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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ........... TO ...............
REGISTRATION NUMBER 333-37811
TEXAS PETROCHEMICAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0504002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
THREE RIVERWAY, SUITE 1500
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 627-7474
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) AND 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X} No []
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
The number of shares of common stock of the registrant outstanding as of
September 27, 1999 is 488,445.
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TEXAS PETROCHEMICAL HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 8
Item 3. Legal Proceedings ............................................... 9
Item 4. Submission of Matters to a Vote of
Security Holders .............................................. 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ............................... 10
Item 6. Selected Financial Data ......................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 11
Item7A. Quantitative and Qualitative Disclosures
About Market Risks ............................................ 18
Item 8. Financial Statements and Supplementary Data ..................... 19
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ........................ 42
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 42
Item 11. Executive Compensation ........................................ 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................... 46
Item 13. Certain Relationships and Related Transactions ................. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .......................................... 47
Signatures ..................................................... 49
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PART I
ITEM 1. BUSINESS
Texas Petrochemical Holdings, Inc. and its wholly owned subsidiary Texas
Petrochemicals Corporation (collectively referred to as the "Company") is the
third largest producer of butadiene, the largest producer of butene-1, and the
third largest producer of MTBE in North America. In addition, the Company is the
sole producer of diisobutylene and isobutylene concentrate in the United States
and the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
material suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge. During fiscal 1997
the Company successfully gained access to the MTBE market on the East Coast of
the United States through the negotiation of a terminalling and storage
agreement with the Northville terminal in Linden, New Jersey.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
Mr. Dave C. Swalm acquired from Tenneco, Inc. the assets (principally comprised
of the Houston facility) of Petro-Tex Chemical Corporation ("Petro-Tex") the
prior owner of the Company's manufacturing facility.
On July 1, 1996 Texas Olefins Company, Texas Petrochemicals Corporation and
a raw material supply contract of Clarkston Corporation (collectively referred
to as the "Predecessor") were acquired for approximately $371 million in a
series of transactions (the "Acquisition"). After the transactions, TOC was
merged with and into Texas Petrochemicals Corporation with Texas Petrochemicals
Corporation becoming a 100% owned subsidiary of Texas Petrochemical Holdings,
Inc. Texas Petrochemical Holdings, Inc. was formed by a group of closely held
investors.
The Company's principal executive offices are located at Three Riverway,
Suite 1500, Houston, Texas 77056. The Company's telephone number is (713)
627-7474.
PRODUCTS
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base. As the
second 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 is the largest non-integrated crude butadiene
processor in North America and as a result of its strategic
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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 motor gasoline blending stock which reduces carbon monoxide and
volatile organic compound emissions and enhances the octane content of gasoline,
and has been one of the fastest growing petrochemicals, in terms of volume, over
the past fifteen years. MTBE is produced by reacting methanol and isobutylene.
The Company's ability to produce isobutylene by three alternative methods
enables it to produce MTBE by the most economical process available to the
Company. The U.S. Clean Air Act of 1990 requires the use of an "oxygenate" in
gasoline sold in certain regions that are not in compliance with air quality
standards. MTBE is the predominate oxygenate used in gasoline. However, as a
result of incidents in which MTBE from gasoline has contaminated drinking water,
the federal government and certain state governments are considering actions
that could reduce or even eventually eliminate the use of MTBE in gasoline.
There can be no assurance that these activities will not impact the Company's
market for MTBE. A significant reduction in the demand for MTBE could have a
material adverse effect on the Company's financial condition or results of
operations. See "Environmental Regulation" section for a further discussion of
MTBE.
The Company is the leading producer of chemical grade n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications.
Butene-1 is used as a comonomer in the production of high-density polyethylene
("HDPE") and linear low-density polyethylene ("LLDPE"). Both HDPE and LLDPE are
raw materials for the production of trash bags, film wrap, pipe and plastic
containers. Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations. Butene-2 is
recovered as part of the crude butadiene stream that remains after extraction of
butadiene, isobutylene and butene-1. The Company sells purified butene-2
primarily for use in the production of coatings and plasticizers. Lower purity
butene-2 is sold as a gasoline feedstock.
High purity isobutylene is used in the production of butyl rubber, which is
used to produce tires and in specialty chemical applications such as in the
production of resins, antioxidants, paints and coatings, synthetic lubricant
oils and rubber chemicals. The Company is currently the largest domestic
merchant supplier of high purity isobutylene to the chemical market. Isobutylene
concentrate is similar to high purity isobutylene in composition, although its
purity is 88% isobutylene compared to 99.9% in high purity isobutylene. The
Company markets isobutylene concentrate for use in the lubricant additives
business as well as for use in the production of butyl rubber. The Company is
the sole U.S. producer of isobutylene concentrate. Diisobutylene is used
primarily as an intermediate in the manufacturing of alkylphenols for the
surfactant and phenolic resins markets. Other uses include the production of
tackifier and ink resins, dispersants and lubricant oil additives, and rubber
and processing chemicals. The Company is the sole U.S. producer of
diisobutylene.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate products, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes.
COMPANY STRATEGY
The Company believes that it has become an industry leader in the
production of the majority of its products by capitalizing on its production
flexibility, its ability to add significant cost effective,
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incremental capacity across its product lines, the marketing experience of its
management team, its competitive cost position and its customer focus. The
Company's strategy is to strengthen its established presence in its selected
markets by focusing on the following factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS The markets in which the Company
competes are cyclical. The Company intends to mitigate the effects of this
cyclicality while benefiting from potential upturns in industry profitability by
optimizing the production of its sales under contracts allowing for a fixed
profit or at prices linked directly or indirectly to raw material prices.
CAPITALIZE ON PRODUCTION FLEXIBILITY The Company has the ability to produce
a number of its intermediate and finished products (i.e. crude butadiene,
isobutylene and butene-1) by a variety of processes. The Company intends to
capitalize on this ability by shifting production to the most economical process
and production level based upon market conditions, thus ensuring a reliable
source of supply for its customers.
UTILIZE INCREMENTAL CAPACITY The Company can increase its capacity to
produce butadiene, isobutylene and its derivatives at significantly lower cost
than that of new construction. The Company's ability to add incremental
butadiene capacity and its relationships with several North American ethylene
producers are expected to enable it to capture the benefit of increased U.S.
crude butadiene supply.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS The Company's production flexibility
and its ability to add low-cost capacity are crucial to its capitalizing on
market opportunities. 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.
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.
OTHER OPERATIONS
The Company operates a cogeneration power plant that supplies electricity
and process steam to the facility's chemical processing operations. Excess
capacity of this power plant, as well as steam and boiler feed water are
currently sold to neighboring facilities under contracts at a price equal to the
cost of fuel plus a fixed profit. In addition, the Company generates revenues
from its terminals in Baytown, Texas and Lake Charles, Louisiana and from
chemical by-product sales to third parties.
CONTRACTS
The Company enters into three general types of contracts in connection with
its production processes: feedstock supply contracts, product sales contracts
and, to a lesser extent, toll manufacturing agreements. The majority of these
contracts have terms of two to three years and provide for successive one-year
renewals unless either party objects to such renewal in a timely manner.
Certain of the Company's largest customers account for a significant
percentage of the Company's sales of particular products. The Company had two
customers, which represented 11%
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and 14% of sales during the year ended June 30, 1999, 13% and 15% of sales
during the year ended June 30, 1998, and 11% and 17% of sales during the year
ended June 30, 1997. 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.
COMPETITION
The petrochemicals businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemicals industry, are larger and have greater financial resources than
the Company. Among the Company's competitors are some of the world's largest
chemical companies and major integrated petroleum companies that have their own
raw material resources. In addition, a significant portion of the Company's
business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Further,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may continue to expand their role in this
industry in the future. Any of these developments would have a negative impact
on the Company's financial position, results of operations and cash flows.
Given the nature of the markets in which it competes, the Company believes
it has two primary competitive advantages over its competitors. First, the
Company's position as the most significant merchant crude butadiene processor in
the U.S. has allowed it to secure supply arrangements for crude butadiene that
provide for a fixed profit based on the Company's selling prices for the
finished product. The Company believes that this partially limits its exposure
to fluctuations in raw materials prices. Secondly, the Company's flexible
production processes enable it to take advantage of increases in demand for its
products at a lower cost than its competitors, thus allowing the Company to meet
its customers' needs through the most economic processes.
PATENTS AND LICENSES
The Company presently owns, controls or holds right to approximately 21
patents and seeks patent protection for its proprietary processes where feasible
to do so..
ENVIRONMENTAL REGULATION
The Company's policy is to be in compliance with all applicable
environmental laws. The Company is also committed to Responsible Care(R), a
chemical industry initiative tO enhance the industry's responsible management of
chemicals. The Company's operations are subject to federal, state, and local
laws and regulations administered by the U.S. EPA, the U.S. Coast Guard, the
Army Corps of Engineers, the Texas Natural Resource Conservation Commission
(TNRCC), the Texas General Land Office, the Texas Department of Health and
various local regulatory agencies. The Company holds all required permits and
registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with the laws
and regulations that materially affect its operations. While management does not
expect that compliance with existing environmental laws will have a material
adverse effect on the Company's financial condition or results of operations,
there can be no assurance that future legislation, regulation or judicial or
administrative decisions will not have such an effect.
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Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur material remediation costs related to its management,
transportation and disposal of solid and hazardous materials and wastes, or to
its pipeline operations. If the Company were to be required to incur such costs,
however, management believes that such costs would not have a material adverse
effect on the Company's results of operations. In addition, under the terms of
the 1984 purchase agreement, the prior owner of the Houston facility, Petro-Tex,
has indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation. The Company believes that
it has meritorious defenses to Petro-Tex's claim and intends to contest the
claim vigorously. Although no on-site contamination has been identified as
requiring remediation, management believes that certain areas of the Houston
facility were historically used for waste disposal. Based on limited, currently
available information about these waste disposal areas and their contents, the
Company believes that, if such remediation becomes necessary, any remediation
costs would not have a material adverse effect on the Company's financial
condition or results of operations. The Petro-Tex indemnity does not extend to
these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive
regulation under the Resource Conservation and Recovery Act, the Federal Clean
Water Act, the Clean Air Act (CAA) and similar requirements of state law. In
particular, under the CAA, the EPA and the TNRCC have promulgated, or are
required to promulgate, numerous regulations, which affect or will affect the
operations of the Company. The most significant of these are the so-called
Hazardous Organics National Emission Standard for Hazardous Air Pollutants or
HON Rule, the requirements of Title V of the CAA and rules relating to the
control of emissions of nitrogen, which are known as the Nitrogen Oxides
Reasonably Available Control Technology rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethylformamide,
benzene, styrene, acrylonitrile and MTBE, which are manufactured, used and/or
processed by the Company, have been identified as HAPs for purposes of
regulation under the CAA. Areas of concern in the Company's operations for HAP
emissions include equipment leaks, process vents, product storage, transfer
operations and emissions from wastewater streams. The Company expended $600,000
on wastewater collection and treatment systems over the past year to comply with
the HON rule.
The NOx RACT Rules require compliance by December 1999. The Company has
examined the rules and believes that the main expenditure required to achieve
compliance will involve the purchase and installation of monitoring equipment
for NOx emissions, which can be either continuous emission monitors, predictive
emission monitors or other approved monitoring methods. Management estimates
that the cost to comply with the NOx RACT Rules will be $0.8 million.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAA.
Accordingly, the State of Texas is in the process of developing a revised State
Implementation Plan ("SIP") which is expected to require significant reductions
in emissions of ozone precursors, including volatile organic compounds and
oxides of nitrogen in Harris County. To comply with the anticipated SIP, the
Company installed new controls at a cost of approximately $7.8 million. The
Company anticipates that the revised SIP may require certain additional emission
reductions from the Company's facilities. Such reductions would
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require the Company to modify existing controls, install additional controls for
air emissions, or install new equipment. The Company is unable to predict the
cost of modifying its facilities to comply with any additional requirements that
the revised SIP may impose.
The Company has elected to participate in the CARE program sponsored by the
TNRCC under which the Company will voluntarily obtain permits for certain air
emission sources that had historically been "grandfathered" from certain permit
requirements. The Company expects to be required to commit to certain emission
reductions in connection with the CARE program. Since the Company joined the
CARE program, the Texas Legislature enacted Senate Bill 766 which provides
incentives for grandfathered emissions sources to apply for a voluntary
emissions reduction permit instead of remaining grandfathered. In particular,
grandfathered sources are invited to apply for a permit prior to September 1,
2001 that can establish less stringent or deferred emissions controls for
facilities than are provided under permits for new emissions sources. Failure to
apply for and obtain a permit will result in emissions fees that will treble
annually until a grandfathered facility applies for a permit. The Texas Natural
Resource Conservation Commission is currently developing rules to implement the
requirements of Senate Bill 766. The Company will evaluate and pursue available
options with respect to its grandfathered emissions sources that allow the
Company to meet applicable air emissions requirements in a cost-effective
manner. Measures likely to be required as part of the CARE program and/or Senate
Bill 766 implementation are not anticipated to have a materially adverse impact
on the Company or its operations.
Section 112 of the CAA requires prevention of accidental releases of
certain listed extremely hazardous substances. The EPA's rules implementing
portions of Section 112, which were signed by the EPA Administrator on May 24,
1996, required the Company to conduct a hazards assessment and develop a risk
management plan by June 1999. The Company completed the plan and filed it with
the appropriate agencies in a timely manner.
The regulations under Title V of the CAA will require a facility-wide
inventory of emissions, sources and the air pollution control requirements
applicable to those sources. The Company is in the process of compiling the
required inventory. In connection with the Title V program, the Company may be
required to upgrade its on-going monitoring program once it has received its
operating permit. It is also possible that the Company may be required to make
modifications to some of its equipment in order to comply with requirements
identified through the facility-wide Title V permit process. These anticipated
commitments are not expected to have a materially adverse impact on the
Company's operations.
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, when properly
managed, these materials pose a hazard to the health of Company 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 has closed its facility, and the Company now operates
the treatment system. The federal and state discharge permits are held jointly
by the Company and Bayer. As a result of the change in operator the Company has
applied for new discharge permits for the wastewater treatment system. The
Company believes that the system has sufficient capacity for the Company's
projected needs.
The Company has completed the first phase of its work on its storm water
discharge system. An engineering study is under way to determine whether
additional work will be required. The Company has completed installation of
noise barriers for certain equipment.
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The terminals in Baytown and Lake Charles are subject to many of the same
or similar environmental laws and regulations as are applicable at the Houston
facility. Management believes that the terminals are in substantial compliance
with these requirements and that no significant expenditures will be required at
these facilities to allow them to continue to comply with such laws and
regulations.
The EPA has 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
currently meets the PEL at most of its operations. For some operations, the
Company anticipates employees will need to use respirators and that additional
emission controls may be necessary. The Company does not expect that the current
health concerns regarding butadiene will have a material adverse effect on the
Company's financial condition or results of operations, although no assurance
can be given that future studies will not result in more stringent regulation of
butadiene.
MTBE ENVIRONMENTAL AND MARKET ISSUES
The possibly adverse effects of MTBE on health and the environment has
become a statewide concern in California because MTBE has appeared in certain
drinking water wells. It is believed that this is the result of leaks from older
underground gasoline storage tanks and pipelines.
In addition, certain bodies of water have shown the presence of MTBE. A
typical source of MTBE in these bodies is the operation of two-cycle outboard
motors, which do not fully combust gasoline. Certain regulatory bodies are
considering imposing limitations on the use of two-cycle outboard motors in
bodies of water that are also used as sources of drinking water.
In California, the legislature required the state Department of Health
Services (DHS) to assess MTBE and to set the maximum permissible levels of MTBE
in drinking water in 1999. The levels are referred to as the primary and
secondary maximum contaminant levels (MCLs). Secondary MCLs or secondary
drinking water standards apply to chemicals in public drinking water that may
adversely affect the taste, odor, or appearance of the water, and may cause
people served by the public water system to discontinue its use. In January
1999, the DHS adopted 5 parts per billion (ppb) as the California secondary MCL
for MTBE based upon the aesthetic factors alone.
The primary MCL for MTBE in California is pending in the regulatory process
at this time. The DHS has proposed 13 ppb as the primary MCL for MTBE. It will
accept public comments on the proposal through November 1, 1999. It is unknown
at this time whether the proposed primary MCL would be adopted as the applicable
standard in California or when it would become effective. The DHS is authorized
to modify the proposed primary MCL for MTBE in response to public comments. The
primary MCL for MTBE is based upon the public health goal (PHG) for MTBE, and
the technical feasibility and costs associated with compliance. Notably,
however, a public health goal of 13 ppb for MTBE was set by the California
Office of Environmental Health Hazard Assessment (OEHHA) in March 1999 based
exclusively on public health considerations. PHGs represent the level of
chemicals in drinking water that would pose no significant health risks to
individuals, and are non-mandatory goals. Until a primary MCL is adopted, the
DHS will enforce the action level of 13 ppb for MTBE in lieu of the former level
of 35 ppb set in 1991. If MTBE is found in a drinking water supply at levels
exceeding 13 ppb, it is expected that the DHS will require treatment for the
removal of MTBE from the water system to attain compliance.
On March 25, 1999, California Governor Gray Davis declared that, "on
balance, there is a significant risk to the environment from using (MTBE) in
gasoline in California," and issued an
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executive order calling for the removal of MTBE from gasoline at the earliest
possible date and no later than December 31, 2002. Governor Davis also mandated
state agencies to conduct an environmental analysis and evaluation of ethanol as
a possible substitute for MTBE and to seek relief from the requirement of the
CAA to use oxygenates in gasoline in certain areas of the state. In September
1999, several bills codifying the Executive Order were before the California
legislature. Senate Bill 192 would prohibit the sale of gasoline containing MTBE
on or after January 1, 2003. The bill would also require the State Energy
Resources Conservation and Development Commission to report to the legislature
the amount of MTBE used in gasoline in California by refineries on a quarterly
basis. Senate Bill 989 would require various state agencies to develop
guidelines for the investigation, remediation, and clean up of MTBE in ground
water. The bill would authorize the California Environmental Protection Agency
to prohibit the use of MTBE in motor vehicle fuel before December 31, 2002, on a
sub-regional basis in the Bay Area Air Basin, or in any other air basin in the
state.
Although the EPA continues to require oxygenates to be added to gasoline in
certain regions of the country either year-round or during the winter months,
and MTBE continues to be the predominate oxygenate used, a panel appointed by
the EPA has issued a report calling for the reduction in the use of MTBE in
gasoline. No assurance can be given that actions will not be taken to restrict
or prohibit the use of MTBE in certain areas of the country or to remove the
oxygenate requirement from the CAA. Any restriction on or prohibition of the use
of MTBE could have a material adverse effect on the Company's financial
condition or results of operations.
EMPLOYEES
As of June 30, 1999, the Company had approximately 308 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 116 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 five years, the
Company has not experienced a lost time injury at the Houston Plant Site. The
Company believes this record is accomplished through extensive classroom and
on-the-job training as well as the efforts of its highly trained, 75-member
volunteer emergency response team.
ITEM 2. PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile
from the Houston Ship Channel and near one of the chemical industry's largest
domestic processing facilities. Approximately 230 acres is owned by the Company,
and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the
Port of Houston two ship docks, which accommodate barge and ocean-going vessels,
and has the facilities to be served by rail and by truck. In addition, the
facility is connected by pipeline to customers and suppliers of raw materials,
directly and through other major pipelines in the immediate area as well as in
Texas City, and with salt dome storage facilities of other companies located at
both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a
laboratory for sampling and testing. The Company owns and operates a storage and
terminal facility at Baytown, Texas, leases storage and terminal facilities in
Lake Charles, Louisiana and Linden, New Jersey, and leases tank storage capacity
in Bayonne, New Jersey. The Company also leases office space in Three Riverway
Plaza, Houston, Texas as its principal executive offices. The Company believes
that is has adequate facilities for the conduct of its current and planned
operations.
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ITEM 3. LEGAL PROCEEDINGS
In addition to the matters disclosed under "Environmental Regulation," the
Company is a party to various claims and litigation arising in the ordinary
course of its business. Management recognizes the uncertainties of litigation
and the possibility that one or more adverse rulings could materially impact
operating results. However, although no assurances can be given, management
believes that other than as disclosed, based on the nature of and its
understanding of the facts and circumstances which give rise to such claims and
litigation, and after considering appropriate reserves that have been
established, that the ultimate resolution of such issues, individually and in
the aggregate, will not have a material adverse effect on the Company's
financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1999.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company set forth below for the three
years ended June 30, 1999, the one month period ended June 30, 1996, the twelve
months ended May 31, 1996 and the year ended May 31, 1995 should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------- ---------------------------------
TWELVE ONE
YEAR MONTHS MONTH
ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, YEAR ENDED JUNE 30,
------- ------- ------- ---------------------------------
1995 1996 1996 1997 1998 1999(1)
------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................... $ 474.7 $ 455.6 $ 41.4 $ 490.2 $ 514.8 $ 448.2
Income from operations ............ 47.5 42.0 2.4 18.3 37.3 38.7
Interest expense (income) ......... (0.7) 1.6 0.1 39.4 40.5 39.4
Net income (loss)2 ................ 32.5 16.7 1.2 (15.5) (4.5) (2.2)
Loss per common share
Before extraordinary loss ... -- -- -- $(32.04) $ (9.86) $ (6.99)
Extraordinary loss .......... -- -- -- (3.33) -- --
------- ------- -------
$(35.37) $ (9.86) $ (6.99)
======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Total assets ...................... $ 230.7 $ 167.9 $ 521.5 $ 497.2 $ 482.8
Long-term debt .................... -- 13.0 351.9 349.8 337.9
</TABLE>
- ----------------------------------
(1) In January 1999, the estimated useful lives of certain plant assets were
increased from 10 to 15 years. This change was accounted for as a change in
accounting estimate and resulted in a $4.2 million decrease in depreciation
expense.
(2) Net income (loss) for the twelve months ended May 31, 1996 includes a
non-recurring charge for the impairment of investment in land of $12.6
million, with an associated income tax benefit of $4.7 million. Net loss for
the year ended June 30, 1997 includes an extraordinary loss of $1.5 million
for early extinguishment of debt.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials), and from time
to time, other external factors, such as the implementation of the Clean Air Act
Amendments of 1990, which has significantly increased the demand for MTBE over
the past 10 years. 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 product produced
by the Company, to produce MTBE or higher margin specialty products depending on
prevailing market conditions. See "Environmental Regulation" section for a
further discussion of MTBE.
REVENUES
The Company's revenues are a function of the volume of products sold by the
Company and the prices for such products. The following tables set forth the
Company's historical revenues and the percentages of historical revenues by
product and volume of products sold.
REVENUES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Butadiene ...................... $130.9 27% $135.0 26% $ 98.2 22%
MTBE ........................... 230.3 47 235.4 46 229.3 51
n-Butylenes .................... 49.4 10 55.2 11 45.2 10
Specialty Isobutylenes ......... 62.3 13 73.7 14 62.7 14
Other(1) ....................... 17.3 3 15.5 3 12.8 3
------ ------ ------ ------ ------ ------
Total .......................... $490.2 100% $514.8 100% $448.2 100%
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes utility revenues and revenues realized from the Company's
terminalling facilities.
11
<PAGE>
SALES VOLUMES
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1998 1999
------------- ------------ -------------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene 750.3 822.0 821.1
MTBE(1) 274.1 300.4 376.9
n-Butylenes 266.4 320.4 317.5
Specialty Isobutylenes 275.7 369.7 330.9
- ----------
(1) Volumes in millions of gallons. Includes 98.5 million, and 15.0 million
gallons finished MTBE purchased for resale for the years ended June 30, 1999
and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .......................... $490.2 100% $514.8 100% $448.2 100%
Cost of goods sold ................ 436.3 89 438.7 85 374.4 84
Non-cash ESOP compensation ........ -- -- -- -- 0.4 --
Depreciation and amortization ..... 29.8 6 31.8 6 26.8 6
------ ------ ------ ------ ------ ------
Gross profit .............. 24.1 5 44.3 9 46.6 10
Selling, general and administrative 5.8 1 7.0 2 7.9 2
------ ------ ------ ------ ------ ------
Income from operations .... $ 18.3 4% $ 37.3 7% $ 38.7 8%
====== ====== ====== ====== ====== ======
</TABLE>
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
REVENUES
The Company's revenues decreased by approximately 13%, or $66.6 million, to
$448.2 million for the year ended June 30, 1999 from $514.8 million for the year
ended June 30, 1998. The decrease was primarily due to lower product sales
prices, which was partially offset by higher sales volumes.
Butadiene revenues decreased by approximately 27%, or $36.8 million, to
$98.2 million for the year ended June 30, 1999 from $135.0 million for the year
ended June 30, 1998. The decrease was attributable to a decrease in sales
prices. Excess supply and imports of butadiene into the U.S. market contributed
to lower prices. Sales volumes remained stable over the prior year.
MTBE revenues decreased by approximately 3%, or $6.1 million, to $229.3
million for the year ended June 30, 1999 from $235.4 million for the year ended
June 30, 1998. The decrease was due to lower sales prices, which was partially
offset by higher sales volumes. MTBE prices were lower in the current year due
to the lower unleaded gasoline and crude oil prices. Sales volumes increased
over the prior year due to purchases of finished MTBE for resale.
12
<PAGE>
n-Butylenes revenues decreased by approximately 18%, or $10.0 million, to
$45.2 million for the year ended June 30, 1999 from $55.2 million for the year
ended June 30, 1998. n-Butylene sales revenue decreased due to lower sales
prices during most of the fiscal year. Sales volumes of butene-1 and butene-2
were relatively unchanged as compared to the prior year.
Specialty isobutylene revenues decreased by approximately 15%, or $11.0
million, to $62.7 million for the year ended June 30, 1999 from $73.7 million
for the year ended June 30, 1998. The decrease was due to lower sales prices of
all of the Company's specialty products and lower sales volumes of isobutylene
concentrate. Isobutylene concentrate sales volumes were lower due to a planned
turnaround by one of the company's customers during the first half of the fiscal
year.
GROSS PROFIT
Gross profit increased by approximately 5%, or $2.3 million, to $46.6
million for the year ended June 30, 1999 from $44.3 million for the year ended
June 30, 1998. Gross margin during the period increased to 10.4% from 8.6%. The
gross profit increase was primarily due to a change in accounting estimate,
which reduced depreciation expense by $4.2 million during the current year. In
January 1999, the depreciable lives of a certain plant assets were increased
from 10 years to 15 years. With this adjustment excluded, gross margin would
have decreased by $1.9 million over the prior year. The decrease is attributable
to lower MTBE margins caused by a smaller spread between sales prices and raw
materials. The decrease in MTBE margins was partially offset by improved margins
in butadiene, specialty isobutylenes and reductions in operating costs.
INCOME FROM OPERATIONS
Income from operations increased by approximately 4%, or $1.4 million, to
$38.7 million for the year ended June 30, 1999 from $37.3 million for the year
ended June 30, 1998. Operating margin during this period increased to 8.6% from
7.2%. The increase in income from operations was primarily due to the same
factors contributing the increase in gross profit described above, partially
offset by an increase in selling, general and administrative expenses. This
increase was associated with increased MTBE advocacy costs, software integration
costs and business development activity in the current year.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
REVENUES
The Company's revenues increased by approximately 5%, or $24.6 million, to
$514.8 million for the year ended June 30, 1998 from $490.2 million for the year
ended June 30, 1997. The increase was primarily due to increased sales volumes
of all products, which was partially offset by lower sales prices.
Butadiene revenues increased by approximately 3%, or $4.1 million, to
$135.0 million for the year ended June 30, 1998 from $130.9 million for the year
ended June 30, 1997. The increase was attributable to an increase in sales
volumes of approximately 10% or 71.7 million pounds. Production rates during the
year increased as a result of operating efficiencies and the availability of
crude butadiene. The volume increase was offset by a decline in butadiene
prices, which began during the second half of fiscal year. Excess supply and
imports of butadiene into the U.S. market contributed to lower prices.
13
<PAGE>
MTBE revenues increased by approximately 2%, or $5.1 million, to $235.4
million for the year ended June 30, 1998 from $230.3 million for the year ended
June 30, 1997. The increase was due to higher sales volume, which was partially
offset by lower sales prices. MTBE production levels increased during the period
due to improved on-stream time of the Company's Dehydro units during the current
fiscal year. MTBE prices were lower in the current year due to the lower
unleaded gasoline and crude oil prices during the second half of the fiscal
year.
n-Butylenes revenues increased by approximately 12%, or $5.8 million, to
$55.2 million for the year ended June 30, 1998 from $49.4 million for the year
ended June 30, 1997. n-Butylene sales revenue increased due to higher sales
volumes particularly during the first half of the fiscal year. Sales volumes of
butene-1 increased due to an unplanned shutdown of a major competitor in the
market. The Company was able to successfully increase its butene-1 production
rates to meet this demand from customers. Sales volumes of butene-2 to also
increased during the current year.
Specialty isobutylene revenues increased by approximately 18%, or $11.4
million, to $73.7 million for the year ended June 30, 1998 from $62.3 million
for the year ended June 30, 1997. The increase was due to higher sales volumes
of all of the Company's specialty products. Isobutylene concentrate sales
volumes returned to more historical levels during the current year after a down
year in fiscal 1997. Sales volumes of high purity isobutylene and diisobutylene
increased due to customer demand.
GROSS PROFIT
Gross profit increased by approximately 84%, or $20.2 million, to $44.3
million for the year ended June 30, 1998 from $24.1 million for the year ended
June 30, 1997. Gross margin during the period increased to 8.6% from 4.9%. The
gross profit increase was primarily due to higher margins on MTBE and increased
sales volumes of butadiene, n-butylenes and specialty isobutylenes. MTBE margins
improved primarily due to lower isobutane and methanol costs, which was
partially offset by lower MTBE sales prices.
INCOME FROM OPERATIONS
Income from operations increased by approximately 104%, or $19.0 million,
to $37.3 million for the year ended June 30, 1998 from $18.3 million for the
year ended June 30, 1997. Operating margin during this period increased to 7.2%
from 3.7%. The increase in income from operations was primarily due to the same
factors contributing the increase in gross profit described above, offset
slightly by and increase in selling, general and administrative expenses. This
increase was associated with increased business development activity in the
current year.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
Net cash provided by operating activities was $34.2 million for the year
ended June 30, 1999 compared to $35.0 million for the year ended June 30, 1998.
The decrease of $0.8 million was primarily attributable to lower profitability
levels offset by changes in working capital. Net cash used in investing
activities was $12.9 million for the year ended June 30, 1999 compared to $11.2
million for the year ended June 30, 1998. The increase of $1.7 million was
primarily attributable to an increase in capital expenditures during the current
year. Net cash used in financing activities was $22.1 million for the year ended
June 30, 1999 compared to $23.0 million for the year ended June 30, 1998. The
decrease of $0.9 million was primarily attributable to the net change in bank
overdraft and reduction in the outstanding revolving line of credit.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
Net cash provided by (used in) operating activities was $35.0 million for
the year ended June 30, 1998 compared to $(1.8) million for the year ended June
30, 1997. The change of $36.8 million was primarily attributable to improved
profitability levels and changes in working capital. Net cash used in investing
activities was $11.2 million for the year ended June 30, 1998 compared to $352.3
million for the year ended June 30, 1997. The change of $341.1 million was
primarily attributable to the Acquisition of the Company on July 1, 1996,
partially offset by proceeds from the sale of non-plant assets and Predecessor
assets and investments. Net cash provided by (used in) financing activities was
$(23.0) million for the year ended June 30, 1998 compared to $354.2 million for
the year ended June 30, 1997. The change of $377.2 million was primarily
attributable to the issuance of long-term debt and an investment from the
Parent, in order to finance the Acquisition.
LIQUIDITY
On July 1, 1996 the Company issued $175 million of 11 1/8% Senior
Subordinated Notes due 2006, $57.7 million of 13 1/2% Discount Notes dues 2007
and borrowed $140 million undeR the Bank Credit Agreement. The Company used the
combined proceeds to finance the Acquisition of Texas Petrochemicals
Corporation. The Company's liquidity needs arise primarily from principal and
interest payments under the Bank Credit Agreement and the Subordinated Notes.
Interest payments are not made on the Discount Notes until 2002. The Company's
primary source of funds to meet debt service requirements is net cash flow
provided by operating activities. Operating cash flow is significantly impacted
by raw materials cost as well as the selling price and volume variances of
finished goods. The Company enters into supply contracts for certain of its
products in order to mitigate the impact of changing prices. Additionally, the
Company has a $40 million Revolving Credit Facility, of which $2 million was in
use at June 30, 1999, to provide funds for ongoing operations, working capital
and planned capital expenditures. The Company believes that the availability of
funds under the Revolving Credit Facility are sufficient to cover any current
liquidity needs which could arise as a result of negative working capital. The
Company's ability to borrow under the Revolving Credit Facility is limited by
the terms of the Bank Credit Agreement, the Subordinated Notes and the Discount
Notes. The Bank Credit Agreement, the Subordinated Notes and the Discount Notes
include certain restrictive covenants, which include but are not limited to,
limitations on capital expenditures, indebtedness, investments and sales of
assets and subsidiary stock. Additionally, the Bank Credit Agreement requires
the Company to maintain certain financial ratios. Effective June 30, 1999 the
Company obtained an amendment to the Bank Credit Agreement to update the
financial ratios relating to fixed charge coverage and debt to EBITDA for fiscal
2000.
15
<PAGE>
In February 1998, the Company entered into a three-year swap agreement for
$125 million of its Senior Subordinated Notes. The swap agreement effectively
converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a
floating debt with a structured collar. Under the agreement the Company's
interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If
LIBOR rates are set above 6.75% the Company's interest rate is floating at
current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the
Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates
are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June
30, 1999 LIBOR rates were set at 5.22%. In June 1998, the Company entered into a
three-year interest rate cap for $64 million of its senior debt under the Bank
Credit Agreement. The cap effectively converts a portion of the Company's
floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates
are set above 6.75%. The principal amount of the cap amortizes from $64 million
to $32 million on a quarterly basis over the three-year term.
CASH BONUS PLAN
In connection with the Acquisition, the Predecessor established a $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering certain third-party
contractors who had contributed to the past success of the Predecessor. During
the year ended June 30, 1999, $7.8 million of this amount was paid to eligible
participants and the remaining $9.8 million will be made in five equal future
quarterly installments.
CAPITAL EXPENDITURES
The Company's capital expenditures for fiscal 1999 related principally to
improving operating efficiencies and maintaining environmental compliance.
Capital expenditures for year ended June 30, 1999 were $14.4 million, compared
to $12.5 million for the year ended June 30, 1998. The Company expenses
approximately $20 million annually for plant maintenance. These maintenance
costs are not treated as capital expenditures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company has adopted the
provisions of SFAS No. 132 with no material revisions to the disclosures in the
financial statements. The Company has entered into interest rate swap and cap
agreements, and may have entered into other types of contracts, which are
included in the scope of SFAS No. 133. The Company will analyze SFAS No. 133 to
determine what effect it will have on the Company's future financial statements
and disclosures. In June 1999, SFAS No. 137 was issued to delay the required
effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999
to fiscal years beginning after June 15, 2000.
16
<PAGE>
YEAR 2000
The Company has recognized the need to ensure that its systems, equipment
and operations will not be adversely impacted by the change to the calendar year
2000. The issues arise from computer programs, computer equipment and other
equipment with embedded chips or processors that use two digits rather than four
to designate the year. Date-sensitive computer operations may recognize a date
using "00" as the year 1900 rather than the year 2000, resulting in system
failures or miscalculations, which could potentially cause operational
disruptions.
In preparation the Company has established a Steering Committee composed of
members of all functional groups of the organization to address these issues.
This committee is responsible for prioritizing the Company's efforts and
ensuring that the appropriate resources both internal and external have been
dedicated to the project. The committee's assessment was focused on those areas,
which were considered high-risk critical business processes. The assessment and
future progress has been based on the following categories including plant
automation and process control, client server, desktop, communications,
enterprise infrastructure and overall readiness. The Company's overall readiness
expressed as a percentage of completion as of September 15, 1999 is
approximately 95%. The total estimated spending for all categories is expected
to range from $15 to $16 million. The majority of these costs relate to capital
investments made in automating our plant production processes and in upgrading
our financial accounting systems.
The Company believes that all significant systems controlled by the Company
will be Year 2000 ready in the last half of calendar 1999. The Company's
operations are dependent upon third parties for continuous supply of raw
materials, natural gas, transportation and storage. While the Company has
attempted to obtain an assessment of the readiness of these third parties, there
can be no assurance that all third parties will have their systems ready. The
Company is developing contingency plans to be implemented prior to end of
calendar 1999. These contingency plans are being developed to avoid any material
interruption of our core business operations. These plans include alternative
operating procedures and appropriate staffing on critical dates.
The Company believes that it has taken all of the appropriate steps to
prevent any Year 2000 issues from arising. However, there can be no assurances
that all internal and third party systems will operate as expected into calendar
year 2000 and beyond. The failure of any such systems could have a material
impact on the operation of the Company's production facilities and cause a
general business interruption. The Company is unable to determine what the
impact on the financial results of the Company could be from such failure.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Part I, Items 1 and 2 of this document include forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company believes that the expectations reflected in such forward
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in conjunction with the forward looking statements included herein
("Cautionary Disclosures"). Subsequent written or oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has a credit facility and interest rate swap agreements, which
subject the Company to the risk of loss associated with movements in market
interest rates. As of June 30, 1999 the Company has $65.4 million of floating
rate obligations under the credit facility. A 1% increase in interest rates
could result in a $0.7 million increase in annual interest expense. The Company
also has a swap agreement for $125 million of its Senior Subordinated Notes. The
swap converts this amount of the fixed rate obligations to floating if LIBOR
rates exceed 6.75%. If LIBOR rates were to exceed this level a 1% increase in
interest rates could result in a $1.3 million increase in annual interest
expense. As of June 30, 1999 LIBOR rates were set at 5.22%.
The Company's exposure to foreign currency market risk is minimal since
sales prices are typically denominated in US dollars. The Company's exposure to
changing commodity prices is also minimal since substantially all raw material
acquisitions and finished goods sales prices are generally at posted or market
related prices.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Auditors ......................................... 20
Financial Statements
Consolidated Balance Sheet ......................................... 21
Consolidated Statement of Operations ............................... 22
Consolidated Statement of Stockholder's Equity ..................... 23
Consolidated Statement of Cash Flows ............................... 24
Notes to Consolidated Financial Statements ......................... 25
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Texas Petrochemical Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Texas
Petrochemical Holdings, Inc. and subsidiary (the "Company") as of June 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1999 and 1998 and
the results of its operations and its cash flows for each of the three years
ended June 30, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 6, 1999
20
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 103 $ 956
Accounts receivable - trade ...................................... 40,220 45,298
Inventories ........................................................... 19,973 17,210
Other current assets ............................................. 18,576 13,636
--------- ---------
Total current assets ......................................... 78,872 77,100
Property, plant and equipment, net .................................... 219,706 227,217
Investments in land held for sale ..................................... 2,058 2,579
Investment in and advances to limited partnership ..................... 2,820 3,035
Goodwill, net of accumulated amortization of $14,925 and $10,342 ...... 169,560 174,143
Other assets, net ..................................................... 9,833 13,163
--------- ---------
Total assets ................................................. $ 482,849 $ 497,237
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................................... $ 874 $ --
Accounts payable - trade ......................................... 38,992 28,000
Accrued expenses ................................................. 19,215 21,787
Current portion of cash bonus plan liability ..................... 7,811 7,811
Current portion of long-term debt ................................ 7,465 6,982
--------- ---------
Total current liabilities .................................... 74,357 64,580
Revolving line of credit .............................................. 2,000 12,000
Long-term debt ........................................................ 328,467 330,814
Cash bonus plan liability ............................................. 1,959 9,766
Deferred income taxes ................................................. 55,494 59,806
Commitments and contingencies (Note 8)
Common stock held by the ESOP ......................................... 12,600 10,000
Less: unearned compensation ........................................... (5,040) (6,000)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 voting and
100,000 shares non-voting authorized, 528,445 voting
shares issued and outstanding ................................. 5 5
Additional paid in capital ....................................... 36,738 36,264
Accumulated deficit .............................................. (23,731) (19,998)
--------- ---------
Total stockholders' equity ................................... 13,012 16,271
--------- ---------
Total liabilities and stockholders' equity ................. $ 482,849 $ 497,237
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues ..................................... $ 448,155 $ 514,790 $ 490,246
Cost of goods sold ........................... 374,401 438,725 436,339
Non-cash ESOP compensation ................... 407 -- --
Depreciation and amortization ................ 26,784 31,787 29,876
--------- --------- ---------
Gross profit ............................... 46,563 44,278 24,031
Selling, general and administrative expenses . 7,927 6,949 5,766
--------- --------- ---------
Income from operations ................ 38,636 37,329 18,265
Interest expense ............................. 39,444 40,533 39,386
Other income (expense)
Loss on disposal of assets and
investment securities, net .............. (44) (436) --
Other, net ................................. 1,320 993 2,271
--------- --------- ---------
1,276 557 2,271
--------- --------- ---------
Income (loss) before income taxes and
extraordinary loss .................. 468 (2,647) (18,850)
Provision (benefit) for income taxes ......... 2,641 1,868 (4,823)
--------- --------- ---------
Income (loss) before extraordinary loss (2,173) (4,515) (14,027)
Extraordinary loss from early extinguishment
of debt, net of tax benefit of $784 ........ -- -- 1,456
--------- --------- ---------
Net loss .............................. $ (2,173) $ (4,515) $ (15,483)
========= ========= =========
Basic and diluted loss per common share:
Before extraordinary loss .............. $ (6.99) $ (9.86) $ (32.04)
Extraordinary loss ..................... -- -- (3.33)
- ---------------------------------------------- --------- --------- ---------
$ (6.99) $ (9.86) $ (35.37)
========= ========= =========
Weighted average shares outstanding .......... 478,045 457,778 437,778,
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL EARNINGS
--------------------- PAID IN (ACCUMULATED)
SHARES VALUE CAPITAL (DEFICIT) TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Opening Balance July 1, 1996 ......... 527,778 $ 5 $ 36,264 $- $ 36,269
Net loss ............................. (15,483) (15,483)
-------- -------- -------- -------- --------
Balance June 30, 1997 ................ 527,778 5 36,264 (15,483) 20,786
Net loss ............................. (4,515) (4,515)
-------- -------- -------- -------- --------
Balance June 30, 1998 ................ 527,778 5 36,264 (19,998) 16,271
Net loss ............................. (2,173) (2,173)
Issuance of common stock ............. 667 -- 67 67
Non-cash ESOP compensation ........... 407 407
Revaluation of ESOP shares to
independently appraised market
value .............................. (1,560) (1,560)
-------- -------- -------- -------- --------
Balance June 30, 1999 ................ 528,445 $ 5 $ 36,738 $(23,731) $ 13,012
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................. $ (2,173) $ (4,515) $ (15,483)
Adjustments to reconcile net income (loss)
to cash flow from operating activities:
Extraordinary loss ............................. -- -- 1,456
Depreciation of fixed assets ................... 21,924 25,208 24,810
Amortization of intangibles .................... 4,860 6,759 5,066
Amortization of debt issue costs and deferred
premium ...................................... 6,650 5,902 5,664
Deferred income taxes .......................... (3,363) (3,334) (2,897)
Earnings from limited partnership .............. (775) (476) (670)
Non-cash ESOP expense .......................... 407 -- --
Change in:
Accounts receivable ......................... 5,078 (636) (9,382)
Inventories ................................. (2,763) 716 (5,993)
Other assets ................................ (4,097) 1,839 (6,381)
Accounts payable, accrueds and other ........ 8,420 3,728 2,051
--------- --------- ---------
Net cash provided by (used in) operating
activities .............................. 34,168 35,011 (1,759)
Cash flows from investing activities:
Capital expenditures ........................... (14,413) (12,466) (7,634)
Proceeds from asset sales ...................... 477 871 4,754
Acquisition of the Company, net of cash acquired -- -- (366,277)
Distribution received from partnership ......... 990 410 525
Proceeds from sale of Predecessor assets ....... -- -- 16,288
--------- --------- ---------
Net cash used in investing activities ..... (12,946) (11,185) (352,344)
Cash flows from financing activities:
Bank overdraft ................................. 874 (10,157) 10,157
Net repayments on revolving line of credit ..... (10,000) -- (1,000)
Proceeds from issuance of long-term debt ....... -- 3,192 398,000
Payments on long-term debt ..................... (6,979) (9,706) (62,219)
Cash bonus plan payments ....................... (7,807) (7,807) (9,406)
Debt issuance and organizational costs ......... (163) (493) (16,304)
Proceeds from sale of common stock, net ........ -- -- 32,976
Reduction in note receivable from ESOP ......... 2,000 2,000 2,000
--------- --------- ---------
Net cash provided by (used in) financing
activities .............................. (22,075) (22,971) 354,204
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ..................................... (853) 855 101
Cash and cash equivalents, beginning .............. 956 101 --
--------- --------- ---------
Cash and cash equivalents, ending ................. $ 103 $ 956 $ 101
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
On July 1, 1996, Texas Olefins Company, Texas Petrochemicals Corporation
and a raw material supply contract of Clarkston Corporation were acquired for
approximately $371 million in a series of transactions (the "Acquisition").
After the transactions, TOC was merged with and into Texas Petrochemicals
Corporation with Texas Petrochemicals Corporation becoming a 100% owned
subsidiary of Texas Petrochemicals Holdings, Inc. In connection with the
Acquisition, Texas Petrochemicals Corporation issued $175 million of Senior
Subordinated Notes due 2006 (the "Subordinated Notes") and borrowed $140 million
under the Bank Credit Agreement. Texas Petrochemical Holdings, Inc. issued $57.7
million in Discount Notes due 2007 (the "Discount Notes") for net proceeds of
$30 million and sold $43.8 million in common stock, $10 million of which was
financed under the Bank Credit Agreement.
The Acquisition was accounted for using the purchase method of accounting
and, therefore, the consolidated financial statements for the year ended June
30, 1997 reflect the acquisition cost allocated to the net assets acquired based
on their estimated fair values as of July 1, 1996. The fair value of tangible
assets acquired, net of liabilities assumed, was $179 million. The balance of
the acquisition cost, $184 million, was recorded as goodwill and is being
amortized over 40 years utilizing the straight-line method.
The Company through its facility in Houston, Texas is the third largest
producer of butadiene, the largest producer of butene-1, and the third largest
producer of methyl tertiary-butyl ether ("MTBE"), in North America. In addition,
the Company is the sole producer of diisobutylene and isobutylene concentrate in
the United States and is the largest domestic merchant supplier of high purity
isobutylene to the chemical market. The Company's products include: (i)
butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an
oxygenate and octane enhancer in gasoline; (iii) 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.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three years ended
June 30, 1999 include the accounts of Texas Petrochemical Holdings, Inc. and its
wholly owned subsidiary, TPC Holding Corp., (collectively referred to as) the
"Company".
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.
25
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 for
major units of the manufacturing facilities are capitalized and amortized over
the life of the turnaround. Maintenance and repairs are charged to expense as
incurred while significant improvements are capitalized. Upon retirement or sale
of an asset, the asset and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations.
DEPRECIATION
Depreciation of property, plant and equipment is computed using the
straight-line method over their estimated useful lives ranging from 3 to 31
years. In January 1999, the estimated useful lives of certain plant assets were
increased from 10 years to 15 years based on engineering analysis. This change
was accounted for as a change in accounting estimate and resulted in a $4.2
million decrease in depreciation expense for fiscal 1999.
DEBT ISSUE COSTS AND OTHER
Debt issue costs relating to the Company's long-term debt are amortized to
interest expense over the scheduled maturity of debt utilizing the effective
interest method. Unamortized debt issue costs relating to long-term debt retired
prior to its scheduled maturity are charged off as an extraordinary item. Other
assets include patents and catalysts, which are amortized using the
straight-line method over their useful lives ranging from 2 to 7 years.
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.
26
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EARNINGS PER SHARE
Loss per share for three years ended June 30, 1999 has been computed using
a weighted average shares outstanding of 478,045, 457,778 and 437,778,
respectively. The weighted average shares outstanding used in the computation of
earnings (loss) per share are net of 40,000, 60,000 and 80,000 shares held by
the Employee Stock Ownership Plan that are not allocated to employees as of June
30, 1999, June 30, 1998 and 1997, respectively. For the year ended June 30, 1999
loss per share used in calculating earning per share has been reduced by an
amount equivalent to the increase in the market value of the shares allocated to
employees, to the extent that such increase has not already been recognized as
compensation expense in the current year ($1,170,000). The effect options was
antidilutive in fiscal 1999, therefore, 6,661 shares were excluded from the
earnings per share calculation. The effect of options was not dilutive for
fiscal years 1998 and 1997 for purposes of calculating diluted earnings per
share.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company has adopted the
provisions of SFAS No. 132 with no material revisions to the disclosures in the
financial statements. The Company has entered into interest rate swap and cap
agreements, and may have entered into other types of contracts, which are
included in the scope of SFAS No. 133. The Company will analyze SFAS No. 133 to
determine what effect it will have on the Company's future financial statements
and disclosures. In June 1999, SFAS No. 137 was issued to delay the required
effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999
to fiscal years beginning after June 15, 2000.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
JUNE 30,
--------------------------
1999 1998
---------- ----------
Finished goods......................... $ 10,594 $ 4,701
Raw materials.......................... 8,053 10,415
Chemicals and supplies................. 1,326 2,094
---------- ----------
$ 19,973 $ 17,210
========== ==========
27
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CURRENT ASSETS:
JUNE 30,
----------------------
1999 1998
-------- --------
Catalyst Inventory ......................... $ 7,463 $ 4,849
Deferred turnaround costs .................. 2,585 1,265
Prepaid and other .......................... 8,528 7,522
-------- --------
$ 18,576 $ 13,636
======== ========
PROPERTY, PLANT AND EQUIPMENT:
JUNE 30,
----------------------
1999 1998
-------- --------
Chemical plants ............................ $277,117 $260,808
Construction in progress ................... 8,834 13,624
Other ...................................... 5,202 2,308
-------- --------
291,153 276,740
Less accumulated depreciation,
depletion and amortization ............... 71,447 49,523
-------- --------
$219,706 $227,217
======== ========
ACCRUED EXPENSES:
JUNE 30,
----------------------
1999 1998
-------- --------
Accrued interest ........................... $ 13,893 $ 14,581
Property and sales taxes ................... 1,995 2,836
Federal and state income taxes ............. 2,731 3,629
Other ...................................... 596 741
-------- --------
$ 19,215 $ 21,787
======== ========
4. LONG-TERM DEBT
JUNE 30,
----------------------
1999 1998
-------- --------
Bank Credit Agreement:
Term A Loan ................................ $ 18,002 $ 21,003
Term B Loan ................................ 41,407 42,393
ESOP Loan .................................. 4,000 6,000
Revolving Credit Loans ..................... 2,000 12,000
Senior Subordinated Notes .................... 225,000 225,000
Discount Notes ............................... 44,394 38,958
Deferred premium on Senior
Subordinated Notes ......................... 2,250 2,571
Long-term financing .......................... 879 1,871
-------- --------
337,932 349,796
Less current maturities .................... 7,465 6,982
-------- --------
Long-term debt ............................. $330,467 $342,814
======== ========
28
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Bank Credit Agreement originally 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, 1999) or the greater of the prime rate and the federal
funds rate plus 1/2% plus a margin (1.5% at June 30, 1999). Substantially all
assets of the Company are pledged as collateral under the Bank Credit Agreement.
The Senior Subordinated Notes are due 2006 and bear interest at 11 1/8% payable
semiannually on January 1 and July 1. The Discount Notes are due 2007 and bear
interest at 13 1/2% payable semiannually on January 1 and July 1 beginning 2002.
The Bank Credit Agreement and the Senior Subordinated Notes include certain
restrictive covenants, which include but are not limited to, limitations on
capital expenditures, indebtedness, investments and sales of assets and
subsidiary stock. Additionally, the Bank Credit Agreement requires the Company
to maintain certain financial ratios. Effective June 30, 1999 the Company
obtained an amendment to the Bank Credit Agreement to update the financial
ratios relating to fixed charge coverage and debt to EBITDA for fiscal 2000.
The fair value of the Senior Subordinated Notes, based on quoted market
prices, was approximately $200 million and $244 million as of June 30, 1999 and
1998, respectively. There is currently not and active market for the Discount
Notes, therefore, the Company estimated that the fair value based on current
interest rates available for the Company and similar debt instruments, was
approximately $35 million and $45 million as of June 30, 1999 and 1998,
respectively. The long-term debt under the Bank Credit Agreement carries a
floating interest rate, therefore, the Company estimates that the carrying
amount of such debt was not materially different from its fair value as of June
30, 1999 and 1998.
In February 1998, the Company entered into a three-year swap agreement for
$125 million of its Senior Subordinated Notes. The swap agreement effectively
converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a
floating debt with a structured collar. Under the agreement the Company's
interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If
LIBOR rates are set above 6.75% the Company's interest rate is floating at
current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the
Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates
are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June
30, 1999 LIBOR rates were set at 5.22%. In June 1998, the Company entered into a
three-year interest rate cap for $64 million of its senior debt under the Bank
Credit Agreement. The cap effectively converts a portion of the Company's
floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates
are set above 6.75%. The principal amount of the cap amortizes from $64 million
to $32 million on a quarterly basis over the three-year term.
The net premiums paid for interest rate swap agreements are charged to
expense over the terms of the agreements. The Company is exposed to credit
losses in the event of nonperformance by a counterparty to the derivative
financial instruments. The Company anticipates, however, that the counterparties
will be able to fully satisfy obligations under the contracts. Market risk
arises from changes in interest rates.
29
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate scheduled maturities outstanding debt for the succeeding five
years are as follows:
FISCAL YEAR
-----------
2000 ..................................... $ 7,465
2001 ..................................... 7,486
2002 ..................................... 6,386
2003 ..................................... 20,302
2004 ..................................... 24,647
5. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
at June 30, 1999 and June 30, 1998 are as follows (in thousands of dollars):
JUNE 30,
--------------------
1999 1998
-------- --------
Deferred tax asset (liability) - current:
Cash bonus plan ................................... $ 2,756 2,756
Turnaround costs .................................. (905) (443)
Other ............................................. (537) (49)
-------- --------
$ 1,314 $ 2,264
======== ========
Deferred tax asset (liability) - noncurrent:
Investment in land ................................ $ 4,828 $ 4,813
Cash bonus plan ................................... 733 3,466
Interest .......................................... 5,037 3,135
Property, plant and equipment ..................... (65,872) (71,000)
Other ............................................. (220) (220)
-------- --------
$(55,494) $(59,806)
======== ========
The current deferred tax asset is included in other current assets in the
accompanying balance sheet. The provision for federal and state income taxes is
comprised of the following (in thousand of dollars):
YEAR ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
Current:
Federal .................. $ 5,296 $ 4,259 $ (508)
State .................... 708 943 63
---------- ---------- ----------
6,004 5,202 (445)
---------- ---------- ----------
Deferred:
Federal .................. (3,363) (3,334) (4,378)
State .................... - - -
---------- ---------- ----------
(3,363) (3,334) (4,378)
---------- ---------- ----------
Total provision (benefit)
for income taxes $ 2,641 $ 1,868 $ (4,823)
========== ========== ==========
30
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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:
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
------- ------- -------
Statutory federal income tax rate ........ 35% 35% 35%
Computed "expected" federal income tax ... $ 164 $ (926) $(6,596)
Increase in tax resulting from:
State income taxes, net of
federal benefit .................. 460 612 41
Other, net .......................... 413 273 22
Amortization of goodwill and other .. 1,604 1,909 1,710
------- ------- -------
Provision (benefit) for income taxes ..... $ 2,641 $ 1,868 $(4,823)
======= ======= =======
6. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP
The Company and Hollywood Marine, Inc. formed a limited partnership,
Hollywood/Texas Petrochemicals, 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.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997
--------- ---------- ---------
Interest ................... $ 34,641 $ 33,735 $ 20,600
Income taxes ............... 6,897 1,641 967
8. 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 $0.5 million, $0.8 million, $0.8 million, for the three years
ended June 30, 1999, respectively.
31
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Total rent expense was approximately $4.6 million, $3.6 million and $3.9
million, (net of reimbursements described above and including $0.7 million, $0.7
million and $1.8 million for the rental of barges) for the three years ended
June 30, 1999, respectively. Future minimum lease payments at June 30, 1999 are
as follows (in thousands of dollars):
FISCAL YEAR
-----------
2000.............................. $ 3,918
2001.............................. 3,614
2002.............................. 2,450
2003.............................. 1,360
2004.............................. 270
PURCHASE COMMITMENTS
The Company has purchase commitments incident to the ordinary conduct of
business. The prices of such purchase commitments are based on formulas, which
are determined from the prevailing market rate for such products. These
commitments generally have cancellation provisions given proper notification.
LITIGATION
The Company is involved in various routine legal proceedings which are
incidental to the business. Management of the Company is vigorously defending
such matters and is of the opinion that their ultimate resolution will not have
a material adverse impact on the Company's financial position, results of
operations or cash flows.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency, the U.S.
Coast Guard, the Army Corps of Engineers, the Texas Natural Resource
Conservation Commission, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect the cost of compliance
with existing environmental laws will have a material adverse effect on the
Company's financial condition, results of operations or cash flows, there can be
no assurance that future legislation, regulation or judicial or administrative
decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex,
32
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
has indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation. The Company believes that
it has meritorious defenses to Petro-Tex's claim and intends to contest the
claim vigorously. Although no on-site contamination has been identified as
requiring remediation, management believes that certain areas of the Houston
facility were historically used for waste disposal. Based on limited, currently
available information about these waste disposal areas and their contents, the
Company believes that, if such remediation becomes necessary, any remediation
costs would not have a material adverse effect on the Company's financial
condition or results of operations. The Petro-Tex indemnity does not extend to
these on-site waste disposal areas or their contents.
9. 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 approximately $0.2 million for each of the
three years ended June 30, 1999, respectively. Additionally, the Company made
additional discretionary contributions to the plan, which amounted to
approximately $2.0 million, $2.1 million and $1.1 million, for the three years
ended June 30, 1999, respectively. The Company's contributions vest with the
employee at a rate of 20% per year.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, the Company established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees of the Company. The ESOP borrowed $10 million under the Bank Credit
Agreement to purchase 100,000 shares of the Company's Common Stock at the
closing of the Acquisition. The shares of Common Stock purchased by the ESOP
were pledged as security for the ESOP Loan, and such shares will be released and
allocated to ESOP participants' accounts as the ESOP Loan is discharged. For
employees whose employment commenced prior to October 1, 1996 and who have
attained 21 years, participation begins as of the Acquisition date or the date
of commencement of the participant's employment. A participant's ESOP account
vests at the rate of 20% per year. The Company's contributions to the ESOP,
which are used to retire principal and pay interest on the loan is reported as
compensation expense. Principal and interest payments made for the three years
ended June 30, 1999 amounted to $2.4 million, $2.6 million and $2.7 million,
respectively. The common stock held by the Employee Stock Ownership Plan and the
related unearned compensation is reported between liabilities and permanent
stockholders' equity in a manner similar to redeemable preferred stock as
employees have an option to put the shares of the Company. As of June 30, 1999,
60,000 shares have been allocated to employees.
33
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK OPTION PLAN
In October 1996, the Company approved the Stock Option Plan (the "Plan") to
reserve up to 27,778 shares of Common Stock to certain officers, directors and
key employees of the Company. In April 1998 the Company amended the Plan to
reserve up to an additional 42,000 shares of Common Stock under the plan. The
term of the options issued under the Plan cannot exceed ten years from the date
of grant. The options issued to date vest ratably over a three-year period from
the date of grant and are exercisable at $100 per share. Stock option activity
under the Plan was as follows:
NUMBER OF
SHARES
---------
Balance July 1, 1996 -
Granted .............................. 27,778
Exercised ............................ -
Canceled ............................. -
------
Balance June 30, 1997 27,778
Granted .............................. 11,500
Exercised ............................ -
Canceled ............................. (1,000)
------
Balance June 30, 1998 38,278
Granted .............................. -
Exercised ............................ (667)
Canceled ............................. (5,333)
------
Balance June 30, 1999 ................ 32,278
======
The Company applies APB 25 and related Interpretations in accounting for
the Plan. There has been no compensation cost recognized by the Company
associated with the Plan as the exercise price of the options at the dates of
measurement were equivalent to the estimated fair value of the common stock on
that date. Had compensation cost for the Plan been determined based on the
method consistent with SFAS 123, the Company's net loss and net loss per share
for the three years ended June 30, 1999 would have been unchanged on a pro forma
basis.
CASH BONUS PLAN LIABILITY
In connection with the Acquisition, the Predecessor established the $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering the employees of certain
third-party contractors who had contributed to the past success of the
Predecessor. All participants of the plan as of July 2, 1996 were distributed
10% of the cash bonus in August 1996, and the remaining amount is to be paid in
sixteen quarterly installments which began in October 1996.
34
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED PARTY TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and
Corporate Development in the amount of $200,000 of which $21,024 remained
outstanding as of June 30, 1999. The proceeds from the loan were utilized to
purchase outstanding shares of the Company's common stock at fair market value.
The loan carries an interest rate of 7%. During fiscal 1999 and 1998 the Company
made payments totaling $250,000 and $500,000, respectively, to a consulting firm
whose majority shareholder is also an outside director and shareholder of the
Company. The Chairman of the Company receives annual compensation of $150,000
for consulting services provided to the Company and reimbursements of
approximately $25,000 per year for office expenses.
11. CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the three years ended June 30, 1999
approximately 34%, 41% and 41%, respectively, of the Company's sales were to
four customers. The Company had two customers, which represented 11% and 14% of
sales during the year ended June 30, 1999, 13% and 15% of sales during the year
ended June 30, 1998, and 11% and 17% of sales during the year ended June 30,
1997. 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.
12. FINANCIAL INSTRUMENTS
At June 30, 1999 the Company estimated that the carrying value and fair
value of its financial instruments, other than long-term debt (See Note 4), were
approximately equal due to the short-term nature of the instruments. Such
instruments include cash and cash equivalents, accounts receivable and accounts
payable. The Company enters into certain derivative financial instruments as
part of its interest rate risk management. Interest rate swaps, caps, collars
and floors are classified as matched transactions. The differential to be paid
or received as interest rates change is accrued and recognized as an adjustment
to interest expense.
The fair value of derivative financial instruments are the amounts at which
they could be settled base on estimates from dealers. As of June 30, 1999, the
carrying amounts and estimated fair values of derivative financial instruments
were not significant.
35
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL GUARANTOR INFORMATION
TPC Holding Corp. a wholly owned subsidiary of Texas Petrochemical
Holdings, Inc. has fully and unconditionally guaranteed, on a joint and several
basis, Texas Petrochemical Holdings, Inc's. obligations relative to the Discount
Notes due 2007 in an Event of Default. TPC Holding Corp. conducts its operations
through its subsidiaries and is dependent upon distribution from these
subsidiaries as its source of cash flow. Management has determined that
separate, full financial statements of TPC Holding Corp. ("Guarantor") would not
be material to investors and such financial statements are not provided.
Supplemental combining financial information of Texas Petrochemical Holdings,
Inc. is presented below:
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ - $ - $ 103 $ - $ 103
Accounts receivable - trade ...................... 40,220 40,220
Inventories ...................................... 19,973 19,973
Other current assets ............................. (48) 18,624 18,576
--------- --------- --------- --------- ---------
Total current assets ..................... (48) 78,920 78,872
Property, plant and equipment, net ................... 219,706 219,706
Investments in land held for sale .................... 2,058 2,058
Investment in and advances to limited partnership .... 2,820 2,820
Goodwill, net ........................................ 169,560 169,560
Other assets, net of accumulated amortization ........ 459 9,374 9,833
Consolidated subsidiaries ............................ 59,518 59,518 (119,036) -
--------- --------- --------- --------- ---------
Total assets ............................. $ 59,929 $ 59,518 $ 482,438 $(119,036) $ 482,849
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft ................................... $ - $ - $ 874 $ - $ 874
Accounts payable - trade ......................... 38,992 38,992
Payable to Parent ................................ 1,987 (1,987) -
Accrued expenses ................................. 17,228 1,987 19,215
Current portion of cash bonus plan ............... 7,811 7,811
Current portion of long-term debt ................ 7,465 7,465
--------- --------- --------- --------- ---------
Total current liabilities ................ 74,357 74,357
Revolving line of credit ............................. 2,000 2,000
Long-term debt ....................................... 44,394 284,073 328,467
Cash bonus plan ...................................... 1,959 1,959
Deferred income taxes ................................ (5,037) 60,531 55,494
Common stock held by the ESOP ........................ 12,600 12,600
Less: unearned compensation .......................... (5,040) (5,040)
Stockholders' equity:
Common Stock ..................................... 5 4,162 (4,162) 5
Additional paid in capital ....................... 36,738 72,212 72,050 (144,262) 36,738
Accumulated deficit .............................. (23,731) (12,694) (12,694) 25,388 (23,731)
Note receivable from ESOP ........................ - - (4,000) 4,000 -
--------- --------- --------- --------- ---------
Total stockholders' equity ................... 13,012 59,518 59,518 (119,036) 13,012
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 59,929 $ 59,518 $ 482,438 $(119,036) $ 482,849
========= ========= ========= ========= =========
</TABLE>
36
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ -- $ -- $ 956 $ -- $ 956
Accounts receivable - trade ..................... 45,298 45,298
Inventories ..................................... 17,210 17,210
Other current assets ............................ 13,636 13,636
--------- --------- --------- --------- ---------
Total current assets ...................... 77,100 77,100
Property, plant and equipment, net ...................... 227,217 227,217
Investments in land held for sale ....................... 2,579 2,579
Investment in and advances to limited partnership ....... 3,035 3,035
Goodwill, net ........................................... 174,143 174,143
Other assets, net of accumulated amortization ........... 484 12,679 13,163
Consolidated subsidiaries ............................... 55,679 55,679 (111,358) --
--------- --------- --------- --------- ---------
Total assets .............................. $ 56,163 $ 55,679 $ 496,753 $(111,358) $ 497,237
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Bank overdraft .................................. $ -- $ -- $ -- $ -- $ --
Accounts payable - trade ........................ 28,000 28,000
Payable to Parent ............................... 2,850 (2,850) --
Accrued expenses ................................ 69 18,868 2,850 21,787
Current portion of cash bonus plan .............. 7,811 7,811
Current portion of long-term debt ............... 6,982 6,982
--------- --------- --------- --------- ---------
Total current liabilities ................. 69 64,511 64,580
Revolving line of credit ................................ 12,000 12,000
Long-term debt .......................................... 38,958 291,856 330,814
Cash bonus plan ......................................... 9,766 9,766
Deferred income taxes ................................... (3,135) 62,941 59,806
Common stock held by the ESOP ........................... 10,000 10,000
Less: unearned compensation ............................. (6,000) (6,000)
Stockholders' equity:
Common Stock .................................... 5 4,162 (4,162) 5
Additional paid in capital ...................... 36,264 69,805 71,643 (141,448) 36,264
Accumulated deficit ............................. (19,998) (14,126) (14,126) 28,252 (19,998)
Note receivable from ESOP ....................... (6,000) 6,000 --
--------- --------- --------- --------- ---------
Total stockholders' equity ................ 16,271 55,679 55,679 (111,358) 16,271
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity .............................. $ 56,163 $ 55,679 $ 496,753 $(111,358) $ 497,237
========= ========= ========= ========= =========
</TABLE>
37
<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, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ -- $ -- $ 448,155 $ -- $ 448,155
Cost of goods sold ............................. -- -- 374,401 -- 374,401
Non-cash ESOP compensation ..................... -- -- 407 -- 407
Depreciation and amortization .................. -- -- 26,784 -- 26,784
--------- ---------
Gross profit ........................... -- -- 46,563 -- 46,563
Selling, general and administrative expenses ... 11 -- 7,916 -- 7,927
--------- --------- --------- --------- ---------
Income (loss) from operations ... (11) -- 38,647 -- 38,636
Interest expense ............................... 5,491 -- 33,953 -- 39,444
Other income ................................... -- -- 1,276 -- 1,276
--------- --------- --------- --------- ---------
Income (loss) before income taxes (5,502) -- 5,970 -- 468
Provision for income taxes ..................... (1,897) -- 4,538 -- 2,641
Equity in net loss of subsidiaries ............. 1,432 1,432 -- (2,864) --
--------- --------- --------- --------- ---------
Net loss ........................ $ (2,173) $ 1,432 $ 1,432 $ (2,864) $ (2,173)
========= ========= ========= ========= =========
</TABLE>
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Year Ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ -- $ -- $ 514,790 $ -- $ 514,790
Cost of goods sold ............................. -- -- 438,725 -- 438,725
Depreciation and amortization .................. -- -- 31,787 -- 31,787
--------- ---------
Gross profit ........................... -- 44,278 -- 44,278
Selling, general and administrative expenses ... 61 -- 6,888 -- 6,949
--------- --------- --------- --------- ---------
Income (loss) from operations ... (61) -- 37,390 -- 37,329
Interest expense ............................... 4,813 -- 35,720 -- 40,533
Other income (expense):
Loss on disposal of non-plant assets ... -- -- (436) -- (436)
Other, net ............................. -- -- 993 -- 993
--------- ---------
-- -- 557 -- 557
--------- --------- --------- --------- ---------
Income (loss) before income taxes (4,874) 2,227 (2,647)
Provision (benefit) for income taxes ... (1,756) 3,624 1,868
Equity in net income of subsidiaries ........... 1,397 1,397 -- (2,794) --
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (4,515) $ (1,397) $ (1,397) $ 2,794 $ (4,515)
========= ========= ========= ========= =========
</TABLE>
Texas Petrochemical Holdings, Inc.
Supplemental Consolidating Statement of Income
Year Ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ -- $ -- $ 490,246 $ -- $ 490,246
Cost of goods sold ............................. -- -- 436,339 -- 436,339
Depreciation and amortization .................. -- -- 29,876 -- 29,876
--------- ---------
Gross profit ........................... -- -- 24,031 -- 24,031
Selling, general and administrative expenses ... 6 -- 5,760 -- 5,766
--------- --------- --------- --------- ---------
Income (loss) from operations ... (6) -- 18,271 -- 18,265
Interest expense ............................... 4,229 -- 35,157 -- 39,386
Other income ................................... -- -- 2,271 -- 2,271
--------- --------- --------- --------- ---------
Income (loss) before income taxes (4,235) -- (14,615) -- (18,850)
Benefit for income taxes ....................... (1,481) -- (3,342) -- (4,823)
Extraordinary loss, net ........................ -- 1,456 -- 1,456
Equity in net loss of subsidiaries ............. 12,729 12,729 -- (25,458) --
--------- --------- --------- --------- ---------
Net loss ........................ $ (15,483) $ (12,729) $ (12,729) $ 25,458 $ (15,483)
========= ========= ========= ========= =========
</TABLE>
38
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Year Ended June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (2,173) $ 1,432 $ 1,432 $ (2,864) $ (2,173)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets ..................... -- -- 21,924 -- 21,924
Amortization of goodwill and other assets ........ -- 4,860 -- 4,860
Amortization of debt issue costs ................. 5,491 -- 1,159 -- 6,650
Earnings from limited partnership ................ -- (775) -- (775)
Deferred income taxes ............................ (1,903) -- (1,460) -- (3,363)
Non-cash ESOP compensation ....................... -- -- 407 -- 407
Change in:
Accounts receivable .......................... -- -- 5,078 -- 5,078
Inventories .................................. -- -- (2,763) -- (2,763)
Other assets ................................. 86 -- (4,183) -- (4,097)
Accounts payable, accrueds and other ......... (69) -- 8,489 -- 8,420
-------- -------- -------- -------- --------
Net cash provided by operating activities 1,432 1,432 34,168 (2,864) 34,168
Cash flows from investing activities:
Capital expenditures ............................. -- -- (14,413) -- (14,413)
Proceeds from the sale of non-plant assets ....... -- -- 477 -- 477
Distribution from limited partnership ............ -- -- 990 -- 990
-------- -------- -------- -------- --------
Net cash used in investing activities ... -- -- (12,946) -- (12,946)
Cash flows from financing activities:
Change in bank overdraft ......................... -- -- 874 -- 874
Net repayments under revolver .................... -- -- (10,000) -- (10,000)
Payments on long-term debt ....................... -- -- (6,979) -- (6,979)
Payment of cash bonus plan ....................... -- -- (7,807) -- (7,807)
Debt issuance costs .............................. -- -- (163) -- (163)
Reduction in note receivable from ESOP ........... -- -- 2,000 -- 2,000
-------- -------- -------- -------- --------
Net cash used in financing activities ... -- -- (22,075) -- (22,075)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ..... 1,432 1,432 (853) (2,864) (853)
Cash and cash equivalents, at beginning of period ........ -- -- 956 -- 956
-------- -------- -------- -------- --------
Cash and cash equivalents, at end of period .............. $ 1,432 $ 1,432 $ 103 $ (2,864) $ 103
======== ======== ======== ======== ========
</TABLE>
39
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Year Ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (4,515) $ (1,397) $ (1,397) $ 2,794 $ (4,515)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of fixed assets ..................... -- -- 25,208 -- 25,208
Amortization of goodwill and other assets ........ -- -- 6,579 -- 6,579
Amortization of debt issue costs ................. 4,813 -- 1,089 -- 5,902
Earnings from limited partnership ................ -- -- (476) -- (476)
Deferred income taxes ............................ (1,654) -- (1,680) -- (3,334)
Change in:
Accounts receivable .......................... -- -- (636) -- (636)
Inventories .................................. -- -- 716 -- 716
Other assets ................................. (4) -- 1,843 -- 1,839
Accounts payable, accrueds and other ......... 67 -- 3,661 -- 3,728
-------- -------- -------- -------- --------
Net cash provided by operating activities (1,293) (1,397) 34,907 2,794 35,011
Cash flows from investing activities:
Capital expenditures ............................. -- -- (12,466) -- (12,466)
Proceeds from the sale of non-plant assets ....... -- -- 871 -- 871
Distribution from limited partnership ............ -- -- 410 -- 410
-------- -------- -------- -------- --------
Net cash used in investing activities ... -- -- (11,185) -- (11,185)
Cash flows from financing activities:
Change in bank overdraft ......................... -- -- (10,157) -- (10,157)
Net repayments under revolver .................... -- -- -- -- --
Proceeds from issuance of long-term debt ......... -- -- 3,192 -- 3,192
Payments on long-term debt ....................... -- -- (9,706) -- (9,706)
Payment of cash bonus plan ....................... -- -- (7,807) -- (7,807)
Debt issuance costs .............................. (104) -- (389) -- (493)
Reduction in note receivable from ESOP ........... -- -- 2,000 -- 2,000
-------- -------- -------- -------- --------
Net cash used in financing activities ... (104) -- (22,867) -- (22,971)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ..... (1,397) (1,397) 855 2,794 855
Cash and cash equivalents, at beginning of period ........ -- -- 101 -- 101
-------- -------- -------- -------- --------
Cash and cash equivalents, at end of period .............. $ (1,397) $ (1,397) $ 956 $ 2,794 $ 956
======== ======== ======== ======== ========
</TABLE>
40
<PAGE>
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc.
Supplemental Combining Statement of Cash Flows
Year Ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTORS ELIMINATIONS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (15,483) $ (12,729) $ (12,729) $ 25,458 $ (15,483)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary loss, net ...................... -- -- 1,456 -- 1,456
Depreciation of fixed assets ................. -- -- 24,810 -- 24,810
Amortization of goodwill and other assets .... -- -- 5,066 -- 5,066
Amortization of debt issue costs ............. 4,229 -- 1,435 -- 5,664
Earnings from limited partnership ............ -- -- (670) -- (670)
Deferred income taxes ........................ -- -- (2,897) -- (2,897)
Change in:
Accounts receivable ...................... -- -- (9,382) -- (9,382)
Inventories .............................. -- -- (5,993) -- (5,993)
Other assets ............................. (1,475) -- (4,906) -- (6,381)
Accounts payable, accrueds and other ..... -- -- 2,051 -- 2,051
--------- --------- --------- --------- ---------
Net cash used in operating activities (12,729) (12,729) (1,759) 25,458 (1,759)
Cash flows from investing activities:
Capital expenditures ......................... -- -- (7,634) -- (7,634)
Proceeds from the sale of non-plant assets ... -- -- 4,754 -- 4,754
Distribution from limited partnership ........ -- -- 525 -- 525
Acquisition of the Company ................... -- -- (366,277) -- (366,277)
Proceeds from sale of Predecessor assets ..... -- -- 16,288 -- 16,288
--------- --------- --------- --------- ---------
Net cash used in investing activities -- -- (352,344) -- (352,344)
Cash flows from financing activities:
Change in bank overdraft ..................... -- 10,157 -- 10,157
Net repayments under revolver ................ -- (1,000) -- (1,000)
Proceeds from issuance of long-term debt ..... 30,000 -- 368,000 -- 398,000
Payments on long-term debt ................... -- -- (62,219) -- (62,219)
Payment of cash bonus plan ................... -- -- (9,406) -- (9,406)
Debt issuance and organization costs ......... (465) -- (15,839) -- (16,304)
Reduction in note receivable from ESOP ....... -- -- 2,000 -- 2,000
Proceeds from sale of common stock ........... 32,976 -- 32,976
Cash contribution to subsidiary .............. (62,511) -- 62,511 -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............. -- -- 354,204 -- 354,204
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents . (12,729) (12,729) 101 25,458 101
Cash and cash equivalents, at beginning of period
--------- --------- --------- --------- ---------
Cash and cash equivalents, at end of period .......... $ (12,729) $ (12,729) $ 101 $ 25,458 $ 101
========= ========= ========= ========= =========
</TABLE>
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director is elected for a one-year
term or until such person's successor is duly elected and qualified.
<TABLE>
<CAPTION>
YEARS OF
SERVICE WITH THECOMPANY
NAME AGE POSITION OR ITS PREDECESSORS
- ---- --- -------- -----------------------
<S> <C> <C>
Gordon A. Cain 87 Director 15
Hunter W. Henry Jr. 71 Director 1
William R. Huff 49 Director 3
William A. McMinn 69 Director and Chairman 15
Steve A. Nordaker 52 Director 2
Gary L. Rosenthal 50 Director 1
Susan O. Rheney 40 Director 3
John T. Shelton 68 Director 15
B. W. Waycaster 60 Director, President and Chief Executive Officer 7
Bill R. McNeese 65 Vice President, Operations 11
H.E. Sebastian 55 Vice President, Marketing and Supply 1
Carl S. Stutts 52 Vice President, Finance and Corporate Development 1
Stephen R. Wright 51 Vice President, Secretary and General Counsel 3
</TABLE>
Mr. Cain is Chairman of the Board of Agennix Inc. and of Lexicon
Genetics, Inc., biotechnology companies. From August 1982 until his retirement
in December 31, 1992, he was Chairman of the Board of The Sterling Group, Inc.
("Sterling"). Mr. Cain was the Chairman of the Board of Sterling Chemicals, Inc.
from 1986 until it was sold in August 1996 and was on the Board of Directors of
Arcadian Corporation from May 1989 until it was sold in April 1997. Prior to
organizing Sterling, Mr. Cain was involved in the purchase of a variety of
businesses and provided consulting services to these and other companies. Mr.
Cain was also Chairman of the Board of UltraAir, Inc. from 1991 to 1994,
Chairman of the Board of Cain Chemical Inc. from its organization in March 1987
until its acquisition by Occidental Petroleum Corporation in May 1988 and the
Chairman of the Board of Vista Chemical Company from 1984 until 1986.
42
<PAGE>
Mr. Henry has held various manufacturing and management positions in the
Dow Chemical Company, including Vice President - Business Operations for Latin
America, Vice President - Manufacturing Dow Badische, General Manager - Michigan
Division, President - Dow Brazil, President - Dow USA and Executive Vice
President of Dow Chemical Company (1982 - 1988). Mr. Henry was on Dow's board
from 1979 to 1993 and has served on the Executive, Compensation, Health and
Safety Committees and as Chairman of the Finance and Investment Policy
Committee. Mr. Henry also served as Chairman of the Board of Dowell
Schlumberger, 1985 - 1988.
Mr. Huff has been President of the General Manager of WRH Partners, L.L.C.,
the General Partner of The Huff Alternative Income Fund, L.P. (the "Huff Fund")
since 1994. He also has been President of one of the general managers of W.R.
Huff Asset Management Co., L.L.C., an investment management firm, since 1984.
Mr. Huff serves on the Board of Directors as the designee of the Huff Fund.
Mr. McMinn has been Chairman of the Board of the Company since 1996. He was
Corporate Vice President and Manager of the Industrial Chemical Group of FMC
Corporation, a manufacturer of machinery and chemical products, from 1973
through 1985. He became President and Chief Executive Officer of Cain Chemical
Inc., a producer of petrochemicals, in 1987 and served in that capacity until
its acquisition by Occidental Petroleum in May 1988. He became Chairman of the
Board of Directors of Arcadian Corporation in August 1990 and served in that
capacity until it was sold in April 1997
Mr. Nordaker has been a Managing Director of Chase Securities since August
1995. From 1982 to 1995, he was a Group Manager at Texas Commerce Bank National
Association and, in addition, served in several capacities at Texas Commerce
Bank in the Energy Group, including Section Manager and Division Manager. From
May 1977 to March 1982, Mr. Nordaker was a Manager of Projects for The Frantz
Company, an engineering consulting firm servicing the oil refinery and
petrochemical industry. Prior thereto, he was a chemical engineer with Universal
Oil Products. Mr. Nordaker serves on the Board of Directors as the Designee of
Chase Venture, an affiliate of Chase Securities.
Ms. Rheney has been a principal of The Sterling Group, Inc. since February
1992. She worked as an independent financial consultant from December 1990 to
January 1992. Prior to that time, from June 1987 to November 1990, she was an
associate at Sterling. Ms. Rheney is also a director of AXIA Group, Inc., and
American Plumbing & Mechanical, Inc.
Mr. Rosenthal has served as President of Heaney Rosenthal, Inc. which
focuses on investment, acquisition and advice to various businesses since 1994,
and as Chairman of the Board, President and CEO of AXIA Incorporated since 1998.
Mr. Rosenthal previously served as Chairman of the Board (1990-1994) and CEO
(1994) of 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.
43
<PAGE>
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 Hydrocarbons and Resources when
he left to join the Company. Mr. Waycaster is a Board member of the Chemical
Manufacturers Association, National Petrochemical and Refiners Association, and
serves on the Advisory Board of ChemConnect, Inc..
Mr. McNeese retired from the Company on July 1, 1999, and has been retained
as a consultant. Mr. McNeese was the Vice President - Operations of the Company
from 1992 - 1999. 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 and Engineering for Paktank Corporation. Prior
thereto, Mr. McNeese held various positions in a number of Atlantic Richfield
Company businesses. Mr. McNeese has 36 years of experience in the chemicals
industry.
Mr. Sebastian joined the Company in March 1998 as Vice President Marketing
and Supply. Prior to joining the Company, he performed consulting activities in
chemical and oil products marketing, operations and logistics, specializing in
buying and selling physical assets and companies. Prior to that, he was
Executive Vice President of Commonwealth Oil Refining Company and a Co-Founder
of Arochem Corporation, both with refinery and petrochemical operations in
Puerto Rico. He also brings extensive marketing and trading experience from
Exxon Chemical Company and Phibro Energy.
Mr. Stutts joined the Company in April 1998 as Vice President of Finance
and Corporate Development. Previously, he was a general partner of Columbine
Venture Funds, an institutional venture capital fund focusing on investments in
early stage companies. From 1971 to 1988 he held various management positions in
Tenneco, Inc. and its subsidiary companies.
Mr. Wright joined the Company in August 1996 as Vice President and General
Counsel. From January 1996 until he joined the Company, Mr. Wright was engaged
in the private practice of law, either as a sole practitioner or of counsel to
Andrews & Kurth, L.L.P. For over five years prior thereto, Mr. Wright was the
Vice President and General Counsel or the Senior Vice President and General
Counsel of Destec Energy, Inc.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company receive an
annual retainer of $15,000 and a fee of $500 for each meeting of the Board or
any committee thereof that they attend. Directors who are also employees of the
Company do not receive Director compensation.
44
<PAGE>
ITEM 11. 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 the Company for the three years ended June 30, 1999.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS
- --------------------------- ------ ------ -----
B. W. Waycaster, President and
Chief Executive Officer ................... 1999 $300,000 $459,156
1998 300,000 507,186
1997 300,000 326,787
Stephen R. Wright, Vice
President, Secretary and .................. 1999 $180,000 $275,494
General Counsel ........................... 1998 180,000 281,138
1997 165,000 50,104
Bill R. McNeese, Vice
President, Operations ..................... 1999 $150,000 $229,579
1998 150,000 236,251
1997 148,500 63,869
H.E. Sebastian
Vice President, Marketing and Supply ...... 1999 $175,000 $265,500
1998 58,333 19,779
Carl S. Stutts, Vice President,
Finance and Corporate Development ........ 1999 $175,000 $267,841
1998 41,761 --
- ----------------
(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.
There were no stock options granted during the fiscal year ended June 30,
1999 to the Named Executive Officers.
The following table sets forth the number and dollar value of exercised and
unexercised options held by each of the Named Executive Officers at June 30,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1999 JUNE 30, 1999
----------------------------- -----------------------------
EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
B.W. Waycaster .. 2,285 1,143 $59,410 $29,718
H.E. Sebastian .. 1,667 3,333 43,342 86,658
Carl S. Stutts .. 1,667 3,333 43,342 86,658
Stephen R. Wright 900 450 23,400 11,700
</TABLE>
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 1, 1999, 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
Hunter W. Henry Jr .................... -- --
1204 Brooks Hollow Rd ...............
Austin, TX 78734
William R. Huff ....................... -- --
67 Park Place
Morristown, New Jersey 07960
William A. McMinn ..................... 13,333(1) 2.5%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese ....................... 2,000 0.4%
Three Riverway, Suite 1500
Houston, Texas 77056
Steve A. Nordaker ..................... -- --
707 Travis, 7th Floor
Houston, TX 77002
Susan O. Rheney ....................... 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Gary L. Rosenthal ..................... 1,450(2) 0.7%
600 Travis, Suite 6110
Houston, TX 77002
H.E. Sebastian ........................ 2,167(3) 0.4%
Two Penn Plaza, 22nd Floor
New York, NY 10121
John T. Shelton ....................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Carl S. Stutts ........................ 4,167(4) 0.8%
3810 Swartmore Street
Houston, TX 77056
B. W. Waycaster ....................... 42,285(5) 8.0%
Three Riverway, Suite 1500
Houston, Texas 77056
Stephen R. Wright ..................... 2,550(6) 0.5%
Three Riverway, Suite 1500
Houston, Texas 77056
All directors and Named Executive
Officers as a group (12 persons) .... 150,502 28.5%
Texas Petrochemicals Corporation ESOP . 100,000 18.9%
Capital Southwest Corporation ......... 30,000 5.7%
12900 Preston Road, Suite 700
Dallas, Texas 75230
Chase Venture Capital Associates, L.P. 60,000 11.4%
380 Madison Avenue
New York, New York 10017
The Huff Alternative Income Fund, L.P. 57,778 10.9%
67 Park Place
Morristown, New Jersey 07960
(1) Includes 3,333 shares subject to options exercisable as of June 30, 1999.
(2) Does not include 2,000 shares held in Trust for Mr. Rosenthal. Mr. Rosental
disclaims beneficial ownership of the shares.
(3) Includes 1,667 shares subject to options exerciseable as of June 30, 1999.
(4) Includes 1,667 shares subject to options exerciseable as of June 30, 1999.
(5) Includes 2,285 shares subject to options exerciseable as of June 30, 1999.
(6) Includes 900 shares subject to options exerciseable as of June 30, 1999.
46
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and
Corporate Development in the amount of $200,000 of which $21,024 remained
outstanding as of June 30, 1999. The proceeds from the loan were utilized to
purchase outstanding shares of the Company's common stock at fair market value.
The loan carries an interest rate of 7%. During fiscal 1999 and 1998 the Company
made payments totaling $250,000 and $500,000, respectively, to a consulting firm
whose majority shareholder is also an outside director and shareholder of the
Company. The Chairman of the Company receives annual compensation of $150,000
for consulting services provided to the Company and reimbursements of
approximately $25,000 per year for office expenses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 of Form S-1, File No.
333-37811).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of
Form S-1, File No. 333-37811).
4.1 Indenture dated as of July 1, 1996 by and between the Company 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 of Texas Petrochemicals
Corporation's 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 4.2 of Texas
Petrochemicals Corporation's Form S-4, File No. 333-24589).
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the validity of the
Discount Notes (incorporated by reference to Exhibit 5 of Form
S-1, File No. 333-37811).
8 Opinion of Bracewell & Patterson, L.L.P. as to certain federal
income tax matters (incorporated by reference to Exhibit 8 of Form
S-1, File No. 333-37811).
10.1 Holdings' 1996 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 of Form S-1, File No. 333-37811).
10.2 TPC Employee Stock Ownership Plan (incorporated by reference to
Exhibit 10.2 of Texas Petrochemicals Corporation's Form S-4, file
No. 333-11569).
10.3 TPC Employee Stock Ownership Plan Trust Agreement (incorporated by
reference to Exhibit 10.3 of Texas Petrochemicals Corporation's
Form S-4, File No. 333-11569).
10.4 TPC Cash Bonus Plan (incorporated by reference to Exhibit 10.4 of
Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.5 Security Agreement by and between Boatmen's Trust Company of Texas
and the Company (incorporated by reference to Exhibit 10.5 of
Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.6 TPC Profit Sharing Plan (incorporated by reference to Exhibit 10.6
of Texas Petrochemicals Corporation's Form S-4, File No.
333-11569).
10.7 Lease for Calcasieu Parish, Louisiana (incorporated by reference
to Exhibit 10.7 of Texas Petrochemicals Corporation's 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
47
<PAGE>
Scotia (incorporated by reference to Exhibit
10.8 of Texas Petrochemicals Corporation's Form S-4, File No.
333-11569).
10.9 Security Agreement date as of July 1, 1996 by and between the
Company and Texas Commerce Bank, National Association
(incorporated by reference to Exhibit 10.9 of Texas Petrochemicals
Corporation's Form S-4, File No. 333-11569).
10.10 Pledge Agreement date as of July 1, 1996 by and between the
Company and Texas Commerce Bank, National Association
(incorporated by reference to Exhibit 10.10 of Texas
Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.11 Letter Agreement dated May 6, 1996 by and among The Sterling
Group, Inc., Texas Petrochemical Holdings, Inc., TPC Holding, and
the Company (incorporated by reference 10.11 of Texas
Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.12 Form of Indemnity Agreement between the Company and each of its
officers and directors (incorporated by reference to Exhibit 10.12
of Texas Petrochemicals Corporation's Form S-4, File No.
333-11569).
10.13 Form of Tax Sharing Agreement among Texas Petrochemical Holdings,
Inc., TPC Holding, the Company and Texas Butylene Chemical
Corporation (incorporated by reference to Exhibit 10.13 of Texas
Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.14 Employment Agreement with Bill W. Waycaster (incorporated by
reference to Exhibit 10.14 of Texas Petrochemicals Corporation's
Form S-4, File No. 333-11569).
10.15 Form of Indemnity Agreement between the Company and each of its
officers and directors.
10.16 Amendment to Credit Agreement dated as of June 30, 1998 by and
among the Company, Chase Bank of Texas, National Association, ABN
AMRO North America, Inc., the Bank of Nova Scotia and other
financial institutions listed on the signature pages attached
thereto (incorporated by reference to Exhibit 10.16 of Form S-1,
File No. 333-37811).
10.17 Amendment to Credit Agreement dated as of June 30, 1999 by and
among the Company, Chase Bank of Texas, National Association, ABN
AMRO North America, Inc., the Bank of Nova Scotia and other
financial institutions listed on the signature pages attached.
21 Subsidiaries of the Company (incorporated to Exhibit 21 of Form
S-1, File No. 333-37811).
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 25.1 of Texas
Petrochemicals Corporation's 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 25.2 of Texas
Petrochemicals Corporation's 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 (incorporated by reference
to Exhibit 25.3 of Form S-1, File No. 333-37811).
27 Financial Data Schedule
(b) Financial Statement Schedules
Not applicable
(c) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended June
30, 1999.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 27, 1999.
TEXAS PETROCHEMICAL HOLDINGS, INC.
(Registrant)
By: /s/ B.W. WAYCASTER
B.W. Waycaster
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
to be signed below by the following persons on behalf of the registrant in the
indicated capacities on September 27, 1999.
/s/ WILLIAM A. MCMINN Chairman
William A. McMinn
/s/ B.W. WAYCASTER Director, President and Chief Executive Officer
B.W. Waycaster
/s/ GORDON A. CAIN Director
Gordon A. Cain
/s/ HUNTER W. HENRY JR. Director
Hunter W. Henry Jr.
/s/ WILLIAM R. HUFF Director
William R. Huff
/s/ STEVE A. NORDAKER Director
Steve A. Nordaker
/s/ SUSAN O. RHENEY Director
Susan O. Rheney
/s/ GARY L. ROSENTHAL Director
Gary L. Rosenthal
/s/ JOHN T. SHELTON Director
John T. Shelton
/s/ CARL S. STUTTS Vice President, Finance and Corporate
Carl S. Stutts Development
49
EXHIBIT 10.17
FOURTH AMENDMENT
TO CREDIT AGREEMENT
This Fourth Amendment to Credit Agreement (this "AGREEMENT") dated as of
June 30, 1999 is entered into by and among Texas Petrochemicals Corporation, a
Texas corporation (the "COMPANY"), the banks and other financial institutions
listed on the signature pages attached hereto (the "LENDERS") and Chase Bank of
Texas, National Association, individually as a Lender and as agent for the other
Lenders (in such latter capacity together with any other Person who becomes the
agent, the "AGENT"), and ABN AMRO North America, Inc. as agent for ABN AMRO
Bank, N.V., and The Bank of Nova Scotia, each individually as a Lender and
together as documentation agents for the other Lenders (in such capacity,
together with any other Person who becomes a documentation agent, the
"DOCUMENTATION AGENTS").
WHEREAS, the Company (together with TPC Finance Corp., which merged into
the Company on the Effective Date), the Lenders, the Agent and the Documentation
Agents entered into that certain Credit Agreement dated as of July 1, 1996, as
amended pursuant to a First Amendment to Credit Agreement dated as of March 28,
1997, a Waiver and Second Amendment dated as of June 30, 1997 and a Third
Amendment to Credit Agreement dated as of June 30, 1998 (said Credit Agreement,
as so amended, the "CREDIT AGREEMENT"; capitalized terms used herein, unless
otherwise defined, are used as defined in the Credit Agreement); and
WHEREAS, the Company has requested the Lenders to amend certain provisions
of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto
hereby agree as follows:
1. AMENDMENT TO SECTION 1.01. Clause (c) of the definition of "Fixed
Charge Coverage Ratio" set forth in Section 1.01 of the Credit Agreement is
hereby amended in its entirety
to read as follows:
"(c) the lesser of (i) Scheduled Capital Expenditures for such
period and (ii) actual Capital Expenditures for such period (other than
Capital Expenditures permitted by Section 8.14(d)),".
2. AMENDMENT TO SECTION 8.13(A). Section 8.13(a) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"FIXED CHARGE COVERAGE RATIO. The Company will not permit at any
time the Fixed Charge Coverage Ratio to be (a) for the period from March
28, 1997 to and including June
<PAGE>
30, 1997, less than 1.0 to 1.0, (b) for the period from July 1, 1997 to
and including September 30, 1997, less than .8 to 1.0, (c) for the period
from October 1, 1997 to and including December 31, 1997, less than .9 to
1.0, (d) for the period from January 1, 1998 to and including June 30,
1998, less than 1.0 to 1.0, (e) for the period from July 1, 1998 to and
including June 30, 1999, less than 1.0 to 1.0, (f) for the period from
July 1, 1999 to and including December 31, 1999, less than 1.0 to 1.0, (g)
for the period from January 1, 2000 to and including June 30, 2000, less
than 1.0 to 1.0, and (h) at any time after June 30, 2000, less than 1.15
to 1.0".
3. AMENDMENT TO SECTION 8.13(B). Section 8.13(b) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"TOTAL DEBT TO EBITDA RATIO. The Company will not be required to
comply with any requirements for the ratio of Total Debt to EBITDA for the
period from March 28, 1997 to and including September 29, 1997. The
Company will not permit at any time the ratio of Total Debt to EBITDA to
be (a) for the period from September 30, 1997 to and including December
30, 1997, greater than 7.2 to 1.0, (b) for the period from December 31,
1997 to and including March 30, 1998, greater than 6.25 to 1.0, (c) for
the period from March 31, 1998 to and including June 29, 1998, greater
than 5.75 to 1.0, (d) for the period from June 30, 1998 to and including
June 30, 1999, greater than 5.0 to 1.0, (e) for the period from July 1,
1999 to and including December 31, 1999, greater than 5.0 to 1.0, (f) for
the period from January 1, 2000 to and including June 30, 2000, greater
than 5.25 to 1.0, (g) for the period from July 1, 2000 to and including
June 30, 2001, greater than 3.5 to 1.0, (h) for the period from July 1,
2001 to and including June 30, 2002, greater than 3.0 to 1.0, (i) for
period from July 1, 2002 to and including June 30, 2003, greater than 3.0
to 1.0, and (j) for the period from July 1, 2003 to and including June 30,
2004, greater than 3.0 to 1.0.".
4. AMENDMENT TO SECTION 8.14. Section 8.14 of the Credit Agreement
is hereby amended by replacing the phrase "Except as permitted in subclauses (b)
and (c) below, " with the phrase "Except as permitted in subclauses (b), (c) and
(d) below,".
Section 8.14 of the Credit Agreement is hereby further amended by adding a
new subclause (d) reading in its entirety as follows:
(d) The Company and its Subsidiaries may make Capital Expenditures
for one or more projects for expansion of the specialty chemicals business
so long as the aggregate Capital Expenditures pursuant to this Section
8.14(d) do not exceed $10,000,000 in the aggregate.
5. RATIFICATION. (a) The Credit Agreement, the Notes and the other
Loan Documents, as amended and affected by this Agreement, shall continue in
full force and effect, and are hereby ratified and confirmed; and
(b) Nothing in this Agreement releases any right, claim, lien,
security interest or entitlement of any Lender created by or contained in
any of such documents nor is the
-2-
<PAGE>
Company or any other Person released from any covenant, warranty or
obligation created by or contained therein.
6. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Lenders that (a) this Agreement has been duly authorized,
executed and delivered on behalf of the Company, (b) this Agreement constitutes
a valid and legally binding agreement enforceable against the Company in
accordance with its terms except, in each case, as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws relating to or affecting the enforcement of
creditors' rights generally, and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law),
(c) after giving effect to this Agreement, the representations and warranties by
the Company contained in the Credit Agreement and in the other Loan Documents
are true and correct on and as of the date hereof in all material respects as
though made as of the date hereof except as heretofore otherwise disclosed in
writing to the Agent (other than those of such representations and warranties
which by their express terms speak to a date on or before the date hereof) and
(d) after giving effect to this Agreement, no Default exists under the Credit
Agreement or any of the other Loan Documents. The Agent may, at its option,
request appropriate documentary evidence to demonstrate the accuracy of the
statements in subsections (a) and (d) hereof.
7. REFERENCE TO THE CREDIT AGREEMENT AND EFFECT ON THE NOTES AND
OTHER LOAN DOCUMENTS.
(a) Upon the effectiveness of the amendments set forth in SECTIONS 1
AND 2, each reference in the Credit Agreement to "this Agreement", "hereunder,"
"herein" or words of like import shall mean and be a reference to the Credit
Agreement, as amended and affected hereby.
(b) Upon the effectiveness of the amendments set forth in SECTIONS 1
AND 2, each reference in the Notes and the other Loan Documents to "the Credit
Agreement" shall mean and be a reference to the Credit Agreement, as amended and
affected hereby.
8. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be construed as an original, but all of which
together shall constitute one and the same instrument.
9 RATIFICATION BY GUARANTORS. By its execution of this Agreement
each of TPC, Holding Co. and Texas Butylene Chemical Corporation hereby consents
and agrees to the provisions of this Agreement and ratifies and confirms the
Guaranty and other Loan Documents to which it is a party, as amended and
affected hereby.
10. EFFECTIVENESS OF AGREEMENT. This Agreement shall become
effective upon the execution hereof by the Company, TPC, Holding Co., Texas
Butylene Chemical Corporation and Lenders constituting the Majority Lenders
under the Credit Agreement.
11. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
-3-
<PAGE>
EXCEPT TO THE EXTENT THAT THE LAWS OF THE UNITED STATES OF AMERICA, AND ANY
RULES, REGULATIONS OR ORDERS ISSUED OR PROMULGATED THEREUNDER APPLICABLE TO THE
AFFAIRS AND TRANSACTIONS OF THE BANKS OTHERWISE PREEMPT TEXAS LAW, IN WHICH
EVENT SUCH FEDERAL LAW SHALL CONTROL.
12. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT, THE CREDIT
AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED
IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
COMPANY:
TEXAS PETROCHEMICALS CORPORATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-4-
<PAGE>
SWING LINE LENDER:
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION (formerly known as TEXAS
COMMERCE BANK NATIONAL
ASSOCIATION)
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-5-
<PAGE>
LENDER:
ABN AMRO BANK N.V., HOUSTON AGENCY
BY: ABN AMRO NORTH AMERICA, INC.,
AS AGENT
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-6-
<PAGE>
LENDER:
THE BANK OF NOVA SCOTIA
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-7-
<PAGE>
LENDER:
BANK OF SCOTLAND
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-8-
<PAGE>
LENDER:
PARIBAS
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-9-
<PAGE>
LENDER:
THE FIRST NATIONAL BANK OF CHICAGO
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-10-
<PAGE>
LENDER:
HIBERNIA NATIONAL BANK
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-11-
<PAGE>
LENDER:
THE CIT GROUP/BUSINESS CREDIT, INC.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-12-
<PAGE>
LENDER:
THE FUJI BANK, LIMITED
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-13-
<PAGE>
LENDER:
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION (formerly known as TEXAS
COMMERCE BANK NATIONAL
ASSOCIATION)
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-14-
<PAGE>
LENDER:
BANK OF AMERICA, N.A. (FORMERLY
(NATIONSBANK, N.A. (FORMERLY THE
BOATMEN'S NATIONAL BANK OF ST. LOUIS)
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-15-
<PAGE>
LENDER:
NATIONAL BANK OF CANADA
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-16-
<PAGE>
LENDER:
PILGRIM AMERICA PRIME RATE TRUST
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-17-
<PAGE>
LENDER:
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-18-
<PAGE>
LENDER:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-19-
<PAGE>
LENDER:
VAN KAMPEN AMERICAN CAPITAL TRUST
PRIME RATE INCOME TRUST
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-20-
<PAGE>
LENDER:
CAPTIVA FINANCE LTD.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-21-
<PAGE>
AGENT:
Acknowledged as of the dfirst above written:
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION (formerly known as TEXAS
COMMERCE BANK NATIONAL
ASSOCIATION)
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
DOCUMENTATION AGENTS:
ABN AMRO NORTH AMERICA, INC., AS AGENT
FOR ABN AMRO BANK N.V.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
THE BANK OF NOVA SCOTIA
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-22-
<PAGE>
Consented to and agreed to
as of the date first above
written:
TPC HOLDING CORP.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
TEXAS PETROCHEMICAL HOLDINGS, INC.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
TEXAS BUTYLENE CHEMICAL CORPORATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 6/30/99 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 40,220
<ALLOWANCES> 0
<INVENTORY> 19,973
<CURRENT-ASSETS> 78,872
<PP&E> 219,706
<DEPRECIATION> 71,447
<TOTAL-ASSETS> 482,849
<CURRENT-LIABILITIES> 74,357
<BONDS> 269,394
0
0
<COMMON> 5
<OTHER-SE> 13,007
<TOTAL-LIABILITY-AND-EQUITY> 482,849
<SALES> 448,155
<TOTAL-REVENUES> 448,155
<CGS> 374,401
<TOTAL-COSTS> 409,519
<OTHER-EXPENSES> 1,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,444
<INCOME-PRETAX> 468
<INCOME-TAX> 2,641
<INCOME-CONTINUING> (2,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,173)
<EPS-BASIC> (6.99)
<EPS-DILUTED> (6.99)
</TABLE>
