Date and (ii) a fraction, the numerator of which is the
number of days from the immediately preceding Semi-Annual Accrual Date to
the Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; and
(iii) if the Specified Date occurs after the last Semi-Annual Accrual
Date, $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Holdings or another Restricted Subsidiary or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by
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contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or other dispositions) by
Holdings or any Restricted Subsidiary, including any disposition by means of a
merger or consolidation (each referred to for the purposes of this definition as
a "disposition"), of (i) any shares of Capital Stock of a Restricted
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than Holdings or a Restricted
Subsidiary), (ii) all or substantially all the assets of any division or line of
business of Holdings or any Restricted Subsidiary or (iii) any other assets of
Holdings or any Restricted Subsidiary outside of the ordinary course of business
of Holdings or such Restricted Subsidiary (other than Holdings, (x) a
disposition of any Excluded Asset, (y) a disposition by a Restricted Subsidiary
to Holdings or by Holdings or a Restricted Subsidiary to a Wholly Owned
Subsidiary and (z) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments" or
a disposition specifically excepted from the definition of Restricted Payment).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest rate
borne by the Securities, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable by the Company
under or in respect of the Bank Credit Agreement, as amended, refinanced or
replaced from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceeding), fees, charges,
expenses, reimbursement obligations, Guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of Holdings, TPC or TPC
Holding, as applicable, or (except for the purposes of clause (ii) of the
covenant described under " -- Certain Covenants -- Change of Control") any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters;
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PROVIDED, HOWEVER, that (1) if Holdings or any Restricted Subsidiary has
Incurred any Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such Indebtedness
had been Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period Holdings or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of Holdings or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
Holdings and its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
Holdings and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale), (3) if since the beginning of such period
Holdings or any Restricted Subsidiary (by merger or otherwise) shall have made
an Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction requiring a calculation to be
made hereunder, which constitutes all or substantially all of an operating unit
of a business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period, and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into Holdings
or any Restricted Subsidiary since the beginning of such period) shall have made
any Asset Disposition, any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (2) or (3) above if made by Holdings
or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition occurred on the
first day of such period. For purposes of this definition, whenever pro forma
effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of Holdings. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months). Notwithstanding the foregoing,
"Consolidated Coverage Ratio", when used with respect to TPC, shall have the
same meaning except that references therein (and in any defined terms contained
therein) to "Holdings" and "Restricted Subsidiary" shall be deemed to refer
to TPC and those Subsidiaries of TPC that are Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its consolidated Restricted Subsidiaries, without regard
to its deductibility for federal income tax purposes, plus, to the extent not
included in such total interest expense, and to the extent incurred by Holdings
or its Restricted Subsidiaries, (i) interest expense attributable to capital
leases and one-third of the rental expense attributable to operating leases,
(ii) amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all
Preferred Stock held by Persons other than Holdings or a Wholly Owned
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations, (ix) interest accruing on any Indebtedness of any other
Person
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to the extent such Indebtedness is Guaranteed by Holdings or any Restricted
Subsidiary, and (x) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than Holdings) in connection with
Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of
Holdings and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, Holdings' equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to Holdings or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to a
Restricted Subsidiary, to the limitations contained in clause (iii) below) and
(B) Holdings' equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any Person acquired by Holdings or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary of TPC to the extent that such
Restricted Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, TPC's equity in the net income of
any such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Restricted Subsidiary during such period to TPC or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) TPC's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income; (iv) any gain (but not loss) realized upon the sale or
other disposition of any assets of TPC or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain (but not
loss) realized upon the sale or other disposition of any Capital Stock of any
Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of a
change in accounting principles. Notwithstanding the foregoing, for the purposes
of the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" only, there shall be excluded from Consolidated Net Income
any dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to Holdings or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(iii)(E) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Holdings and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of Holdings ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of Holdings plus (ii) paid-in
capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository" means The Depository Trust Company, its nominees and their
respective successors.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated
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Maturity of the Notes; PROVIDED, HOWEVER, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to
the first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Change of Control."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of
Holdings, (b) all depreciation expense of Holdings, (c) all amortization expense
of Holdings, and (d) all other non-cash items reducing such Consolidated Net
Income (excluding any non-cash item to the extent it represents an accrual of,
or reserve for, cash disbursement for any subsequent period) less all non-cash
items increasing such Consolidated Net Income (such amount calculated pursuant
to this clause (d) not to be less than zero), in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Employee Offering" means the sale of shares of Common Stock by Holdings
to certain employees of Holdings and its Subsidiaries and other investors
following the Acquisition.
"ESOP" means the Company's Employee Stock Ownership Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" means (i) .4547 acres at 145343 Memorial Drive,
Houston, Texas; (ii) 30.007 acres located at Highway 6 and Briarforest, Houston,
Harris County, Texas; (iii) 8.8962 acres located on Richmond and West Hollow
Drive, Houston, Harris County, Texas; (iv) 2.9613 acres located at 8705-8707
Katy Freeway, Houston, Harris County, Texas; (v) a 4.14560 acre tract of land
located at Highway 288 and South MacGregor Drive, Houston, Harris County, Texas;
(vi) lots 11, 12, 13, 14, 15, 16, 17, 18, 19 and 20, Block 133 located at 206
North Kaufman, Ennis, Texas; and (vii) one airplane.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date consistently applied.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
The term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a Discount
Note is registered on the Registrar's books.
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"Houston Facility" means TPC's plant located at 8600 Park Place
Boulevard, Houston, Texas 77017, together with all land owned or leased by the
Company adjacent or in proximity thereto, all improvements or additions to such
plant or land, including docks, pipelines and facilities for traincar and truck
service, all equipment, catalysts and other items used in the production,
processing, purification, finishing, extraction, hydrogenation, dehydrogenation,
dimerization, oxo-dehydrogenation, back-cracking, skeletal isomerization or
fractionation of chemical products, feedstocks or intermediaries.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for Indebtedness; PROVIDED, HOWEVER, that any Indebtedness of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security (other than the Discount Notes) shall be
deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit); (v) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured; and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
solely to protect the Company or any Restricted Subsidiary against fluctuations
in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. "Investment"
shall not include payments by Holdings to the ESOP (i) for the purpose of
servicing Indebtedness of the ESOP, (ii) for the purpose of paying
administrative expenses of the ESOP, and (iii) on behalf of employees of
Holdings or its Subsidiaries that do not exceed, during any fiscal year, 10% of
the aggregate compensation
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expense during such fiscal year attributable to employees of Holdings and its
Subsidiaries who are eligible to participate in the ESOP. For purposes of the
definition of "Unrestricted Subsidiary", the definition of "Restricted
Payment" and the covenant described under "-- Certain Covenants -- Limitation
on Restricted Payments," (i) "Investment" shall include the portion
(proportionate to Holdings' equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of Holdings at the time that
such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER,
that if such designation is made in connection with the acquisition of such
Subsidiary or the assets owned by such Subsidiary, the "Investment" in such
Subsidiary shall be deemed to be the consideration paid in connection with such
acquisition; PROVIDED FURTHER, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, Holdings shall be deemed to continue to
have a permanent "Investment" in an Unrestricted Subsidiary equal to an a
mount (if positive) equal to (x) Holdings' "Investment" in such Subsidiary at
the time of such redesignation less (y) the portion (proportionate to Holdings'
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors of Holdings.
"Investment Grade Rating" means a rating of BBB - or higher by S&P and
Baa3 or higher by Moody's or the equivalent of such rating by S&P and Moody's or
by any other Rating Agency selected as provided in the definition of Rating
Agency.
"Issue Date" means July 1, 1996.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, brokerage commissions, underwriting discounts or commissions or sales
commissions and other reasonable fees and expenses (including, without
limitation, fees and expenses of counsel, accountants and investment bankers)
related to such Asset Disposition or converting to cash any other proceeds
received, and any relocation and severance expenses as a result thereof, and all
Federal, state, provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition or made in order to obtain a necessary consent to such Asset
Disposition or to comply with applicable law, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition and (iv) appropriate
amounts provided by the seller as a reserve, in accordance with GAAP, against
any liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by Holdings or any Restricted Subsidiary after
such Asset Disposition, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Disposition; provided that to the extent any such reserve is reduced in
accordance with GAAP in excess of the amount of cash paid in respect of such
liability underlying such reserve, the amount of Net Available Cash from an
Asset Disposition shall be increased by such excess amount. Further, with
respect to an Asset Disposition by a Subsidiary which is not a wholly-
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owned Subsidiary, Net Available Cash shall be reduced pro rata for the portion
of the equity of such Subsidiary which is not owned by Holdings.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means (i) each Person who owns Capital Stock of
Holdings on the date of issuance of (a) the Discount Notes or (b) the Common
Stock in connection with the Employee Offering, (ii) any Person who on the date
of original issuance of the Discount Notes is or was before such date an
officer, director, stockholder, employee or consultant of Sterling, (iii) the
ESOP, (iv) any savings or investment plan sponsored by Holdings, (v) with
respect to any Person covered by the preceding clauses (i) through (iv) (A) in
the case of an entity, any Affiliate of such Person, and (B) in the case of an
individual, any spouse, parent, sibling, child or grandchild (in each case,
whether such relationship arises from birth, adoption or through marriage), or
(vi) any trust, limited liability company, corporation, limited or general
partnership or other entity, a majority of interest of the beneficiaries,
stockholders, partners or owners (direct or beneficial) of which are Persons of
the type referred to in the preceding clauses (i) through (v).
"Permitted Investment" means an Investment by Holdings or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, Holdings or a Restricted Subsidiary; PROVIDED, HOWEVER, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to Holdings or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that
such trade terms may include such concessionary trade terms as Holdings or any
such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of Holdings or such Restricted Subsidiary; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Holdings or any Restricted Subsidiary
or in satisfaction of judgments; and (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of business; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real property
or Liens incidental to the conduct of business of such Person or to the
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ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to the finance
the construction, purchase or lease of, or repairs, improvements or addition to,
property of such Person; PROVIDED, HOWEVER, that the Lien may not extend to any
other property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred, and the Indebtedness secured by the Lien may not be Incurred
more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien the Indebtedness secured by such Lien shall
have otherwise been permitted to be issued under this Indenture and, at the time
incurred, the aggregate principal amount of Indebtedness secured by such Liens
shall not exceed the lesser of cost or fair market value of the assets or
property so acquired or constructed; (g) Liens to secure Indebtedness permitted
under the provisions described in clauses (b) or (c)(1),(2), or (6) (except for
Indebtedness of Holdings or TPC Holding) of the convenant described under
" -- Certain Covenants --Limitation on Indebtedness;" (h) Liens existing on
the Issue Date; (i) Liens on property or shares of Capital Stock of another
Person at the time such other Person becomes a Subsidiary of such Person;
PROVIDED, HOWEVER, that such Liens are not created, Incurred, or assumed in
connection with, or in contemplation of, such other Person becoming a
Subsidiary, PROVIDED, FURTHER, HOWEVER, that such Lien may not extend to any
other property owned by such Person or any of its Subsidiaries or Holdings and
its Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such Person
PROVIDED, HOWEVER, that such Liens are not created, Incurred or assumed in
connection with, or in contemplation of, such acquisition; PROVIDED, FURTHER,
HOWEVER, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries or Holdings and its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (l) Liens securing
Hedging Obligations so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted to be incurred under this Indenture, secured by a Lien
on the same property securing such Hedging Obligations; (m) rights of setoff;
(n) any interest or title of a lessor in assets or property subject to Capital
Lease Obligations; (o) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (g), (h), (i) and (j); PROVIDED,
HOWEVER, that (x) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on such
property) and (y) that Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clauses (f), (h), (i), or (j) at the time the original Lien became a Permitted
Lien and (B) an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension, renewal or
replacement; (p) any renewal or extension of any of the Liens referred to in the
foregoing clauses (a) through (o); and (q) Liens in addition to the Liens
referred to in the foregoing clauses (a) through (p) securing Indebtedness of
not more than $5,000,000 at any one time outstanding.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings pursuant to an effective registration statement under
the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has
been consummated and (y) at least 15% of the total issued and outstanding common
stock of Holdings has been distributed by means of
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an effective registration statement under the Securities Act or sales pursuant
to Rule 144 under the Securities Act.
"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Securities publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by the
Company (as certified by a resolution of the Board of Directors) which shall be
substituted for S&P or Moody's or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Holdings or any Restricted Subsidiary existing on the Issue Date
or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; PROVIDED FURTHER,
HOWEVER, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of Holdings or (y) Indebtedness of
Holdings or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of Holdings, TPC Holdings or TPC on the Issue Date.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person), other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to Holdings or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation), (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of Holdings held by any Person or of
any Capital Stock of a Restricted Subsidiary held by any Affiliate of Holdings
(other than a Restricted Subsidiary or The Huff Alternative Fund, L.P. or any
Affiliate thereof), including the exercise of any option to exchange any Capital
Stock (other than into Capital Stock of Holdings that is not Disqualified
Stock), (iii) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition), or (iv) the making of any Investment in any Person (other
than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of Holdings that is not an
Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions in the Bank Credit
Agreement pursuant to which the lenders have committed to make available to the
Company a revolving credit facility in a maximum principal amount of $40
million.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
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"Security Guarantee" means the guaranty of TPC Holding pursuant to the
Discount Notes Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred). "Stated Maturity" means,
with respect to any installment of interest on the Discount Notes, the date
specified in the Discount Notes as the fixed date on which such installment of
interest is due and payable.
"Stock Purchase Agreement" means the stock purchase agreement dated as of
May 14, 1996, by and among TPC Holding, Holdings, certain shareholders of TOC,
and certain shareholders of TPC.
"Subordinated Obligation" means any Indebtedness of Holdings (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Discount Notes or the Security Guarantee, as
the case may be, pursuant to a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, limited liability company, limited or general partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means any tax sharing agreement between TPC, TPC
Holding and Holdings or any other person with which any Subsidiary of Holdings
is required to, or is permitted to, file a consolidated tax return or with which
Holdings is or could be part of a consolidated group for tax purposes.
"Temporary Cash Investments" means: (i) any investment in direct
obligations of the United States of America or any agency thereof or obligations
guaranteed by the United States of America or any agency thereof, (ii)
investments in time deposit accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued by a
bank or trust company which is organized under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States, and which bank or trust company has capital, surplus and undivided
profits aggregating in excess of $50,000,000 (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or
investments in any security issued by an investment company registered under
Section 8 of the Investment Company Act of 1940 that is a money market fund in
compliance with all applicable requirements of SEC Rule 2a-7, or (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's or "A-1" (or higher) according to S&P, and (v) investments in
securities with maturities of 12 months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by S&P or "A" by Moody's.
"Term Loan Provisions" means the provisions in the Bank Credit Agreement
pursuant to which the lenders have committed to make available to the Company
$140 million of credit facilities in the form of amortizing term loans.
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"TOC" means Texas Olefins Company, a Texas Corporation.
"TPC Holding" means TPC Holding Corp., a Delaware corporation.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors of Holdings in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of Holdings may
designate any Subsidiary of Holdings (including any newly acquired or newly
formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or
any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any
Lien on any property of, Holdings or any other Subsidiary of Holdings that is
not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER, that
TPC and TPC Holding or any Subsidiary which owns the Houston Facility may not be
designated an Unrestricted Subsidiary; PROVIDED, FURTHER, HOWEVER, that either
(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments." The Board of Directors of
Holdings may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such
designation (x) if such Unrestricted Subsidiary at such time has Indebtedness,
Holdings could Incur $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such designation
by the Board of Directors of Holdings shall be by Holdings to the Discount Notes
Trustee by promptly filing with the Discount Notes Trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than Holdings or a Restricted Subsidiary) is owned by Holdings or
one or more Wholly Owned Subsidiaries.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion represents the opinion of Bracewell & Patterson,
L.L.P., counsel to the Company, insofar as it relates to law and legal
conclusions concerning the material United States federal income tax
consequences relevant to the purchase, ownership and disposition of the Discount
Notes. This discussion does not address all aspects of federal income taxation
that may be relevant to particular investors in light of their personal
investment circumstances, nor does it address the federal income tax
consequences which may be relevant to certain types of investors subject to
special treatment under the federal income tax laws (for example, certain
financial institutions, insurance companies, tax-exempt entities,
broker-dealers, and taxpayers subject to the alternative minimum tax). In
addition, this discussion
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does not discuss any aspects of state, local, or foreign tax laws. This
discussion assumes that investors will hold their Discount Notes as "capital
assets" (generally, property held for investment), within the meaning of
Section 1221 of the Code.
No ruling from the Internal Revenue Service (the "IRS") will be requested
with respect to any of the matters discussed herein. There can be no assurance
that the IRS will not take a different position concerning the matters discussed
below and that such positions would not be sustained. BECAUSE INDIVIDUAL
CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF DISCOUNT NOTES SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR WITH RESPECT TO HIS OR HER PARTICULAR TAX SITUATION AND AS
TO ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY
POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE DISCOUNT NOTES.
This discussion is based on the provisions of the Code, existing and
proposed Treasury regulations promulgated thereunder (the "Regulations"),
judicial authority interpreting the Code, and current administrative rulings and
pronouncements of the IRS now in effect, all of which are subject to change at
any time by legislative, judicial or administrative action. Any such changes may
be retroactively applied in a manner that could result in federal income tax
consequences different from those discussed below and could adversely affect a
holder of Discount Notes.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of
Discount Notes that is for United States federal income tax purposes (a) a
citizen or resident of the United States, (b) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (c) an estate or trust the income of
which is subject to United States federal income taxation regardless of source.
CLASSIFICATION OF DISCOUNT NOTES. The Discount Notes will be treated as
indebtedness for tax purposes. Set forth below is the expected federal income
tax treatment of the Discount Notes. The IRS, however, could assert that the
positions set forth below are improper. If so, a substantial portion of the
discussion set forth below would be inapplicable, and the tax consequences to
the holders of the Discount Notes would change, possibly with adverse tax
consequences.
Pursuant to Section 385(c) of the Code, a United States Holder of a
Discount Note is required to treat such note as indebtedness for all United
States federal tax purposes unless such holder discloses any such inconsistent
treatment on his or her tax return. Section 385(c) is not binding on the IRS.
AMOUNT OF ORIGINAL ISSUE DISCOUNT. The Discount Notes were issued with
original issue discount within the meaning of Section 1273 of the Code. As a
result, a United States Holder of a Discount Note generally is required to
include such original issue discount in his or her gross income as interest
income on a constant yield to maturity basis, in advance of the receipt of cash
payments to which such income is attributable (regardless of whether the United
States Holder is a cash or accrual taxpayer) and generally in increasing amounts
over the life of the Discount Notes.
The total amount of original issue discount with respect to a Discount Note
will be equal to the excess of the "stated redemption price at maturity" of
such Discount Note over the "issue price" of such Discount Note. The "issue
price" of the Discount Note is discussed in detail below. The "stated
redemption price at maturity" of a Discount Note will be equal to the sum of
all payments, whether denominated as interest or principal, required to be made
on such Discount Note other than payments of "qualified stated interest." A
qualified stated interest payment is generally any one of a series of stated
interest payments that are unconditionally payable at least annually at a single
fixed rate (with certain exceptions for lower rates paid during some periods)
applied to the outstanding principal amount of the debt instrument. Because
interest is not payable on the Discount Notes until January 1, 2002, none of the
interest payments will be payments of qualified stated interest and all such
payments will be included in the stated redemption price at maturity.
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Because the initial purchaser of the Discount Notes acquired these
securities only by purchasing Units (which included Common Stock), the Discount
Notes were treated as having been issued as an investment unit for federal
income tax purposes. The issue price of a Unit was equal to the first price at
which a substantial amount of Units was sold for money (excluding sales to bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters or wholesalers). The issue price for a Unit as so determined was
allocated between the Discount Note and the Common Stock that comprised the Unit
based on their relative fair market values at the time of issuance. Pursuant to
these rules, of the purchase price for each Unit, Holdings allocated $520.38 to
each Discount Note. This allocation, however, is not binding on the IRS, and
there can be no assurance that the IRS will not challenge Holding's
determination of the issue price of the Discount Notes. In addition, Holdings
determination of the issue price of the Discount Notes is not necessarily
indicative of the prices at which the Discount Notes may actually trade.
TAXATION OF ORIGINAL ISSUE DISCOUNT. The amount of original issue discount
to be included in a holder's gross income for any taxable year (regardless of
whether the holder uses the cash or accrual method of accounting) is the sum of
the "daily portions" of original issue discount with respect to the Discount
Notes for each day during the taxable year or portion of the taxable year in
which the holder holds such Discount Note ("accrued original issue discount").
The daily portion is determined by allocating to each day in any "accrual
period" a pro rata portion of the original issue discount allocable to that
accrual period. Accrual periods with respect to a Discount Note may be of any
length selected by the holder and may vary in length over the term of the
Discount Note as long as (i) no accrual period is longer than one year and (ii)
each scheduled payment of interest or principal on the Discount Note occurs on
either the first or final day of an accrual period. The amount of original issue
discount allocable to each accrual period will be equal to the excess of (a) the
product of the "adjusted issue price" of the Discount Note at the beginning of
an accrual period and the yield to maturity of such Discount Note (determined on
the basis of a compounding assumption that reflects the length of the accrual
period) over (b) the sum of the payments of qualified stated interest on the
Discount Note allocable to the accrual period. The "adjusted issue price" of a
Discount Note at the beginning of an accrual period will be equal to its
original issue price increased by all previously accrued original issue discount
(disregarding any reduction on account of acquisition premium described below)
and reduced by the amount of all previous cash payments on the Discount Note.
The yield to maturity is the interest rate, expressed as a constant annual
interest rate, that when used in computing the present value of all payments of
principal and interest to be paid in connection with the Discount Notes produces
an amount equal to the issue price of the Discount Notes.
Holdings will provide certain information to the IRS, and will furnish
annually to record holders of the Discount Notes information with respect to
original issue discount during the calendar year. Because this information is
based upon the adjusted issue price of the Discount Note as if the holder were
the original holder of the instrument, subsequent holders who purchase the
Discount Notes for an amount other than the adjusted issue price and/or on a
date other than the end of an accrual period will be required to determine for
themselves the amount of original issue discount.
A subsequent purchaser of a Discount Note having original issue discount
also will be required to include annual accruals of original issue discount in
gross income, for United States federal income tax purposes, in accordance with
the rules described above, but the amount of the original issue discount may
vary depending upon the amount paid for the debt instrument by the subsequent
purchasers.
In the event of a Change in Control, Holdings will be required to offer to
redeem all of the Discount Notes. Based on the Regulations, the right of holders
of the Discount Notes to require redemption of the Discount Notes upon the
occurrence of a Change in Control will not affect the yield to maturity or the
accrual of original issue discount of the Discount Notes unless, based on all
the facts and circumstances as of the issue date, it is more likely than not
that a Change in Control giving rise to the redemption will occur. Holdings has
no present intention to treat the redemption provisions of the Discount Notes as
affecting the computation of the yield to maturity or the accrual of original
issue discount of any Discount Notes.
ACQUISITION PREMIUM ON DISCOUNT NOTES. If a United States Holder purchases
a Discount Note for an amount that is greater than its adjusted issue price as
of the purchase date but less than its stated redemption
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price at maturity, the holder will be considered to have purchased such Discount
Note at an "acquisition premium." Under the acquisition premium rules of the
Code and Regulations promulgated thereunder, the amount of original issue
discount that such holder must include in its gross income with respect to such
Discount Note for any taxable year is generally reduced by the portion of such
acquisition premium properly allocable to such year.
MARKET DISCOUNT. If a United States Holder purchases a Discount Note,
subsequent to its initial issuance, for an amount that is less than the
"revised issue price" of the Discount Note as of the time of acquisition, the
amount of such difference will generally be treated as "market discount" for
United States federal income tax purposes, unless such difference is less than a
specified de minimis amount. The Code provides that the "revised issue price"
is the original issue price of a Discount Note plus the aggregate amount of
previously accrued original issue discount, without regard to any reductions for
acquisition premium, less payments other than qualified stated interest. Under
the market discount rules, a holder will be required to treat any principal
payment on, or any gain on the sale, exchange, retirement or other disposition
of Discount Notes as ordinary income to the extent of the accrued market
discount that has accrued while the instrument was held by such holder and that
has not previously been included in income. In addition, the holder may be
required to defer, until the maturity date of the Discount Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense on any indebtedness incurred or maintained to purchase or carry
such Discount Note.
The Discount Notes provide for optional redemption and (in the case of a
Change in Control) mandatory offers to purchase, in whole or in part, prior to
maturity. If the Discount Notes were redeemed, a United States Holder generally
would be required to include in gross income as ordinary income the portion of
the gain recognized on the redemption attributable to accrued market discount,
if any.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Discount Note, unless
the holder elects to accrue market discount on a constant yield basis. In
addition, a holder of a Discount Note may elect to include market discount in
income currently as it accrues (under either a ratable or constant yield
method). This election to include currently, once made, applies to all market
discount obligations acquired in or after the first taxable year to which the
election applies and may not be revoked without the consent of the IRS. If a
holder of Discount Notes makes such an election, the foregoing rules with
respect to the recognition of ordinary income on sales and other dispositions of
instruments, and with respect to the deferral of interest deductions incurred or
maintained to purchase or carry such debt instruments, would not apply.
AMORTIZABLE BOND PREMIUM. If a United States Holder purchases a Discount
Note for an amount that is greater than the sum of all payments payable on the
Discount Note after the purchase date, other than qualified stated interest,
such holder will be considered to have purchased such Discount Note with
"amortizable bond premium" equal in amount to such excess, and may elect to
amortize such premium, using a constant yield method, over the remaining term of
the Discount Note. The amount amortized in any year will be treated as a
reduction of the United States Holder's interest income (including original
issue discount) from the Discount Note in such year. An election to amortize
bond premium applies to all taxable debt obligations then owned and thereafter
acquired by the United States Holder and may be revoked only with the consent of
the IRS. The holder should consult with his or her tax advisor with respect to
the general applicability of the amortizable bond premium rules of Section 171
of the Code to such holder, and whether the holder should make an election under
these rules.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. A holder of a
Discount Note may elect to include all interest that accrues on the Discount
Note in gross income on a constant yield basis. For purposes of this election,
interest includes stated interest, original issue discount, market discount, de
minimis market discount and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium.
In applying the constant yield method to a Discount Note with respect to
which this election has been made, the issue price of the Discount Note will
equal the holder's basis in the Discount Note immediately after its acquisition,
the issue date of the Discount Note will be the date of its acquisition by the
holder, and
85
<PAGE>
no payments on the Discount Note will be treated as payments of qualified stated
interest. The election will generally apply only to the Discount Note with
respect to which it is made and may not be revoked without the consent of the
IRS.
If this election is made with respect to a Discount Note with amortizable
bond premium, the electing holder will be deemed to have elected to apply
amortizable bond premium against interest with respect to all debt instruments
with amortizable bond premium (other than debt instruments the interest on which
is excludable from gross income) held by the electing holder as of the beginning
of the taxable year in which the Discount Note with respect to which the
election is made is acquired. The deemed election with respect to amortizable
bond premium may not be revoked without the consent of the IRS.
If the election to apply the constant yield method to all interest on a
Discount Note is made with respect to a Discount Note on which there is market
discount, the electing holder will be treated as having made the election
described above under "-- Market Discount" to include market discount in
income currently over the life of all debt instruments held or thereafter
acquired by such holder.
SALE, EXCHANGE, REDEMPTION, RETIREMENT, OR OTHER DISPOSITION. In general,
the United States Holder of a Discount Note will recognize gain or loss upon the
sale, exchange, redemption, retirement, or other disposition of such debt
instrument measured by the difference between (i) the amount of cash and the
fair market value of property received in exchange therefor (less any portion of
such amount that is allocable to accrued interest or original issue discount,
which amount generally will be taxable as ordinary income) and (ii) the United
States Holder's adjusted tax basis in such debt instrument.
The initial tax basis in a Discount Note purchased by a United States
Holder on the original issuance of such security will be equal to the portion of
the issue price paid for the Unit allocable to the Discount Note, as discussed
in "-- Amount of Original Issue Discount." The United States Holder's initial
tax basis in the Discount Note will be increased by any accrued original issue
discount (net of all amortized acquisition premium) and any market discount
includable in such United States Holder's gross income, and decreased by the
amount of any cash payments received by such United States Holder, regardless of
whether such payments are denominated as principal or interest (other than
payments of qualified stated interest), and amortizable bond premium, if any,
deducted over the term of the Discount Notes.
Any gain or loss on the sale, exchange, redemption, retirement, or other
disposition of a Discount Note should generally be capital gain or loss (except
as discussed in "-- Market Discount"), provided the Discount Note was a
capital asset in the hands of the United States Holder. Any capital gain or loss
will be long-term capital gain or loss or short-term capital gain or loss
depending on the amount of time the debt instrument has been held.
CLASSIFICATION OF DISCOUNT NOTES AND APPLICABLE HIGH YIELD DISCOUNT
OBLIGATIONS. Section 163 of the Code provides that all of the original issue
discount with respect to certain "applicable high yield discount obligations"
will be bifurcated into two elements -- (i) an interest element that is
deductible by the issuer only when paid and (ii) a disqualified portion for
which the issuer receives no deduction (the "disqualified portion"). The
United States Holder of an applicable high yield discount obligation must
continue to include original issue discount on the obligation as it accrues. A
corporate United States Holder of an applicable high yield discount obligation,
however, is allowed a dividends-received deduction for the part of the
disqualified portion of the original issue discount that would have been treated
as a dividend had it been distributed by the issuing corporation with respect to
its stock.
The deduction by Holdings of original issue discount on the Discount Notes
will be limited because the Discount Notes constitute applicable high yield
discount obligations. Further, since the Discount Notes are applicable high
yield debt obligations, the disqualified portion of original issue discount will
equal the lesser of such original issue discount or the product of the total
original issue discount under the Discount Notes times the ratio of (a) the
excess of the yield to maturity over the sum of the applicable federal rate plus
six percentage points to (b) the yield to maturity.
Corporate United States Holders will generally be eligible for the 70%
dividends received deduction with respect to the disqualified portion of
original issue discount on a Discount Note to the extent of
86
<PAGE>
Holdings' accumulated or current earnings and profits. There can be no assurance
that Holdings will have any earnings and profits. In any year in which Holdings
has no earnings and profits, the disqualified portion of any original issue
discount would not be eligible for the dividends received deduction.
BACKUP WITHHOLDING
Certain non-corporate United States Holders of Discount Notes may be
subject to backup withholding at the rate of 31% with respect to interest
(including original issue discount) and cash received in certain circumstances
upon the disposition of such securities. Generally, backup withholding is
applied only when the taxpayer (i) fails to furnish or certify its correct
taxpayer identification number to the payor in the manner required, (ii) is
notified by the IRS that it has failed to report payments of interest and
dividends properly, or (iii) under certain circumstances, fails to certify that
it has not been notified by the IRS that it is subject to backup withholding for
failure to report interest and dividend payments. Any amounts withheld under the
backup withholding rules will be allowed as a refund or credit against a United
States Holders's United States federal income tax liability, provided that such
United States Holder furnished the required information to the IRS.
UNITED STATES FEDERAL TAXATION OF NON-UNITED STATES HOLDERS
This section discusses certain special rules applicable to a holder of
Discount Notes that is a Non-United States Holder. For purposes of this
discussion, a "Non-United States Holder" means a holder of Discount Notes that
is not (i) an individual who is a citizen or resident of the United States; (ii)
a corporation or partnership created or organized in the United States or under
the laws of the United States or any political subdivision thereof; or (iii) an
estate or trust whose income is includable in gross income for United States
federal income tax purposes regardless of its source.
INTEREST AND ORIGINAL ISSUE DISCOUNT ATTRIBUTABLE TO THE DISCOUNT
NOTES. Subject to the discussion of backup withholding set forth below,
payments of interest (including original issue discount) on the Discount Notes
to a Non-United States Holder who is the beneficial owner of a Discount Note
generally will not be subject to the 30% U.S. withholding tax under the
portfolio interest exemption of the Code; provided, that (i) the beneficial
owner of the Discount Note does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of Holdings entitled
to vote within the meaning of Section 871(h)(3) of the Code and the regulations
thereunder; (ii) such beneficial owner is not a controlled foreign corporation
that is related to Holdings through stock ownership; (iii) such beneficial owner
is not a bank whose receipt of interest on a Discount Note is described in
Section 881(c)(3)(A) of the Code; and (iv) such beneficial owner satisfies the
certification requirement (described generally below) set forth in Section
871(h) (in the case of individuals) or Section 881(c) (in the case of foreign
corporations) of the Code and the Regulations thereunder.
To satisfy the certification requirement referred to in (iv) above, the
beneficial owner of a Discount Note, or a financial institution holding the
Discount Note on behalf of such owner, must provide, in accordance with
specified procedures, Holdings or its paying agent, as the case may be, with a
statement to the effect that the beneficial owner is a Non-United States Holder.
Such requirement generally will be met if (1) the beneficial owner provides his
name and address, signs under penalties of perjury, and certifies that he is
Non-United States Holder (which certification may be made on IRS Form W-8 (or
substitute Form W-8)) or (2) a securities clearing organization, a bank or other
financial institution holding the Discount Note on behalf of the beneficial
owner certifies, under penalties of perjury, that such statement has been
received by it and furnishes Holdings or its paying agent, as the case may be,
with a copy thereof.
Certain Regulations provide alternative methods for satisfying the
certification requirement described above. The Regulations also require, in the
case of Discount Notes held by a foreign partnership, that (i) the certification
be provided by the partners rather than by the foreign partnership, and (ii) the
partnership provide certain information, including a United States taxpayer
identification number. The Regulations are effective for payments made after
December 31, 1997.
87
<PAGE>
If the Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described above, payments of premium, if any,
and interest (including original issue discount) made to Non-United States
Holders with respect to the Discount Notes will be subject to a 30% United
States withholding tax unless the beneficial owner of the Discount Note provides
Holdings or its paying agent, as the case may be, with, and keeps current (i) a
properly executed IRS Form 1001 (or successor form) claiming an exemption from
United States withholding tax under a United States income tax treaty, or (ii) a
properly executed IRS Form 4224 (or successor form) claiming such premium and/or
interest is exempt from United States withholding tax because such premium
and/or interest is effectively connected with the conduct of a United States
trade or business by the Non-United States Holder, in which case the premium
and/or interest will be subject to the United States federal income tax on net
income at the rates applicable to United States persons generally (and with
respect to corporate holders and under certain circumstances, the 30% branch
profits tax).
INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, there is no
United States information reporting or backup withholding tax on payments to
Non-United States Holders who provide the appropriate certification described
above regarding qualifying for the portfolio interest exemption from United
States federal income tax for payments of principal or interest (including
original issue discount) on the Discount Notes.
Payment by Holdings of principal on the Discount Notes or payment by a
United States office of a broker of the proceeds of a sale of the Discount Notes
is subject to both backup withholding and information reporting unless the
beneficial owner provides a completed IRS Form W-8 which certifies under
penalties of perjury that such owner is a Non-United States Holder who meets all
of the requirements for exemption from United States federal income tax on any
gain from the sale, exchange, or retirement of the Discount Notes.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Discount Notes effected at the
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes a United States person, or a foreign controlled
corporation, or a foreign person 50% or more of whose gross income for certain
periods is derived from activities that are effectively connected with the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding, but will be subject to information reporting
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a Non-United States Holder and certain other conditions are
met, or (ii) the beneficial owner otherwise established an exemption, provided
such broker does not have actual knowledge that the payee is a United States
person. Non-United States Holders should consult their tax advisors regarding
the application of these rules to their particular situations, the availability
of an exemption therefrom and the procedure for obtaining such an exemption, if
available.
Any amounts withheld under backup withholding will be allowed as a credit
against such holder's United States federal income tax liability and may entitle
such holder to a refund, provided the required information is furnished to the
IRS.
GAIN ON DISPOSITION OF DISCOUNT NOTES. A Non-United States Holder will
generally not be subject to United States federal income tax with respect to
gain recognized on disposition of the Discount Notes unless (i) the gain is
effectively connected with a trade or business of the Non-United States Holder
in the United States, or (ii) in the case of a Non-United States Holder that is
an individual, such holder is present in the United States for 183 or more days
in the taxable year of the disposition and certain other requirements are met.
UNITED STATES FEDERAL ESTATE TAXES. Subject to applicable treaty
provisions, the Discount Notes held at the time of death (or theretofore
transferred subject to certain retained rights or powers) by an individual who
at the time of death is not a United States citizen or domiciliary of the United
States at the date of death generally will not be included in such person's
gross estate for United States federal estate tax purposes provided that (a) the
decedent is not a 10% shareholder of Holdings, and (b) the decedent does not
hold the Discount Notes in connection with a trade or business within the United
States.
88
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus is being used by the Huff Fund in connection with offers
and sales of the Discount Notes in the over-the-counter market, in private
transactions, or otherwise at negotiated prices related to prevailing market
prices at the time of sale. The Company will not receive any proceeds from the
sale of the Discount Notes. The Company has agreed to indemnify the Huff Fund
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments which the Huff Fund might be required to make in
respect thereof.
The Huff Fund owns approximately 10.9% of the Common Stock of Holdings.
Under the terms of the Voting Agreement, the Huff Fund may cause Holdings to
nominate a director to the Board of Directors of Holdings. See "Related
Transactions" and "The Selling Security Holder."
LEGAL MATTERS
Certain legal matters with respect to the original issuance and sale of the
Discount Notes are being passed upon for the Company by Bracewell & Patterson,
L.L.P., Houston, Texas. Certain members of Bracewell & Patterson, L.L.P. own
less than .5% of the outstanding Common Stock of Holdings.
EXPERTS
The combined financial statements of TOC, its subsidiaries and Clarkston as
of May 31, 1995 and as of June 30, 1996, for the years ended May 31, 1994 and
1995, the twelve months ended May 31, 1996 and the one month ended June 30, 1996
included in this Prospectus and Registration Statement have been audited by
Coopers & Lybrand L.L.P., independent public accountants, as stated in their
report included herein and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of the Company as of June 30, 1997 and for the
year then ended included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report included herein and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants...... F-2
Financial Statements
Consolidated Balance Sheet......... F-4
Consolidated Statement of
Operations........................ F-5
Consolidated Statement of
Stockholders' Equity.............. F-6
Consolidated Statement of Cash
Flows............................. F-7
Notes to Consolidated Financial
Statements........................ F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Petrochemical Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Texas
Petrochemical Holdings, Inc. as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 1, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Petrochemical Holdings, Inc.:
We have audited the accompanying combined balance sheet of Texas Olefins
Company, its subsidiaries and affiliate (Predecessor to Texas Petrochemical
Holdings, Inc.) as of June 30, 1996, and the related combined statements of
operations, stockholders' equity, and cash flows for the one month period ended
June 30, 1996, the twelve month period ended May 31, 1996 and for the year ended
May 31, 1995. 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 financial position of Texas
Olefins Company, subsidiaries and affiliate as of June 30, 1996, and the
combined results of their operations and their cash flows for the one month
period ended June 30, 1996, the twelve month period May 31, 1996 and for the
year ended May 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the combined financial statements, effective June
1, 1994 and June 1, 1995, the Company changed its method of accounting for
investment securities and its method of accounting for impairment of long-lived
assets, respectively.
COOPERS & LYBRAND
L.L.P.
Houston, Texas
August 16, 1996
F-3
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------ ------------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 139 $ 101 $ 4,780
Investment securities.............. -- -- 6,794
Accounts receivable -- trade....... 48,450 44,662 35,280
Inventories........................ 21,348 17,926 11,933
Other current assets............... 17,958 21,157 11,753
------------ -------- ------------
Total current assets.......... 87,895 83,846 70,540
Property, plant and equipment, net...... 231,870 239,959 81,814
Investments in land held for sale....... 2,579 3,886 6,181
Investment in and advances to limited
partnership........................... 3,032 2,969 2,824
Goodwill, net of accumulated
amortization of $6,250 and $4,887..... 177,663 179,598 --
Other assets, net....................... 14,091 12,748 6,523
------------ -------- ------------
Total assets.................. $517,130 $523,006 $167,882
============ ======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................... $ 5,030 $ 10,157 $ --
Accounts payable -- trade.......... 36,017 29,942 40,131
Accrued expenses................... 20,735 16,917 4,383
Current portion of cash bonus plan
liability........................ 7,811 7,811 --
Current portion of long-term
debt............................. 7,234 6,438 --
Dividends payable.................. -- -- 677
------------ -------- ------------
Total current liabilities..... 76,827 71,265 45,191
Revolving line of credit................ 5,000 12,000 13,000
Long-term debt.......................... 332,003 333,423 --
Cash bonus plan liability............... 13,673 17,573 --
Deferred income taxes and other......... 65,566 65,959 16,107
Minority interest in net assets of
consolidated subsidiary............... -- -- 1,107
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.01 par value,
1,000,000 shares voting and
100,000 shares non-voting
authorized, 527,778 voting shares
issued and outstanding........... 5 5 --
Additional paid in capital......... 46,264 46,264 --
Accumulated deficit................ (15,208) (15,483) --
Note receivable from ESOP.......... (7,000) (8,000) --
Net equity of Predecessor.......... -- -- 92,477
------------ -------- ------------
Total stockholders' equity.... 24,061 22,786 92,477
------------ -------- ------------
Total liabilities and
stockholders'
equity................ $517,130 $523,006 $167,882
============ ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
---------------------------------------- -------------------------------
SIX SIX ONE TWELVE
MONTHS MONTHS YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1997 1996 1996 1995
------------ ------------ --------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $276,548 $246,736 $ 490,246 $ 41,384 $ 455,585 $ 474,677
Cost of goods sold...................... 235,840 217,892 436,014 36,392 390,968 404,760
Depreciation and amortization........... 15,463 15,894 29,876 1,277 14,982 14,298
------------ ------------ --------- -------- --------- ---------
Gross profit........................ 25,245 12,950 24,356 3,715 49,635 55,619
Selling, general and administrative
expenses.............................. 3,183 2,843 6,091 1,283 7,570 8,171
------------ ------------ --------- -------- --------- ---------
Income from operations......... 22,062 10,107 18,265 2,432 42,065 47,448
Interest expense (income)............... 20,167 19,414 39,386 76 1,630 (720)
Other income (expense)
Gain (loss) on disposal of assets
and investment securities, net.... (436) -- -- (280) (3,099) 1,112
Impairment of investment in land.... -- -- -- -- (12,592) --
Other, net.......................... 432 1,488 2,271 (88) (236) (12)
------------ ------------ --------- -------- --------- ---------
(4) 1,488 2,271 (368) (15,927) 1,100
------------ ------------ --------- -------- --------- ---------
Income (loss) before income
taxes, extraordinary loss and
minority interest............ 1,891 (7,819) (18,850) 1,988 24,508 49,268
Provision (benefit) for income taxes.... 1,616 (1,639) (4,823) 761 7,903 16,880
------------ ------------ --------- -------- --------- ---------
Income (loss) before
extraordinary loss and
minority interest............ 275 (6,180) (14,027) 1,227 16,605 32,388
Extraordinary loss from early
extinguishment of debt, net of tax
benefit of $784....................... -- -- 1,456 -- -- --
Minority interest in net loss of
consolidated subsidiary............... -- -- -- 9 143 129
------------ ------------ --------- -------- --------- ---------
Net income (loss).............. $ 275 $ (6,180) $ (15,483) $ 1,236 $ 16,748 $ 32,517
============ ============ ========= ======== ========= =========
Pro Forma net income to reflect income
taxes for Affiliate (Note 7).......... $ 1,236 $ 15,098 $ 30,448
======== ========= =========
Income (Loss) per common share:
Before extraordinary loss...... $ 0.52 $ (11.71) $ (26.58)
Extraordinary loss............. -- -- (2.76)
------------ ------------ ---------
$ 0.52 $ (11.71) $ (29.34)
============ ============ =========
Weighted average shares outstanding..... 527,778 527,778 527,778
============ ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL NOTE CLASS A CLASS B AFFILIATE EARNINGS
COMMON PAID IN RECEIVABLE COMMON COMMON COMMON (ACCUMULATED)
STOCK CAPITAL FROM ESOP STOCK STOCK STOCK (DEFICIT)
------- ----------- ---------- ------- ------- ------- --------------
PREDECESSOR COMPANY:
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1994................ $ 200 $5,028 $1,000 $135,367
Net Income........................... 32,517
Dividends (6,253)
Sale of treasury stock...............
Cancellation of Class B Common....... (7 ) (461)
Unrealized loss on investment
investment securities..............
------- ------- ------- --------------
Balance, May 31, 1995................ 200 5,021 1,000 161,170
Net income........................... 16,749
Redemption of Class A & B Common.....
Sale of treasury stock...............
Dividends............................ (16,526)
Net change in unrealized loss on
investment securities..............
Cancellation of Class B Common....... (1,214 ) (71,626)
Cancellation of Class B Common....... (7 ) (461)
Redemption and cancellation of
Affiliate common stock............. (1,000 )
------- ------- ------- --------------
Balance, May 31, 1996................ 200 3,800 -- 89,306
Net income........................... 1,236
Net change in unrealized loss on
investment securities..............
Liquidating dividend to affiliate
shareholders....................... (677)
------- ------- ------- --------------
Balance, June 30, 1996............... 200 3,800 -- 89,865
POST ACQUISITION:
Adjustments due to Acquisition....... $ 5 $46,264 $(10,000) (200 ) (3,800 ) -- (89,865)
Net loss............................. (15,483)
Reduction in ESOP Note............... 2,000
------- ----------- ---------- ------- ------- ------- --------------
Balance, June 30, 1997............... $ 5 $46,264 $ (8,000) $ -- $ -- $ -- $(15,483)
======= =========== ========== ======= ======= ======= ==============
</TABLE>
UNREALIZED
LOSS ON
INVESTMENT TREASURY
SECURITIES STOCK TOTAL
----------- --------- --------
PREDECESSOR COMPANY:
Balance, May 31, 1994................ $ (1,187) $140,408
Net Income........................... 32,517
Dividends (6,253)
Sale of treasury stock............... 251 251
Cancellation of Class B Common....... 468
Unrealized loss on investment
investment securities.............. $(3,651) (3,651)
----------- --------- --------
Balance, May 31, 1995................ (3,651) (468) 163,272
Net income........................... 16,749
Redemption of Class A & B Common..... (95,440) (95,440)
Sale of treasury stock............... 22,600 22,600
Dividends............................ (16,526)
Net change in unrealized loss on
investment securities.............. 3,007 3,007
Cancellation of Class B Common....... 72,840
Cancellation of Class B Common....... 468
Redemption and cancellation of
Affiliate common stock............. (1,000)
----------- --------- --------
Balance, May 31, 1996................ (644) -- 92,662
Net income........................... 1,236
Net change in unrealized loss on
investment securities.............. (744) (744)
Liquidating dividend to affiliate
shareholders....................... (677)
----------- --------- --------
Balance, June 30, 1996............... (1,388) -- 92,477
POST ACQUISITION:
Adjustments due to Acquisition....... 1,388 -- (56,208)
Net loss............................. (15,483)
Reduction in ESOP Note............... 2,000
----------- --------- --------
Balance, June 30, 1997............... $-- $ -- $ 22,786
=========== ========= ========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------- --------------------------------
SIX SIX ONE TWELVE
MONTHS MONTHS YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1997 1996 1996 1995
------------ ------------ --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)................... $ 275 $ (6,180) $ (15,483) $ 1,236 $ 16,748 $ 32,517
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........ 12,571 12,921 24,810 1,259 14,768 14,072
Amortization of intangibles......... 2,892 2,973 5,066 18 214 226
Amortization of debt issue costs and
discount.......................... 2,871 2,857 5,664 -- -- --
Loss on sale of non-plant assets.... 436 --
Deferred income taxes............... (784) (584) (2,897) (237) (5,829) 818
Earnings from limited partnership... (278) (270) (670) 190 202 (260)
Change in:
Accounts receivable............ (3,788) (5,834) (9,382) 7,723 1,593 (18,100)
Inventories.................... (3,422) (10,011) (5,993) 3,069 2,230 12,954
Other assets................... (513) (2,451) (6,381) 1,424 (3,616) (852)
Accounts payable, accrueds and
other........................ 11,444 6,444 2,051 (768) 5,597 8,927
------------ ------------ --------- -------- -------- --------
Net cash provided by (used
in) operating
activities............... 21,704 (135) (1,759) 13,914 44,499 50,302
Cash flows from investing activities:
Capital expenditures................ (4,480) (5,171) (7,634) (1,997) (5,462) (8,680)
Proceeds from asset sales........... 871 1,311 4,754 -- -- --
Acquisition of the Company, net of
cash acquired..................... -- (366,277) (366,277) -- -- --
Distribution received from
partnership....................... 215 250 525 -- -- --
Purchase of investment securities... -- -- -- -- (19,138) (33,998)
Proceeds from sale of Predecessor
assets............................ -- 16,288 16,288 702 32,821 16,778
------------ ------------ --------- -------- -------- --------
Net cash provided by (used
in) investing
activities............... (3,394) (353,599) (352,344) (1,295) 8,221 (25,900)
Cash flows from financing activities:
Bank overdraft...................... (5,127) 10,478 10,157 (12,382) 12,382 --
Net borrowings (repayments)
revolving line of credit.......... (7,000) (8,500) (1,000) 3,000 10,000 (11,000)
Proceeds from issuance of long-term
debt.............................. 3,192 345,000 398,000 -- -- 1,000
Payments on long-term debt.......... (5,962) (6,500) (62,219) -- (1,022) (4,697)
Cash bonus plan payments............ (3,900) (5,469) (9,406) -- -- --
Debt issuance and organizational
costs............................. (475) (15,508) (16,304) -- -- --
Proceeds from sale of Common Stock,
net............................... -- 33,374 32,976 -- -- --
Reduction in note receivable from
ESOP.............................. 1,000 1,000 2,000 -- -- --
Dividends paid...................... -- -- -- -- (16,526) (9,085)
Predecessor common stock
transactions...................... -- -- -- -- (73,840) 451
------------ ------------ --------- -------- -------- --------
Net cash provided by (used
in) financing
activities............... (18,272) 353,875 354,204 (9,382) (69,006) (23,331)
------------ ------------ --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................... 38 141 101 3,237 (16,286) 1,071
Cash and cash equivalents, beginning.... 101 -- -- 1,543 17,829 16,758
------------ ------------ --------- -------- -------- --------
Cash and cash equivalents, ending....... $ 139 $ 141 $ 101 $ 4,780 $ 1,543 $ 17,829
============ ============ ========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE ACQUISITION
On July 1, 1996, Texas Olefins Company ("TOC") and a raw material supply
contract of Clarkston Corporation (defined within these financial statements and
related notes as the "Affiliate") were acquired for approximately $371 million
in a series of transactions in connection with the Acquisition. After the
transactions, TOC was merged with and into Texas Petrochemicals Corporation
becoming a 100% owned subsidiary of Texas Petrochemical Holdings, Inc. In
connection with the Acquisition, the Texas Petrochemicals Corporation issued
$175 million aggregate principal amount of Original 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 (the "Ranch") and 80% of
the outstanding capital stock of 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
Original Notes..................... 175
Discount Notes..................... 30
Sale 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 Falls 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 purchase price 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 purchase price, $184 million, was recorded as goodwill and is being
amortized over 40 years utilizing the straight-line method.
F-8
<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................ $(26.15)
============
Weighted average shares
outstanding................ 527,778
============
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 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.
F-9
<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 year ended June 30,
1997 include the accounts of Texas Petrochemical Holdings, Inc. and its wholly
owned subsidiary, TPC Holding Corp. 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 in these financial statements and related notes as the
"Predecessor". TOC was merged with and into TPC in conjunction with the
Acquisition as 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.
INTERIM INFORMATION
The accompanying financial statements as of September 30, 1997 and 1996 and
all references made to amounts for the periods then ended are unaudited and have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation of the results of operations and financial position of the Company
for the interim periods presented, have been included.
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," (SFAS 115). 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs and
other 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.
F-10
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
The Affiliate of the Predecessor has elected for federal tax purposes to be
taxed under provisions of Subchapter S of the Internal Revenue Code. This
election requires the stockholders to include the Affiliate's net earnings,
losses and credits in their own income for tax purposes. Accordingly, the
Affiliate generally is 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 require 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.
EMPLOYEE STOCK OWNERSHIP PLAN
The balance of the note receivable from the Employee Stock Ownership Plan
(see Note 11), is recorded as a contra account in the stockholder's equity
section of the balance sheet.
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.
F-11
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board 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." SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. SFAS No. 129 is effective for periods ending after December
15, 1997. SFAS No. 130 and SFAS 131 are effective for fiscal years beginning
after December 15, 1997. Adoption of these pronouncements is not expected to
have a material effect on the Company's financial position, results of
operations or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation. There is no resulting impact
on stockholders' equity or net income (loss). The Company classifies variable
compensation paid to employees as cost of goods sold. Previously, the Company
had classified this cost as selling, general and administrative expenses. The
Company has made reclassifications to the prior periods in order to conform to
the current period presentation.
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.
The Predecessor held $3.7 million of bankers acceptance notes at May 31,
1995, with scheduled maturities of less than one year. The Predecessor also held
approximately $17.4 million of equity securities at May 31, 1995. Unrealized
losses of $3.6 million (net of deferred tax) related to these securities are
recorded as a component of stockholders' equity for the year ended May 31, 1995.
During the year ended May 31, 1995, gross realized gains of approximately $1.2
million and gross realized losses of approximately $0.05 million were recognized
on the sale of securities.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
COMPANY PREDECESSOR
------------------------ ------------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- ------------
(UNAUDITED)
Finished goods..................... $ 9,919 $ 8,500 $ 5,480
Raw materials...................... 9,551 7,504 4,533
Chemicals and supplies............. 1,878 1,922 1,920
------------ -------- ------------
$ 21,348 $ 17,926 $ 11,933
============ ======== ============
F-12
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------ ------------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Chemical plants......................... $259,771 $259,293 $173,369
Construction in progress................ 6,901 3,047 5,378
Other................................... 2,084 1,934 13,812
------------ -------- ------------
268,756 264,274 192,559
Less accumulated depreciation, depletion
and amortization...................... 36,886 24,315 110,745
------------ -------- ------------
$231,870 $239,959 $ 81,814
============ ======== ============
</TABLE>
OTHER ASSETS:
COMPANY PREDECESSOR
------------------------ -----------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- -----------
(UNAUDITED)
Debt issue costs..................... $ 13,966 $ 13,491 $ --
Organizational costs................. 573 573 --
Prepaid insurance costs.............. 1,710 -- --
Intangibles and other................ 2,000 2,000 7,934
------------ -------- -----------
18,249 16,064 7,934
Less accumulated amortization........ 4,158 3,316 1,411
------------ -------- -----------
$ 14,091 $ 12,748 $ 6,523
============ ======== ===========
ACCRUED EXPENSES:
COMPANY PREDECESSOR
------------------------ -----------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- -----------
(UNAUDITED)
Accrued interest.................... $ 14,469 $ 13,203 $ 81
Property and sales taxes............ 5,555 2,866 2,370
Federal and state taxes............. 80 135 959
Other............................... 631 713 973
------------ -------- -----------
$ 20,735 $ 16,917 $ 4,383
============ ======== ===========
F-13
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
COMPANY PREDECESSOR
------------------------- -----------
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ ---------- -----------
(UNAUDITED)
Bank Credit Agreement
Term A Loan................... $ 22,503 $ 25,781 $--
Term B Loan................... 42,886 44,000 --
ESOP Loan..................... 7,000 8,000 --
Revolving Credit Loans........ 5,000 12,000 13,000
Original Notes and Notes........... 225,000 225,000 --
Discount Notes..................... 36,494 34,187 --
Deferred premium on Securities..... 2,732 2,893 --
Long-term financing................ 2,622 -- --
------------ ---------- -----------
344,237 351,861 13,000
Less current maturities............ 7,234 6,438 --
------------ ---------- -----------
Long-term debt..................... $337,003 $ 345,423 $13,000
============ ========== ===========
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, 1997) or the greater of the prime rate and the federal
funds rate plus 1/2% plus a margin (1.5% at June 30, 1997). Substantially all
assets of the Company are pledged as collateral under the Bank Credit Agreement.
The Original Notes and 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 semi-annually on January 1 and July 1, beginning in
2002. The Bank Credit Agreement and the Indentures 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. As of June 30, 1997 the Company obtained an amendment
to the Bank Credit Agreement to waive the debt to EBITDA ratio at June 30, 1997
and to update the financial ratios relating to fixed charge coverage and debt to
EBITDA for fiscal 1998.
On March 13, 1997 the Company closed on the sale of $50 million aggregate
principal amount of Notes in a Rule 144A offering. The terms of the Notes were
identical, except as to the offering price, to the terms of the Original Notes
issued by the Company in July 1996. The Company applied the net proceeds
received from the offering to reduce the Term A Loan. The Company subsequently
completed an exchange offer to exchange the unregistered securities for
identical securities, which have been registered under the Securities Act.
The fair value of the Original Notes and Notes in the aggregate, based on
quoted market prices, was approximately $242 million as of June 30, 1997. 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, 1997. There currently is
not an active market for the Discount Notes, therefore, the Company estimates
that the fair value, based on current interest rates available to the Company
for similar debt instruments, was approximately $37 million as of June 30, 1997.
F-14
<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
- ----------------------------------------
1998.................................. $ 6,438
1999.................................. 6,438
2000.................................. 7,125
2001.................................. 8,156
2002.................................. 7,188
7. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax assets and liability
at June 30, 1997 and June 30, 1996 are as follows (in thousands of dollars):
JUNE 30, JUNE 30,
1997 1996
-------- --------
Deferred tax asset
(liability) -- current:
Net operating loss carryforward.... $ 2,773 $ --
Cash bonus plan.................... 2,756 --
Accrued liabilities................ (446) --
Unrealized loss on investment
securities........................ -- 815
-------- --------
$ 5,083 $ 815
======== ========
Deferred tax asset
(liability) -- noncurrent:
Investment in land................. $ 4,660 $ 4,660
Cash bonus plan.................... 6,200 --
Property, plant and equipment...... (76,819) (20,423)
-------- --------
$(65,959) $(15,763)
======== ========
The current deferred tax asset is included in other current assets in the
accompanying balance sheet. As of June 30, 1997 the Company had estimated net
operating loss carryforwards for income tax reporting purposes of approximately
$7.9 million which expire on June 30, 2017.
The provision for federal and state income taxes is comprised of the
following (in thousand of dollars):
<TABLE>
<CAPTION>
ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal............................ $ (1,989) $ 880 $12,150 $14,314
State.............................. 63 118 1,582 1,748
-------- -------- ------- -------
(1,926) 998 13,732 16,062
-------- -------- ------- -------
Deferred:
Federal............................ (2,897) (210) (5,461) 895
State.............................. -- (27) (368) (77)
-------- -------- ------- -------
(2,897) (237) (5,829) 818
-------- -------- ------- -------
Total provision (benefit) for
income taxes............... $ (4,823) $ 761 $ 7,903 $16,880
======== ======== ======= =======
Pro Forma income tax
provision.................. $ 761 $ 9,553 $18,949
======== ======= =======
</TABLE>
F-15
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma income tax provision assumes 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>
ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Statutory federal income tax rate....... 35% 35% 35% 35%
Computed "expected" federal income
tax................................... $ (6,596) $ 696 $ 8,578 $17,438
Increase (decrease) in tax resulting
from:
Affiliate earnings not subject to
federal income tax............... -- -- (1,651) (2,069)
State income taxes, net of federal
benefit.......................... 41 59 789 1,086
Other, net......................... 22 6 280 518
Amortization of goodwill and
other............................ 1,710 -- (93) (93)
-------- -------- ------- -------
Provision (benefit) for income taxes.... $ (4,823) $ 761 $ 7,903 $16,880
======== ======== ======= =======
</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):
ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
-------- -------- ------- -------
Interest......................... $ 20,600 $ 62 $ 2,330 $ 527
Income taxes..................... 967 877 14,756 14,740
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, $0.04 million, $0.8 million and $0.7 million,
for the year ended June 30, 1997, for the one month period ended June 30, 1996,
for the twelve months ended May 31, 1996 and for the year ended May 31, 1995,
respectively. The Company is also obligated under an operating lease to
Hollywood/Texas Olefins, Ltd. for the rental of two barges.
Total rent expense was approximately $3.9 million, $0.4 million, $4.8
million and $4.4 million (net of reimbursements described above and including
$1.8 million, $0.2 million, $2.0 million and $2.0 million for
F-16
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the rental of four barges) for the year ended June 30, 1997, for the one month
period ended June 30, 1996, for the twelve months ended May 31, 1996 and for the
year ended May 31, 1995, respectively.
Future minimum lease payments at June 30, 1997 are as follows (in thousands
of dollars):
FISCAL YEAR
- ----------------------------------------
1998.................................. $ 3,993
1999.................................. 2,994
2000.................................. 2,307
2001.................................. 1,783
2002.................................. 814
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.
STOCKHOLDER ACTION
Effective July 28, 1995 the Predecessor's Board of Directors approved the
redemption of 25,000 shares of Class A common stock and 1,565,670 shares of
Class B common stock from certain stockholders for total consideration of
approximately $95,000,000. The redemption was paid with cash of approximately
$80,000,000 and with the issuance to a former stockholder of a $15,000,000
promissory note due November 1, 1995 collateralized by 915,000 shares of Class B
common stock and the personal guarantee of an officer of the Predecessor. In
connection with the above redemption the Predecessor's Board of Directors
approved the sale of (1) 351,670 shares of Class B treasury stock to certain
officers of the Predecessor and to a trust at the price of $60 per share, and
(2) 25,000 shares to Class A treasury stock to an officer of the Predecessor at
a price of $60 per share. On September 12, 1995, the Predecessor's stockholders
did not ratify the stock redemption and other transactions described above.
These items were not ratified due to the abstention of the trustee representing
a majority of Class B common stock. The abstaining stockholder has the right,
for up to two years from September 12, 1995, to vote in favor of or against the
aforementioned transaction or take other action on behalf of the trust
beneficiaries. The Company cannot predict what action the abstaining stockholder
will take. Accordingly, the Company cannot determine the effect, if any, of this
uncertainty on its financial position, results of operations or cash flows.
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
F-17
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, and TNRCC has revoked Malone's permits
to operate its facilities. It is not known whether the site will require
remediation or at what cost. 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.
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
F-18
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-19
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $169,591, $14,786, $195,627 and $180,000 for
the year ended June 30, 1997, for the one month period ended June 30, 1996, for
the twelve month period ended May 31, 1996 and for the year ended May 31, 1995,
respectively. Additionally, the Company made additional discretionary
contributions to the plan which amounted to approximately $1.1 million, $0.2
million, $2.4 million and $2.6 million for the year ended June 30, 1997, for the
one month period ended June 30, 1996, for the twelve month period ended May 31,
1996 and for the year ended May 31, 1995, 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 interest on the loan is reported as
compensation expense. Principal and interest payments made for the year ended
June 30, 1997 amounted to $2.7 million.
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 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
Prior to the Acquisition, the Predecessor made contributions from time to
time to a charitable organization that is an affiliate of the Predecessor.
13. CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the year ended June 30, 1997, the one month
period ended June 30, 1996, the twelve month period ended May 31, 1996 and the
year ended May 31, 1995 approximately 41%, 46%, 50%, and 35%,
F-20
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, of the Company's sales were to four customers. The Company had two
customers, which represented 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
had one customer, which represented 12% of sales during the year ended May 31,
1995. 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, 1997 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.
F-21
<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 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
consolidating financial information is presented below:
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ -- $ 139 $ -- $ 139
Accounts receivable -- trade..... 48,450 48,450
Inventories...................... 21,348 21,348
Other current assets............. 2,239 15,719 17,958
-------- --------- -------------- ------------ ---------
Total current assets........ 2,239 85,656 87,895
Property, plant and equipment, net... 231,870 231,870
Investments in land held for sale.... 2,579 2,579
Investment in and advances to limited
partnership........................ 3,032 3,032
Goodwill, net........................ 177,663 177,663
Other assets, net of accumulated
amortization....................... 451 13,640 14,091
Consolidated subsidiaries............ 64,865 64,865 (129,730) --
-------- --------- -------------- ------------ ---------
Total assets................ $ 67,555 $ 64,865 $514,440 $ (129,730) $ 517,130
======== ========= ============== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft................... $ -- $ -- $ 5,030 $ -- $ 5,030
Accounts payable -- trade........ 36,017 36,017
Accrued expenses................. 20,735 20,735
Current portion of cash bonus
plan............................. 7,811 7,811
Current portion of long-term
debt............................. 7,234 7,234
-------- --------- -------------- ------------ ---------
Total current liabilities... 76,827 76,827
Revolving line of credit............. 5,000 5,000
Long-term debt....................... 36,494 295,509 332,003
Cash bonus plan...................... 13,673 13,673
Deferred income taxes................ 65,566 65,566
Stockholders' equity:
Common Stock..................... 5 4,162 (4,162) 5
Additional paid in capital....... 46,264 75,805 71,643 (147,448) 46,264
Accumulated deficit.............. (15,208) (10,940 ) (10,940) 21,880 (15,208)
Note receivable from ESOP........ (7,000) (7,000)
-------- --------- -------------- ------------ ---------
Total stockholders'
equity...................... 31,061 64,865 57,865 (129,730) 24,061
-------- --------- -------------- ------------ ---------
Total liabilities and
stockholders'
equity................ $ 67,555 $ 64,865 $514,440 $ (129,730) $ 517,130
======== ========= ============== ============ =========
</TABLE>
F-22
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING 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............. 1,475 19,682 21,157
------- ---------- --------------- ------------- ---------
Total current assets........ 1,475 82,371 83,846
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............ 63,075 63,075 (126,150) --
------- ---------- --------------- ------------- ---------
Total assets................ $64,973 $ 63,075 $ 521,108 $(126,150) $ 523,006
======= ========== =============== ============= =========
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................ 65,959 65,959
Stockholders' equity:
Common Stock..................... 5 4,162 (4,162) 5
Additional paid in capital....... 46,264 75,804 71,642 (147,446) 46,264
Accumulated deficit.............. (15,483) (12,729) (12,729) 25,458 (15,483)
Note receivable from ESOP........ (8,000) (8,000)
------- ---------- --------------- ------------- ---------
Total stockholders'
equity...................... 30,786 63,075 55,075 (126,150) 22,786
------- ---------- --------------- ------------- ---------
Total liabilities and
stockholders' equity...... $64,973 $ 63,075 $ 521,108 $(126,150) $ 523,006
======= ========== =============== ============= =========
</TABLE>
F-23
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues................. $ -- $ -- $276,548 $ -- $ 276,548
Cost of goods sold....... 235,840 235,840
Depreciation and
amortization........... 15,463 15,463
--------------
Gross profit......... 25,245 25,245
Selling, general and
administrative
expenses............... 3 3,180 3,183
-------- --------- -------------- ------------ ---------
Income (loss)
from
operations.... (3) 22,065 22,062
Interest expense......... 2,328 17,839 20,167
Other income (expense):
Loss on disposal of
non-plant assets... (436) (436)
Other, net........... 432 432
-------------- ---------
(4) (4)
-------- --------- -------------- ------------ ---------
Income (loss)
before income
taxes......... (2,331) 4,222 1,891
Provision (benefit) for
income taxes........... (816) 2,432 1,616
Equity in net income of
subsidiaries........... 1,790 1,790 (3,580) --
-------- --------- -------------- ------------ ---------
Net income...... $ 275 $ 1,790 $ 1,790 $ (3,580) $ 275
======== ========= ============== ============ =========
</TABLE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues................. $ -- $ -- $246,736 $ -- $ 246,736
Cost of goods sold....... 217,892 217,892
Depreciation and
amortization........... 15,894 15,894
-------------- ---------
Gross profit......... 12,950 12,950
Selling, general and
administrative
expenses............... 1 2,842 2,843
-------- --------- -------------- ------------ ---------
Income from
operations.... (1) 10,108 10,107
Interest expense......... 2,046 17,368 19,414
Other income............. 1,488 1,488
-------- --------- -------------- ------------ ---------
Income (loss)
before income
taxes......... (2,047) (5,772) (7,819)
Provision (benefit) for
income taxes........... (717) (922) (1,639)
Equity in net loss of
subsidiaries........... 4,850 4,850 (9,700) --
-------- --------- -------------- ------------ ---------
Net loss........ $ (6,180) $ (4,850 ) $ (4,850) $ 9,700 $ (6,180)
======== ========= ============== ============ =========
</TABLE>
F-24
<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, 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................... 436,014 436,014
Depreciation and amortization........ 29,876 29,876
-------------- --------
Gross profit..................... 24,356 24,356
Selling, general and administrative
expenses........................... 6 6,091 6,091
-------- --------- -------------- ------------ --------
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>
F-25
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- --------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................... $ 275 $ 1,790 $ 1,790 $ (3,580) $ 275
Adjustments to reconcile net
income to net cash provided by
operating activities:..........
Depreciation of fixed assets..... 12,571 12,571
Amortization of goodwill and
other assets................... 2,892 2,892
Amortization of debt issue
costs.......................... 2,328 543 2,871
Loss on sale of non-plant
assets......................... 436 436
Earnings from limited
partnership.................... (278) (278)
Deferred income taxes............ (784) (784)
Change in:
Accounts receivable......... (3,788) (3,788)
Inventories................. (3,422) (3,422)
Other assets................ (813) 300 (513)
Accounts payable, accrueds
and other................. 11,444 11,444
-------- --------- -------------- ------------ --------
Net cash provided by
operating
activities............ 1,790 1,790 21,704 (3,580) 21,704
Cash flows from investing activities:
Capital expenditures............. (4,480) (4,480)
Proceeds from the sale of
non-plant assets............... 871 871
Distribution from limited
partnership.................... 215 215
-------- --------- -------------- ------------ --------
Net cash used in
investing activities.. (3,394) (3,394)
Cash flows from financing activities:
Change in bank overdraft......... (5,127) (5,127)
Net repayments under revolver.... (7,000) (7,000)
Proceeds from issuance of
long-term debt................. 3,192 3,192
Payments on long-term debt....... (5,962) (5,962)
Payment of cash bonus plan....... (3,900) (3,900)
Debt issuance costs.............. (475) 475
Reduction in note receivable from
ESOP........................... 1,000 1,000
-------- --------- -------------- ------------ --------
Net cash used in
financing activities.. (18,272) (18,272)
-------- --------- -------------- ------------ --------
Net increase (decrease) in cash and
cash equivalents................... 1,790 1,790 38 (3,580) 38
Cash and cash equivalents, at
beginning of period................ 101 101
-------- --------- -------------- ------------ --------
Cash and cash equivalents, at end of
period............................. $ 1,790 $ 1,790 $ 139 $ (3,580) $ 139
======== ========= ============== ============ ========
</TABLE>
F-26
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- --------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $ (6,180) $(4,850) $ (4,850) $9,700 $ (6,180)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation of fixed assets........ 12,921 12,921
Amortization of goodwill and other
assets............................ 2,973 2,973
Amortization of debt issue costs.... 2,046 811 2,857
Earnings from limited partnership... (270) (270)
Deferred income taxes............... (584) (584)
Change in:
Accounts receivable............ (5,834) (5,834)
Inventories.................... (10,011) (10,011)
Other assets................... (716) (1,735) (2,451)
Accounts payable, accrueds and
other........................ 6,444 6,444
-------- --------- -------------- ------------ ---------
Net cash provided by (used
in) operating
activities............... (4,850) (4,850) (135) 9,700 (135)
Cash flows from investing activities:
Capital expenditures................ (5,171) (5,171)
Proceeds from the sale of non-plant
assets............................ 1,311 1,311
Acquisition of the Company.......... (366,277) (366,277)
Distribution from limited
partnership....................... 250 250
Proceeds from sale of Predecessor
assets............................ 16,288 16,288
-------- --------- -------------- ------------ ---------
Net cash used in investing
activities............... (353,599) (353,599)
Cash flows from financing activities:
Change in bank overdraft............ 10,478 10,478
Net repayments under revolver....... (8,500) (8,500)
Proceeds from issuance of long-term
debt.............................. 30,000 315,000 345,000
Payments on long-term debt.......... (6,500) (6,500)
Payment of cash bonus plan.......... (5,469) (5,469)
Debt issuance and organization
costs............................. (465) (15,043) (15,508)
Reduction in note receivable from
ESOP.............................. 1,000 1,000
Proceeds from sale of common
stock............................. 33,374 33,374
Cash contribution to subsidiary..... (62,909) 62,909 --
-------- --------- -------------- ------------ ---------
Net cash provided by (used
in) financing
activities............... -- 353,875 353,875
-------- --------- -------------- ------------ ---------
Net increase (decrease) in cash and cash
equivalents........................... (4,850) (4,850) 141 9,700 141
Cash and cash equivalents, at beginning
of period............................. -- -- -- -- --
-------- --------- -------------- ------------ ---------
Cash and cash equivalents, at end of
period................................ $ (4,850) $(4,850) $ 141 $9,700 $ 141
======== ========= ============== ============ =========
</TABLE>
F-27
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS PETROCHEMICAL HOLDINGS, INC.
SUPPLEMENTAL CONSOLIDATING 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>
F-28
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information................... 2
Summary................................. 3
Risk Factors............................ 10
Use of Proceeds......................... 15
Capitalization.......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 27
Management.............................. 44
The Selling Security Holder............. 50
Related Transactions.................... 51
Beneficial Ownership of Holdings' Common
Stock................................. 52
Description of the Bank Credit
Agreement............................. 53
Description of the Discount Notes....... 56
Material Federal Income Tax
Considerations........................ 82
Plan of Distribution.................... 89
Legal Matters........................... 89
Experts................................. 89
Index to Financial Statements........... F-1
Texas Petrochemical Holdings, Inc.
PROSPECTUS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth those expenses to be incurred by Holdings in
connection with the registration of the Discount Notes. Except for the
Securities and Exhange Commission registration fee, all amounts shown are
estimates.
Securities and Exchange Commission
Registration Fee................... $ 9,091
Accounting Fees and Expenses......... 40,000
Legal Fees and Expenses.............. 80,000
Blue Sky Fees and Expenses, Including
Counsel Fees....................... 5,000
Printing and Engraving Expense....... 100,000
Miscellaneous........................ 5,909
----------
Total........................... $ 240,000
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Holding's Certificate of Incorporation, as amended, and Bylaws incorporate
substantially the provisions of the Delaware General Corporation Law ("DGCL")
providing for indemnification of directors and officers of Holdings against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that such person is or was an officer or director of Holdings or is or was
serving at the request of Holdings as a director, officer or employee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
As permitted by Section 102 of the DGCL, Holding's Certificate of
Incorporation, as amended, contains provisions eliminating a director's personal
liability for monetary damages to Holdings and its stockholders arising from a
breach of a director's fiduciary duty except for liability (a) for any breach of
the director's duty of loyalty to Holdings or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction
from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnifed by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is fairly and reasonably entitled to
indemnity for proper expenses. Indemnification is mandatory in the case of a
director or officer who is successful on the merits in defense of a suit against
such person.
Pursuant to policies of Directors and Officers Liability and Company
Reimbursement insurance with total limits of $10,000,000, the Directors and
Officers of Holdings are insured, subject to the limits, retention, exceptions
and other terms and conditions of such policies, against liability for any
actual or alleged error or misstatement or misleading statement or act or
omission or neglect or breach of duty while acting in their capacities as
Directors or Officers of Holdings.
II-1
<PAGE>
Holdings has entered into Indemnity Agreements with its directors and
certain officers pursuant to which Holdings generally is obligated to indemnify
its directors and such officers to the full extent permitted by the DGCL, as
described above.
ITEM 15. SALE OF UNREGISTERED SECURITIES.
In connection with the Acquisition, on July 1, 1996 Holdings (i) sold
$57,650,103.55 principal amount of Discount Notes for $30,000,000 cash to the
Huff Fund, (ii) sold $43.8 million of its Common Stock for cash to an investor
group led by Gordon A. Cain and Sterling, and (iii) issued $6.2 million of its
Common Stock for the shares contributed by certain shareholders of TOC and TPC
in connection with the transactions associated with the Acquisition. The offer
and sale of the Discount Notes and Common Stock for cash were exempt from
registration pursuant to Section 4(2) of the Securities Act. The offer and sale
of $6.2 million in Common Stock in a share exchange was exempt from registration
pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
<C> <S>
3.1* -- Certificate of Incorporation of Holdings, as amended.
3.2* -- Bylaws of Holdings.
4.1 -- Indenture dated as of July 1, 1996 by and between TPC and Fleet National Bank, as Trustee,
with respect to the 11 1/8% Senior Subordinated Notes due 2006, including the form of the
Note (incorporated by reference to Exhibit 4.1 to TPC's Registration Statement on Form
S-4, File No. 333-11569).
4.2 -- Indenture dated as of March 1, 1997 by and between the Company and Fleet National Bank, as
Trustee, with respect to the 11 1/8% Series B Senior Subordinated Notes due 2006,
including the form of Note (incorporated by reference to Exhibit 4.1 to TPC's Registration
Statement on Form S-4, File No. 333-24589).
4.3* -- Indenture dated as of July 1, 1996 by and among Holdings, TPC Holding and Fleet National
Bank, as Trustee, with respect to the Discount Notes, including the form of Note.
4.4** -- Waiver dated as of March 3, 1998 made by The Huff Fund in favor of Holdings.
5* -- Opinion of Bracewell & Patterson, L.L.P. as to the validity of the Discount Notes.
8* -- Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters.
10.1 -- Holdings' 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to TPC's
Registration Statement on Form S-4, File No. 333-11569).
10.2 -- TPC Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.2 to TPC's
Registration Statement on Form S-4, File No. 333-11569).
10.3 -- TPC Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit
10.3 to TPC's Registration Statement on Form S-4, File No. 333-11569).
10.4 -- TPC Cash Bonus Plan (incorporated by reference to Exhibit 10.4 to TPC's Registration
Statement on Form S-4, File No. 333-11569).
10.5 -- Security Agreement by and between Boatmen's Trust Company of Texas and TPC (incorporated
by reference to Exhibit 10.5 to TPC's Registration Statement on Form S-4, File No.
333-11569).
10.6 -- TPC Profit Sharing Plan (incorporated by reference to Exhibit 10.6 to TPC's Registration
Statement on Form S-4, File No. 333-11569).
10.7 -- Lease for Calcasieu Parish, Louisiana (incorporated by reference to Exhibit 10.7 to TPC's
Registration Statement on Form S-4, File No. 333-11569).
10.8 -- Credit Agreement dated as of July 1, 1996 among the Company, Texas Commerce Bank, National
Association, ABN AMRO North America, Inc., and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.8 to TPC's Registration Statement on Form S-4, File No.
333-11569).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.9 -- Security Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association (incorporated by reference to Exhibit 10.9 to TPC's Registration
Statement on Form S-4, File No. 333-11569).
10.10 -- Pledge Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association (incorporated by reference to Exhibit 10.10 to TPC's Registration
Statement on Form S-4, File No. 333-11569).
10.11 -- Letter Agreement dated May 6, 1996, by and among The Sterling Group, Inc., Holdings, TPC
Holding, and TPC (incorporated by reference to Exhibit 10.11 to TPC's Registration
Statement on Form S-4, File No. 333-11569).
10.12 -- Form of Indemnity Agreement between TPC and each of its officers and directors
(incorporated by reference to Exhibit 10.12 to TPC's Registration Statement on Form S-4,
File No. 333-11569).
10.13 -- Form of Tax Sharing Agreement among Holdings, TPC Holding, TPC and Texas Butylene Chemical
Corporation (incorporated by reference to Exhibit 10.13 to TPC's Registration Statement on
Form S-4, File No. 333-11569).
10.14 -- Employment Agreement with Bill W. Waycaster (incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-4, File No. 333-11569).
10.15* -- Form of Indemnity Agreement between Holdings and each of its officers and directors.
12** -- Statement re Computation of Ratio of Earnings to Fixed Charges.
21* -- Subsidiaries of Holdings.
23.1** -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Bracewell & Patterson, L.L.P. (included in their opinion filed as Exhibit 5
hereto).
23.3** -- Consent of Deloitte & Touche LLP
24* -- Powers of Attorney.
25.1 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture dated as of July 1, 1996 (incorporated by reference to Exhibit 25 to
TPC's Registration Statement on Form S-4, File No. 333-11569).
25.2 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture dated as of March 1, 1997 (incorporated by reference to Exhibit 25 to
TPC's Registration Statement on Form S-4, File No. 333-24589).
25.3* -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture dated as of July 1, 1996 with respect to the Discount Notes.
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration
II-3
<PAGE>
statement. Notwithstanding the foregoing, any increase or decease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer of controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TEXAS
PETROCHEMICAL HOLDINGS, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT OR
AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON MARCH 26, 1998.
TEXAS PETROCHEMICAL HOLDINGS, INC.
By: /s/ B. W. WAYCASTER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON MARCH 26, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
WILLIAM A. McMINN* Chairman
WILLIAM A. MCMINN
/s/B. W. WAYCASTER Director, President and Chief Executive Officer
B. W. WAYCASTER (principal executive officer)
/s/STEPHEN R. WRIGHT Chief Financial Officer
STEPHEN R. WRIGHT (principal financial and accounting officer)
GORDON A. CAIN* Director
GORDON A. CAIN
STEVE A. NORDAKER* Director
STEVE A. NORDAKER
WILLIAM R. HUFF* Director
WILLIAM R. HUFF
SUSAN O. RHENEY* Director
SUSAN O. RHENEY
JOHN T. SHELTON* Director
JOHN T. SHELTON
*By: /s/STEPHEN R. WRIGHT
STEPHEN R. WRIGHT
(ATTORNEY-IN-FACT FOR PERSONS INDICATED)
</TABLE>
II-5
EXHIBIT 4.4
WAIVER
This Waiver dated as of March 3, 1998 ("Waiver"), is made by The Huff
Alternative Income Fund, L.P., the sole holder of the Securities (as defined in
the Indenture referred to below) ("Holder"), in favor of Texas Petrochemical
Holdings, Inc., the issuer of such Securities ("Company").
INTRODUCTION
Reference is made to the Indenture dated as of July 1, 1996 (the
"Indenture") among the Company, TPC Holding Corporation, and Fleet National
Bank, as trustee. Capitalized terms used in this Waiver and not otherwise
defined shall have the respective meanings given those terms in the Indenture.
The Holder is the holder of the Senior Discount Notes due 2007 represented by
certificate No. 1 (CUSIP No. 882649 AA 4) in the original principal amount of
$57,650,103.55, which are the sole Securities issued under the Indenture as of
the date hereof. The Company has requested that the Holder waive, and the Holder
has agreed to waive, the requirements of Section 10.09(a)(ii) and (iii) of the
Indenture to the extent such requirements would not be met by the Investment (as
defined below).
Therefore, on the terms and conditions of this Waiver:
1. The Holder hereby (a) waives, for a single transaction, the
requirements of Sections 10.09(a)(ii) and (iii) of the Indenture to the extent,
if any, such requirements would not be met by the investment by a Restricted
Subsidiary of Holdings of up to $1,000 for a 50% interest in a corporation
organized to conduct certain business in Venezuela (the "Investment") and (b)
provided that the Investment complies with the terms of the Indenture other than
Sections 10.09(a)(ii) and (iii), consents to the Investment.
2. This Waiver shall be effective as of the date hereof when delivered to
the Trustee.
3. This Waiver is limited solely to the purposes and to the extent
provided herein and shall not be construed to be a waiver of, except as
specifically provided in Section 1 of this Waiver, (a) any term, condition, or
provision of the Indenture or (b) any Default or Event of Default that has or
may have occurred or occurs after the date hereof. Except as specifically
provided herein, the Indenture will continue in full force and effect.
-1-
<PAGE>
4. The Company agrees to notify the Holder within three Business Days
after the closing of the Investment.
5. This Waiver (a) shall be binding on the parties hereto and their
respective successors and assigns and shall inure to the benefit of the parties
hereto and their respective successors and assigns, (b) may be executed in
multiple counterparts and may be delivered by telecopier transmission, (c)
constitutes the entire agreement among the parties hereto with respect to the
matters addressed herein, and (d) shall be governed by, and construed in
accordance with, the laws of the State of New York.
EXECUTED as of the date first above written.
THE HUFF ALTERNATIVE INCOME FUND, L.P.
By: WRH Partners, L.L.C., its general partner
By: /s/ DONNA B. CHARLTON
Donna B. Charlton
President
Accepted by:
TEXAS PETROCHEMICAL HOLDINGS, INC.
By: /s/ STEPHEN R. WRIGHT
Stephen R. Wright
Vice President and General Counsel
-2-
EXHIBIT 12
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY
31, TWELVE ONE MONTH
------------------------------- MONTHS ENDED ENDED YEAR ENDED
1993 1994 1995 MAY 31, 1996 JUNE 30, 1996 JUNE 30, 1997
--------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes and
minority interest.................. $ 41,081 $ 52,303 $ 49,268 $24,508 $ 1,988 $ (18,850)
Interest expense..................... 1,087 663 475 2,343 98 39,386
Interest portion of rental expense... 1,630 1,430 1,470 1,600 140 1,600
--------- --------- --------- ------------- ------------- -------------
Earnings....................... $ 43,798 $ 54,396 $ 51,213 $28,451 $ 2,226 $ 22,136
========= ========= ========= ============= ============= =============
Fixed Charges:
Interest expense................... $ 1,087 $ 663 $ 475 $ 2,343 $ 98 $ 39,386
Interest portion of rental
expense.......................... 1,630 1,430 1,470 1,600 140 1,600
--------- --------- --------- ------------- ------------- -------------
Total fixed charges............ $ 2,717 $ 2,093 $ 1,945 $ 3,943 $ 238 $ 40,986
========= ========= ========= ============= ============= =============
Ratio of earnings to fixed
charges.......................... 16.1x 26.0x 26.3x 7.2x(3) 9.4x --(1)
</TABLE>
SIX SIX
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
Income (loss) before income taxes and
minority interest.................. $ 1,891 $(7,819)
Interest expense..................... 20,167 19,414
Interest portion of rental expense... 800 800
------------- -------------
Earnings....................... $22,858 $12,395
============= =============
Fixed Charges:
Interest expense................... $20,167 $19,414
Interest portion of rental
expense.......................... 800 800
------------- -------------
Total fixed charges............ $20,967 $20,214
============= =============
Ratio of earnings to fixed
charges.......................... 1.1x --(1)
PRO FORMA PRO FORMA
TWELVE ONE MONTH
MONTHS ENDED ENDED
MAY 31, 1996 JUNE 30, 1996
------------- -------------
Loss before income taxes and minority
interest........................... $ (13,800) $(1,950)
Interest expense..................... 36,100 2,850
Interest portion of rental expense... 1,600 140
------------- -------------
Earnings...................... $ 23,900 $ 1,040
============= =============
Fixed Charges:
Interest expense................... $ 36,100 $ 2,850
Interest portion of rental
expense......................... 1,600 140
------------- -------------
Total fixed charges........... $ 37,700 $ 2,990
============= =============
Ratio of earnings to fixed
charges......................... -- (2) -- (2)
============= =============
- ------------
(1) For the year ended June 30, 1997 and the six months ended December 31, 1996,
earnings were insufficient to cover fixed charges by the amount of $18.8
million and $7.8 million, respectively.
(2) For the pro forma twelve months ended May 31, 1996 and the one month ended
June 30, 1996, earnings were insufficient to cover fixed charges in the
amount of $13.8 million and $1.9 million, respectively.
(3) For the twelve months ended May 31, 1996, income before taxes and minority
interest includes a $12.6 million non-cash provision for the impairment of
certain non-strategic properties which TPC intends to sell.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated August 16, 1996, on our audits of the financial statements of
Texas Olefins Company, subsidiaries and affiliate (predecessor to Texas
Petrochemical Holdings, Inc.), which includes an explanatory paragraph relating
to changes in accounting principles. We also consent to the reference to our
firm under the captions "Selected Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 26, 1998
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-37811 of Texas Petrochemical Holdings, Inc. on Form S-1 of our report dated
August 1, 1997 appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
March 26, 1998
