AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER __, 1996
REGISTRATION NO. 333-11569
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TEXAS PETROCHEMICALS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2869
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
TEXAS 74-1778313
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
CLAUDE E. MANNING
8707 KATY FREEWAY, SUITE 300 8707 KATY FREEWAY, SUITE 300
HOUSTON, TEXAS 77024 HOUSTON, TEXAS 77024
(713) 461-3322 (713) 461-3322
(ADDRESS, INCLUDING ZIP CODE, (ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,INCLUDING AREA CODE, AND TELEPHONE NUMBER,INCLUDING
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) AREA CODE OF REGISTRANT'S
AGENT FOR SERVICE OF PROCESS)
------------------------
COPY TO:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
SOUTH TOWER PENNZOIL PLACE, SUITE 2900
711 LOUISIANA STREET
HOUSTON, TEXAS 77002-2781
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company or there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
TEXAS PETROCHEMICALS CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS OF FORM S-4 AND THE LOCATION IN THE
PROSPECTUS
PURSUANT TO RULE 404(A) UNDER THE SECURITIES ACT OF 1933 AND ITEM 501(B) OF
REGULATION S-K
FORM S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------- -------------------------------------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Facing Page; Cross Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside Back Cover
Pages of Prospectus; Additional
Information
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information........................ Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors;
Pro Forma Combined Financial
Information; Selected Historical
Financial Data
4. Terms of the Transaction............. Prospectus Summary; The Exchange
Offer; Description of the Notes;
Certain Federal Income Tax
Considerations
5. Pro Forma Financial Information...... Prospectus Summary; Pro Forma
Combined Financial Information
6. Material Contracts with the Company
Being Acquired..................... Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters.......... Not Applicable
8. Interests of Named Experts and
Counsel............................ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Not Applicable
10. Information with Respect to S-3
Registrants........................ Not Applicable
11. Incorporation of Certain Information
by Reference....................... Not Applicable
12. Information with Respect to S-2 or
S-3 Registrants.................... Not Applicable
13. Incorporation of Certain Information
by Reference....................... Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants........................ Prospectus Summary; Selected
Historical Financial Data; Pro Forma
Combined Financial Information;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business; Description
of the Notes; Combined Financial
Statements
15. Information with Respect to S-3
Companies.......................... Not Applicable
16. Information with Respect to S-2 or
S-3 Companies...................... Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies.... Not Applicable
18. Information if Proxies, Consents or
Authorizations are to be
Solicited.......................... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange
Offer.............................. The Exchange Offer; Management;
Related Transactions; Beneficial
Ownership of Holdings' Common Stock
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER __, 1996
TEXAS PETROCHEMICALS CORPORATION
OFFER TO EXCHANGE ITS
11 1/8% EXCHANGE SENIOR SUBORDINATED NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OUTSTANDING
11 1/8% SENIOR SUBORDINATED NOTES DUE 2006
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON_____,__1996,
UNLESS EXTENDED BY TEXAS PETROCHEMICALS CORPORATION IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). ALTHOUGH TEXAS PETROCHEMICALS CORPORATION HAS NO PRESENT
INTENTION TO CONDUCT ITS EXCHANGE OFFER LONGER THAN 30 DAYS, IT RESERVES THE
RIGHT TO EXTEND THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
Texas Petrochemicals Corporation, a Texas corporation (the "Company" or
"TPC"), hereby offers, upon the terms and subject to the conditions set forth in
the Prospectus (the "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal" and, together with the Prospectus, the "Exchange
Offer"), to exchange $1,000 principal amount of its 11 1/8% Exchange Senior
Subordinated Notes due 2006 (the "Exchange Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 11 1/8% Senior Subordinated Notes due 2006
(the "Original Notes"), of which an aggregate of $175,000,000 principal amount
is outstanding.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer pursuant to the Securities Act, and (ii) holders of
the Exchange Notes generally will not be entitled to the rights of holders of
the Original Notes under the Registration Rights Agreement (as defined under
"Prospectus Summary -- The Exchange Offer") following the consummation of the
Exchange Offer. See "The Exchange Offer -- Registration Rights," "--
Consequences of Failure to Exchange" and "-- Resale of the Exchange Notes; Plan
of Distribution." The Exchange Notes will evidence the same debt as the Original
Notes (which they replace) and will be issued under, and be entitled to the
benefits of, the indenture governing the Exchange Notes.
The Company will accept for exchange any and all Original Notes validly
tendered and not withdrawn prior to the Expiration Date. Tenders of Original
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is subject to certain customary conditions. See "The Exchange Offer." The
Original Notes may be tendered only in integral multiples of $1,000 principal
amount.
(PROSPECTUS COVER CONTINUED ON FOLLOWING PAGE)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
<PAGE>
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1996.
<PAGE>
The Original Notes and the Exchange Notes are referred to herein
collectively as the "Notes."
Interest on the Notes is payable semiannually on January 1 and July 1 of
each year, commencing January 1, 1997. Except as described below, the Notes are
not redeemable at the option of the Company prior to February 15, 1999.
Thereafter, the Notes will be redeemable, in whole or in part, at the option of
the Company, at the redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. Up to 35% of the
original principal amount of the Notes will be redeemable at any time and from
time to time prior to July 1, 1999, at the option of the Company, with the
proceeds of any Public Equity Offerings (as defined under "Description of the
Notes -- Certain Definitions") following which there is a Public Market (as
defined under "Description of the Notes -- Certain Definitions") at a redemption
price equal to 110% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption; provided, however, that at
least $113.75 million aggregate principal amount of the Notes must remain
outstanding after each such redemption. Upon a Change in Control (as defined
under "Description of the Notes -- Change of Control"), each holder of Notes may
require the Company to purchase all or a portion of such holder's Notes at 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of purchase. The Notes are unsecured senior subordinated
obligations of the Company and will rank subordinate in right of payment to all
existing and future Senior Indebtedness (as defined under "Description of the
Notes -- Certain Definitions") of the Company. As of June 30, 1996, on a pro
forma basis after giving effect to the Transactions as if the Transactions had
occurred on that date, the Company would have had approximately $140.0 million
of Senior Indebtedness outstanding. For a more complete description of the
Notes, see "Description of the Notes."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters issued
to third parties, the Company believes, except as otherwise described herein,
the Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Original Notes may be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 of the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and that such holder does not intend to participate and there
is no arrangement or understanding with any person to participate, in the
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Issuer has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Exchange Offer -- Resale of the Exchange Notes; Plan of
Distribution."
Prior to this offering, there has been no public market for the Notes. The
Notes are not, and are not expected to be, listed on any securities exchange or
authorized for trading on NASDAQ. The Company does not expect that an active
market for the Notes will develop. The Original Notes have been eligible for
trading in the Private Offerings, Resale and Trading through Automated Linkages
(PORTAL) Market of The Nasdaq Stock Market, Inc., but the Exchange Notes will
not be so eligible. To the extent that an active market for Notes does develop,
the market value thereof will depend on many factors, including among other
things, prevailing interest rates, general economic conditions, the Company's
financial condition and results of operations, the volatility of the market for
non-investment grade debt and other factors. Such conditions might cause the
Notes, to the extent that they are traded, to trade at a discount. See "Risk
Factors -- Lack of Public Market for the Notes."
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any and all amendments thereto) on Form S-4 (the
"Registration Statement") under the Securities Act, with respect to, among other
things, the Exchange Notes offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company and the Notes, reference is hereby made
to the Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission, upon payment of prescribed fees. The Commission
maintains a Web site that contains reports and information regarding registrants
that file electronically with the Commission at Web site (http://www.sec.gov).
Pursuant to the Indenture (as defined under "Description of the Notes --
General"), so long as any of the Notes are outstanding, whether or not the
Company is subject to the reporting requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company is obligated to send to the Commission the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) if the Company were
subject to such reporting requirements; PROVIDED, HOWEVER, that if Holdings (as
defined) shall have become a Guarantor (as defined under "Description of the
Notes -- Certain Definitions") with respect to all obligations relating to the
Notes, the reports, information and other documents required to be filed and
provided as described hereunder may, at the Company's option, be filed by and be
those of Holdings rather than the Company; PROVIDED FURTHER, HOWEVER, that in
the event Holdings conducts, directly or indirectly, any business or holds,
directly or indirectly, any significant assets other than the capital stock of
TPC Holding (as defined) or the Company at the time of filing and providing any
such report, information or other document containing financial statements of
Holdings, Holdings shall include in such report, information or other document
summarized financial information (as defined in Rule 1-02(bb) of Regulation S-X
promulgated by the Commission) with respect to the Company. The Company is also
obligated to provide to all holders of the Notes, and file with the Trustee (as
defined under "Description of the Notes"), copies of such annual reports,
quarterly reports and other documents and, if filing such documents by the
Company with the Commission is not permitted under the Exchange Act, promptly
upon written request supply copies of such documents to any prospective
purchaser of the Notes and to securities analysts and broker-dealers upon their
request.
3
<PAGE>
PRODUCT OVERVIEW
<TABLE>
<CAPTION>
TWELVE MONTHS
NORTH TWELVE MONTHS ENDED MAY 31,
AMERICAN ENDED 1996
MARKET MAY 31, 1996 SALES
PRODUCT POSITION(1) REVENUES VOLUME(2) COMMENTS
- ------------------------ ---------- ------------- ------------- ---------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BUTADIENE................. 1 $112.6 623 Only significant North American
producer whose core business is
the production of butadiene. Only
domestic producer with
"on-purpose" capability.
MTBE...................... 2 $187.4 14,335 MTBE, produced by reacting
Bbls./day(3) methanol and isobutylene, is the
preferred oxygenate and a major
component of reformulated
gasoline in the U.S.
N-BUTYLENES........................ $ 48.2
Butene-1............. 1 229 The Company has the ability to
produce butene-1 from two
different production processes.
Butene-2(4).......... 1 55 The Company either recycles or
upgrades by-product streams into
butene-2, which is sold at higher
margins.
SPECIALTY ISOBUTYLENES.............. $ 74.5
Isobutylene
Concentrate........ 1 256 Sole U.S. producer.
High Purity
Isobutylene(5)..... 1 74 Of three U.S. producers, the
Company is the largest merchant
supplier to the chemical market.
Diisobutylene........ 1 38 Sole U.S. producer.
</TABLE>
- ------------
(1) The Company's (as defined) North American market share position, in terms of
annual rated production capacity. Rated capacities reflect production levels
achievable if plant operations are dedicated to maximizing output of that
particular product, which exceeds actual capacities available under typical
multi-product configurations.
(2) In millions of pounds per year, unless expressed in barrels per day.
Relevant conversion ratios for the Company's products are as follows:
POUNDS PER GALLON POUNDS PER BARREL
----------------- -----------------
MTBE 6.22 261.11
Butene-1, high purity isobutylene,
isobutylene concentrate 5.01 210.21
Butene-2 5.10 213.99
Diisobutylene 6.00 252.00
(3) Refers to sales of MTBE to third parties and excludes MTBE production
volumes used to produce high purity isobutylene.
(4) High purity butene-2 sold by the Company for use in chemical applications.
(5) High purity isobutylene sold by the Company for use in chemical
applications.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE FINANCIAL STATEMENTS AND OTHER INFORMATION SET FORTH HEREIN
COMBINE THE HISTORICAL RESULTS OF TEXAS OLEFINS COMPANY, A TEXAS CORPORATION
("TOC"), ITS SUBSIDIARIES AND CLARKSTON CORPORATION ("CLARKSTON"). UNLESS THE
CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" REFERS TO TOC AND
ITS SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS, AND TO TPC AND
ITS SUBSIDIARIES FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS. ALL REFERENCES
TO FISCAL YEARS IN THIS PROSPECTUS UP TO AND INCLUDING FISCAL 1995 REFER TO THE
FISCAL YEARS ENDED MAY 31 IN THE CALENDAR YEARS INDICATED. THE COMPANY HAS
CHANGED ITS FISCAL YEAR END TO JUNE 30 AND INFORMATION FOR FISCAL YEARS ENDED
SUBSEQUENT TO MAY 31, 1995 IS SO PRESENTED. ALL REFERENCES IN THIS PROSPECTUS TO
THE COMPANY'S CAPACITY TO PRODUCE CERTAIN PRODUCTS REFLECT PRODUCTION LEVELS
ACHIEVABLE IF PLANT OPERATIONS ARE DEDICATED TO MAXIMIZING OUTPUT OF THAT
PARTICULAR PRODUCT, WHICH EXCEEDS ACTUAL CAPACITY AVAILABLE UNDER TYPICAL
MULTI-PRODUCT PRODUCTION CONFIGURATIONS. UNLESS OTHERWISE INDICATED, INDUSTRY
DATA CONTAINED HEREIN, OTHER THAN WITH RESPECT TO THE COMPANY, IS DERIVED FROM
PUBLICLY AVAILABLE INDUSTRY TRADE JOURNALS AND OTHER PUBLICLY AVAILABLE INDUSTRY
SOURCES, WHICH THE COMPANY HAS NOT INDEPENDENTLY VERIFIED BUT WHICH THE COMPANY
BELIEVES TO BE RELIABLE.
THE COMPANY
The Company is the largest producer of butadiene and butene-1, and the
second largest producer of methyl TERTIARY-butyl ether ("MTBE"), in North
America, in terms of production capacity. In addition, the Company is the sole
producer of diisobutylene and isobutylene concentrate in the United States and
the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings. For the twelve months ended May 31, 1996,
butadiene represented 25% of the Company's total revenues, MTBE represented 41%,
n-butylenes 11%, specialty isobutylenes 16% and other revenues the remaining 7%.
On a pro forma basis after giving effect to the Transactions, the Company's
revenues for the twelve months ended May 31, 1996 and the one month ended June
30, 1996 would have been $454.2 million and $41.2 million, respectively, and
EBITDA (as defined) for the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 would have been $74.2 million and $4.3 million,
respectively.
The Company seeks to reduce its exposure to the cyclical nature of the
petrochemical industry through long-term, fixed profit contracts and to increase
its profitability by maximizing its production flexibility and increasing sales
of high margin n-butylenes and specialty isobutylenes. For the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, approximately 43% and
45% of the Company's total revenues were derived from products sold on a fixed
profit basis or whose selling prices were linked, directly or indirectly, to raw
material costs. The Company believes that the combination of its fixed profit
contracts, competitive cost position and specialty product sales provides
stability to its cash flows and helps to offset the effects of cyclical
downturns.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in North America, the Company believes that many of its customers
place significant value on its ability to provide a reliable domestic supply of
butadiene and as a result have entered into long-term sales contracts with the
Company, which, in aggregate, accounted for 92% and 88% of its butadiene sales
in the twelve months ended May 31, 1996 and the one month ended June 30, 1996,
respectively.
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
5
<PAGE>
Company to process their crude butadiene streams, as the crude butadiene volumes
they produce are not sufficient to justify the construction of on-site butadiene
recovery facilities. The Company estimates that producers accounting for 65% of
U.S. and Canadian ethylene production capacity do not internally process crude
butadiene by-product streams. The Company is the largest non-integrated crude
butadiene processor in North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations. For the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, fixed profit supply contracts for crude butadiene accounted
for approximately 92% and 72%, respectively, of the Company's butadiene sales
volume.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major component of,
reformulated gasoline ("RFG") and is used in over 25% of the U.S. gasoline pool.
MTBE is produced by reacting methanol and isobutylene, and the Company's ability
to produce isobutylene by three alternative methods enables it to produce MTBE
by the most economical processes available to the Company. In addition, the
Company has the ability to add incremental capacity to capitalize on expected
future growth, at a significantly lower cost than the cost of adding new
capacity. The Company believes that this incremental capacity gives it a
competitive advantage over other producers who would have to incur greater cost
to increase capacity. The Company sells MTBE to oil refiners and gasoline
producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and
CITGO Petroleum Corporation on both a contract and spot basis at prices linked
to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes. In the twelve months ended
May 31, 1996 and the one month ended June 30, 1996, sales of n-butylenes and
specialty isobutylenes represented 27% and 21%, respectively, of the Company's
revenues as compared to 19% in fiscal 1993.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally to produce MTBE for sale in the spot
market. In the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 18% and 11%, respectively, of the Company's isobutylene was
used in the production of specialty isobutylenes with the remainder being used
for MTBE production. In addition, the Company maintains the production
flexibility to upgrade n-butylenes contained in crude butadiene streams to
either isobutylene or butene-1 using its patented skeletal isomerization process
("SKIP"). This flexibility allows the Company to meet its customers' needs
through the most economical process, to produce additional products and to
capitalize on favorable market conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company's principal executive offices are located at 8707 Katy Freeway,
Suite 300, Houston, Texas 77024. The Company's telephone number is (713)
461-3322.
6
<PAGE>
THE TRANSACTIONS
Texas Petrochemical Holdings, Inc., a Delaware corporation ("Holdings"),
TPC Holding Corp., a Delaware corporation ("TPC Holding"), and TPC Finance
Corp., a Texas corporation ("Finance Co."), were organized in May 1996 to effect
the acquisition (the "Acquisition") of TOC and its subsidiaries, including TPC,
and to assume a raw materials supply contract from Clarkston. On the Closing
Date (as defined), Holdings issued and sold $43.8 million of its common stock
("Common Stock"), issued $6.2 million of its Common Stock for the shares
contributed by the Rollover Investors (as defined), sold a sufficient amount of
13.5% Senior Discount Notes Due 2007 (the "Discount Notes") and Common Stock, as
an investment unit to raise $30 million, and contributed the proceeds thereof to
TPC Holding. Finance Co. borrowed approximately $140.0 million under the Bank
Credit Agreement and received approximately $169 million in net proceeds of the
Notes and loaned the combined net proceeds to TPC Holding. TPC Holding used the
capital contributions received from Holdings, cash on hand and the proceeds of
the loan from Finance Co. to effect the Acquisition pursuant to a stock purchase
agreement dated as of May 14, 1996 (the "Stock Purchase Agreement"), to fund the
ESOP (as defined) and pay fees and expenses in connection with the Transactions.
TOC and Finance Co. then merged into TPC.
As a result of the foregoing, TPC is the primary obligor on the Notes and
the loans made pursuant to the Bank Credit Agreement, is a wholly-owned
subsidiary of TPC Holding (which in turn is wholly-owned by Holdings) and
operates the principal business of the Company. The sale of the Original Notes,
the execution of and initial borrowings under the Bank Credit Agreement, the
placement of the Common Stock and the sale of the Discount Notes are hereinafter
referred to as the "Financings." The Financings, the Acquisition, the
establishment of the ESOP, the payment of certain fees and expenses, and other
related transactions are collectively referred to herein as "The Transactions."
See "The Transactions."
Prior to the Acquisition, TPC established a Cash Bonus Plan (as defined)
providing generally for $35 million for certain present employees of the Company
and certain present employees of its independent contractors, of which 10% was
paid within 45 days of Closing (as defined) and the remainder will be paid in
sixteen quarterly installments after Closing. See "Management -- Cash Bonus
Plan."
7
<PAGE>
The following charts depict (i) the organizational structure of Holdings
and its subsidiaries (the acquiring companies), and TOC and its subsidiaries
(the companies that were acquired) prior to the Transactions and (ii) the
organizational structure upon consummation of the Transactions.
PRIOR TO THE TRANSACTIONS
Acquiring Companies Companies to be Acquired
Texas Petrochemical Texas Olefins Company Other
Holdings, Inc. ("TOC") Stockholders
("Holdings")
Issuer of Common Stock
and Discount Notes 81% 19%
100% Texas Petrochemicals
Corporation
TPC Holding Corp. ("TPC")
("TPC Holding")
100%
TPC Finance Corp.
("Finance Co.")
Initial borrower under the
Bank Credit Agreement
and issuer of the Notes
Following the Transactions
Texas Petrochemical
Holdings, Inc. Discount Notes
Common Stock ("Holdings") and Common Stock
$50 million Issuer of Common Stock $30 million
and Discount Notes
100%
TPC Holding Corp.
("TPC Holding")
100%
Bank Credit
Agreement Texas Petrochemicals
$140.6 million Corporation
("TPC")
Successor obligor on loans
under the Bank Credit
Agreement
Notes and the Notes
$175 million
8
<PAGE>
SOURCES AND USES OF FUNDS. Pursuant to the Stock Purchase Agreement, the
Acquisition was effected for $363.3 in cash and $6.2 million represented by the
shares contributed by the Rollover Investors. The following table sets forth the
sources and uses of funds used to effect the Acquisition.
AMOUNT
-------------
(IN MILLIONS)
SOURCES OF FUNDS:
Bank Credit Agreement(1)........... $ 140.0
Original Notes(2).................. 175.0
Discount Notes and Common Stock.... 30.0
Common Stock Placement............. 43.8
-------------
Total......................... $ 388.8
=============
USES OF FUNDS:
Acquisition(3)..................... $ 363.3
Company ESOP Loan(4)............... 10.0
Fees and expenses(5)............... 15.5
-------------
Total......................... $ 388.8
=============
- ------------
(1) Consists of $85.0 million under the Tranche A Term Loan (as defined) and
$45.0 million under the Tranche B Term Loan (as defined) and $10.0 million
under the ESOP Term Loan (as defined). The Company has available borrowings
under the Revolving Credit Facility (as defined) of up to $40.0 million,
subject to borrowing base limitations. See "Description of the Bank Credit
Agreement."
(2) Represents the gross proceeds of the sale of the Original Notes before the
underwriting discount to the Initial Purchasers (as defined).
(3) Acquisition cost is net of cash received from the sale of the Texas Falls
Corporation and the Ranch for combined proceeds of $7.8 million.
(4) For a description of the Company ESOP Loan, see "Management -- Employee
Stock Ownership Plan."
(5) Represents fees and expenses, including (i) the underwriting discount
payable by Finance Co. to the Initial Purchasers in connection with the sale
of the Original Notes, (ii) legal, accounting and other professional fees
payable in connection with the Transactions, and (iii) certain other
expenses.
9
<PAGE>
THE EXCHANGE OFFER
Registration Rights Agreement........... To fund a portion of the
Acquisition, the Company sold $175
million in aggregate principal
amount of Original Notes to
qualified institutional buyers as
defined in Rule 144A under the
Securities Act or to institutional
accredited investors within the
meaning of Rule 501 under the
Securities Act, through CS First
Boston Corporation and Merrill
Lynch, Pierce, Fenner & Smith
Incorporated, as initial purchasers
(the "Initial Purchasers"). The
Company and the Initial Purchasers
entered into a Registration Rights
Agreement dated as of July 1, 1996
(the "Registration Rights
Agreement"), which grants the
holders of the Original Notes
certain exchange and registration
rights. The Exchange Offer made
hereby is intended to satisfy such
exchange rights.
The Exchange Offer...................... $1,000 principal amount of Exchange
Notes in exchange for each $1,000
principal amount of Original Notes.
As of the date hereof, $175 million
aggregate principal amount of the
Original Notes are out- standing.
The Company will issue the Exchange
Notes to holders on the earliest
practicable date following the
Expiration Date.
Resales of the Exchange Notes........... Based on an interpretation by the
staff of the Commission set forth in
no-action letters issued to third
parties, the Company believes that,
except as described below, the
Exchange Notes issued pursuant to
the Exchange Offer may be offered
for resale, resold and otherwise
transferred by a holder thereof
(other than any such holder that is
an "affiliate" of the Company within
the meaning of Rule 405 under the
Securities Act) without compliance
with the registration and pro-
spectus delivery provisions of the
Securities Act, provided that such
Exchange Notes are acquired in the
ordinary course of such holder's
business and that such holder has no
arrangement or understanding with
any person to participate in the
distribution of such Exchange Notes.
Each broker-dealer that receives
Exchange Notes pursuant to the
Exchange Offer in exchange for
Original Notes that such
broker-dealer acquired for its own
account as a result of market-making
activities or other trading
activities (other than Original
Notes acquired directly from the
Company or its affiliates) must
acknowledge that it will deliver a
prospectus in connection with any
resale of such Exchange Notes. The
Letter of Transmittal states that by
so acknowledging and by delivering a
prospectus, a broker-dealer will not
be deemed to admit that it is an
"underwriter" within the meaning of
the Securities Act. If the Company
receives certain notices in the
Letter of Transmittal, this
Prospectus, as it may be amended or
supplemented from time to time, may
be used for the period described
below by a broker-dealer in
connection with resales of Exchange
Notes received in exchange for
Original Notes where such Original
Notes were acquired by such
broker-dealer as a result of
market-making activities or other
trading activities and not acquired
directly from the Company. The
Company has agreed that, if it
receives certain notices in the
Letter of Transmittal, for a period
of 180 days after the date on which
the Registration Statement becomes
effective, it will make this
Prospectus available to any such
broker-dealer for use in connection
with any such resale. The Letter of
Transmittal requires broker-dealers
tendering Original Notes in the
Exchange Offer to indicate whether
such broker-dealer acquired such
Original Notes for its own account
as a result of market-making
activities or other trading
activities (other than Original
Notes acquired directly from the
Company or any of its affiliates),
and if no broker-dealer indicates
that such Original Notes were so
acquired, the Company has no
obligation under the Registration
Rights Agreement to maintain the
effectiveness of the Registration
Statement past the con- summation of
the Exchange Offer or to allow the
use of this Prospectus for such
resales. See "The Exchange Offer --
Purpose and Effect of the Exchange
Offer"; " -- Registration Rights"
and " -- Resale of the Exchange
Notes; Plan of Distribution."
Expiration Date......................... The Exchange Offer expires at 5:00
p.m., New York City time, on , 1996,
unless such Exchange Offer is
extended by the
10
<PAGE>
Company in its sole discretion, in
which case the term "Expiration
Date" means the latest date and time
to which such Exchange Offer is
extended.
Conditions to the Exchange Offer........ The Exchange Offer is subject to
certain conditions, which may be
waived by the Company. See "The
Exchange Offer -- Conditions to the
Exchange Offer."
Procedures for Tendering the Original
Notes.................................. Each holder of Original Notes
wishing to accept the Exchange Offer
must complete, sign and date the
accompanying Letter of Transmittal
in accordance with the instructions
contained herein and therein, and
mail or otherwise deliver such
Letter of Transmittal together with
the Original Notes and any other
required documentation to the
Exchange Agent (as defined below
under "Exchange Agent") at the
address set forth herein. By
executing the Letter of Transmittal,
a holder will make certain
representations to the Company. See
"The Exchange Offer -- Registration
Rights" and " -- Procedures for
Tendering Original Notes."
Special Procedures for Beneficial
Owners................................. Any beneficial owner whose Original
Notes are registered in the name of
a broker, dealer, commercial bank,
trust company or other nominee and
who wishes to tender should contact
such registered holder promptly and
instruct such registered holder to
tender on such beneficial owner's
behalf. See "The Exchange Offer --
Procedures for Tendering Original
Notes."
Guaranteed Delivery Procedures.. Holders of Original Notes who wish
to tender their Original Notes when
those securities are not immediately
available or who cannot deliver
their Original Notes, the Letter of
Transmittal or any other documents
required by such Letter of
Transmittal to the Exchange Agent
prior to the Expiration Date, must
tender their Original Notes
according to the guaranteed delivery
procedures set forth in "The
Exchange Offer -- Procedures for
Tendering Original Notes --
GUARANTEED DELIVERY."
Withdrawal Rights....................... Tenders of Original Notes pursuant
to the Exchange Offer may be
withdrawn at any time prior to the
Expiration Date.
Acceptance of Original Notes and
Delivery of Exchange Notes............. The Company will accept for exchange
any and all Original Notes that are
properly tendered in the Exchange
Offer, and not withdrawn, prior to
the Expiration Date. The Exchange
Notes issued pursuant to the
Exchange Offer will be issued on the
earliest practicable date following
the acceptance for exchange of
Original Notes by the Company. See
"The Exchange Offer -- Terms of the
Exchange Offer."
Exchange Agent.......................... Fleet National Bank is serving as
exchange agent (the "Exchange
Agent") in connection with the
Exchange Offer.
Federal Income Tax Considerations....... The Company has received an opinion
of counsel advising that the
exchange of Original Notes for
Exchange Notes pursuant to the
Exchange Offer will not be treated
as a taxable exchange for federal
income tax purposes. See "Certain
Federal Income Tax Considerations."
11
<PAGE>
THE NOTES
Maturity Date........................ July 1, 2006.
Interest Payment Dates............... January 1 and July 1 of each year,
commencing January 1, 1997.
Optional Redemption.................. The Notes may be redeemed at the option
of TPC, in whole or in part, at any time
on or after July 1, 2001 at the
redemption prices set forth herein plus
accrued interest to the date of
redemption. Up to an aggregate of 35% of
the principal amount of the Notes may be
redeemed from time to time prior to July
1, 1999 at the option of TPC at the
redemption price set forth herein plus
accrued interest to the date of
redemption, with the net proceeds
received after the issuance of the Notes
of one or more Public Equity Offerings
following which there is a X Public
Market if at least $113.75 million
principal amount of the Notes remains
outstanding after each such redemption.
See "Description of the Notes --
Optional Redemption."
Change of Control.................... Upon a Change of Control, TPC will be
required to make an offer to repurchase
all outstanding Notes at 101% of the
principal amount thereof plus accrued
interest to the date of repurchase. See
"Description of the Notes -- Change of
Control."
Ranking.............................. The Notes are unsecured senior
subordinated obligations of TPC and, as
such, are subordinated in right of
payment to all existing and future
Senior Indebtedness of TPC. The Notes
rank PARI PASSU in right of payment with
all senior subordinated indebtedness of
TPC, if any, and rank senior to any
subordinated indebtedness of TPC. As of
June 30, 1996, after giving pro forma
effect to the Transactions as if they
had occurred on such date, the aggregate
amount of Senior Indebtedness of TPC
would have been approximately $140.0
million. See "Description of the Notes
-- Ranking."
Restrictive Covenants................ The indenture under which the Notes were
issued and the Exchange Notes will be
issued (the "Indenture") contains
certain covenants that, among other
things, limit the ability of TPC and/or
its Restricted Subsidiaries (as defined)
to (i) incur additional indebtedness,
(ii) pay dividends or make certain other
restricted payments, (iii) make
investments, (iv) enter into
transactions with affiliates, (v) make
certain asset dispositions, and (vi)
merge or consolidate with, or transfer
substantially all of its assets to,
another person. The Indenture also
limits the ability of TPC's Restricted
Subsidiaries to issue Capital Stock (as
defined) and to create restrictions on
the ability of such Restricted
Subsidiaries to pay dividends or make
any other distributions. In addition,
TPC is obligated, under certain
circumstances, to offer to repurchase
Notes at a purchase price equal to 100%
of the principal amount thereof, plus
accrued and unpaid interest, if any, to
the date of repurchase, with the net
cash proceeds of certain sales or other
dispositions of assets. However, all of
these limitations and prohibitions are
subject to a number of important
qualifications. See "Description of the
Notes -- Certain Covenants."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus before making any investment in the Notes.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OTHER INFORMATION
The summary combined historical financial information set forth below has
been derived from the combined financial statements of TOC, its subsidiaries and
Clarkston which appear elsewhere in this Prospectus and from combined financial
statements of TOC, its subsidiaries and Clarkston for prior fiscal years, and
should be read in conjunction with, and is qualified in its entirety by
reference to, such combined financial statements and their accompanying notes.
Such financial information is combined to reflect the assumption by the Company
of a raw material supply contract. The Company has changed its fiscal year to
end June 30, 1996. The combined financial information set forth below for each
of the years in the three-year period ended May 31, 1995, the twelve month
period ended May 31, 1996 and the one month period ended June 30, 1996 has been
audited by Coopers & Lybrand L.L.P., independent auditors for such entities. The
combined financial information set forth below for the year ended May 31, 1992
has been derived from unaudited combined financial statements of TOC, its
subsidiaries and Clarkston, which, in the opinion of management, have been
prepared on a basis consistent with the audited combined financial statements of
such entities and contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for these periods.
The unaudited combined financial information for the year ended May 31, 1992 has
been prepared from audited financial statements of TOC and its subsidiaries and
unaudited financial statements of Clarkston. The results of the one month period
is not necessarily indicative of the results of the entire year or any other
period. The pro forma combined income statement and cash flow statement data of
TOC, its subsidiaries and Clarkston presented below has been derived from the
unaudited pro forma combined financial statements of TOC, its subsidiaries and
Clarkston included elsewhere herein, and give effect to the Transactions
(including the Acquisition, the Financings, the sale of certain assets and the
new employee compensation arrangements) as if they had occurred on June 1, 1995.
The pro forma combined balance sheet data of TOC, its subsidiaries and Clarkston
at June 30, 1996 presented below has been derived from the unaudited pro forma
combined financial statements of such entities included elsewhere herein, and
give effect to the Transactions as if they had occurred on June 30, 1996. The
summary pro forma combined financial information does not necessarily represent
what such entities' financial position and results of operations would have been
if the Transactions had actually been completed as of the dates indicated and
are not intended to project such entities' financial position or results of
operations for any future period or as of any date. The information presented
below should be read in conjunction with the combined financial statements of
TOC, its subsidiaries and Clarkston and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Pro Forma Combined Financial Information and the related notes thereto
included elsewhere herein.
13
<PAGE>
<TABLE>
<CAPTION>
PRO PRO
FORMA FORMA
TWELVE ONE TWELVE ONE
MONTHS MONTH MONTHS MONTH
ENDED ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, MAY 31, JUNE 30,
------------------------------------------ ------- -------- ------- --------
1992 1993 1994 1995 1996 1996 1996 1996
--------- --------- --------- --------- ------- -------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 416.1 $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4 $454.2 $ 41.2
Cost of goods sold(1)................ 318.3 340.8 268.8 396.3 379.5 36.0 367.3 35.4
Depreciation and amortization........ 12.0 12.6 13.6 14.3 15.0 1.3 36.3 3.1
--------- --------- --------- --------- ------- -------- ------- --------
Gross profit......................... 85.8 57.3 70.0 64.1 61.1 4.1 50.6 2.7
Selling, general and administrative
expenses(1)........................ 15.4 14.4 16.7 16.6 19.1 1.7 12.7 1.5
--------- --------- --------- --------- ------- -------- ------- --------
Income from operations............... 70.4 42.9 53.3 47.5 42.0 2.4 37.9 1.2
Interest income (expense), net....... (0.6) (0.6) (0.2) 0.7 (1.6 ) (.1) (31.9 ) (2.6)
Other income (expense)(2)............ (6.3) (1.2) (0.8) 1.1 (15.9 ) (.3) (15.6 ) (0.2)
--------- --------- --------- --------- ------- -------- ------- --------
Income before income taxes and
minority interest.................. 63.5 41.1 52.3 49.3 24.5 2.0 (9.6 ) (1.6)
Provision for income taxes........... 24.3 13.0 18.4 16.9 7.9 0.8 -- --
Minority interest in net loss of
consolidated subsidiary............ -- -- 0.0 0.1 0.1 0.0 -- --
--------- --------- --------- --------- ------- -------- ------- --------
Net income........................... 39.2 28.1 33.9 32.5 16.7 1.2 (9.6 ) (1.6)
OPERATING DATA:
Revenues by product:
Butadiene(3)..................... $ 64.9 $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2 $112.6 $ 10.2
MTBE............................. 252.0 211.0 175.2 199.1 187.4 21.0 187.4 21.0
n-Butylenes...................... 29.2 21.7 28.1 42.7 48.2 3.2 48.2 3.2
Specialty Isobutylenes........... 38.2 54.8 59.9 75.5 74.5 5.5 74.5 5.5
Other(4)......................... 31.8 41.9 20.5 51.2 32.9 1.5 31.5 1.3
Sales volumes (in million of pounds):
Butadiene........................ 559.1 556.2 484.4 580.8 622.6 64.6 622.6 64.6
MTBE(5).......................... 254.4 225.1 194.8 211.1 219.8 26.6 219.8 26.6
n-Butylenes...................... 158.7 114.7 150.8 245.9 284.6 17.1 284.6 17.1
Specialty Isobutylenes........... 240.4 309.0 312.2 398.0 368.2 23.0 368.2 23.0
</TABLE>
<TABLE>
<CAPTION>
MAY 31, PRO FORMA
------------------------------------------ JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 33.9 $ 38.6 $ 50.6 $ 67.8 $ 25.3 $ 20.8
Property, plant and equipment, net... 101.8 101.6 95.9 90.1 81.8 260.5
Total assets......................... 203.2 194.1 214.6 230.7 167.9 540.6
Long-term debt (including current
portion)........................... 14.4 10.9 11.0 -- 13.0 315.0
Total stockholders' equity........... 123.7 128.2 140.4 163.3 92.5 66.2
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
PRO PRO
FORMA FORMA
TWELVE ONE TWELVE ONE
MONTHS MONTH MONTHS MONTH
ENDED ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, MAY 31, JUNE 30,
------------------------------------------ ------- -------- ------- --------
1992 1993 1994 1995 1996 1996 1996 1996
--------- --------- --------- --------- ------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................ $ 82.4 $ 55.5 $ 66.9 $ 61.8 $57.6 $3.7 $74.2 $ 4.3
Employee profit sharing and
bonuses(1)......................... 22.5 18.6 23.6 20.9 23.5 1.0 8.3 .5
Capital expenditures................. 7.1 12.0 12.5 8.7 5.5 2.0 5.5 2.0
Net cash provided by operating
activities......................... 53.9 44.5 30.2 50.3 44.5 13.9 -- --
Net cash provided by (used in)
investing activities............... (24.5) (7.2) (5.3) (25.9) 8.2 (1.3) -- --
Net cash used in financing
activities......................... (31.3) (29.9) (17.6) (23.3) (69.0) (9.4) -- --
Cash dividends....................... 8.7 23.7 21.4 6.2 16.5 -- -- --
Pro forma ratio of EBITDA to interest
expense, net....................... 2.3x 1.7x
Pro forma ratio of long-term debt to
EBITDA(7).......................... 4.2x 6.1x
Pro forma ratio of earnings to fixed
charges(8)......................... -- --
</TABLE>
- ------------
(1) Historically, the Company has allocated employee profit sharing and bonuses
to cost of goods sold and selling, general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." Employee profit sharing and bonuses on
a pro forma basis are restated to reflect amounts that would have been paid
under new plans to be established as part of the Acquisition.
(2) Includes dividend income, charitable contributions, gain (loss) on disposal
of assets and investment securities, net, and other, net. For the twelve
months ended May 31, 1996, other expense includes an impairment of
investment in land of $12.6 million.
(3) Approximately 95% of the Company's butadiene sales are under fixed profit
contracts with suppliers of crude butadiene.
(4) Includes Clarkston's trading revenues from third parties, utility revenues,
revenues realized from the Company's terminalling facilities and sales of
chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income from operations before taking into consideration
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. EBITDA should not be construed by an investor as an alternative to
income from operations (as determined in accordance with generally accepted
accounting principles) as an indicator of the operating performance of the
Company or as an alternative to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as a
measure of liquidity.
(7) For the purposes of calculating the pro forma ratio of long-term debt to
EBITDA for the one month ended June 30, 1996, EBITDA has been calculated on
an annualized basis.
(8) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the pro forma
twelve months ended May 31, 1996 and the one month ended June 30, 1996,
earnings were insufficient to cover fixed charges in the amount of $(9.6)
million and $(1.6) million, respectively. For the twelve months ended May
31, 1996, income before taxes and minority interest includes a $12.6 million
non-cash provision for the impairment of certain non-strategic properties
which TPC intends to sell.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PURCHASERS OF THE
NOTES OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW.
SUBSTANTIAL LEVERAGE
In connection with the Transactions, the Company incurred a significant
amount of indebtedness and has significant debt service requirements. As of June
30, 1996, on a pro forma basis after giving effect to the Transactions as if the
Transactions had occurred on such date, the Company would have had outstanding
indebtedness of approximately $315.0 million, including the Notes, and
stockholders' equity of $66.2 million. See "Capitalization" and "Pro Forma
Combined Financial Information." In addition, the Indenture permits the Company
to incur or guarantee additional indebtedness, including indebtedness under the
Bank Credit Agreement, subject to certain limitations. The Company also has
additional borrowing capacity on a revolving credit basis under the Bank Credit
Agreement.
The Company's high degree of leverage could have important consequences to
the holders of the Notes, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, debt service requirements, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes, including its operations and
future business opportunities; (iii) certain of the Company's borrowings,
including certain borrowings under the Bank Credit Agreement, are at variable
rates of interest, which will expose the Company to the risk of increased
interest rates; (iv) the indebtedness outstanding under the Bank Credit
Agreement is secured by substantially all the assets of the Company and will
mature prior to the maturity of the Notes; and (v) the Company's flexibility to
adjust to changing market conditions and ability to withstand competitive
pressures could be limited by its leveraged position and the covenants contained
in its debt instruments, thus putting the Company at a competitive disadvantage,
and the Company may be more vulnerable to a downturn in general economic
conditions or in its business or be unable to carry out capital spending that is
important to its growth and productivity improvement programs. See "Description
of the Bank Credit Agreement" and "Description of the Notes."
The Company will be required to make scheduled principal payments under the
Bank Credit Agreement commencing on September 30, 1996. See "Description of the
Bank Credit Agreement." The Company's ability to make scheduled payments or to
refinance its obligations with respect to its indebtedness, including the Notes,
will depend on its financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond its control, including interest rates,
unscheduled plant shutdowns, increased operating costs, raw material and product
prices, and regulatory developments. There can be no assurance that the Company
will maintain a level of cash flow from operations sufficient to permit it to
pay the principal, premium, if any, and interest on its indebtedness (including
the Notes).
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital
or restructure or refinance its debt (including the Notes). There can be no
assurance that such alternative measures would be successful or would permit the
Company to meet its scheduled debt service obligations. In the absence of such
operating results and resources, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations. The Bank Credit Agreement and the
Indenture will restrict the Company's ability to sell assets and use the
proceeds therefrom. See "Description of the Bank Credit Agreement" and
"Description of the Notes." There can be no assurance as to the ability of the
Company to consummate such sales or the proceeds which the Company could realize
therefrom or that such proceeds would be adequate to meet the obligations then
due.
16
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In the event that the Company is unable to generate sufficient cash flow
and the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its indebtedness, or if
the Company otherwise fails to comply with the various covenants in the
instruments governing such indebtedness (including covenants in the Indenture
and the Bank Credit Agreement), the Company could be in default under the terms
of the agreements governing such indebtedness, including the Indenture and the
Bank Credit Agreement. In the event of such default, the holders of such
indebtedness could elect to declare all of the funds borrowed thereunder to be
due and payable together with accrued and unpaid interest, the lenders under the
Bank Credit Agreement could elect to terminate their commitments thereunder and
the Company could be forced into bankruptcy or liquidation. Any default under
the agreements governing the indebtedness of the Company could have a
significant adverse effect on the Company's ability to pay principal, premium,
if any, and interest on the Notes and on the market value of the Notes. See
"Description of the Notes" and "Description of the Bank Credit Agreement."
RESTRICTIVE FINANCING COVENANTS
The Bank Credit Agreement contains a number of significant covenants that,
among other things, restricts the ability of the Company to dispose of assets or
merge, incur additional indebtedness, incur guarantee obligations, repay the
Notes or amend the Indenture, pay dividends, create liens on assets, enter into
sale and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, make capital expenditures or
engage in certain transactions with affiliates, and otherwise restrict corporate
activities. In addition, under the Bank Credit Agreement, the Company is
required to comply with specified financial ratios and tests, including a
limitation on capital expenditures, an EBITDA to fixed charges ratio, a minimum
net worth test, a total debt to EBITDA ratio, and a current ratio. See
"Description of the Bank Credit Agreement." The Indenture also contains a number
of restrictive covenants. See "Description of the Notes -- Certain Covenants."
The Company's ability to comply with the covenants and restrictions
contained in the Bank Credit Agreement and the Indenture may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any such covenants or restrictions could result in a
default under the Bank Credit Agreement or the Indenture which would permit the
lenders under the Bank Credit Agreement or the holders of the Notes, as the case
may be, to declare all amounts outstanding thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the lenders
under the Bank Credit Agreement to make further extensions of credit could be
terminated. In addition, in the event of a default under the Bank Credit
Agreement, in certain circumstances the lenders under the Bank Credit Agreement
could elect to prevent the Company from making any payments on the Notes. See
"Description of the Notes -- Ranking." If the Company were unable to repay its
indebtedness to the lenders under the Bank Credit Agreement, such lenders could
proceed against the collateral securing such indebtedness as described under
"Description of the Bank Credit Agreement." There can be no assurance that in
the event of any such default the Company will have adequate resources to repay
in full principal, premium, if any, and interest on the Notes.
SUBORDINATION OF THE NOTES; UNSECURED STATUS OF THE NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Notes is subordinated in right of payment to
the prior payment in full of all existing and future Senior Indebtedness of TPC,
including all amounts owing under the Bank Credit Agreement. As of June 30,
1996, on a pro forma basis after giving effect to the Transactions as if they
had occurred on such date, the aggregate principal amount of such Senior
Indebtedness of TPC would have been $140.0 million. Therefore, in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to TPC, the assets of TPC will be available to pay obligations on the
Notes only after all Senior Indebtedness of TPC has been paid in full, and there
can be no assurance that there will be sufficient assets remaining to pay
amounts due on all or any of the Notes. In addition, TPC may not pay principal
of, premium, if any, or interest on the Notes, or purchase, redeem or otherwise
retire the Notes, if any principal, premium, if any, or interest on any
Designated Senior Indebtedness (as defined under "Description of the
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Notes -- Certain Definitions") is not paid when due (whether at final maturity,
upon scheduled redemption or installment, acceleration or otherwise) unless such
default has been cured or waived or such indebtedness has been repaid in full.
In addition, under certain circumstances, if any nonpayment default exists with
respect to Designated Senior Indebtedness, TPC may not make any payments on the
Notes for a specified period of time, unless such default is cured or waived or
such Designated Senior Indebtedness has been repaid in full. See "Description of
the Notes -- Ranking."
The Indenture permits the Company to incur certain secured indebtedness,
including indebtedness under the Bank Credit Agreement, which is secured by a
lien on substantially all of the assets of Holdings, TPC Holding and the
Company, including pledges of all of the capital stock of TPC and TPC Holding.
The Notes are unsecured and therefore do not have the benefit of such
collateral. Accordingly, if an event of default occurs under the Bank Credit
Agreement, the lenders under the Bank Credit Agreement will have a prior right
to the assets of the Company, and may foreclose upon such collateral, to the
exclusion of the holders of the Notes. In either such event, such assets would
first be used to repay in full amounts outstanding under the Bank Credit
Agreement, resulting in all or a portion of the Company's assets being
unavailable to satisfy the claims of the holders of Notes and other unsecured
indebtedness.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined under "Description
of the Notes -- Certain Definitions"), TPC is required to offer to purchase all
of the outstanding Notes at a price equal to 101% of the principal amount
thereof at the date of purchase plus accrued and unpaid interest, if any, to the
date of purchase. The occurrence of certain of the events which would constitute
a Change of Control constitute a default under the Bank Credit Agreement. In
addition, the Bank Credit Agreement prohibits the purchase of the Notes by TPC
in the event of a Change of Control, unless and until such time as the
indebtedness under the Bank Credit Agreement is repaid in full. TPC's failure to
purchase the Notes in such instance would result in a default under each of the
Indenture and the Bank Credit Agreement. The inability to repay the indebtedness
under the Bank Credit Agreement, if accelerated, would also constitute an event
of default under the Indenture, which could have materially adverse consequences
to the Company and to the holders of the Notes. In the event of a Change of
Control, there can be no assurance that the Company would have sufficient assets
to satisfy all of its obligations under the Bank Credit Agreement and the Notes.
See "Description of the Notes -- Change of Control" and "Description of the Bank
Credit Agreement."
CYCLICAL INDUSTRIES
The Company's primary business consists of the production of butadiene,
MTBE, n-butylenes and specialty isobutylenes. The prices of certain of these
products have historically been cyclical and have been sensitive to overall
production capacity relative to demand, the availability and price of feedstocks
and the level of general business activity. In the past, certain of these
products have experienced market shortages, accompanied by relatively high
prices, and periods of oversupply, accompanied by relatively low prices.
While the Company has achieved relatively stable profitability on its sales
of butadiene due to the nature of the supply contracts under which it purchases
crude butadiene, industry profitability for MTBE has fluctuated considerably
over the past several years. In the early 1990s, considerable additional
production capacity was installed in the U.S. in anticipation of demand for MTBE
created by the Federal Clean Air Act Amendments of 1990 ("CAAA"). This demand
did not completely materialize due to states opting-out of the programs
promulgated by the CAAA as well as less than anticipated demand in states not
required to comply with such programs, resulting in an industry overcapacity
condition that has resulted in lower average selling prices and margins.
HIGHLY COMPETITIVE INDUSTRY
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors are larger and have greater
financial resources than the Company. Among the Company's competitors are some
of the world's largest chemical companies and major integrated petroleum
companies that have their own raw material resources. In addition, a significant
portion of the Company's
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business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Furthermore,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may expand such role significantly in the future.
Any of these developments could have a negative impact on the Company's
financial position, results of operations and cash flows. See "Business --
Competition."
DEPENDENCE ON KEY CUSTOMERS
Certain of the Company's largest customers account for a significant
percentage of the Company's sales of particular products. In the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, over 84% and 71%,
respectively, of the Company's butadiene and MTBE sales were made to its five
largest customers for each product. In addition, in the twelve-month period
ended May 31, 1996 and the one-month period ended June 30, 1996, approximately
16.1% and 14.1%, respectively, of the Company's total revenues were derived from
a single butadiene customer. Although the Company believes its relationships
with its largest customers are good, the loss of a significant customer or a
number of significant customers would have a material adverse effect on the
Company's financial condition, results of operations and cash flows. There can
be no assurance that the historic levels of business from these customers or the
Company's ability to replace a lost customer will be maintained in the future.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive Federal, state and local
laws, regulations and decrees governing, among other things, emissions to air,
discharges to waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. The Company's production facilities
require operating permits that are subject to revocation, modification and
renewal, violations of which may provide for substantial fines and civil or
criminal sanctions. The operation of any chemical manufacturing plant entails
risk of adverse environmental effect, including exposure to chemical products
and by-products from the Company's operations, and there can be no assurance
that material costs or liabilities will not be incurred to rectify any such
damage. In addition, potentially significant expenditures could be required in
order to comply with environmental, health and safety laws and regulations that
may be adopted or imposed in the future. To meet changing licensing and
regulatory standards, the Company may be required to make additional significant
site or operational modifications, potentially involving substantial
expenditures or the reduction or suspension of certain operations. See "--
Dependence on Single Facility" and "Business -- Environmental Regulation."
PRICE VOLATILITY OF PETROCHEMICAL FEEDSTOCKS
The Company uses large amounts of petrochemical feedstocks in the
manufacturing of its chemical products. While the Company tries to match cost
increases with corresponding price increases, there may be periods of time
during which increases in feedstock prices are not recovered by the Company due
to an inability to increase the selling prices of its products because of
weakness in demand for, or oversupply of, such products.
The principal raw material feedstocks purchased by the Company are crude
butadiene, isobutane and methanol. A number of the Company's raw material
suppliers provide the Company with a significant amount of its raw materials,
and if one significant supplier or a number of significant suppliers were unable
to meet their obligations under present supply arrangements, or if such
arrangements could not be renewed upon expiration, the Company could be required
to incur increased costs for its raw materials. The ability to pass on increases
in raw material prices to the Company's customers is, to a large extent,
dependent on market conditions. There may be periods of time in which increases
in feedstock prices are not recovered by the Company due to an inability to
increase the selling prices of its products because of weakness in demand for,
or oversupply of, such products, and therefore, certain increases in raw
materials prices may have a material adverse effect on the operations of the
Company.
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DEPENDENCE ON SINGLE FACILITY
The Company has one major operating facility located approximately one mile
from the Houston Ship Channel. The loss or shutdown of operations over an
extended period of time at such facility would have a material adverse effect on
the Company. The Company's operations are subject to the usual hazards
associated with chemical manufacturing and the related storage and
transportation of feedstocks, products and wastes, including explosions, fires,
inclement weather and natural disasters, mechanical failure, unscheduled
downtime, transportation interruptions, chemical spills, discharges or releases
of toxic or hazardous substances or gases and other environmental risks, such as
required remediation of contamination. These hazards can cause personal injury
and loss of life, severe damage to or destruction of property and equipment and
environmental damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. The Company maintains property,
business interruption and casualty insurance at levels which it believes are in
accordance with customary industry practice, but there can be no assurance that
the Company will not incur losses beyond the limits or outside the coverage of
its insurance.
FACTORS AFFECTING DEMAND FOR MTBE
One of the Company's core products is MTBE, an oxygenate and octane
enhancer used in reformulated gasoline. The CAAA mandates numerous comprehensive
specifications for motor vehicle fuel, including minimum oxygen content and
reduced emissions of ozone precursors. Future demand for MTBE will depend on,
among other things, the degree to which the CAAA is implemented and enforced,
the possible adoption of additional legislation, the degree to which existing
ozone non-attainment areas come into compliance with air quality standards, the
degree to which gasoline suppliers can isolate ozone non-attainment areas where
the use of oxygenates is not required and the results of ongoing and any future
scientific studies regarding the health effects of oxygenates added to gasoline.
In addition, although the Company expects that there will be a continued market
preference and governmental support for MTBE, it is possible that alternative
oxygenates or octane enhancers could make inroads into MTBE's market share. See
"Business -- Industry Overview -- MTBE" and "Business -- Environmental
Regulation."
REGULATION OF EXPOSURE TO BUTADIENE
Butadiene is a known carcinogen in laboratory animals at high doses and is
being studied for its potential adverse health effects. In March 1996, the
Occupational Safety and Health Administration proposed to lower substantially
the employee permissible exposure limit for butadiene. Although the Company
believes that it will be able to comply with the proposed limit without
incurring significant costs, there can be no assurance that future scientific
studies regarding the health effects of butadiene or any other product handled
by the Company will not result in more stringent regulations or in restrictions
on the use of, or exposure to, such products. See "Business -- Environmental
Regulation."
FRAUDULENT TRANSFER CONSIDERATIONS
In connection with the Transactions, TPC incurred substantial indebtedness,
including through its incurrence of indebtedness under the Bank Credit Agreement
and the Notes. If, under relevant federal and state fraudulent transfer and
conveyance statues, in a bankruptcy, reorganization or rehabilitation case or
similar preceding or a lawsuit by or on behalf of unpaid creditors of TPC, a
court were to find that, at the time the Notes were issued by TPC, (a) TPC
issued the Notes with the intent of hindering, delaying or defrauding current or
future creditors or (b) (i) TPC received less than reasonably equivalent value
or fair consideration for issuing the Notes and (ii) TPC (A) was insolvent or
was rendered insolvent by reason of any of the Transactions, including the
incurrence of the indebtedness to fund the Transactions, (B) was engaged, or
about to engage, in a business or transaction for which its assets constituted
unreasonably small capital to carry on its business, or (C) intended to incur,
or believed or reasonably should have believed that it would incur, debts beyond
its ability to pay as such debts matured or became due (as all of the foregoing
terms are defined in or interpreted under the relevant fraudulent transfer or
conveyance statutes), such court could avoid the obligations under the Notes or
subordinate the Notes to presently existing and future indebtedness of TPC or
take other action detrimental to the holders of the Notes, including, under
certain
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circumstances, invalidating the Notes. In that event, there can be no assurance
that any repayment on the Notes would ever be recovered by holders of the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, TPC would be considered insolvent if, at
the time it incurred the indebtedness constituting the Notes, either (i) the sum
of its debts (including contingent liabilities) was greater than its assets, at
a fair valuation, or (ii) the present fair saleable value of its assets is less
than the amount required to pay the probable liability on its total existing
debts and liabilities (including contingent liabilities) as they become absolute
and matured. There can be no assurance as to what standards a court would use to
determine whether TPC was solvent at the relevant time, or whether, whatever
standard was used, the Notes would not be avoided on another of the grounds set
forth above.
LACK OF PUBLIC MARKET FOR THE NOTES
The Original Notes have not been registered under the Securities Act, and
may not be resold by purchasers thereof unless the Original Notes are
subsequently registered or an exemption from the registration requirements of
the Securities Act is available. While the Original Notes are at present
eligible for trading in the PORTAL market of the Nasdaq Stock Market, Inc., the
Exchange Notes will not be so eligible, and there can be no assurance, even
following registration or exchange of the Original Notes for Exchange Notes,
that an active trading market for the Original Notes or the Exchange Notes will
exist. At the time of the private placement of the Original Notes, the Initial
Purchasers advised the Company that they intended to make a market in the
Original Notes and, if issued, the Exchange Notes. However, the Initial
Purchasers are not obliged to make a market in the Original Notes or the
Exchange Notes, and any such market-making may be discontinued at any time at
the sole discretion of the Initial Purchasers. No assurance can be given as to
the liquidity of or trading market for the Original Notes or the Exchange Notes.
CONSEQUENCES TO NON-TENDERED HOLDERS OF ORIGINAL NOTES
CONSEQUENCES OF FAILURE TO EXCHANGE. To the extent that Original Notes are
tendered and accepted for exchange pursuant to the Exchange Offer, the trading
market for Original Notes that remain outstanding may be significantly more
limited, which might adversely affect the liquidity of the Original Notes not
tendered for exchange. The extent of the market therefor and the availability of
price quotations would depend upon a number of factors, including the number of
holders of Original Notes remaining at such time and the interest in maintaining
a market in such Original Notes on the part of securities firms. An issue of
securities with a smaller outstanding market value available for trading (the
"float") may command a lower price than would a comparable issue of securities
with a greater float. Therefore, the market price for Original Notes that are
not exchanged in the Exchange Offer may be affected adversely to the extent that
the amount of Original Notes exchanged pursuant to the Exchange Offer reduces
the float. The reduced float also may tend to make the trading price of the
Original Notes that are not exchanged more volatile.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER. Issuance of the Exchange Notes
in exchange for the Original Notes pursuant to the Exchange Offer will be made
following the prior satisfaction, or waiver, of the conditions set forth in "The
Exchange Offer -- Conditions to the Exchange Offer" and only after timely
receipt by the Exchange Agent of such Original Notes, a properly completed and
duly executed Letter of Transmittal and all other required documents. Therefore,
holders of Original Notes desiring to tender such Original Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery of all
required documentation. Neither the Exchange Agent, the Company or any other
person is under any duty to give notification of defects or irregularities with
respect to the tenders of Original Notes for exchange. Original Notes that may
be tendered in the Exchange Offer but which are not validly tendered will,
following the consummation of the Exchange Offer, remain outstanding and will
continue to be subject to the same transfer restrictions currently applicable to
such Original Notes.
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THE TRANSACTIONS
Holdings, its wholly-owned subsidiary, TPC Holding, and TPC Holding's
wholly-owned subsidiary, Finance Co., were organized to effect the Acquisition.
Prior to the Acquisition, TOC was owned by various individuals, foundations and
trusts, including approximately 5% by certain members of management of TPC. TOC
owned approximately 81% of the outstanding capital stock of TPC, which was its
principal operating subsidiary. Approximately 19% of the outstanding capital
stock of TPC was owned by certain individuals and trusts, including
approximately 3% by certain members of management of TPC.
TPC Holding, Holdings, the shareholders of TOC, the shareholders of TPC
(other than TOC) and Mr. Dave C. Swalm, as representative of certain of such
shareholders, entered into the Stock Purchase Agreement pursuant to which TPC
Holding acquired 3,830,000 shares (95.75%) of the outstanding capital stock of
TOC and 734,962 shares (18.55%) of the outstanding capital stock of TPC for a
total consideration of $361.8 million in cash. This total consideration was
based on a per share purchase price for TOC and TPC shares of $77.076 and
$90.626, respectively. Fifty thousand shares (1.25%) of capital stock of TOC and
the remaining 26,038 shares (0.66%) of capital stock of TPC (not held by TOC)
were contributed by certain shareholders of TOC and TPC (the "Rollover
Investors") to Holdings in exchange for $6.2 million of Holdings' Common Stock
at the closing (the "Closing") of the Acquisition.
CASH BONUS PLAN. Prior to the Closing, TPC established the Cash Bonus Plan
providing generally for $35 million for certain present employees of the Company
and certain present employees of its independent contractors. Within 45 days
after Closing, 10% of this amount was paid to eligible participants and the
remaining payments will be made in sixteen quarterly installments of
approximately 5.63% each, plus an interest factor, payable within 15 days of
each of the sixteen quarterly installment dates. See "Management -- Cash Bonus
Plan."
ASSET SALES. On the closing date (the "Closing Date") of the Acquisition,
prior to the Closing, TOC sold to Mr. Swalm for $7.8 million in cash a ranch of
approximately 1,900 acres and the livestock and personalty thereon
(collectively, the "Ranch") and the 80% of the outstanding capital stock of The
Texas Falls Corporation owned by TOC.
On the Closing Date, prior to the Closing, Holdings (i) issued
approximately $50 million in common equity comprised of (a) approximately $43.8
million of Common Stock to an investor group (the "Investor Group") led by
Gordon A. Cain and The Sterling Group, Inc. ("Sterling"), the ESOP, certain
directors and officers of Holdings and the Company, and certain employees of the
Company (the "Common Stock Placement"), and (b) approximately $6.2 million of
Common Stock to the Rollover Investors in exchange for their contribution to
Holdings of 1.25% of the outstanding capital stock of TOC and 0.66% of the
outstanding capital stock of TPC, representing the aggregate fair value of such
shares; and (ii) raised $30 million in cash by the issue of the Discount Notes
and Common Stock of Holdings, as an investment unit. After Holdings had been so
capitalized, Holdings contributed to TPC Holding, its wholly-owned subsidiary,
the cash received from the issuance of its Common Stock, the Discount Notes and
the capital stock of TOC and TPC contributed to Holdings by the Rollover
Investors.
In connection with the Acquisition, Finance Co. borrowed approximately
$140.0 million under the Bank Credit Agreement and received approximately $169
million in net proceeds from the consummation of the sale of the Original Notes.
TPC Holding then borrowed all of such funds from Finance Co. pursuant to an
intercompany promissory note.
THE CLOSING. Pursuant to the Stock Purchase Agreement, TPC Holding
purchased 3,830,000 shares of TOC common stock (95.75% of the total outstanding
capital stock of TOC) for $295.2 million in cash of which $13.3 million ($3.473
per share of TOC common stock) was deposited in a post-closing indemnity escrow
(the "Indemnity Escrow"). An additional $0.173 million was deposited in the
Indemnity Escrow by a Rollover Investor who has contributed 50,000 shares of TOC
common stock to Holdings.
Pursuant to the Stock Purchase Agreement, TPC Holding also purchased
734,962 shares of TPC common stock (18.55% of the total outstanding capital
stock of TPC) for $66.6 million in cash of which $3 million ($4.084 per share of
TPC common stock) was deposited in the Indemnity Escrow. An additional
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$0.11 million was deposited in the Indemnity Escrow by the Rollover Investors
who contributed 26,038 shares of TPC common stock to Holdings.
On the Closing Date, 120,000 shares of TOC common stock (3% of the
outstanding capital stock of TOC) was deposited in a subsequent closing escrow
(the "Subsequent Escrow") and TPC Holding deposited into the Subsequent Escrow
$9.2 million ($76.94 per share), representing the estimated purchase price for
such shares. On or about September 16, 1996, $0.4 million of the cash deposited
into the Subsequent Escrow will be funded into the Indemnity Escrow, the
escrowed shares will be distributed to TPC Holding, and $8.8 million will be
distributed to former holders of the escrowed shares. An additional $16,320
($0.136 per share) will be paid to such former holders by TPC Holding,
representing the difference between the final purchase price and the estimated
purchase price initially deposited in the Subsequent Escrow.
As a result of these transactions, on the Closing Date immediately after
the Closing, TOC was a 97.0% owned subsidiary of TPC Holding, and TPC was owned
80.79% by TOC and 19.21% by TPC Holding (including shares contributed by the
Rollover Investors). Following the Mergers (as defined) and the delivery to TPC
Holding on or about September 16, 1996 of the shares held in the Subsequent
Escrow, TPC will be a wholly-owned subsidiary of TPC Holding.
MERGERS. On the Closing Date immediately after the Closing, TOC merged with
and into TPC, with TPC as the surviving corporation (the "Initial Merger"). In
the Initial Merger, each outstanding share of TOC was converted into .85 of a
share of TPC and, except for the shares of TPC held by TOC which were canceled,
the outstanding shares of TPC remained unchanged. On the Closing Date,
immediately after the Initial Merger, Finance Co. merged with and into TPC, with
TPC as the surviving corporation (the "Second Merger" and, together with the
Initial Merger, the "Mergers"). In the Second Merger, each outstanding share of
Finance Co. was converted into one share of common stock of TPC. As a result of
the Mergers, TPC holds the promissory note payable by TPC Holding to Finance
Co., and TPC is a 97.5% owned subsidiary of TPC Holding, which in turn is a
wholly-owned subsidiary of Holdings. In addition, TPC is the primary obligor
with respect to borrowings under the Bank Credit Agreement and the primary
obligor on the Notes. On or about September 16, 1996, the shares of capital
stock formerly representing shares of TOC, and at that time representing shares
of common stock of TPC, held in the Subsequent Escrow will be delivered to TPC
Holding, and TPC will thereupon be a wholly-owned subsidiary of TPC Holding.
INDEMNITY ESCROW. Pursuant to the Stock Purchase Agreement, the Company
will indemnify the present and former officers and directors of TOC and TPC for
certain matters arising prior to the Closing. In addition, the Company will have
the right to recover from the Indemnity Escrow losses and liabilities arising
from or in connection with certain matters, including but not limited to, the
following: (i) breach of any covenant, representation or warranty in the Stock
Purchase Agreement by any TOC or TPC shareholder; (ii) failure by TOC, TPC or
any subsidiary to perform any obligation in the Stock Purchase Agreement, and
the inaccuracy of certain statements of fact regarding TOC, TPC and their
subsidiary in the Stock Purchase Agreement; (iii) losses arising from claims in
connection with the sale, purchase or issuance of common stock of TOC or TPC;
(iv) any taxes payable by TOC, TPC or any subsidiary attributable to periods
prior to March 31, 1996 to the extent not accrued on the consolidated balance
sheet of TOC as of March 31, 1996; (v) losses or claims paid to any present or
former director, officer, employee or agent of the Company pursuant to the
contractual right described in the preceding sentence arising prior to the
Closing; and (vi) losses arising from certain acts, omissions, events,
circumstances or conditions, including environmental matters, occurring or
existing prior to the Closing Date and not disclosed to TPC Holding. All claims
to recover such losses and liabilities from the Indemnity Escrow must be brought
within one year from the Closing Date, with the exception of losses and
liabilities arising from environmental matters and taxes, which must be brought
within eighteen months from the Closing Date. The Company has the right to
indemnification from the selling shareholders for the breach of any covenant,
representation or warranty made severally by them in the Stock Purchase
Agreement (generally relating to title to the shares being sold and authority to
perform their obligations under the Stock Purchase Agreement). Beyond that, in
the
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absence of fraud, the Company's rights to recovery for breach of the Stock
Purchase Agreement or for losses arising from pre-closing matters are limited to
recovery against the Indemnity Escrow.
COMMON STOCK PLACEMENT. Substantially concurrently with the consummation
of the Acquisition, Holdings completed the Common Stock Placement of
approximately 438,000 shares of its Common Stock to the ESOP, certain directors
and officers of Holdings and the Company, certain employees of the Company, and
the Investor Group. See "Common Stock Placement," "Related Transactions" and
"Beneficial Ownership of Holdings' Common Stock."
DISCOUNT NOTES. The Discount Notes are senior unsecured obligations of
Holdings ranking PARI PASSU with other senior unsecured indebtedness of
Holdings. The purchaser of the Discount Notes purchased the Discount Notes and
shares of Common Stock as an investment unit. The Discount Notes are limited to
approximately $57.7 million aggregate principal amount at final maturity
(providing $30.0 million of proceeds) and will mature on July 1, 2007. No
interest will accrue on the Discount Notes prior to July 1, 2001. From and after
July 1, 2001, interest on the Discount Notes will be payable semiannually at the
rate of 13.5% per annum.
THE BANK CREDIT AGREEMENT. The Bank Credit Agreement provides for, (i) the
Revolving Credit Facility, and (ii) the Tranche A Term Loan, the Tranche B Term
Loan and the ESOP Term Loan. See "Description of the Bank Credit Agreement."
RAW MATERIAL SUPPLY. Clarkston was an affiliate of the Company that
primarily sold isobutane to, and also purchased n-butane from, the Company and
certain third parties. Clarkston purchased substantially all of its isobutane
requirements at market prices under a supply contract with EPC Venture, Inc.
("Enterprise"). In connection with the Transactions, this supply contract with
Enterprise was assigned to the Company.
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SOURCES AND USES OF FUNDS. Pursuant to the Stock Purchase Agreement, the
Acquisition was effected for $363.3 million in cash and $6.2 million represented
by the shares contributed by the Rollover Investors. The following table sets
forth the sources and uses of funds used to effect the Acquisition.
AMOUNT
-------------
(IN MILLIONS)
SOURCES OF FUNDS:
Bank Credit Agreement(1)........ $ 140.0
Original Notes(2)............... 175.0
Discount Notes and Common
Stock.......................... 30.0
Common Stock Placement.......... 43.8
-------------
Total...................... $ 388.8
=============
USES OF FUNDS:
Acquisition(3).................. $ 363.3
Company ESOP Loan(4)............ 10.0
Fees and expenses(5)............ 15.5
-------------
Total...................... $ 388.8
=============
- ------------
(1) Consists of $85.0 million under the Tranche A Term Loan, $45.0 million under
the Tranche B Term Loan and $10.0 million under the ESOP Term Loan. The
Company has available borrowings under the Revolving Credit Facility of up
to $40.0 million, subject to borrowing base limitations. See "Description of
the Bank Credit Agreement."
(2) Represents the gross proceeds of the sale of the Original Notes before the
underwriting discount to the Initial Purchasers.
(3) Acquisition cost is net of cash received from the sale of the Texas Falls
Corporation and the Ranch for combined proceeds of $7.8 million.
(4) For a description of the Company ESOP Loan, see "Management -- Employee
Stock Ownership Plan."
(5) Represents fees and expenses, including (i) the underwriting discount
payable by Finance Co. to the Initial Purchasers in connection with the sale
of the Original Notes, (ii) legal, accounting and other professional fees
payable in connection with the Transactions, and (iii) certain other
expenses.
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THE EXCHANGE OFFER
REGISTRATION RIGHTS
At the Closing, the Company entered into the Registration Rights Agreement
with the Initial Purchasers pursuant to which the Company agreed, for the
benefit of the holders of the Original Notes, at its cost, (i) within 75 days
after the date of the original issue of the Original Notes, to file an Exchange
Offer Registration Statement with the Commission with respect to the Exchange
Offer for the Exchange Notes, and (ii) to use all reasonable efforts to cause
the Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the date of original issuance of the
Original Notes. Upon the Exchange Offer Registration Statement being declared
effective, the Company agreed to offer the Exchange Notes in exchange for
surrender of the Original Notes. The Company agreed to keep the Exchange Offer
open for not less than 30 calendar days (or longer if required by applicable
law) after the date notice of the Exchange Offer is mailed to the holders of the
Original Notes. For each Original Note surrendered to the Company pursuant to
its Exchange Offer, the holder of such Original Note will receive an Exchange
Note having a principal amount equal to that of the surrendered Note. Interest
on each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Original Note surrendered in exchange therefor or, if
no interest has been paid on such Original Note, from the date of its original
issue. The Registration Rights Agreement also provides an agreement to include
in the prospectus for the Exchange Offer certain information necessary to allow
a broker-dealer who holds Original Notes that were acquired for its own account
as a result of market-making activities or other ordinary course trading
activities (other than Original Notes acquired directly from the Company or one
of its affiliates) to exchange such Original Notes pursuant to the Exchange
Offer and to satisfy the prospectus delivery requirements in connection with
resales of Exchange Notes received by such broker-dealer in the Exchange Offer,
and to maintain the effectiveness of the Registration Statement for such
purposes for 180 days.
The foregoing agreement is needed because any broker-dealer who acquires
Original Notes for its own account as a result of market-making activities or
other trading activities is required to deliver a prospectus meeting the
requirements of the Securities Act. This Prospectus covers the offer and sale of
the Exchange Notes pursuant to the Exchange Offer made hereby and the resale of
Exchange Notes received in the Exchange Offer by any broker-dealer who held
Original Notes acquired for its own account as a result of market-making
activities or other trading activities (other than Original Notes acquired
directly from the Company or one of its affiliates).
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in general
be freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Original Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes (i) will not be able to rely
on the interpretation of the staff of the Commission, (ii) will not be able to
tender its Original Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Original Notes unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Original Notes (other than certain specified holders)
who wishes to exchange Original Notes for Exchange Notes in the Exchange Offer
will be required to make certain representations, including that (i) it is not
an affiliate of the Company, (ii) any Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any other reason the Exchange Offer is not consummated within
150 days of the date of issuance and sale of the Original Notes, or upon request
of the Initial Purchasers (under certain circumstances), the Company will, at
its cost, (i) as promptly as practicable,
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<PAGE>
file a Shelf Registration Statement (which may be an amendment of the
Registration Statement of which this Prospectus is a part) covering resales of
the Original Notes, (ii) use all reasonable efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act and
(iii) use all reasonable efforts to keep effective the Shelf Registration
Statement until three years after its effective date (or until one year after
such effective date if such Shelf Registration Statement is filed at the request
of the Initial Purchasers under certain circumstances). The Company will, in the
event of the filing of a Shelf Registration Statement, provide to each holder of
the Original Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement for the Original Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Original Notes. A
holder of Original Notes that sells such Original Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations). In addition, each holder
of the Original Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Original Notes included in
the Shelf Registration Statement and to benefit from the provisions regarding
liquidated damages set forth in the following paragraph.
In the event that either (i) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 75th calendar day following the
date of original issue of the Original Notes, (ii) the Exchange Offer
Registration Statement or, if required in lieu thereof, the Shelf Registration
Statement, is not declared effective on or prior to the 120th calendar day
following the date of original issue of the Original Notes or (iii) once
effective, the Exchange Offer Registration Statement or the Shelf Registration
Statement ceases to be effective or the prospectus ceases to be usable (under
certain circumstances), the interest rate borne by the Original Notes shall be
increased by one-half of one percent per annum following such 75-day period in
the case of (i) above, such 120-day period in the case of clause (ii) above or
any such period in the case of (iii) above, in each case payable in cash
semiannually, in arrears, on January 1 and July 1 of each year. Upon (x) the
filing of the Exchange Offer Registration Statement in the case of clause (i)
above, (y) the effectiveness of the Exchange Offer Registration Statement or
Shelf Registration Statement in the case of clause (ii) above or (z) the
reeffectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement in the case of clause (iii) above, and provided that none
of the conditions set forth in clauses (i), (ii) and (iii) above continues to
exist, the interest rate borne by the Original Notes from the date of such
filing, effectiveness or reeffectiveness, as the case may be, will be reduced to
the original interest rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement.
Except as set forth above, after consummation of the Exchange Offer,
holders of Original Notes have no registration or exchange rights under the
Registration Rights Agreement. See "-- Consequences of Failure to Exchange," and
"-- Resales of Exchange Notes; Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Notes which are not exchanged for Exchange Notes pursuant to
the Exchange Offer and are not included in a resale prospectus which, if
required, will be filed as part of an amendment to the Registration Statement,
will remain restricted securities and subject to restrictions on transfer.
Accordingly, such Original Notes may be resold (i) to the Company (upon
redemption thereof or otherwise), (ii) so long as the Original Notes are
eligible for resale pursuant to Rule 144A, to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act, purchasing for its own account or for the
account of a qualified institutional buyer to whom notice is given that the
resale, pledge or other transfer is being made in reliance on Rule 144A, (iii)
in an offshore
27
<PAGE>
transaction in accordance with Regulation S under the Securities Act, (iv)
pursuant to an exemption from registration in accordance with Rule 144 (if
available) under the Securities Act, (v) in reliance on another exemption from
the registration requirements of the Securities Act, or (vi) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United States
and subject to certain requirements of the registrar or co-registrar being met,
including receipt by the registrar or co-registrar of a certification and (in
the case of (iii), (iv) and (v)) an opinion of counsel reasonably acceptable to
the Company and the registrar.
To the extent Original Notes are tendered and accepted in the Exchange
Offer, the principal amount of outstanding Original Notes will decrease with a
resulting decrease in the liquidity in the market therefor. Accordingly, the
liquidity of the market for the Original Notes could be adversely affected. See
"Risk Factors -- Consequences to Non-Tendering Holders of Original Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Prospectus
and in the Letter of Transmittal, a copy of which is attached to this Prospectus
as Annex A, the Company will accept any and all Original Notes validly tendered
and not withdrawn prior to the Expiration Date. The Company will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal amount
of Original Notes accepted in the Exchange Offer. Holders may tender some or all
of their Original Notes pursuant to the Exchange Offer. However, Original Notes
may be tendered only in integral multiples of $1,000 principal amount.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and hence will not bear legends restricting
their transfer pursuant to the Securities Act, and (ii) except as otherwise
described above, holders of the Exchange Notes will not be entitled to the
rights of holders of Original Notes under the Registration Rights Agreement. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace), and will be issued under, and be entitled to the benefits of, the
Indenture which governs all of the Notes.
Solely for reasons of administration (and for no other purpose) the Company
has fixed the close of business on , 1996 as the record date for the Exchange
Offer for purposes of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially. Only a registered holder of
Original Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Original Notes entitled to participate in the Exchange
Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Texas Business Corporation Act or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if they have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of the Original Notes for the purposes of receiving the Exchange Notes. The
Exchange Notes delivered pursuant to the Exchange Offer will be issued on the
earliest practicable date following the acceptance for exchange of Original
Notes by the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions of fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to
28
<PAGE>
the exchange of the Original Notes pursuant to the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes, in
connection with the Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any of
the conditions set forth below under " -- Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer, by giving oral
or written notice of such delay, extension or termination to the Exchange Agent,
or (iv) to amend the terms of the Exchange Offer in any manner. Except as
specified in the immediately preceding paragraph, any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by it to constitute a material change, the Company will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders of the Original Notes, and the Exchange
Offer will be extended for a period of five to 10 business days, as required by
law, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of its
Exchange Offer, the Company shall not have an obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING ORIGINAL NOTES
TENDERS OF ORIGINAL NOTES. The tender by a holder of Original Notes
pursuant to any of the procedures set forth below will constitute the tendering
holder's acceptance of the terms and conditions of the Exchange Offer. The
Company's acceptance for exchange of Original Notes tendered pursuant to any of
the procedures described below will constitute a binding agreement between such
tendering holder and the Company in accordance with the terms and subject to the
conditions of the Exchange Offer. Only holders are authorized to tender their
Original Notes. The procedures by which Original Notes may be tendered by
beneficial owners that are not holders will depend upon the manner in which the
Original Notes are held.
DTC has authorized DTC participants that are beneficial owners of Original
Notes through DTC to tender their Original Notes as if they were holders. To
effect a tender, DTC participants should either (i) complete and sign the Letter
of Transmittal (or a facsimile thereof), have the signature thereon guaranteed
if required by Instruction 1 of the Letter of Transmittal, and mail or deliver
the Letter of Transmittal or such facsimile pursuant to the procedures for
book-entry transfer set forth below under " -- BOOK-ENTRY DELIVERY PROCEDURES,"
or (ii) transmit their acceptance to DTC through the DTC Automated Tender Offer
Program ("ATOP"), for which the transaction will be eligible, and follow the
procedures for book-entry transfer set forth below under " -- BOOK-ENTRY
DELIVERY PROCEDURES."
TENDER OF ORIGINAL NOTES HELD IN PHYSICAL FORM. To tender effectively
Original Notes held in physical form pursuant to the Exchange Offer, a properly
completed Letter of Transmittal (or a facsimile thereof) duly executed by the
holder thereof, and any other documents required by the Letter of Transmittal,
must be received by the Exchange Agent at one of its addresses set forth below,
and tendered Original Notes must be received by the Exchange Agent at such
address (or delivery effected through the deposit of Original Notes into the
Exchange Agent's account with DTC and making book-entry delivery as set forth
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<PAGE>
below) on or prior to the Expiration Date, or the tendering holder must comply
with the guaranteed delivery procedure set forth below. LETTERS OF TRANSMITTAL
OR ORIGINAL NOTES SHOULD BE SENT ONLY TO THE EXCHANGE AGENT AND SHOULD NOT BE
SENT TO THE COMPANY.
TENDER OF ORIGINAL NOTES HELD THROUGH A CUSTODIAN. To tender effectively
Original Notes that are held of record by a custodian bank, depository, broker,
trust company or other nominee, the beneficial owner thereof must instruct such
holder to tender the Original Notes on the beneficial owner's behalf. A Letter
of Instructions from the record owner to the beneficial owner may be included in
the materials provided along with this Prospectus which may be used by the
beneficial owner in this process to instruct the registered holder of such
owner's Original Notes to effect the tender.
TENDER OF ORIGINAL NOTES HELD THROUGH DTC. To tender effectively Original
Notes that are held through DTC, DTC participants should either (i) properly
complete and duly execute the Letter of Transmittal (or a facsimile thereof),
and any other documents required by the Letter of Transmittal, and mail or
deliver the Letter of Transmittal or such facsimile pursuant to the procedures
for book-entry transfer set forth below or (ii) transmit their acceptance
through ATOP, for which the transaction will be eligible, and DTC will then edit
and verify the acceptance and send an Agent's Message to the Exchange Agent for
its acceptance. Delivery of tendered Original Notes held through DTC must be
made to the Exchange Agent pursuant to the book-entry delivery procedures set
forth below or the tendering DTC participant must comply with the guaranteed
delivery procedures set forth below.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND LETTERS OF TRANSMITTAL, ANY
REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING
DELIVERY THROUGH DTC AND ANY ACCEPTANCE OR AGENT'S MESSAGE TRANSMITTED THROUGH
ATOP, IS AT THE ELECTION AND RISK OF THE PERSON TENDERING ORIGINAL NOTES AND
DELIVERING LETTERS OF TRANSMITTAL AND, EXCEPT AS OTHERWISE PROVIDED IN THE
LETTER OF TRANSMITTAL, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED
BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER
USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT
THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
Except as provided below, unless the Original Notes being tendered are
deposited with the Exchange Agent on or prior to the Expiration Date
(accompanied by a properly completed and duly executed Letter of Transmittal or
a properly transmitted Agent's Message), the Company may, at its option, reject
such tender. Exchange of Exchange Notes for the Original Notes will be made only
against deposit of the tendered Original Notes and delivery of all other
required documents.
BOOK-ENTRY DELIVERY PROCEDURES. The Exchange Agent will establish accounts
with respect to the Original Notes at DTC for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in DTC may make book-entry delivery of the
Original Notes by causing DTC to transfer such Original Notes into the Exchange
Agent's account in accordance with DTC's procedures for such transfer. However,
although delivery of Original Notes may be effected through book-entry at DTC,
the Letter of Transmittal (or facsimile thereof), with any required signature
guarantees or an Agent's Message in connection with a book-entry transfer, and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at one or more of its addresses set forth in this
Prospectus on or prior to the Expiration Date, or compliance must be made with
the guaranteed delivery procedures described below. Delivery of documents to DTC
does not constitute delivery to the Exchange Agent. The confirmation of a
book-entry transfer into the Exchange Agent's account at DTC as described above
is referred to herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each participant in DTC tendering the Original Notes and that such participant
has received the Letter of Transmittal and agrees to be bound by the terms of
the Letter of Transmittal and the Company may enforce such agreement against
such participant.
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<PAGE>
SIGNATURE GUARANTEES. Signatures on all Letters of Transmittal must be
guaranteed by a recognized member of the Medallion Signature Guarantee Program
or by any other "eligible guarantor institution," as such term is defined in
Rule 17Ad-15 promulgated under the Exchange Act (each of the foregoing, an
"Eligible Institution"), unless the Original Notes tendered thereby are tendered
(i) by a registered holder of Original Notes (or by a participant in DTC whose
name appears on a DTC security position listing as the owner of such Original
Notes) who has not completed either the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. See Instruction 1 of the
Letter of Transmittal. If the Original Notes are registered in the name of a
person other than the signer of the Letter of Transmittal or if Original Notes
not accepted for exchange or not tendered are to be returned to a person other
than the registered holder, then the signatures on the Letter of Transmittal
accompanying the tendered Original Notes must be guaranteed by an Eligible
Institution as described above. See Instructions 1 and 5 of the Letter of
Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Original Notes pursuant
to the Exchange Offer and time will not permit the Letter of Transmittal,
certificates representing such Original Notes and all other required documents
to reach the Exchange Agent, or the procedures for book-entry transfer cannot be
completed, on or prior to the Expiration Date, such Original Notes may
nevertheless be tendered if all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company
herewith, or an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, is received by the
Exchange Agent on or prior to the Expiration Date, as provided
below; and
(iii) the certificates for the tendered Original Notes, in proper
form for transfer (or a Book-Entry Confirmation of the transfer
of such Original Notes into the Exchange Agent's account at DTC
as described above), together with a Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents
required by the Letter of Transmittal or a properly transmitted
Agent's Message, are received by the Exchange Agent within two
business days after the date of execution of the Notice of
Guaranteed Delivery.
The Notice of Guaranteed Delivery may be sent by hand delivery, telegram,
facsimile transmission or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery.
Notwithstanding any other provision hereof, delivery of Exchange Notes by
the Exchange Agent for Original Notes tendered and accepted for exchange
pursuant to the Exchange Offer will, in all cases, be made only after timely
receipt by the Exchange Agent of such Original Notes (or Book-Entry Confirmation
of the transfer of such Original Notes into the Exchange Agent's account at DTC
as described above), and a Letter of Transmittal (or facsimile thereof) with
respect to such Original Notes, properly completed and duly executed, with any
required signature guarantees and any other documents required by the Letter of
Transmittal, or a properly transmitted Agent's Message.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt), acceptance and withdrawal of tendered
Original Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Original Notes not properly tendered or any Original Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
interpretation of the terms and conditions of its Exchange Offer (including the
instructions in the Letter of Transmittal) by the Company will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of
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Original Notes, neither the Company, the Exchange Agent nor any other person is
under any duty to give such notice, nor shall they incur any liability for
failure to give such notification. Tenders of Original Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Original Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Original Notes are submitted in a principal amount greater than
the principal amount of Original Notes being tendered by such tendering holder,
such unaccepted or non-exchanged Original Notes will be returned by the Exchange
Agent to the tendering holders (or, in the case of Original Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described below, such
unaccepted or non-exchanged Original Notes will be credited to an account
maintained with such Book-Entry Transfer Facility), unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration Date.
By tendering, each registered holder will represent to the Company that,
among other things, (i) the Exchange Notes to be acquired by the holder and any
beneficial owner(s) of the Original Notes ("Beneficial Owner(s)") in connection
with the Exchange Offer are being acquired by the holder and any Beneficial
Owner(s) in the ordinary course of business of the holder and any Beneficial
Owner(s), (ii) the holder and each Beneficial Owner are not participating, do
not intend to participate, and have no arrangement or understanding with any
person to participate, in a distribution of the Exchange Notes, (iii) the holder
and each Beneficial Owner acknowledge and agree that (x) any person
participating in the Exchange Offer for the purpose of distributing the Exchange
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction with
respect to the Exchange Notes acquired by such person and cannot rely on the
position of the Staff of the Commission set forth in no-action letters that are
discussed herein under " -- Resale of the Exchange Notes; Plan of Distribution,"
and (y) any broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes pursuant to the Exchange Offer must deliver a
prospectus in connection with any resale of such Exchange Notes, but by so
acknowledging, the holder shall not be deemed to admit that, by delivering a
prospectus, it is an "underwriter" within the meaning of the Securities Act,
(iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing, and (v) the holder and each Beneficial
Owner understands that a secondary resale transaction described in clause (iii)
above should be covered by an effective registration statement containing the
selling securityholder information required by Item 507 of Regulation S-K of the
Commission.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "-- Resale of the Exchange Notes;
Plan of Distribution."
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes pursuant to
the Exchange Offer may be withdrawn, unless theretofore accepted for exchange as
provided in the Exchange Offer, at any time prior to the Expiration Date.
To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn, including the
certificate number or numbers of the particular certificates evidencing the
Original Notes (unless such Original Notes were tendered by book-entry
transfer), and aggregate principal amount of such Original Notes, and (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of the Original Notes into the name of the person
withdrawing such Original Notes. If Original Notes have been delivered pursuant
to the procedures for book-entry transfer set forth in
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"-- Procedures for Tendering Original Notes -- BOOK-ENTRY DELIVERY PROCEDURES,"
any notice of withdrawal must specify the name and number of the account at the
appropriate book-entry transfer facility to be credited with such withdrawn
Original Notes and must otherwise comply with such book-entry transfer
facility's procedures. If the Original Notes to be withdrawn have been delivered
or otherwise identified to the Exchange Agent, a signed notice of withdrawal
meeting the requirements above is effective immediately upon written or
facsimile notice of withdrawal even if physical release is not yet effected. A
withdrawal of Original Notes can only be accomplished in accordance with the
foregoing procedures.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. No
withdrawal of Original Notes will be deemed to have been properly made until all
defects or irregularities have been cured or expressly waived. Neither the
Company nor the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in any notice of withdrawal
or revocation, nor shall they incur any liability for failure to give any such
notification. Any Original Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Original Notes so withdrawn are
retendered. Properly withdrawn Original Notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering Original
Notes" at any time prior to the Expiration Date.
Any Original Notes which have been tendered but which are not accepted for
exchange due to the rejection of the tender due to uncured defects or the prior
termination of the Exchange Offer, or which have been validly withdrawn, will be
returned to the holder thereof (unless otherwise provided in the Letter of
Transmittal), as soon as practicable following the Expiration Date or, if so
requested in the notice of withdrawal, promptly after receipt by the Company of
notice of withdrawal without cost to such holder.
CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer shall not be subject to any conditions, other than that
(i) the Commission has issued an order or orders declaring the Indenture
governing the Notes qualified under the Trust Indenture Act of 1939, (ii) the
Exchange Offer, or the making of any exchange by a holder, does not violate
applicable law or any applicable interpretation of the staff of the Commission,
(iii) no action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency with respect to the Exchange
Offer, which, in the judgment of the Company, might impair the ability of the
Company to proceed with the Exchange Offer, (iv) there shall not have been
adopted or enacted any law, statute, rule or regulation which, in the Company's
judgment, would materially impair its ability to proceed with the Exchange Offer
or (v) there shall not have occurred any material change in the financial
markets in the United States or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which on the financial markets
of the United States, in the Company's judgment, would materially impair its
ability to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the conditions
to the Exchange Offer are not satisfied, it may (i) refuse to accept any
Original Notes and return all tendered Original Notes to the tendering holders,
(ii) extend its Exchange Offer and retain all Original Notes tendered prior to
the Expiration Date, subject, however, to the rights of holders to withdraw such
Original Notes (see "-- Withdrawal of Tenders") or (iii) waiver such unsatisfied
conditions with respect to the Exchange Offer and accept all validly tendered
Original Notes which have not been withdrawn. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered holders, and will extend the Exchange Offer for a period of five to
10 business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
33
<PAGE>
EXCHANGE AGENT
Fleet National Bank, the Trustee under the Indenture governing the Notes,
has been appointed as Exchange Agent for the Exchange Offer. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery and
other documents should be directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
BY MAIL: BY FACSIMILE: BY HAND:
Fleet National Bank (860) 986-7908 Fleet National Bank
Corporate Trust Operations Corporate Trust Operations
777 Main Street, Lower Level Confirm by Telephone: 777 Main Street, Lower Level
Hartford, CT 06115 Hartford, CT 06115
Attention: Patricia Williams (860) 986-2910 Attention: Patricia Williams
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting acceptance
of the Exchange Offer. However, reasonable and customary fees will be paid to
the Exchange Agent for its service and it will be reimbursed for its reasonable
out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$300,000. Such expenses include fees and expenses of the Exchange Agent and the
trustee under the Indenture, accounting and legal fees and printing costs, among
others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of its Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of its Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The carrying values of the Original Notes are not expected to be materially
different from the fair value of the Exchange Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the Exchange
Notes.
RESALE OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1996, all dealers
effecting transactions in the Exchange Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be
34
<PAGE>
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commission or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses approved in writing of
one counsel for the holders of the Notes) other than commissions or concessions
of any brokers or dealers and will indemnify the holders of the Notes (including
any broker-dealers) required to use this Prospectus in connection with their
resale of Exchange Notes as described above against certain liabilities,
including liabilities under the Securities Act.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Original Notes in like
principal amount, the form and terms of which are the same as the form and terms
of the Exchange Notes, except as otherwise described herein under "The Exchange
Offer -- Terms of the Exchange Offer." The Original Notes surrendered in
exchange for the Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase in the indebtedness of the Company.
35
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996. See "The Transactions." The information set forth below should be read
in conjunction with the "Pro Forma Combined Financial Information" and the
Combined Financial Statements of TOC, its subsidiaries and Clarkston and related
notes thereto included elsewhere herein.
AS OF
JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
Cash and investment securities....... 11.6 7.6
====== ===========
Long-term debt, including current maturities:
Existing revolving line of
credit........................ 13.0 --
Revolving Credit Facility....... --
Tranche A Term Loan............. 85.0
Tranche B Term Loan............. 45.0
ESOP Term Loan.................. 10.0
11 1/8% Senior Subordinated
Notes Due 2006................ 175.0
------ -----------
Total long-term debt,
including current
maturities.............. 13.0 315.0
Minority interest in net
assets of consolidated
subsidiary.............. 1.1 --
Common stock held by ESOP............ 10.0
Less -- Note receivable
from ESOP............... (10.0)
Total stockholders'
equity.................. 92.5 66.2
------ -----------
Total
capitalization..... 106.6 381.2
====== ===========
36
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited Pro Forma Combined Statements of Operations for the
twelve months ended May 31, 1996 and the one month ended June 30, 1996 give
effect to the Transactions as if they had occurred on June 1, 1995, and the
following unaudited Pro Forma Combined Balance Sheet gives effect to the
Transactions as if they had occurred on June 30, 1996. The acquisition was
accounted for as a purchase under generally accepted accounting principles.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma combined
financial information does not purport to represent what the results of
operations or financial condition would actually have been had the Transactions
in fact occurred on the dates set forth above or to project the Company's
results of operations or financial condition for any future period or as of any
date, respectively. The pro forma combined financial information set forth below
should be read in conjunction with the historical Combined Financial Statements
and Notes thereto of TOC, its subsidiaries and Clarkston included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
37
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR ONE MONTH ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
TOC, ITS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
SUBSIDIARIES FOR THE FOR THE FOR THE FOR THE
AND CLARKSTON ACQUISITION ACQUISITION FINANCINGS TRANSACTIONS
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................. $41.4 $(0.2)(a) $ 41.2 $ 41.2
Cost of goods sold................... 36.0 (0.6)(c) 35.4 35.4
Depreciation and amortization........ 1.3 1.8(d) 3.1 3.1
------------- ----------- ------------ ----------- ------------
Gross profit.................... 4.1 (1.4) 2.7 -- 2.7
Selling, general and administrative
expenses........................... 1.7 (0.2)(a) 1.5 1.5
0.1(c)
(0.1)(e)
------------- ----------- ------------ ----------- ------------
Income from operations..... 2.4 (1.2) 1.2 -- 1.2
Interest expense, net................ .1 (0.1)(a) 0.1 2.5(j) 2.6
0.1(g)
Other income (expense):
Dividend income................. -- -- --
Charitable contribution......... (0.1) 0.1(h) -- --
Loss on disposal of assets and
investment securities, net.... (0.3) (0.3) (0.3)
Impairment of investment in
land.......................... -- -- --
Other, net...................... 0.1 0.1 0.1
------------- ----------- ------------ ----------- ------------
Income before income taxes and
minority interest.................. 2.0 (1.1) 0.9 (2.5) (1.6)
Provision for income taxes........... 0.8 (0.3)(i) 0.5 (0.5)(i) --
Minority interest in net loss of
consolidated subsidiary............ 0.0 0.0(a) -- -- --
------------- ----------- ------------ ----------- ------------
Net income (loss).......... $ 1.2 $(0.8) $ 0.4 $(2.0) $ (1.6)
============= =========== ============ =========== ============
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements
38
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MAY 31, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
TOC, ITS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
SUBSIDIARIES FOR THE FOR THE FOR THE FOR THE
AND CLARKSTON ACQUISITION ACQUISITION FINANCINGS TRANSACTIONS
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 455.6 $ (1.4)(a) $ 454.2 $454.2
Cost of goods sold................... 379.5 (0.2)(a) 367.3 367.3
(12.0)(c)
Depreciation and amortization........ 15.0 (0.3)(a) 36.3 36.3
(0.1)(b)
21.7(d)
------------- ----------- ----------- ----------- ------------
Gross profit.................... 61.1 (10.5) 50.6 -- 50.6
Selling, general and administrative
expenses........................... 19.1 (1.7)(a) 12.7 12.7
(0.3)(b)
(3.2)(c)
(1.2)(e)
------------- ----------- ----------- ----------- ------------
Income from operations..... 42.0 (4.1) 37.9 37.9
Interest expense, net................ 1.6 0.1(a) 1.3 30.6(j) 31.9
(1.7)(f)
1.3(g)
Other income (expense):
Dividend income................. 0.3 (0.3)(f) -- --
Charitable contribution......... (0.6) 0.6(h) -- --
(Loss) on disposal of assets and
investment securities, net.... (3.1) (3.1) (3.1)
Impairment of investment in
land.......................... (12.6) (12.6) (12.6)
Other, net...................... 0.1 0.1 0.1
------------- ----------- ----------- ----------- ------------
Income before income taxes and
minority interest.................. 24.5 (3.5) 21.0 (30.6) (9.6)
Provision for income taxes........... 7.9 2.1(i) 10.0 (10.0)(i) --
Minority interest in net loss of
consolidated subsidiary............ 0.1 (0.1)(a) -- --
------------- ----------- ----------- ----------- ------------
Net income................. $ 16.7 $ (5.7) $ 11.0 $ (20.6) $ (9.6)
============= =========== =========== =========== ============
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements
39
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
TOC, ITS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
SUBSIDIARIES FOR THE FOR THE FOR THE FOR THE
AND CLARKSTON ACQUISITION ACQUISITION FINANCINGS TRANSACTIONS
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 4.8 $ (0.5)(a) $ (355.7) $ 363.3(n) $ 7.6
3.3(k)
(363.3)(m)
Investment securities........... 6.8 (6.8)(k) -- --
Accounts receivable............. 35.3 35.3 35.3
Inventories..................... 11.9 11.9 11.9
Other current assets............ 11.8 (0.8)(k) 11.0 11.0
------------- ----------- ------------ ----------- ------------
Total current assets....... 70.6 (368.1) (297.5) 363.3 65.8
Property, plant and equipment, net... 81.8 (2.2)(b) 260.5 260.5
180.9(m)
Investments in land.................. 6.2 (2.3)(a) 3.9 3.9
Investment in and advances to limited
partnership........................ 2.8 2.8 2.8
Other assets, net of accumulated
amortization, including pro forma
good will of $189.0 ............... 6.5 (2.8)(a) 192.7 14.9(n) 207.6
63.3(l)
35.0(o)
90.7(m)
------------- ----------- ------------ ----------- ------------
Total assets............... $ 167.9 $ (5.5) $ 162.4 $ 378.2 $540.6
============= =========== ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 40.1 $ 40.1 $ 40.1
Accrued expenses................ 4.4 (0.2)(a) 4.2 4.2
Dividends payable............... 0.7 0.7 0.7
------------- ----------- ------------ ----------- ------------
Total current
liabilities............. 45.2 (0.2) 45.0 -- 45.0
Revolving line of credit............. 13.0 (5.6)(a) -- --
(2.2)(b)
(5.2)(k)
Senior Term Loans.................... -- -- 130.0(n) 130.0
Senior Subordinated Notes............ -- -- 175.0(n) 175.0
ESOP Term Loan....................... -- -- 10.0(n) 10.0
Other liabilities.................... 0.3 35.0(o) 35.3 35.3
Deferred income taxes................ 15.8 79.1 79.1
63.3(l)
Minority interest in net assets of
consolidated subsidiary............ 1.1 (1.1)(m) -- --
Common Stock held by ESOP............ -- -- 10.0(n) 10.0
Less: Note receivable from
ESOP.......................... -- -- (10.0)(n) (10.0)
Stockholders' equity................. 92.5 0.2(a) 3.0 63.2(n) 66.2
0.9(k)
(90.6)(m)
------------- ----------- ------------ ----------- ------------
Total liabilities and
stockholders' equity.... $ 167.9 $ (5.5) $ 162.4 $ 378.2 $540.6
============= =========== ============ =========== ============
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements
40
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE ONE MONTH ENDED JUNE 30, 1996, THE TWELVE MONTHS ENDED
MAY 31, 1996 AND FOR THE YEAR ENDED MAY 31, 1995
(DOLLARS IN MILLIONS)
(UNAUDITED)
(a) Represents the elimination of operations, assets and liabilities
associated with The Texas Falls Corporation, which was not acquired as
part of the Acquisition. Pursuant to the Stock Purchase Agreement, 80% of
the outstanding capital stock of The Texas Falls Corporation was sold at
Closing to Mr. Swalm for $5.6 million. The proceeds were used to reduce
the Company's outstanding indebtedness.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Revenues............................. $0.2 $1.4
Cost of goods sold................... 0.0 0.2
Depreciation and amortization........ 0.0 0.3
Selling, general and administrative
expenses........................... 0.2 1.7
Interest income (expense), net....... (0.1 ) 0.1
Minority interest in net loss of
consolidated subsidiary............ 0.0 0.1
------------- -------------
Net loss................... $ (0.1 ) $ (0.6 )
============= =============
Cash................................. 0.5
Investments in land.................. 2.3
Other assets, net of accumulated
amortization....................... 2.8
Accrued expenses..................... (0.2 )
-------------
Net adjustment............. $ 5.4
=============
(b) Represents the elimination of operations and assets associated with the
Ranch, which was sold pursuant to the Stock Purchase Agreement at Closing
to a former shareholder for $2.2 million. The proceeds were used to reduce
the Company's outstanding indebtedness.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Depreciation......................... -- $0.1
Selling, general and administrative
expenses........................... -- $0.3
Fixed assets associated with the
Ranch.............................. $2.2
(c) Pursuant to the Stock Purchase Agreement, the existing profit sharing plan
was replaced with a new profit sharing plan. The Pro Forma Combined
Statements of Operations reflect (i) a reduction in the cost of goods sold
and selling, general and administrative expenses resulting from the
elimination of bonuses attributable to the existing profit sharing plan,
and (ii) an increase associated with bonuses attributable to the new
profit sharing plan.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Cost of goods sold:
Bonuses under the previous
profit sharing plan........... $(0.6) $ (12.0)
============= =============
Selling, general and administrative expenses:
Bonuses under the previous
profit sharing plan........... $(0.4) $ (11.5)
Bonuses under the proposed
profit sharing plan........... 0.5 8.3
------------- -------------
Net increase (decrease).... $ 0.1 $ (3.2)
============= =============
(d) Represents an increase in depreciation and amortization resulting from the
preliminary purchase price allocation in accordance with the purchase
method of accounting. Goodwill is amortized over 40 years.
41
<PAGE>
(e) In connection with the Transactions, certain shareholders will no longer
be employed by the Company. The Pro Forma Combined Statements of
Operations reflect a decrease in selling, general and administrative
expenses for the elimination of related shareholder salaries and expenses.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Shareholder salaries................. $ 0.1 $ 0.8
Expenses............................. 0.0 0.4
------------- -------------
$ 0.1 $ 1.2
============= =============
(f) Represents the reduction of interest expense, interest income and dividend
income for the sales of marketable equity securities, the Ranch and 80% of
the outstanding capital stock of The Texas Falls Corporation at June 1,
1995.
(g) Represents interest expense associated with the Cash Bonus Plan.
(h) Represents the elimination of charitable contributions paid to an
affiliate organization. Such contributions will not be made after the
Acquisition.
(i) Represents the tax effect of all adjustments and the net income of
Clarkston using a combined state and federal statutory income tax rate of
approximately 37%.
(j) Represents interest incurred on borrowings under the Bank Credit Agreement
and the Notes. Debt issuance costs are amortized over the terms of the
related debt and included as a component of interest expense. Assumes a
7.8% average borrowing rate and average outstanding borrowings under the
Bank Credit Agreement of $120.4 million and $110.4 million for the
twelve-month period ended May 31, 1996 and the one-month period ended June
30, 1996, respectively. The stated and effective interest rate on the
Notes is 11.125% and 11.58%, respectively.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Bank Credit Agreement................ $ 0.8 $ 9.6
ESOP Note, net of interest income.... -- --
Notes................................ 1.6 19.4
Amortization of debt issuance
costs.............................. .1 1.6
------------- -------------
$ 2.5 $30.6
============= =============
A 1% change in the interest rate payable on the outstanding balance under
the Bank Credit Agreement would change annual interest expense by $1.2
million on an annual basis before the effect of income taxes.
(k) Pursuant to the Stock Purchase Agreement, investment securities were sold
prior to Closing. A $0.5 million loss was recognized on the sale. The
related proceeds were used to reduce the Company's outstanding
indebtedness.
(l) Represents the adjustment to deferred taxes resulting from the adjustment
to property, plant and equipment.
42
<PAGE>
(m) The cash expended for the Acquisition pursuant to the Stock Purchase
Agreement and the allocation associated with the purchase method of
accounting are presented in the table below.
Purchase price....................... $ 377.3
Cash received from sales of the Ranch
and The Texas Falls Corporation.... (7.8)
Rollover shares...................... (6.2)
---------
Cash expended........................ $ 363.3
=========
The resultant pro forma purchase price entries are as follows:
Fixed assets.................... $ 180.9
Elimination of historical
equity, less predecessor basis
of rollover shares of $3.0
million........................ 90.6
Elimination of minority interest
in The Texas Falls
Corporation.................... 1.1
Other assets.................... 90.7
---------
$ 363.3
=========
(n) In order to finance the Acquisition and related fees and expenses, the
Company used the proceeds of the issuance of the Notes, the Discount Notes
and the Common Stock Placement, and obtained borrowings under the Bank
Credit Agreement. The net proceeds from such financings were $363.3
million.
Notes................................ $ 175.0
Common stock (less Rollover shares of
$6.2 million)...................... 63.8
Equity financing costs............... (0.6)
---------
63.2
Common Stock held by ESOP............ 10.0
---------
248.2
Bank Credit Agreement:
Tranche A Term Loan............. 85.0
Tranche B Term Loan............. 45.0
ESOP Term Loan.................. 10.0
---------
140.0
Deferred financing costs............. (14.4)
---------
125.6
Less: Loan to ESOP................... (10.0)
Less: Organizational Costs........... (0.5)
---------
$ 363.3
=========
(o) Represents the liability and related purchase price associated with the
Cash Bonus Plan in accordance with the Stock Purchase Agreement.
43
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below has been derived
from the combined financial statements of TOC, its subsidiaries and Clarkston
which appear elsewhere in this Prospectus and from combined financial statements
of TOC, its subsidiaries and Clarkston for prior fiscal years, and should be
read in conjunction with, and is qualified in its entirety by reference to, such
combined financial statements and their accompanying notes. Such financial
information is combined to reflect the assumption by the Company of a raw
material supply contract. The combined financial information set forth below for
each of the years in the three-year period ended May 31, 1995, the twelve-month
period ended May 31, 1996 and the one-month period ended June 30, 1996 has been
audited by Coopers & Lybrand L.L.P., independent auditors for such entities. The
combined financial information set forth below for the years ended May 31, 1992
has been derived from unaudited combined financial statements of TOC, its
subsidiaries and Clarkston, which, in the opinion of management, have been
prepared on a basis consistent with the audited combined financial statements of
such entities and contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for these periods.
The unaudited combined financial information for the year ended May 31, 1992 has
been prepared from audited financial statements of TOC and its subsidiaries and
unaudited financial statements of Clarkston. The results of the one month period
is not necessarily indicative of the results of the entire year or any other
period. The information presented below should be read in conjunction with the
combined financial statements of TOC, its subsidiaries and Clarkston and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
TWELVE ONE
MONTHS MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30,
------------------------------------------ -------- ---------
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 416.1 $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4
Cost of goods sold(1)................ 318.3 340.8 268.8 396.3 379.5 36.0
Depreciation and amortization........ 12.0 12.6 13.6 14.3 15.0 1.3
--------- --------- --------- --------- -------- ---------
Gross profit......................... 85.8 57.3 70.0 64.1 61.1 4.1
Selling, general and administrative
expenses(1)........................ 15.4 14.4 16.7 16.6 19.1 1.7
--------- --------- --------- --------- -------- ---------
Income from operations............... 70.4 42.9 53.3 47.5 42.0 2.4
Interest income (expense), net....... (0.6) (0.6) (0.2) 0.7 (1.6) (0.1)
Other income (expense)(2)............ (6.3) (1.2) (0.8) 1.1 (15.9) (0.3)
--------- --------- --------- --------- -------- ---------
Income before income taxes and
minority interest.................. 63.5 41.1 52.3 49.3 24.5 2.0
Provision for income taxes........... 24.3 13.0 18.4 16.9 7.9 0.8
Minority interest in net loss of
consolidated subsidiary............ -- -- 0.0 0.1 0.1 0.0
--------- --------- --------- --------- -------- ---------
Net income........................... 39.2 28.1 33.9 32.5 16.7 1.2
OPERATING DATA:
Revenues by product:
Butadiene(3)..................... $ 64.9 $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2
MTBE............................. 252.0 211.0 175.2 199.1 187.4 21.0
n-Butylenes...................... 29.2 21.7 28.1 42.7 48.2 3.2
Specialty Isobutylenes........... 38.2 54.8 59.9 75.5 74.5 5.5
Other(4)......................... 31.8 41.9 20.5 51.2 32.9 1.5
Sales volumes (in millions of pounds):
Butadiene........................ 559.1 556.2 484.4 580.8 622.6 64.6
MTBE(5).......................... 254.4 225.1 194.8 211.1 219.8 26.6
n-Butylenes...................... 158.7 114.7 150.8 245.9 284.6 17.1
Specialty Isobutylenes........... 240.4 309.0 312.2 398.0 368.2 23.0
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
44
<PAGE>
<TABLE>
<CAPTION>
MAY 31,
------------------------------------------ JUNE 30,
1992 1993 1994 1995 1996
--------- --------- --------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 33.9 $ 38.6 $ 50.6 $ 67.8 $ 25.3
Property, plant and equipment, net... 101.8 101.6 95.9 90.1 81.8
Total assets......................... 203.2 194.1 214.6 230.7 167.9
Long-term debt (including current
portion)........................... 14.4 10.9 11.0 -- 13.0
Total stockholders' equity........... 123.7 128.2 140.4 163.3 92.5
</TABLE>
<TABLE>
<CAPTION>
TWELVE ONE
MONTHS MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30,
------------------------------------------ -------- ---------
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................ $ 82.4 $ 55.5 $ 66.9 $ 61.8 $ 57.6 $ 3.7
Employee profit sharing and
bonuses(1)......................... 22.5 18.6 23.6 20.9 23.5 1.0
Capital expenditures................. 7.1 12.0 12.5 8.7 5.5 2.0
Net cash provided by operating
activities......................... 53.9 44.5 30.2 50.3 44.5 13.9
Net cash provided by (used in)
investing activities............... (24.5) (7.2) (5.3) (25.9) 8.2 (1.3)
Net cash used in financing
activities......................... (31.3) (29.9) (17.6) (23.3) (69.0) (9.4)
Cash dividends....................... 8.7 23.7 21.4 6.2 16.5 --
Ratio of earnings to fixed
charges(7)......................... 23.6x 16.1x 26.0x 26.3x 7.2x 9.4x
</TABLE>
- ------------
(1) Historically, the Company has allocated employee profit sharing and bonuses
to cost of goods sold and selling, general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
(2) Includes dividend income, charitable contributions, gain (loss) on disposal
of assets and investment securities, net, and other, net. For the twelve
months ended May 31, 1996, other expense includes an impairment of
investment in land of $12.6 million.
(3) Approximately 95% of the Company's butadiene sales are under fixed profit
contracts with suppliers of crude butadiene.
(4) Includes Clarkston's trading revenues from third parties, utility revenues,
revenues realized from the Company's terminalling facilities and sales of
chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income from operations before taking into consideration
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. EBITDA should not be construed by an investor as an alternative to
income from operations (as determined in accordance with generally accepted
accounting principles) as an indicator of the operating performance of the
Company or as an alternative to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as a
measure of liquidity.
(7) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the twelve months
ended May 31, 1996, income before taxes and minority interest includes a
$12.6 million non-cash provision for the impairment of certain non-strategic
properties which TPC intends to sell.
45
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of the results of operations,
financial condition and liquidity of TOC, its subsidiaries and Clarkston should
be read in conjunction with the combined financial statements of TOC, its
subsidiaries and Clarkston included in this Prospectus and the notes thereto.
The financial statements and other information set forth herein combine the
historical results of TOC, its subsidiaries and Clarkston. As a result, the
transactions between Clarkston and the Company have been eliminated in the
combined financial statements.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials), and, from time
to time, other external factors, such as the implementation of the CAAA, which
has significantly increased the demand for MTBE. Historically, the Company has
successfully mitigated the cyclicality of the markets for certain of its end
products by entering into contracts with pricing which allows for a fixed profit
by linking prices directly or indirectly to raw material costs. In addition, the
Company has attempted to optimize the use of isobutylene, an intermediate
feedstock produced by the Company, to produce MTBE or higher margin, specialty
products depending on prevailing market conditions.
The markets for the Company's principal products, butadiene and MTBE, are
cyclical, and market conditions may have a significant impact on the Company's
operating results. During the past five years, industry-wide pricing and
operating rates for butadiene and MTBE have fluctuated significantly and have
affected the Company's revenues and profit margins. The Company has, however,
achieved relatively stable profitability on its sales of butadiene due to the
nature of the supply contracts under which the Company purchases crude
butadiene, the raw material from which most of the Company's butadiene is
produced. The Company purchases approximately 95% of its crude butadiene
requirements at prices which are adjusted based on the Company's selling price
of butadiene as well as the energy cost of natural gas used to produce
butadiene, thereby providing the Company with a fixed profit on such sales.
Moreover, the Company sells butadiene under contracts which typically require
its customers to purchase a certain minimum volume from the Company.
Historically, MTBE was sold in the U.S. under sales contracts which allowed
suppliers to recover raw material costs and earn a fixed profit. Sales prices
under these contracts were higher than the then prevailing spot prices. Since
December 1994, the Company, as well as most other U.S. MTBE producers, has sold
all of its MTBE production at prices related to spot market prices. The Company
believes that the reduction of industry-wide volumes sold under these types of
fixed profit contracts and the large U.S. capacity additions built in the early
1990s in anticipation of demand created by the implementation of the CAAA's
oxygenated gasoline program in 1992 has acted as a deterrent to possible
capacity additions. Despite the transition in the industry away from fixed
profit contracts, the Company has consistently achieved profitability on its
sales of MTBE. One of the Company's principal raw materials used in the
production of MTBE, methanol, which the Company purchases at market prices, has
experienced considerable price fluctuations over the past several years. The
addition of significant new methanol production capacity in 1995 and early 1996
has resulted in a decline in the price of methanol from the historically high
levels reached in the winter of 1994. The Company believes that this current
imbalance between supply and demand will continue over the next several years,
and that the price of methanol will remain relatively stable at historically low
levels, which is expected to have a positive impact on the profitability of the
Company's MTBE operations.
46
<PAGE>
The markets and pricing for the Company's n-butylene and specialty
isobutylene products historically have been less cyclical than those for
butadiene and MTBE. These products are generally more specialized in nature,
typically account for a smaller proportion of the end-use product's overall cost
than commodity products, and are produced by a fewer number of producers. The
Company sells certain n-butylenes and specialty isobutylenes under contracts
which link their selling prices to the prices of products (principally gasoline
and butanes) for which prices fluctuate in a manner that correlates closely with
those of the raw materials used to manufacture n-butylenes and specialty
isobutylenes. In addition, the Company sells certain of these products under
contracts which link selling prices directly to raw material costs. The Company
has increased its focus on maximizing sales of these products. In the twelve
months ended May 31, 1996 and the one month ended June 30, 1996, sales of
n-butylenes and specialty isobutylenes represented 27% and 21%, respectively, of
the Company's revenues as compared to 19% in fiscal 1993.
For the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 43% and 45% of the Company's revenues were derived from
products which were sold on a fixed profit basis or for which selling prices
were linked directly or indirectly to raw material costs. Historically, the
percentage of the Company's revenues represented by such contracts has been
relatively stable. However, there can be no assurance that such contracts will
remain in effect beyond their current terms or, if extended, that the same
provisions would continue to apply. See "Business -- Contracts." The pricing of
the Company's other products, including MTBE, is typically based on prevailing
market prices.
Other revenues include Clarkston's trading revenues from third parties,
utility revenues, revenues realized from the Company's terminalling facilities
and sales of chemical by-products. The Company's utility revenues have been
primarily a function of natural gas costs since demand has been relatively
stable. The Company's terminalling revenues are primarily a function of the
volume of services provided. Sales of chemical by-products are primarily a
function of plant production levels. Clarkston, which was owned by certain of
the same shareholders as TOC, historically engaged in the purchase of isobutane,
one of the Company's principal raw materials, primarily on behalf of the
Company, and also on behalf of certain third parties. As part of the
Transactions, the Company has assumed from Clarkston a contract between
Clarkston and a certain supplier for the purchase of isobutane. Clarkston's
historical revenues derived from third parties have been included in other
revenues, and the raw material costs relating to such revenues have been
included in cost of goods sold. Historically, trading costs have substantially
offset Clarkston's third party trading revenues. Historical transactions between
the Company and Clarkston have been eliminated.
The Company believes its relationships with its largest customers are good.
Certain of its largest customers account for a significant percentage of the
Company's sales of particular products. As a result, the loss of significant
volumes or a significant customer could affect revenues from year to year.
Historically the Company has successfully replaced lost volumes or customers
with new customers or open market sales.
47
<PAGE>
REVENUES
The Company's revenues are primarily a function of the volume of products
sold by the Company and the prices for such products. The following tables set
forth the Company's: (i) historical revenues and the percentages of historical
revenues by product; (ii) volume of products sold; and (iii) average selling
prices for such products, exclusive of tolling fees, in each case for the years
ended May 31, 1994 and 1995, the twelve-month period ended May 31, 1996 and the
one-month period ended June 30, 1996.
REVENUES
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30,
------------------------------------------ -------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Butadiene............................ $ 68.7 19% $ 106.2 22% $ 112.6 25% $ 10.2 25%
MTBE................................. 175.2 50 199.1 42 187.4 41 21.0 50
n-Butylenes.......................... 28.1 8 42.7 9 48.2 11 3.2 8
Specialty Isobutylenes............... 59.9 17 75.5 16 74.5 16 5.5 13
Other(1)............................. 20.5 6 51.2 11 32.9 7 1.5 4
--------- --- --------- --- --------- --- --------- ---
Total............................ $ 352.4 100% $ 474.7 100% $ 455.6 100% $ 41.4 100%
========= === ========= === ========= === ========= ===
</TABLE>
- ------------
(1) Includes Clarkston's trading revenues from third parties, utility revenues,
revenues realized from the Company's terminalling facilities and sales of
chemical by-products to third parties.
SALES VOLUMES
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
YEAR ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30,
-------------------- ------------- ----------
1994 1995 1996 1996
--------- --------- ------------- ----------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C>
Butadiene............................ 484.4 580.8 622.6 64.6
MTBE(1).............................. 194.8 211.1 219.8 26.6
n-Butylenes.......................... 150.8 245.9 284.6 17.1
Specialty Isobutylenes............... 312.2 398.0 368.2 23.0
</TABLE>
- ------------
(1) Volumes in millions of gallons.
AVERAGE SELLING PRICES
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
YEAR ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30,
-------------------- ------------- ----------
1994 1995 1996 1996
--------- --------- ------------- ----------
(DOLLARS PER POUND, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C>
Butadiene............................ $ 0.16 $ 0.21 $0.20 $ 0.18
MTBE(1).............................. 0.90 0.94 0.85 0.80
n-Butylenes(2)....................... 0.19 0.17 0.17 0.19
Specialty Isobutylenes(2)............ 0.19 0.19 0.20 0.24
</TABLE>
- ------------
(1) Prices in dollars per gallon.
(2) Weighted average of the products under these categories.
48
<PAGE>
RAW MATERIALS
The Company's principal purchased raw materials are crude butadiene,
methanol and isobutane. The Company purchases approximately 95% 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. The following table sets forth the Company's average raw material prices
for crude butadiene, methanol and isobutane for the years ended May 31, 1994 and
1995, the twelve-month period ended May 31, 1996 and the one-month period ended
June 30, 1996.
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
YEAR ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30,
-------------------- -------------- ---------------
1994 1995 1996 1996
--------- --------- -------------- ---------------
(DOLLARS PER GALLON, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C>
Crude Butadiene(1)................... $ 0.09 $ 0.15 $ 0.14 $0.12
Methanol............................. 0.44 0.80 0.40 0.41
Isobutane............................ 0.39 0.41 0.43 0.46
</TABLE>
- ------------
(1) Prices in dollars per pound.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations .
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30,
------------------------------------------ -------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 352.4 100% $ 474.7 100% $ 455.6 100% $ 41.4 100%
Cost of goods sold(1)................ 268.8 76 396.3 83 379.5 84 36.0 87
Depreciation and amortization........ 13.6 4 14.3 3 15.0 3 1.3 3
--------- --- --------- --- --------- --- --------- ---
Gross profit......................... 70.0 20 64.1 13 61.1 13 4.1 10
Selling, general and administrative
expenses(1)........................ 16.7 5 16.6 3 19.1 4 1.7 4
--------- --- --------- --- --------- --- --------- ---
Income from operations............... $ 53.3 15% $ 47.5 10% $ 42.0 9% 2.4 6%
========= === ========= === ========= === ========= ===
</TABLE>
- ------------
(1) Employee profit sharing and bonuses were historically included in cost of
goods sold and selling, general and administrative expenses in the following
amounts:
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH
YEAR ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30,
-------------------- -------------- ---------------
1994 1995 1996 1996
--------- --------- -------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cost of goods sold................... $ 13.4 $ 12.5 $ 12.0 -$-
Selling, general and administrative
expenses........................... 10.2 8.4 11.5 1.0
--------- --------- -------------- ---------------
Total............................ $ 23.6 $ 20.9 23.5 $ 1.0
========= ========= ============== ===============
</TABLE>
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
REVENUES
The Company's revenues increased by approximately 14%, or $5.2 million, to
$41.4 million for the one month ended June 30, 1996 from $36.2 million for the
one month ended June 30, 1995. This increase was attributable to increased
volumes for butadiene and MTBE. Volumes for n-butylenes and specialty
isobutylenes were down compared to the prior period. Prices for butadiene were
up slightly and MTBE prices were down. Other product prices remained constant
with the prior period.
49
<PAGE>
GROSS PROFIT
Gross profit decreased by approximately 26%, or $1.5 million, to $4.1
million for the one month ended June 30, 1996 from $5.6 million for the one
month ended June 30, 1995. Gross margin during this period decreased slightly to
9.9% from 15.4%. The decline in gross profit was primarily attributable to the
decreased sales price of MTBE.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 27%, or $0.9 million, to
$2.4 million for the one month ended June 30, 1996 from $3.3 million for the one
month ended June 30, 1995. Operating margin during this period declined to 5.9%
from 9.2%. This decrease in income from operations and operating margin was
primarily due to the same factors contributing to the decrease in gross profit
and gross margin described above.
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
REVENUES
The Company's revenues decreased by approximately 4%, or $19.1 million, to
$455.6 million for the twelve months ended May 31, 1996 from $474.7 million for
the year ended May 31, 1995. This decrease was primarily attributable to
decreased selling prices for butadiene, MTBE and n-butylenes, as well as
decreased sales volumes for specialty isobutylenes and a decrease in other
revenues, partially offset by increased selling prices of specialty isobutylenes
as well as increased sales volumes of butadiene, MTBE and n-butylenes. The
Company's revenues by product for the year ended May 31, 1995 and the
twelve-month period ended May 31, 1996 were as follows:
<TABLE>
<CAPTION>
TWELEVE
INCREASE (DECREASE) MONTHS
YEAR ENDED IN REVENUES ENDED
MAY 31, DUE TO CHANGES IN MAY 31,
----------- --------------------- -----------
1995 PRICE VOLUME 1996
----------- ------ ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Butadiene............................ $ 106.2 $ (1.2) $ 7.6 $ 112.6
MTBE................................. 199.1 (19.9) 8.2 187.4
n-Butylenes.......................... 42.7 (1.2) 6.7 48.2
Specialty Isobutylenes............... 75.5 4.7 (5.7 ) 74.5
Other(1)............................. 51.2 32.9
----------- -----------
Total............................ $ 474.7 $ 455.6
=========== ===========
</TABLE>
- ------------
(1) The component mix of other revenues does not make it meaningful to show
increases or decreases due to price or volume.
Butadiene revenues increased by approximately 6%, or $6.4 million, to
$112.6 million for the twelve months ended May 31, 1996 from $106.2 million for
the year ended May 31, 1995. This increase was primarily attributable to an
increase in sales volumes of approximately 7%, or 41.8 million pounds, as a
result of increased contractual volumes sold at then current prices to a major
customer as the Company gained a larger share of this customer's business and as
this customer increased its requirements. In addition, sales prices decreased
slightly due to customers drawing down inventory thereby decreasing overall
product demand.
MTBE revenues decreased by approximately 6%, or $11.7 million, to $187.4
million for the twelve months ended May 31, 1996 from $199.1 million for the
year ended May 31, 1995. This decrease was primarily attributable to a decrease
in selling prices due to the expiration of significant sales contracts in which
pricing was based on a fixed profit above cost, in accordance with industry
trends. In addition, sales volumes increased by approximately 4%, or 8.7 million
gallons, due to the full year implementation of mandated oxygenate requirements.
n-Butylenes revenues increased by approximately 13%, or $5.5 million, to
$48.2 million for the twelve months ended May 31, 1996 from $42.7 million for
the year ended May 31, 1995. This increase was attributable to increased sales
volumes of approximately 16%, or 38.7 million pounds, as the Company
50
<PAGE>
expanded its customer base and increased its contractual volumes to a
significant existing customer. A decrease in average selling prices resulted
from the Company matching competitors' pricing for certain products, which
partially offset the increase in sales volumes.
Specialty isobutylenes revenues decreased by approximately 1%, or $1.0
million, to $74.5 million for the twelve months ended May 31, 1996 from $75.5
million for the year ended May 31, 1995. This decrease was the result of a major
specialty isobutylene customer increasing purchases of a low price specialty
isobutylene product from a competing supplier offering an alternate, lower
purity product during this period. The Company offset a portion of these lower
volumes by sales of higher priced specialty isobutylene products to other
customers at prices which were lower than prevailing contract prices.
Other revenues decreased by approximately 36%, or $18.3 million, to $32.9
million for the twelve months ended May 31, 1996, from $51.2 million for the
year ended May 31, 1995. This decrease was primarily due to a $17.5 million
decrease in sales from Clarkston to third parties due to reduced n-butane and
isobutane trading activity.
GROSS PROFIT
Gross profit decreased by approximately 5%, or $3 million, to $61.1 million
for the twelve months ended May 31, 1996 from $64.1 million for the year ended
May 31, 1995. Gross margin during this period decreased slightly to 13.4% from
13.5%. The decline in gross profit was primarily attributable to a one-time 10%
salary increase for employees included in cost of goods sold, and to an
additional $3 million increase in cost of goods sold resulting from a scheduled
maintenance shutdown on one of the Company's dehydrogenation units and the
write-off of capitalized dehydrogenation catalyst costs, which resulted from an
unscheduled shutdown. In addition, depreciation and amortization increased
slightly related to new capital investments. These cost increases were partially
offset by a decrease in raw material methanol costs and a decrease in costs
associated with Clarkston's third party trading activities during this period.
Additionally, gross profit and gross margin were adversely affected by a $17.6
million decrease in product revenues as a result of overall price decreases.
However, this decrease was offset by a $16.8 million increase in product sales
revenues resulting from an overall increase in sales volumes.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 12%, or $5.5 million, to
$42.0 million for the twelve months ended May 31, 1996 from $47.5 million for
the year ended May 31, 1995. Operating margin during this period declined to
9.2% from 10.0%. This decrease in income from operations and operating margin
was primarily due to the same factors contributing to the declines in gross
profit and gross margin described above, as well as a $1.3 million increase in
selling, general and administrative expenses primarily attributable to legal and
other expenses related to the repurchase of the Company's stock. See "--
Liquidity and Capital Resources."
51
<PAGE>
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
REVENUES
The Company's revenues increased by 35%, or $122.3 million, to $474.7
million for the year ended May 31, 1995 from $352.4 million for the year ended
May 31, 1994. This increase was primarily attributable to increased sales prices
and volumes for butadiene and MTBE, to increased sales volumes for n-butylenes
and specialty isobutylenes, and to an increase in other revenues. The Company's
revenues by product for the fiscal years 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
YEAR ENDED IN REVENUES YEAR ENDED
MAY 31, DUE TO CHANGES IN MAY 31,
---------- ---------------------- ----------
1994 PRICE VOLUME 1995
---------- ------ ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Butadiene............................ $ 68.7 $23.8 $13.7 $106.2
MTBE................................. 175.2 9.6 14.3 199.1
n-Butylenes.......................... 28.1 (3.2 ) 17.8 42.7
Specialty Isobutylenes............... 59.9 (0.9 ) 16.5 75.5
Other(1)............................. 20.5 51.2
---------- ----------
Total............................ $352.4 $474.7
========== ==========
</TABLE>
- ------------
(1) The component mix of other revenues does not make it meaningful to show
increases or decreases due to price or volume.
Butadiene revenues increased by 55%, or $37.5 million, to $106.2 million
for the year ended May 31, 1995 from $68.7 million for the year ended May 31,
1994. This increase was primarily attributable to an increase in selling prices
due to higher U.S. demand relative to supply. U.S. demand for butadiene
increased primarily as a result of rubber end-users substituting synthetic
rubber for higher priced natural rubber. Supply of butadiene decreased in fiscal
1995 as imports of butadiene and crude butadiene declined due to reduced foreign
ethylene production and higher ocean freight costs. Butadiene sales volumes also
increased by approximately 20%, or 96.4 million pounds, as a result of an
increase in sales under contract to two major customers, one of which expanded
its production capacity.
MTBE revenues increased by 14%, or $23.9 million, to $199.1 million for the
year ended May 31, 1995 from $175.2 million for the year ended May 31, 1994.
This increase was primarily attributable to an increase in sales volumes of 8%,
or 16.3 million gallons. This volume increase was the result of MTBE users
building inventories in anticipation of greater demand for MTBE due to further
implementation of the CAAA in early 1995. In addition, MTBE selling prices
increased as a result of higher methanol raw material prices. Methanol prices on
the U.S. Gulf Coast increased from $0.40 per gallon in June 1994 to $1.45 per
gallon in December 1994, before falling to $0.75 per gallon in May 1995.
n-Butylenes revenues increased by 52%, or $14.6 million, to $42.7 million
for the year ended May 31, 1995 from $28.1 million for the year ended May 31,
1994. This increase was primarily the result of increased sales volumes of
butene-1 to new customers and increased sales volumes of butene-2 in response to
periodic customer demand. Overall n-butylenes sales volumes increased by 63%, or
95.1 million pounds, during this period. This increase was partially offset by a
decline in n-butylenes average selling prices as a result of butene-1 price
reductions by the Company in response to market competition.
Specialty isobutylenes revenues increased by 26%, or $15.6 million, to
$75.5 million for the year ended May 31, 1995 from $59.9 million for the year
ended May 31, 1994. This increase was due to an increase in specialty
isobutylenes sales volumes of 27%, or 85.8 million pounds. This volume increase
was the result of the Company actively seeking alternate uses for its
isobutylene as a result of the lower margin realized for MTBE in this period due
to higher methanol prices. This led to higher sales volumes for diisobutylene
and high purity isobutylene attributable to increased sales to a major customer,
as well as increased sales volumes of isobutylene concentrate during the first
half of the fiscal year as the Company gained a greater share of a major
customer's business.
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<PAGE>
Other revenues increased by 149%, or $30.7 million, to $51.2 million for
the year ended May 31, 1995 from $20.5 million for the year ended May 31, 1994.
This increase was primarily due to an increase of $28.9 million in revenues from
Clarkston's third party trading activities, partially offset by a decrease in
utility revenues.
GROSS PROFIT
Gross profit decreased by 8%, or $5.9 million, to $64.1 million for the
year ended May 31, 1995 from $70.0 million for the year ended May 31, 1994.
Gross margin during this period declined to 13.5% from 19.9%. The decline in
gross profit and gross margin was primarily attributable to a significant
increase in the price of methanol, a primary raw material used to produce MTBE,
partially offset by increased sales volumes of specialty isobutylenes produced
from isobutylene, which would otherwise have been used to produce lower margin
MTBE. The average price of methanol increased to $0.80 per gallon for the year
ended May 31, 1995 from $0.44 per gallon for the prior period. In addition,
crude butadiene prices increased to $0.15 per pound from $0.09 per pound in the
prior period directly attributable to the increase in the Company's selling
price of butadiene. Costs associated with Clarkston's third party trading
activities increased, offsetting increases in revenues.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 11%, or $5.8 million, to
$47.5 million for the year ended May 31, 1995 from $53.3 million for the year
ended May 31, 1994. Operating margin during this period declined to 10.0% from
15.1%. The decrease in income from operations and operating margin was
attributable to the same factors contributing to the decline in gross profit and
gross margin. Selling, general and administrative expenses were generally
unchanged from the prior period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
Net cash provided by operating activities was $13.9 million for the one
month ended June 30, 1996 compared to $1.9 million for the one month ended June
30, 1995. This increase of $12.0 million was primarily attributable to increases
in changes in working capital, partially offset by a decrease in net income. Net
cash used in investing activities was $1.3 million for the one month ended June
30, 1996 compared to net cash provided by investing activities of $5.9 million
for the one month ended June 30, 1995. This change of $7.2 million was due to an
increase in capital expenditures and a decrease in proceeds from sales of
investment securities. Net cash used in financing activities was $9.4 million
for the one month ended June 30, 1996 compared to $4.5 million for the one month
ended June 30, 1995. This increase of $4.9 million was primarily due to a
decrease in bank overdrafts partially offset by an increase in borrowings under
revolving credit lines, a decrease in payments of notes payable and a decrease
in dividends paid.
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
Net cash provided by operating activities was $44.5 million for the twelve
months ended May 31, 1996 compared to $50.3 million for the year ended May 31,
1995. This decrease of $5.8 million was primarily attributable to a decrease in
net income adjusted for non-cash items and a decrease in changes in working
capital. Net cash provided by investing activities was $8.2 million for the
twelve months ended May 31, 1996 compared to net cash used in investing
activities of $25.9 million for the year ended May 31, 1995. This change of
$34.1 million was due to decreases in capital expenditures, an increase in
proceeds from the sales of investment securities and a decrease in purchases of
investment securities. Net cash used in financing activities was $69.0 million
for the twelve months ended May 31, 1996 compared to $23.3 million for the year
ended May 31, 1995. This increase of $45.7 million was primarily due to the
purchase by the Company of common stock for a total consideration of $95.4
million in August 1995 and an increase in dividends and distributions paid,
partially offset by the sale by the Company of common stock to certain officers
of the Company for $22.6 million and decreased repayments under revolving credit
lines.
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<PAGE>
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
Net cash provided by operating activities was $50.3 million for the year
ended May 31, 1995 compared to $30.2 million for the year ended May 31, 1994.
This increase of $20.1 million was primarily attributable to increases in
changes in working capital and an increase in losses realized on the disposal of
assets and investment securities, partially offset by a decrease in net income.
Net cash used in investing activities was $25.9 million for the year ended May
31, 1995 compared to $5.3 million for the year ended May 31, 1994. This increase
of $20.6 million was primarily attributable to a reduction in proceeds from the
sale of investment securities and a decrease in purchases of investment
securities, partially offset by a decrease in capital expenditures. Net cash
used in financing activities was $23.3 million for the year ended May 31, 1995
compared to $17.6 million for the year ended May 31, 1994. This increase of $5.7
million was primarily due to decreased borrowings under revolving credit lines
and also to increased repayments of notes payable, partially offset by decreased
repayments under revolving credit lines and decreased dividends paid.
LIQUIDITY
The Company's liquidity needs will arise primarily from debt service on the
indebtedness incurred in connection with the Acquisition. After the consummation
of the Transactions, the Company had outstanding approximately $315.0 million of
indebtedness, primarily consisting of $175.0 million principal amount of the
Notes and $140.0 million in Term Loans. See "Risk Factors -- Substantial
Leverage."
DEBT SERVICE
Principal and interest payments under the Bank Credit Agreement and
interest payments on the Notes will represent significant liquidity requirements
for the Company. With respect to the $140.0 million borrowed under the Term
Loans, the Company will be required to make scheduled principal payments of
approximately $13.0 million in fiscal 1997. The Term Loans bear interest at
floating rates based upon the interest rate option elected by the Company. See
"Description of the Bank Credit Agreement." As a result of the indebtedness
incurred in connection with the Acquisition, the Company's interest expense will
be higher and will have a greater proportionate impact on net income in
comparison to pre-Transactions periods.
CASH BONUS PLAN
In connection with the Acquisition, TPC established a $35.0 million Cash
Bonus Plan for certain employees of the Company as of Closing and certain
employees of its independent contractors as of Closing. Within 45 days after
Closing, 10% of this amount was paid to eligible participants and the remaining
payments will be made in sixteen quarterly installments. The Company will be
expected to make scheduled payments of approximately $10.4 million in fiscal
1997, $8.9 million in fiscal 1998, $8.6 million in fiscal 1999, $8.2 million in
fiscal 2000 and $2.0 million in fiscal 2001. See "Management -- Cash Bonus
Plan."
FUTURE FINANCING AND CASH FLOWS
The Company believes that cash flow from operations and the availability of
borrowings under the Revolving Credit Facility will provide adequate funds for
ongoing operations, planned capital expenditures and debt service during the
term of such Revolving Credit Facility. The Company believes that it will be
able to refinance the Bank Credit Agreement prior to its termination, although
there can be no assurance that it will be able to do so. The Company's ability
to borrow is limited by the terms of the Bank Credit Agreement and the
Indenture. See "Risk Factors -- Restrictive Financing Covenants," "Description
of the Bank Credit Agreement" and "Description of the Notes."
CAPITAL EXPENDITURES
The Company's historical capital expenditures since 1993 have in
substantial part resulted from implementing its strategic plan of improving
operating efficiency, and complying with environmental and safety standards. The
Company's capital expenditures were $12.5 million, $8.7 million and $5.5 million
for
54
<PAGE>
the years ended May 31, 1994 and 1995 and the twelve-month period ended May 31,
1996, respectively, of which $1.0 million, $2.2 million and $2.1 million,
respectively, related to environmental compliance. Capital expenditures are
expected to be $12.5 million for the fiscal year ended June 30, 1997. See
"Business -- Environmental Regulation."
Capital expenditures for fiscal 1997 will relate principally to improving
operating efficiencies and environmental expenditures.
The Company expenses approximately $20 million annually for plant
maintenance and expects to incur cash expenditures of a similar amount in fiscal
1997 for such purposes. These maintenance costs are not treated as capital
expenditures.
The Company's operations are subject to federal, state, and local laws and
regulations administered by the EPA, the U.S. Coast Guard, the Army Corps of
Engineers, the Texas Natural Resource Conservation Commission ("TNRCC"), the
Texas General Land Office, the Texas Department of Health and various local
regulatory agencies. The Company holds all required permits and registrations
necessary to comply substantially with all applicable environmental laws and
regulations, including permits and registrations for wastewater discharges,
solid and hazardous waste disposal and air emissions, and management believes
that the Company is in substantial compliance with all such laws and
regulations. While management does not expect that 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.
The Company routinely incurs expenses associated with managing hazardous
substances and pollution in its ongoing operations. The amounts of these
operating expenses were approximately $3.1 million, $3.1 million and $2.8
million for the years ended May 31, 1994 and 1995 and the twelve-month period
ended May 31, 1996, respectively.
Capital expenditures for fiscal 1997 are expected to relate principally to
improving operating efficiencies and environmental expenditures (including the
installation of an environmentally superior waste-heat boiler in one of the
Company's dehydrogenation units).
OTHER
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
- -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (the "Standard"). The Standard requires, among other things,
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. During 1996, the Company evaluated the carrying value of its
investments in land in light of the possible sale of these assets in the
foreseeable future and considering the criteria in the Standard, determined that
an impairment write-down was necessary. Prior to 1996, the Company did not
consider the decline in the fair value of those assets, which was below the
Company's cost, to be a permanent decline. During the twelve months ended May
31, 1996 the Company adopted the Standard and as a result recorded a provision
of $12,592,112, with an associated tax benefit of $4,660,000, to write down
certain properties to estimated fair market value.
RECENTLY ISSUED PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). SFAS No. 123, which is effective for fiscal years beginning after
December 31, 1995, encourages but does not require companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. The Company
has not yet determined if it will adopt this new fair value-based method of
accounting for its stock-based incentive plans or elect the disclosure
provisions of SFAS No. 123.
55
<PAGE>
BUSINESS
GENERAL
The Company is the largest producer of butadiene and butene-1, and the
second largest producer of MTBE, in North America, in terms of production
capacity. In addition, the Company is the sole producer of diisobutylene and
isobutylene concentrate in the United States and the largest domestic merchant
supplier of high purity isobutylene to the chemical market. The Company's
products include: (i) butadiene, primarily used to produce synthetic rubber;
(ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-
butylenes (butene-1 and butene-2), used in the manufacture of plastic resins,
fuel additives and synthetic alcohols; and (iv) specialty isobutylenes,
primarily used in the production of specialty rubbers, lubricant additives,
detergents and coatings. For the twelve months ended May 31, 1996, butadiene
represented 25% of the Company's total revenues, MTBE represented 41%,
n-butylenes 11%, specialty isobutylenes 16% and other revenues the remaining 7%.
On a pro forma basis after giving effect to the Transactions, the Company's
revenues for the twelve months ended May 31, 1996 and the one month ended June
30, 1996 would have been $454.2 million and $41.2 million, respectively, and
EBITDA (as defined) for the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 would have been $74.2 million and $4.3 million,
respectively.
The Company seeks to reduce its exposure to the cyclical nature of the
petrochemical industry through long-term, fixed profit contracts and to increase
its profitability by maximizing its production flexibility and increasing sales
of high margin n-butylenes and specialty isobutylenes. For the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, approximately 43% and
45% of the Company's total revenues were derived from products sold on a fixed
profit basis or whose selling prices were linked, directly or indirectly, to raw
material costs. The Company believes that the combination of its fixed profit
contracts, competitive cost position and specialty product sales provides
stability to its cash flows and helps to offset the effects of cyclical
downturns.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in North America, the Company believes that many of its customers
place significant value on its ability to provide a reliable domestic supply of
butadiene and as a result have entered into long-term sales contracts with the
Company, which, in aggregate, accounted for 92% and 88% of its butadiene sales
in the twelve months ended May 31, 1996, and the one month ended June 30, 1996,
respectively.
The Company extracts butadiene from crude butadiene, which is generated
from the production of ethylene and is comprised of a number of valuable
components, including butadiene, isobutylene, n-butylenes, isobutane and
n-butane. Many U.S. ethylene producers rely on third parties such as the Company
to process their crude butadiene streams, as the crude butadiene volumes they
produce are not sufficient to justify the construction of on-site butadiene
recovery facilities. The Company estimates that producers accounting for 65% of
U.S. and Canadian ethylene production capacity do not internally process crude
butadiene by-product streams. The Company is the largest non-integrated crude
butadiene processor in North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations. For the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, fixed profit supply contracts for crude butadiene accounted
for approximately 92% and 72%, respectively, of the Company's butadiene sales
volume.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major component of, RFG
and is used in over 25% of the U.S. gasoline pool. MTBE is produced by reacting
methanol and isobutylene, and the Company's ability to produce isobutylene by
three alternative methods
56
<PAGE>
enables it to produce MTBE by the most economical processes available to the
Company. In addition, the Company has the ability to add incremental capacity to
capitalize on expected future growth, at a significantly lower cost than the
cost of adding new capacity. The Company believes that this incremental capacity
gives it a competitive advantage over other producers who would have to incur
greater cost to increase capacity. The Company sells MTBE to oil refiners and
gasoline producers, including Mobil Oil Corporation, Lyondell Petrochemical
Company and CITGO Petroleum Corporation on both a contract and spot basis at
prices linked to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes. In the twelve months ended
May 31, 1996 and the one month ended June 30, 1996, sales of n-butylenes and
specialty isobutylenes represented 27% and 21%, respectively, of the Company's
revenues as compared to 19% in fiscal 1993.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally, to produce MTBE for sale in the spot
market. In the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 18% and 11%, respectively, of the Company's isobutylene was
used in the production of specialty isobutylenes with the remainder being used
for MTBE production. In addition, the Company maintains the production
flexibility to upgrade n-butylenes contained in crude butadiene streams to
either isobutylene or butene-1 using its patented SKIP process. This flexibility
allows the Company to meet its customers' needs through the most economical
process, to produce additional products and to capitalize on favorable market
conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
the Company acquired from Tenneco, Inc. the assets (principally comprised of the
Houston facility) of Petro-TexChemical Corporation ("Petro-Tex"), the prior
owner of the Company's manufacturing facility.
COMPANY STRATEGY
The Company believes that it has become the industry leader in the
production of the majority of its products by capitalizing on its production
flexibility, its ability to add significant incremental capacity across its
product lines, the marketing experience of its management team, its competitive
cost position and its customer focus. The Company's strategy is to strengthen
its established presence in its selected markets by focusing on the following
factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS -- The markets in which the Company
competes are cyclical. The Company intends to mitigate the effects of this
cyclicality while benefiting from potential upturns in industry profitability by
optimizing the proportion of its sales made under contracts allowing for a fixed
profit or at prices linked directly or indirectly to raw material prices. In the
twelve months ended
57
<PAGE>
May 31, 1996 and the one month ended June 30, 1996, approximately 43% and 45%,
respectively, of the Company's total revenues were derived from products sold on
a fixed profit basis or whose selling prices were linked, directly or
indirectly, to raw material costs. In addition, the Company intends to increase
its sales of less cyclical n-butylene and specialty isobutylene products. In the
twelve months ended May 31, 1996 and the one month ended June 30, 1996, sales of
n-butylenes and specialty isobutylenes represented 27% and 21%, respectively, of
the Company's revenues as compared to 19% in fiscal 1993.
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 MTBE at significantly lower cost than that of
new construction. While the Company currently has no plans to increase its
production capacity, it continuously evaluates these strategic options in light
of prevailing market conditions. In addition, the Company believes that its
ability to add low-cost incremental capacity acts as a deterrent to other
producers and new entrants considering capacity expansions.
The Company's ability to add incremental butadiene capacity and its
relationships with several North American ethylene producers are expected to
enable it to capture the benefit of increased U.S. crude butadiene supply. In
addition, announced butadiene capacity expansions by other U.S. producers are
minimal. The Company believes that growth in global demand for butadiene will be
consistent with gross domestic product growth based on increased tire production
and potential substitution of synthetic rubber for natural rubber.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS -- The Company's production
flexibility and its ability to add low-cost capacity are crucial to its
capitalizing on the attractive demand/supply outlook for a number of its
products.
o BUTADIENE. The U.S. supply of crude butadiene is increasing in line
with domestic ethylene production, although it is currently
insufficient to meet U.S. demand. Industry operating rates are
expected to remain at current high levels as the increase in domestic
crude butadiene production is expected to replace imports since U.S.
producers have limited alternative uses for their crude butadiene
by-product streams.
o MTBE. While the Company expects U.S. demand for MTBE to grow less
quickly than it has over the past fifteen years, it believes that
future growth in foreign demand may be considerable. In addition,
recently announced U.S. MTBE capacity additions are minimal.
o BUTENE-1. Demand for butene-1 is closely linked to polyethylene
production growth. The Company expects global production of
polyethylene to increase at higher than historical rates in the next
four years. In addition, the Company expects demand for butene-1 used
in other applications (I.E. use in butylene oxide, a gasoline
additive) to be strong.
SUSTAIN CUSTOMER FOCUS -- The Company believes that producing quality
products and providing quality service with dependable supply are key factors in
its ability to compete in the market place for its products. Management believes
that its focus on customer service has resulted in strong customer relationships
and a high degree of customer loyalty. This is evidenced by the fact that
approximately 60% of the Company's current customers have purchased products
from the Company for more than ten years.
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The following table summarizes the Company's products.
<TABLE>
<CAPTION>
REVENUES REVENUES
FOR TWELVE FOR ONE
MONTHS ENDED MONTH ENDED INTERMEDIATE
COMPANY PRODUCT MAY 31, 1996 JUNE 30, 1996 CHEMICAL PRODUCTS PRINCIPAL APPLICATIONS
- ------------------------------------ -------------- ---------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C>
BUTADIENE $ 112.6 10.2 Styrene-Butadiene Rubber Tires, gaskets, pipes and hoses
Styrene-Butadiene Latex Paints, adhesives and paper coatings
Acrylonitrile Butadiene High-performance plastics
Styrene
Polybutadiene Rubber Tires
Hexamethylenediamine Nylon
MTBE $ 187.4 21.0 Reduces automotive emissions and
improves engine performance
N-BUTYLENES $ 48.2 3.2
Butene-1 High Density and Linear Trash bags, film wrap, pipe and
Low Density Polyethylene plastic containers
Butylene Oxide Detergent packages used in new
gasoline formulations to improve
engine performance
Butene-2 SEC-Butyl and other Used in the production of coatings,
Alcohols adhesives and plasticizers
SPECIALTY
ISOBUTYLENES $ 74.5 5.5
Isobutylene
Concentrate Butyl Rubber High-performance synthetic rubbers
used in tires
Polybutenes Lubricant additives
High Purity
Isobutylene Butyl Rubber High-performance synthetic rubbers
used in tires
Alkylphenols Resins and antioxidants
Agricultural Intermediates Herbicides and insecticides
Hydrocarbon Resins Sealants, paints, coatings and rubber
chemicals
Sulfurized Isobutylene Synthetic lubricant oils
Diisobutylene Alkylphenols Phenolic resins, tackifier and ink
resins, surfactants
Rubber Chemicals Specialty additives
Dispersants Lubricant oil additives
Polycarboxylate Polymers Water treatment, detergent and
mineral processing chemicals
</TABLE>
59
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INDUSTRY OVERVIEW
BUTADIENE. Butadiene is an important raw material used in the production of
a number of products, including styrene-butadiene rubber ("SBR"), polybutadiene
rubber, styrene-butadiene ("SB") latex, acrylonitrile butadiene styrene ("ABS")
and hexamethylenediamine ("HMDA"). These products are utilized in the
manufacture of tires and other rubber products, engineered plastics, nylon
fibers and other uses.
Demand for butadiene depends to a large extent on trends in the housing and
automotive sectors, principally the replacement tire market. The tire
replacement market has historically been less cyclical than the market for
original equipment tires and accounts for approximately 75% of all U.S. car and
commercial vehicle tire production. The Company expects continued growth in
butadiene end-use demand over the next several years consistent with global
gross domestic product growth. The Company believes that U.S. tire production
could increase as a result of higher volumes of domestic automobile production
due to foreign "transplant" production.
1995 NORTH AMERICAN BUTADIENE DEMAND
[Pie chart depicting data below]
SB Latex 11.8%
ABS 4.5%
Nylon Intermediates 12.2%
Polychloroprene 3.4%
Nitrile Rubber 2.9%
Polybutadiene 25.1%
SBR 30.5%
Other 9.6%
TOTAL DEMAND = 4.78 BILLION POUNDS
The most important butadiene derivative is SBR, which is primarily used in
the manufacture of tires, gaskets and hoses. Since 1990, the demand for SBR has
increased at a compound annual growth rate of approximately 3%. Although SBR
markets are mature, the Company expects that demand for higher performance tires
and truck tires may contribute to growth in demand for SBR at higher than
historical levels.
Polybutadiene rubber provides higher abrasion resistance than other rubbers
which makes it preferential for high performance tires, plastics applications
and other heavy duty uses. Other types of synthetic rubber produced from
butadiene include polychloroprene rubber, used in wire and cable applications,
and nitrile rubber, which, due to its high tensile strength and abrasion
resistance, is used in specialty applications, such as hoses, tubes and belts.
Butadiene derivatives which are not used to produce synthetic rubber
primarily consist of HMDA, SB latex and ABS. Historically, demand for these
products has generally reflected global gross domestic product growth. HMDA is
an intermediate in the production of nylon fiber. SB latex demand is driven by
its use in paints, adhesives and paper coatings. ABS resins are used in the
production of high-performance plastics with a wide range of applications in the
automotive, appliance and electronics industries.
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Butadiene producers are currently operating at historically high rates and
the Company believes that no new capacity is expected to come on-line in the
U.S. in the next five years. Management believes that the Company's existing
capacity and low-cost expansion alternatives act as an effective deterrent to
the construction of new facilities by others in the United States.
The major source of supply for butadiene is extraction from crude
butadiene, a by-product of ethylene production. In the U.S., volumes of crude
butadiene from ethylene facilities are inadequate to meet domestic demand. The
U.S. imports a large portion of its requirements of butadiene and crude
butadiene, especially from Western Europe, where most ethylene facilities use
feedstocks which result in the production of proportionately more crude
butadiene than in the U.S. Historically, the price of butadiene has been
determined by supply, which is influenced by the amount of ethylene produced and
the availability of crude butadiene, and butadiene demand, which is determined
by demand for end-use products, such as tires, engineered plastics and nylon
fibers.
U.S. BUTADIENE PRICES(1) AND OPERATING RATES, 1985-1995
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Butadiene
Contract Price, Operating
U.S. Gulf Coast Rate
--------------- ----------
1985 29.4 62.7%
1986 15.8 68.2%
1987 23.3 79.2%
1988 22.3 86.2%
1989 20.5 84.9%
1990 26.7 82.1%
1991 15.5 73.6%
1992 16.6 80.2%
1993 16.7 78.9%
1994 18.4 84.2%
1995 24.0 89.4%
- ------------
(1) Refers to butadiene spot market prices. Butadiene is typically sold at a
discount to such prices.
MTBE. MTBE has been one of the fastest growing petrochemicals, in terms of
volume, during the past fifteen years, with global production rising from
approximately 15,000 barrels per day in 1980 to approximately 382,000 barrels
per day in 1995. MTBE's dramatic growth has been a result of two significant
factors. First, MTBE has a high octane rating, which makes it a valuable
gasoline blendstock for adding octane to gasoline. Second, MTBE contains a high
percentage weight (approximately 18%) of oxygen. Its high oxygen level, which
results in improved combustion and reduces the level of carbon monoxide and
ozone-depleting emissions from automobile engines, contributes to MTBE's use as
a blending agent in oxygenated and reformulated gasolines. These properties and
its large scale global production capacity have made it the preferred oxygenate
and a major component of RFG in the U.S.
The use of lead additives in gasoline declined dramatically during the
1980s as a result of environmental legislation. Following such legislation,
octane needs increased, which increased world MTBE use considerably. The passage
of the CAAA in 1990 in the U.S. has caused another round of MTBE production
capacity additions and blending use increases during the past four years.
The two programs mandated by the CAAA which have the most significant
effect on the MTBE market are the oxygenated gasoline and the RFG programs. The
oxygenated gasoline program was initiated in 1992, with the goal of reducing
winter carbon monoxide emissions. With the implementation of the RFG program in
1995, the use of RFG was required in the nine major urban areas with the most
severe ozone pollution. High RFG prices and public health concerns, particularly
in cold weather climates, kept MTBE use below the levels that had been
anticipated in the industry at the time of the passage of the CAAA. Despite the
problems with the implementation of the CAAA, the Company expects continued
growth in the use of MTBE, although at slower rates than in the 1980s as the
regulations requiring "cleaner" gasoline
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have, in large measure, gone into effect in the U.S. The Company anticipates
that higher rates of growth in MTBE use will continue to prevail in certain
regions of the U.S. and internationally, due to consumer preference or where RFG
use is now optional but may be required by state or local governments. For
example, California has mandated greater usage of oxygenates in a gasoline
reformulated for use in that state, and the use of lead in gasoline continues to
decline in certain European, South American and Far Eastern countries. The
Company also expects new capacity expansions to be minimal over the next several
years due to current industry overcapacity as a result of large increases in
U.S. production capacity in the early 1990s in anticipation of the
implementation of the CAAA programs.
MTBE pricing is primarily determined by the price of RFG due to its value
as an octane enhancer and as an oxygenate. The price difference between regular
unleaded and higher octane, premium unleaded gasoline provides a valuation for
octane from which the value of MTBE as an octane enhancer can be derived. At
various times, depending on the supply and demand for MTBE, MTBE pricing enjoys
a premium over this octane value, reflecting its value as an oxygenate. As
indicated by the following table, MTBE pricing is relatively volatile. The MTBE
market has experienced alternating periods of tight supply and rising prices and
profit margins, followed by periods of capacity additions resulting in
oversupply and declining prices and margins. Historically, MTBE was sold in the
U.S. under sales contracts which allowed suppliers to recover raw material costs
and earn a fixed profit. Sales prices under these contracts were higher than the
then prevailing spot prices. Prices decreased substantially from 1985 to 1986
based on low gasoline prices. As gasoline prices recovered in 1988 and 1989,
MTBE prices followed. Prices increased substantially prior to and during the
Persian Gulf war beginning in late 1990, although prices fell back sharply from
1991 to 1993 as supply outpaced demand. MTBE prices increased in 1994 due to
high methanol prices (that were passed on to users) until methanol prices
decreased significantly in the first quarter of 1995. More recently, MTBE prices
have rebounded from their 1995 lows as a result of much higher demands from the
RFG program.
U.S. MTBE PRICES AND OPERATING RATES RELATIVE TO UNLEADED GASOLINE PRICES,
1985-1995
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MTBE
Unleaded Global
MTBE Spot Regular Operating
Price, USGC Gasoline Rate
----------- -------- ---------
1985 101 80.0 77.0%
1986 65 43.7 82.0%
1987 69 51.3 78.0%
1988 82 49.5 79.0%
1989 86 58.1 78.0%
1990 113 73.6 75.0%
1991 92 66.1 73.0%
1992 89 59.0 75.0%
1993 71 51.5 72.0%
1994 81 50.0 67.0%
1995 83 55.1 71.0%
There are a number of competing oxygenate products to MTBE, including
ethanol, ethyl TERTIARY-butyl ether (ETBE) and TERTIARY-amyl methyl ether
(TAME). However, management believes that MTBE will continue to be the U.S.
gasoline industry's oxygenate of choice due to a number of factors, including
price, available capacity, chemical properties and the EPA's CAAA rules
regarding minimum oxygen content in fuels.
BUTENE-1. Butene-1 is used as a comonomer in the production of high density
polyethylene ("HDPE") and linear low density polyethylene ("LLDPE"). Both HDPE
and LLDPE are raw materials for the production of trash bags, film wrap, pipe
and plastic containers. Comonomers are added to polyethylene to improve
characteristics such as tear and crack resistance. The Company expects global
HDPE and LLDPE demand to increase at an annual compound growth rate of 6% and
14%, between 1994 and 1999, respectively. In the U.S., butene-1 is facing
increased competition from other comonomers such as hexene-1
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which, although more expensive than butene-1, improves certain properties of
polyethylene resins. The Company believes that butene-1 demand for use in
polyethylene will continue to grow in line with demand for polyethylene.
Historically, pricing of butene-1 has been determined by demand based on its use
as a polyethylene comonomer, and its competitive position with other comonomers
such as hexene-1.
Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations. The Company
believes that this use represents one of the fastest growing end-uses for
butene-1.
BUTENE-2. Butene-2 is recovered as part of the crude butadiene stream that
remains after extraction of butadiene, isobutylene and butene-1. The Company
sells purified butene-2 primarily for use in the production of coatings and
plasticizers. Due to the high quality of the butene-2 produced by the Company,
it has historically received a higher than market price.
ISOBUTYLENE CONCENTRATE. Isobutylene concentrate is similar to high purity
isobutylene in composition, although its purity is 88% isobutylene compared to
99.9% in high purity isobutylene. The Company markets isobutylene concentrate
for use in the growing lubricant additives business as well as for use in the
production of butyl rubber. The Company is the sole U.S. producer of isobutylene
concentrate.
HIGH PURITY ISOBUTYLENE. High purity isobutylene is used in the production
of butyl rubber, which is used to produce tires and in specialty chemical
applications such as in the production of resins, antioxidants, paints and
coatings, synthetic lubricant oils and rubber chemicals. The Company is
currently the largest domestic merchant supplier of high purity isobutylene to
the chemical market and competes with ARCO Chemical Company and Exxon Chemical
Company.
DIISOBUTYLENE. Diisobutylene is used primarily as an intermediate in the
manufacturing of alkylphenols for the surfactant and phenolic resins markets.
Other uses include the production of tackifier and ink resins, dispersants for
lubricant oil additives, and rubber and processing chemicals. The Company is the
sole U.S. producer of diisobutylene.
PRODUCTION PROCESS
The Company's production operations are based on a number of key factors:
(i) UPGRADING BY-PRODUCT STREAMS: The Company has contracted to purchase
certain volumes of crude butadiene from its suppliers. This volume
determines the Company's ability to produce butadiene and n-butylenes
and also provides some isobutylene (typically 10% of total
isobutylene production) for the production of MTBE and specialty
isobutylenes.
(ii) MAXIMIZING USE OF ISOBUTYLENE: Under normal operating conditions,
the Company maximizes isobutylene production from its
dehydrogenation units. The isobutylene processed is first processed
into specialty isobutylenes to satisfy customer demand, secondly
used to produce MTBE to satisfy contractual demand and thirdly, used
to produce MTBE for sale in the spot market.
(iii) INCREMENTAL PRODUCTION CAPABILITY: The Company has the ability to
augment its isobutylene and butene-1 production by the processing of
butene-2 in its SKIP unit, depending on the relative profitability
from additional isobutylene production (for use in either MTBE or
specialty isobutylenes) or butene-1 sales. In addition, "on purpose"
crude butadiene can be produced from butene-2 using the OXO-D
process, as well as from n-butane using dehydrogenation.
able source of supply for its customers.
BUTADIENE PRODUCTION PROCESS
The Company has the largest butadiene production and finishing facilities
in North America and has an annual production capacity of 840 million pounds of
butadiene, representing approximately 18% of U.S. and Canadian production
capacity. In the twelve months ended May 31, 1996 and the one month ended June
30, 1996, the Company sold and toll-processed 623 million pounds and 65 million
pounds, respectively, of butadiene.
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[CHART DESCRIBING BUTADIENE PRODUCTION PROCESS, CARRYING N-BUTYLENES AND
N-BUTANE THROUGH THE OXODEHYDROGENATION PROCESS AND THROUGH THE DEHYDROGENATION
PROCESS, RESPECTIVELY, TO PRODUCE CRUDE BUTADIENE WHICH IS THEN CARRIED THROUGH
THE EXTRACTION PROCESS TO PRODUCE BUTADIENE.]
The Company obtains crude butadiene from three different sources: (i)
purchasing crude butadiene from suppliers; (ii) Oxo-dehydrogenation of
n-butylenes using the Company's patented OXO-D process; and (iii)
dehydrogenation of n-butane.
The Company primarily produces butadiene from purchased crude butadiene,
which is generally the lowest cost method of production. Such crude butadiene is
a by-product of ethylene production.
"On-purpose" crude butadiene production involves the synthesis of crude
butadiene from n-butane and n-butylenes using the Company's OXO-D process and
the Houdry dehydrogenation process. The OXO-D process was developed by the
Company using a proprietary catalyst. The OXO-D unit has an annual capacity to
produce up to 400 million pounds of crude butadiene, which can be processed to
extract butadiene. The Company's dehydrogenation units can produce n-butylenes
(instead of isobutylenes under normal configuration) using the Houdry process,
by switching feedstock from isobutane to n-butane. Such n-butylenes can be used
to produce crude butadiene using the OXO-D process. As this method of production
is relatively expensive and reduces the volume of isobutylene available for MTBE
production, it is used only when butadiene pricing makes it economically
attractive.
The OXO-D unit and its dehydrogenation capabilities give the Company the
only on-purpose butadiene production capability in the U.S. and reinforce the
Company's image with its customers as a reliable source of butadiene under a
wide variety of market conditions.
The Company's manufacturing flexibility is advantageous for two reasons.
First, the Company is not dependent on any particular feedstock to produce
butadiene and it can therefore provide a reliable source of supply under a
variety of market conditions for its customers. Secondly, it permits the Company
to increase butadiene production in favorable market conditions, subject to the
capacity limitations of the Company's finishing facilities.
The Company believes that it is currently the only butadiene producer in
North America with the ability to add significant incremental capacity with
minimal capital expenditures. The Company believes that this acts as a deterrent
to new entrants and other producers considering capacity expansions and will
enable the Company to process increased volumes of crude butadiene from new
ethylene facilities which are currently being built in North America.
The Company also toll processes crude butadiene under contract on behalf of
third parties for a fee which allows the Company to recover its energy
production costs plus a fixed dollar amount. Typically, the Company delivers
finished butadiene to the customer and purchases the other butylenes contained
in the stream, which can be upgraded to higher value uses, such as specialty
isobutylenes, butadiene and n-butylenes.
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MTBE PRODUCTION PROCESS
The Company owns two MTBE units with a combined capacity to produce 25,000
barrels per day, which represents approximately 9% of North American production
capacity. The Company sold an average of 14,335 barrels per day and 21,115
barrels per day, respectively, in the twelve months ended May 31, 1996 and the
one month ended June 30, 1996.
[CHART DESCRIBING MTBE PRODUCTION PROCESS, SHOWING RAFFINATE-1, ISOBUTANE AND
N-BUTYLENES RUNNING THROUGH THE EXTRACTION, DEHYDROGENATION AND SKIP PROCESS,
RESPECTIVELY, LEADING TO ISOBUTYLENE LEADING TO MTBE, WHILE METHANOL LEADS
SEPARATELY TO MTBE.]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
MTBE is produced by reacting isobutylene and methanol. The Company produces
isobutylene, the principal raw material for MTBE, using any one of three
processes: (i) extraction from raffinate-1, which is produced after butadiene
has been extracted from crude butadiene; (ii) dehydrogenation of purchased
isobutane; and (iii) production from n-butylenes (predominantly butene-2) using
the Company's patented SKIP process. The other primary raw material, methanol,
is purchased from third parties in the spot market and under contract and is
transported to the Company's facility by barge.
Isobutylene is removed from the raffinate-1 stream by processing
raffinate-1 through the Company's MTBE unit. The MTBE reaction is highly
selective and efficiently removes isobutylene from the stream. The stream
remaining is called raffinate-2.
The Company has three dehydrogenation units, two of which have been
completely refurbished and are fully operational. Using these two units, the
Company has the ability to produce a total of 18,000 barrels per day of
isobutylene. The Company estimates that the third dehydrogenation unit, with an
additional capacity of 8,000 barrels per day, could be refurbished at a cost of
approximately $100 million, substantially less than the cost of a new
dehydrogenation unit. This refurbishment would increase the Company's capacity
to produce isobutylene for use either in MTBE or specialty isobutylenes by
approximately one third. The Company currently does not have any plans to
undertake this refurbishment, although this could change depending on market
conditions. The Company has fully paid-up rights to the technology used in its
dehydrogenation units and no royalty or other licensing payments are required.
Isobutane is purchased under long-term contract and supplemented with spot
purchases.
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The Company currently has sufficient additional MTBE capacity to enable it
to take advantage of future expected growth. The Company believes that this
additional capacity gives it a competitive advantage over other producers which
would have to incur greater cost to increase capacity.
The Company's SKIP unit upgrades butene-2 to either butene-1 or isobutylene
depending on requirements. Isobutylene production is normally operated so that a
portion of the isobutylene produced by dehydrogenation is used in the production
of isobutylene concentrate and diisobutylene and the remainder is used to
produce MTBE. In addition, a small amount of MTBE production is used in the
production of high purity isobutylene. The configuration of the plant provides
the flexibility to vary the relative quantities of MTBE and isobutylene products
produced.
N-BUTYLENE PRODUCTION PROCESS
The Company has the largest butene-1 processing capacity in North America
and has an annual production capacity of 275 million pounds of butene-1,
representing approximately 40% of North American production capacity. In the
twelve months ended May 31, 1996 and the one month ended June 30, 1996, the
Company sold 229 million pounds and 17 million pounds, respectively, of
butene-1, and in the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, the Company sold 55 million pounds and .2 million pounds,
respectively, of butene-2.
[CHART DESCRIBING N-BUTYLENE PRODUCTION PROCESS, SHOWING RAFFINATE-1 LEADING TO
THE PRODUCTION OF RAFFINATE-2, FOLLOWED BY FRACTIONATION PROCESSES PRODUCING
BUTANES, BUTENE-2 AND BUTENE-1 AS WELL AS N-BUTYLENES RUNNING THROUGH THE SKIP
PROCESS DIRECTLY TO PRODUCE BUTENE-1. SEPARATELY N-BUTYLENES EMPLOY THE SKIP
PROCESS TO PRODUCE ISOBUTYLENE.]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
The Company has the ability to produce butene-1 using two different
processes: (i) fractionation from raffinate-2, which is produced after
isobutylene has been extracted from raffinate-1; and (ii) production from
n-butylenes (predominantly butene-2) using the Company's patented SKIP process.
After the removal of butene-1, the remaining n-butylenes stream (containing
principally butene-2 and n-butane) is either: (i) further purified to butene-2
which the Company sells intermittently based on customer demand; (ii) used as a
feedstock in the Company's SKIP process to produce butene-1 or isobutylene; or
(iii) used as a feedstock in the OXO-D process to produce crude butadiene. The
remaining product stream, containing principally n-butane, is sold to third
parties as a chemical by-product.
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<PAGE>
SPECIALTY ISOBUTYLENE PRODUCTION PROCESSES
[CHART DESCRIBING SPECIAL ISOBUTYLENE PRODUCTION PROCESSES, SHOWING METHANOL
BEING PROCESSED INTO MTBE WHICH IS BACK-CRACKED TO PRODUCE HIGH-PURITY
ISOBUTYLENE. SEPARATELY, ISOBUTYLENE IS FRACTIONATIONED AND DIMERIZATIONED TO
PRODUCE ISOBUTYLENE CONCENTRATE AND DIISOBUTYLENE, RESPECTIVELY.]
The Company takes advantage of its isobutylene production and extraction
capabilities to produce high purity isobutylene, isobutylene concentrate and
diisobutylene. The Company is currently the only U.S. producer of isobutylene
concentrate and diisobutylene and it is the largest of three U.S. producers of
high purity isobutylene.
High purity isobutylene is manufactured by "back-cracking" a small portion
of the MTBE product stream into its components, isobutylene and methanol. The
isobutylene produced by this method is of extremely high purity and the methanol
is recycled and used in subsequent MTBE production. The Company has an annual
capacity to convert MTBE into 100 million pounds of high purity isobutylene, and
in the twelve months ended May 31, 1996, it sold 74 million pounds.
The Company uses its patented dimerization process to produce diisobutylene
and has an annual production capacity of 50 million pounds. In the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, the Company sold 38
million pounds and 3.0 million pounds, respectively, of diisobutylene
principally on a contractual basis.
Some of the isobutylene produced by the Company is sold as concentrate. The
Company has an annual production capacity of 380 million pounds of isobutylene
concentrate and, in the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, it sold 256 million pounds and 15 million pounds, respectively,
of isobutylene concentrate. The Company has been successful in working with
customers to demonstrate the viability of concentrate as an alternative to high
purity isobutylene or lower purity raffinate-1 feedstock. The Company sells
isobutylene concentrate under contracts at prices linked to the cost of
isobutane feedstock and including energy costs and other components of
isobutylene concentrate, plus a fixed profit, as well as on the spot market.
While produced in smaller volumes than the Company's more commodity-type
products, specialty isobutylenes have historically had high margins due to the
niche sales markets for their end-use products.
OTHER OPERATIONS
The Company operates a large scale cogeneration power plant that supplies
electricity and 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.
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The majority of these contracts have terms of two to three years and provide for
successive one-year renewals unless either party objects to such renewal in a
timely manner. There can be no assurance that these agreements will remain in
effect beyond their current terms or, if extended, that the same provisions
would continue to apply.
FEEDSTOCK SUPPLY. The Company typically purchases its principal feedstock,
crude butadiene, under contracts which require suppliers to deliver a percentage
(varying from 50% to 100%) of their total crude butadiene production. The price
of crude butadiene to the Company is typically based on the price of its
principal components: butadiene, n-butylenes, isobutylene and n-butane. The
price for the butadiene component of crude butadiene is generally set at the
Company's average selling price for butadiene less a fixed dollar amount, which
includes a variable component for energy costs. The prices for the n-butylene
and isobutylene components of crude butadiene are linked to spot gasoline prices
and the n-butane and isobutane components are linked to spot n-butane prices.
The Company typically purchases methanol under contracts which require the
supplier to deliver minimum volumes of methanol. Methanol is generally purchased
at a discount to the prevailing market price, subject to specified minimum and
maximum price ranges.
The majority of the Company's isobutane is purchased under contract from
EPC Venture, Inc. which provides 450,000 barrels per month. This supplier also
provides storage and pipeline transportation. Isobutane is purchased at the
prevailing average market price for each month.
PRODUCT SALES. The Company's sales contracts typically require customers to
purchase minimum volumes expressed either in absolute terms or as a percentage
of the customer's product needs. Pricing for butadiene is generally set at a
small discount to the recognized U.S. Gulf Coast contract market price, while
MTBE pricing is typically based on the average U.S. Gulf Coast spot market
price. Butene-1 is sold under contracts at prices based on formulae which links
the butene-1 selling price to the price of gasoline. Butene-1 is also sold on
the spot market at prevailing prices. Butene-2 is sold at negotiated market
prices. Pricing for isobutylene concentrate is generally linked to the cost of
its principal raw material, isobutane, and fuel plus a transportation fee and
other components, which are linked to relevant average spot market prices.
Pricing for high purity isobutylene and diisobutylene is typically based on
market prices.
TOLL MANUFACTURING AGREEMENTS. The Company toll processes crude butadiene
under contracts on behalf of third parties, including The Dow Chemical Company,
The Goodyear Tire & Rubber Company and Phillips 66 Company. Typically, the
Company returns butadiene to the customer and purchases the other butylenes and
butanes contained in the crude butadiene stream. The toll process fees allow the
Company to recover its energy production costs plus a fixed dollar amount. In
addition, the Company returns purified butene-1 to certain of its crude
butadiene suppliers under similar arrangements.
OTHER. The Company also provides storage and terminalling services under
contract to certain of its customers at its Baytown and Lake Charles facilities.
COMPETITION
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemical industry, are larger and have greater financial resources than the
Company. Among the Company's competitors are some of the world's largest
chemical companies and major integrated petroleum companies that have their own
raw material resources. In addition, a significant portion of the Company's
business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Further,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may expand such role significantly in the future.
Any of these developments would have a negative impact on the Company's
financial position, results of operations and cash flows.
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Given the nature of the markets in which it competes, the Company believes
it has two primary competitive advantages over its competitors. First, the
Company's position as the most significant merchant crude butadiene processor in
the U.S. has allowed it to secure supply arrangements for crude butadiene, which
provide for a fixed profit based on the Company's selling prices for the
finished product. The Company believes that this partially limits its exposure
to fluctuations in raw materials prices. Secondly, the Company's flexible
production processes enable it to take advantage of increases in demand for its
products at a lower cost than its competitors, thereby enabling the Company to
produce additional products on an economically opportunistic basis, and to meet
its customers' needs through the most economic processes.
The Company's primary competitors in the sales of butadiene in the U.S. are
Exxon Chemical Company, Shell Chemical Company, Lyondell Petrochemical Company
and the Huntsman Group. With respect to MTBE, the Company competes primarily
with ARCO Chemical Company, Exxon Chemical Company, Valero Energy Corporation,
Texaco Inc. and Enron Corp. For sales of butene-1 the Company competes primarily
with Exxon Chemical Company, Chevron Chemical Company, Amoco Chemical Company,
Shell Chemical Company and Huls AG. For high purity isobutylene, the Company
competes in the U.S. with ARCO Chemical Company and Exxon Chemical Company.
Although the Company is the only North American producer of isobutylene
concentrate and diisobutylene, diisobutylene is also imported from Japan and
Europe.
SALES AND MARKETING
The majority of the Company's sales are made pursuant to long-term sales
contracts with initial terms ranging from one to five years. The Company enjoys
long-standing relationships with its customers and approximately 85% of its
total sales over each of the last three years were made to the same customers.
The Company believes that its ability to maintain long-term customer contracts
has been facilitated by the extensive market knowledge and experience in the
petrochemical industry of its sales executives as well as the Company's emphasis
on customer relationships. The Company's strategy is to continue to increase
sales to existing customers and to attract new customers by providing
reliability of supply, competitive prices and superior customer service.
CUSTOMERS
The Company's products are generally sold to major refining, chemical and
end-user corporations primarily located in the United States and Canada. The
Company believes that its butadiene customers place significant value on its
ability to provide a reliable domestic supply of butadiene due to its raw
material purchase contracts and its ability to produce butadiene through two
alternative methods. As a result, some of the largest and most established users
of butadiene in the industry have contracted to purchase butadiene from the
Company. Typically, the Company's butadiene sales contracts require these
customers to purchase a percentage of their total requirements from the Company
subject to a minimum volume. Pricing is based on prevailing market prices.
The Company's principal butadiene customers include American Synthetic
Rubber Inc., The Dow Chemical Company, The Goodyear Tire & Rubber Company,
Enichem Elastomers Inc., E.I. du Pont de Nemours and Company and
Bridgestone/Firestone, Inc. In the twelve months ended May 31, 1996 and the one
month ended June 30, 1996, The Goodyear Tire & Rubber Company accounted for
approximately 16.1% and 14.1%, respectively, of the Company's total revenues.
The Company's principal MTBE customers include Lyondell Petrochemical
Company, CITGO Petroleum Corporation and Mobil Oil Corporation.
The Company's principal butene-1 customers include Union Carbide
Corporation, Shell Chemical Company, Lyondell Petrochemical Company, NOVA
Chemicals Ltd. and The Dow Chemical Company. The Company's principal butene-2
customers include Shell Chemical Company.
The Company's principal specialty isobutylene customers include Bayer Inc.,
The Lubrizol Corporation, Schenectady International, Inc., Rhone-Poulenc Inc.
and Mobil Chemical Company Inc.
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PATENTS AND LICENSES
The Company presently owns, controls or holds rights to approximately 21
patents. The Company believes that its patents, particularly its patents
relating to the SKIP, OXO-D and diisobutylene production processes, are
important to its business and provide the Company with certain competitive
advantages. Accordingly, the Company actively protects existing production
process technologies.
The Company has available for license certain of its patented technologies,
including the SKIP and OXO-D processes, to third parties. In addition, the
Company licenses certain technologies, including the process by which it
extracts butadiene from crude butadiene, from third parties.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state, and local laws and
regulations administered by the EPA, the U.S. Coast Guard, the Army Corps of
Engineers, the TNRCC, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect that compliance with
existing environmental laws will have a material adverse effect on the Company's
financial condition or results of operations, there can be no assurance that
future legislation, regulation or judicial or administrative decisions will not
have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex, has
indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation or at what cost. The Company
believes that it has meritorious defenses to Petro-Tex's claim and intends to
contest the claim vigorously. Although no on-site contamination has been
identified as requiring remediation, management believes that certain areas of
the Houston facility were historically used for waste disposal. Based on
limited, currently available information about these waste disposal areas and
their contents, the Company believes that, if such remediation becomes
necessary, any remediation costs would not have a material adverse effect on the
Company's financial condition or results of operations. The Petro-Tex indemnity
does not extend to these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive
regulation under the Resource Conservation and Recovery Act, the Federal Clean
Water Act, the CAAA and similar requirements of state law. In particular, under
the CAAA, the EPA and TNRCC have promulgated, or are required to promulgate,
numerous regulations which affect or will affect the operations of the Company.
The most significant of these are the so-called Hazardous Organics National
Emission Standard for Hazardous Air Pollutants or HON Rule, the requirements of
Title V of the CAAA and rules relating to the controls of oxides of nitrogen,
which are known as the Nitrogen Oxides Reasonably Available Control Technology
rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethyl formamide and
MTBE, which are manufactured, used and/or
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processed by the Company, have been identified as HAPs for purposes of
regulation under the CAAA. Areas of concern in the Company's operations for HAPs
emissions include equipment leaks, process vents, product storage, transfer
operations and emissions from wastewater streams. The Company has examined each
of these areas and believes that it will be able to achieve substantial
compliance with the HON Rule after incorporating additional monitoring and
record-keeping systems into its operations at a cost that management believes
will not be material.
The NOx RACT Rules require compliance by May 1999. The Company has examined
the rules and believes that the main expenditure required to achieve compliance
will involve purchase and installation of monitoring equipment for NOx
emissions, which can be either continuous emission monitors, predictive emission
monitors or other approved monitoring methods. Based on its preliminary study,
management estimates that the cost to comply with the NOx RACT Rules will be $2
million over the next three years.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAAA.
Accordingly, the State of Texas has developed a State Implementation Plan
("SIP") which requires reductions in emissions of ozone precursors, including
volatile organic compounds and carbon monoxide in Harris County. Under the SIP,
new controls must be in operation by November 15, 1996. To comply with these new
requirements, the Company is installing controls at an estimated total capital
cost of $7.2 million. The Company spent $ million on this project by June 30,
1996, and estimates that it will spend the remaining $3.6 million by November
1996. The Company anticipates that, at some time in the future, the State of
Texas may promulgate rules which will require the Company to modify existing
controls or to install additional controls for fugitive air emissions. The
Company estimates that, if these rules are promulgated, it will incur costs of
between $1 million and $2 million in order to modify or install such controls
over a five- or six-year period.
Title III of the CAAA requires prevention of accidental releases of certain
listed extremely hazardous substances. The EPA's rules implementing portions of
Title III, which were signed by the EPA Administrator on May 24, 1996, will
require the Company to conduct a hazards assessment and develop a risk
management plan by May 1999 for each extremely hazardous substance that the
facility manufactures, uses, generates or processes.
The regulations under Title V of the CAAA, which will require a
facility-wide inventory of emissions sources at the Houston facility and a
single operating permit for the facility's air emissions, have not been
promulgated. Based on a preliminary review of the draft requirements, however,
the Company believes that it will have to undertake substantial efforts to
conduct an emissions source inventory. It may also be required to upgrade its
on-going monitoring program once it has received its operating permit; however,
the Company does not expect any costs associated therewith to be significant. It
is also possible that the Company may be required to make modifications to some
of its equipment in order to comply with the terms of the facility-wide permit.
The Company has an active program to manage asbestos-containing material at
its Houston facility in accordance with federal and state environmental, health
and safety regulations. The Company does not believe that these materials pose a
hazard to the health of its employees. There is no requirement to remove these
materials, provided they are properly managed. As the plant is reconfigured or
additions are made, asbestos-containing materials are removed or encapsulated by
a certified contractor. The costs of this program are included in the Company's
operating budget at approximately $500,000 per year for the next five years.
The wastewater treatment system for the Houston facility is 75% owned by
the Company and 25% owned by Bayer Corporation ("Bayer"), the owner of an
adjacent facility. Bayer operates the treatment system, but the federal and
state discharge permits are held jointly by the Company and Bayer. The Company
believes that the system has sufficient capacity for the Company's projected
needs. The Company has budgeted to expend approximately $750,000 by 1998 to
upgrade the sludge-handling equipment of the wastewater treatment system. Under
the joint wastewater treatment agreement, Bayer will pay the remaining cost of
the upgrade, which is expected to be approximately $250,000. The Company has
budgeted approximately $120,000 for fiscal 1997 for maintenance work on the
wastewater treatment facility.
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In February 1996, the EPA issued an order to the Company and Bayer
requiring the companies to resolve the exceedances of their discharge permit
limits for copper and total suspended solids that had occurred since 1992. The
Company believes that these issues have been resolved by raising the limits in
the new discharge permit and by other corrective actions. No penalties were
assessed.
To meet rules expected to be promulgated concerning stormwater runoff, the
Company has budgeted to spend approximately $500,000 by 2000 for additional
stormwater control and collection. The Company has also budgeted $600,000
through fiscal 1999 to purchase noise barriers for certain equipment.
The terminals in Baytown and Lake Charles are in substantial compliance
with applicable environmental laws and regulations, and management believes that
no significant expenditures will be required at these facilities to allow them
to continue to comply with such laws and regulations.
MTBE and butadiene are the subject of continuing health effects studies.
Some recent studies have suggested that MTBE may cause cancer or other adverse
health effects, and the EPA considers MTBE to be a possible human carcinogen.
However, in February 1996, a study by the Health Effects Institute, commissioned
by the EPA and the Centers for Disease Control and Prevention, reported that
adding oxygenates, including MTBE, to gasoline reduces emissions of carbon
monoxide and benzene and is unlikely to increase substantially the health risks
associated with fuel used in motor vehicles. Nevertheless, EPA, California and
other states reportedly are expected to adopt limits for MTBE levels in drinking
water possibly as early as late 1996. The EPA has also determined that butadiene
is a probable human carcinogen. Based on an agreement between industry and labor
organizations, the Occupational Safety and Health Administration proposed on
March 8, 1996 to lower the employee permissible exposure limit ("PEL") over an
8-hour time-weighted average for butadiene from 1000 parts per million ("ppm")
to 1 ppm. The Company has conducted employee exposure monitoring and believes
that it already meets the proposed PEL at most of its operations. For some
operations, the Company anticipates that affected employees will need to use
respirators and that additional emissions controls may be necessary. The Company
has budgeted $600,000 for fiscal 1997 to control butadiene emissions in its
laboratory. The Company does not expect that the current health concerns
regarding MTBE or butadiene will have a material adverse effect on the Company's
financial condition or results of operations, although no assurances can be
given that future studies will not result in more stringent regulation of MTBE
and butadiene.
EMPLOYEES
As of June 30, 1996, the Company had approximately 350 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 155 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 six years, the
Company has experienced only three lost time injuries. The Company believes this
record is accomplished through extensive classroom and on-the-job training as
well as the efforts of its highly trained, 67-member volunteer emergency
response team.
PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile
from the Houston Ship Channel and near one of the chemical industry's largest
domestic processing facilities. Approximately 230 acres is owned by the Company,
and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the
Port of Houston two ship docks which accommodate barge and ocean-going vessels,
and has the facilities to be served by rail and by truck. In addition, the
facility is connected by pipeline to customers and suppliers of raw materials,
directly and through other major pipelines in the immediate area as well as in
Texas City, and with salt dome storage facilities of other companies located at
both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a
laboratory for sampling and testing. The Company owns and operates a storage and
terminal facility at Baytown, Texas, leases a storage and
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terminal facility in Lake Charles, Louisiana and leases tank storage capacity in
Bayonne, New Jersey. In addition, the Company owns its headquarters building and
an adjacent building on the Katy Freeway in Houston, Texas. The Company believes
that is has adequate facilities for the conduct of its current and planned
operations.
LEGAL PROCEEDINGS
In addition to the matters disclosed under "-- Environmental Regulation,"
the Company is a party to various claims and litigation arising in the ordinary
course of its business. Management recognizes the uncertainties of litigation
and the possibility that one or more adverse rulings could materially impact
operating results. However, although no assurances can be given, management
believes that other than as disclosed, based on the nature of and its
understanding of the facts and circumstances which give rise to such claims and
litigation, and after considering appropriate reserves that have been
established, that the ultimate resolution of such issues, individually and in
the aggregate, will not have a material adverse effect on the Company's
financial position or results of operation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company, TPC Holding and Holdings. Each director
is elected for a one year term or until such person's successor is duly elected
and qualified.
<TABLE>
<CAPTION>
YEARS OF
SERVICE WITH THE
COMPANY
NAME AGE POSITION OR ITS PREDECESSORS
- ------------------------------------- --- ------------------------------------------ -------------------
<S> <C> <C>
Gordon A. Cain....................... 83 Director 13
James J. Collis...................... 33 Director --
William R. Huff...................... 46 Director --
William A. McMinn.................... 65 Director and Chairman 9
Susan O. Rheney...................... 36 Director --
John T. Shelton...................... 65 Director 13
B. W. Waycaster...................... 57 Director, President and Chief 4
Executive Officer
Claude E. Manning.................... 50 Chief Financial Officer 24
Ronald W. Woliver.................... 56 Vice President, Marketing 28
Stephen R. Wright.................... 48 Vice President and General Counsel --
Bill R. McNeese...................... 61 Vice President, Operations 9
</TABLE>
Mr. Cain is President of Beta Consulting, Inc. ("Beta Consulting"), a
consulting and investment company. From August 1982 until his retirement in
December 31, 1992, he was Chairman of the Board of Sterling. Mr. Cain is
currently the Chairman of the Board of Sterling Chemicals, Inc. and has been on
the Board of Directors of Arcadian Corporation since May 1989 and Atlantic Coast
Airlines, Inc. since November 1991. Mr. Cain also serves as a director of
Agennix, Incorporated, a biotechnology company, and Martinaire, Inc., an air
freight company. 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.
Mr. Collis has been a Vice President of Chase Capital Partners since April
1996. From May 1995 to April 1996, he was a Vice President, and from mid 1991 to
May 1995 he was an associate, in the Merchant Banking Group of the Chase
Manhattan Bank, N.A.
Mr. Huff is President of the General Manager of WRH Partners, L.L.C., the
General Partner of The Huff Alternative Income Fund, L.P. 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 is also a director
of Arcadian Corporation, a fertilizer manufacturer.
Mr. McMinn 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. He has been a director of PM Holdings Corporation and its principal
operating subsidiary, Purina Mills, Inc., a leading manufacturer of animal
nutrition products, since October 1993.
Ms. Rheney has been a principal of Sterling since February 1992. She worked
as an independent financial consultant from December 1990 to January 1992. Prior
to that time, from June 1987 to November 1990, she was an associate at Sterling.
Ms. Rheney is also a director of Mail-Well, Inc.
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<PAGE>
Mr. Shelton has been Vice Chairman of the Board, Executive Vice President
and Chief Operations Officer of the Company since 1983. Prior thereto, Mr.
Shelton held various positions in the chemicals industry including Vice
President -- Manufacturing of Oxirane Corporation and
Manager -- Manufacturing/Engineering of Atlantic Richfield Company.
Mr. Waycaster has been President and Chief Executive Officer of the Company
since 1992. Prior thereto, Mr. Waycaster spent 27 years with The Dow Chemical
Company and was serving as Vice President of the Hydro-Carbon and Resources
division when he left to join the Company.
Mr. Manning has been Chief Financial Officer of the Company since 1991. In
1972, he joined Petro-Tex Chemical Corporation (which was the prior owner of the
Company's Houston facility), where he served as Vice President -- Finance, and
Director of Finance and Accounting.
Mr. Woliver has been Vice President -- Marketing of the Company since 1976.
He joined Petro-Tex Chemical Corporation in 1968 and has held various marketing
positions in the United States and in Brussels.
Mr. Wright joined the Company in August 1996 as Vice President and General
Counsel. From January 1996 until he joined the Company, Mr. Wright was engaged
in the private practice of law, either as a sole practitioner or of counsel to
Andrews & Kurth, L.L.P. For over five years prior thereto, Mr. Wright was the
Vice President and General Counsel or the Senior Vice President and General
Counsel of Destec, Inc.
Mr. McNeese has been Vice President -- Operations of the Company since
1992. He joined the Company in 1986 and has held positions in manufacturing,
production and utilities. From 1984 to 1986, Mr. McNeese served as General
Manager -- Operations of Engineering for Paktank Corporation. Prior thereto, Mr.
McNeese held various positions in a number of Atlantic Richfield Company
businesses. Mr. McNeese has over 30 years of experience in the chemicals
industry.
THE BOARD AND CERTAIN BOARD COMMITTEES
Prior to the consummation of the Transactions, the Board of Directors held
five regularly scheduled meetings during the fiscal year ended June 30, 1996.
Each director attended all such meetings.
Following the consummation of the Acquisition, the Company's Board
established the following committees:
o The Executive Committee, which will possess all the powers and
authority of the Company's Board with respect to the management and
direction of the business and affairs of the Company, except as
limited by law. The Executive Committee is composed of Messrs. McMinn
(Chair), Shelton and Waycaster.
o The Audit Committee, which will recommend independent public
accountants to the Company's Board, review the annual audit reports of
the Company and review the fees paid to the Company's independent
public accountants. The Audit Committee will report its findings and
recommendations to the Board for ratification. The Audit Committee is
composed of Mr. Collis (Chair) and Ms. Rheney.
o The Compensation Committee, which will be charged with the
responsibility for supervising the Company's executive compensation
policies, administering the employee incentive plans, reviewing
officers' salaries, approving significant changes in executive
employee benefits and recommending to the Board such other forms of
remuneration as it deems appropriate. The Compensation Committee is
composed of Messrs. Cain (Chair), McMinn and Shelton.
o The Finance Committee which will research, evaluate and recommend
corporate growth opportunities and review and make recommendations
regarding debt and equity financing. The Finance Committee is composed
of Ms. Rheney (Chair) and Messrs. Huff, Cain and Waycaster.
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<PAGE>
COMPENSATION OF DIRECTORS
Directors of Holdings and the Company who are not employees of the Company
will 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 will not receive Director compensation. No compensation
will be paid to any directors of TPC Holding for attendance at TPC Holding's
board meetings.
EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the five most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of May 31, 1996 (the "Named Executive Officers") for
services rendered in all capacities to the Company for the twelve months ended
May 31, 1996 and the years ended May 31, 1995 and 1994.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2)
- ------------------------------------- -------- ---------- ------------
David C. Swalm, Chief Corporate
Officer and Chairman............... 1996 $ 480,000 $ 5,210,440
1995 480,000 5,652,400
1994 480,000 6,355,700
B. W. Waycaster, President and Chief
Executive Officer.................. 1996 $ 300,000 $ 2,899,100
1995 300,000 565,300
1994 300,000 636,500
John T. Shelton, Executive Vice
President.......................... 1996 $ 180,000 $ 1,012,300
1995 180,000 1,084,900
1994 180,000 1,216,700
Ronald W. Woliver, Vice President,
Marketing.......................... 1996 $ 180,000 $ 1,012,300
1995 180,000 1,084,900
1994 180,000 1,216,700
Claude E. Manning, Chief Financial
Officer............................ 1996 $ 132,000 $ 72,966
1995 121,000 100,811
1994 116,000 103,683
Bill R. McNeese, Vice President,
Operations......................... 1996 $ 132,000 $ 72,293
1995 121,000 100,133
1994 116,000 103,346
- ------------
(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 except Mr. Swalm, who received approximately $54,000 in
1995.
(2) Includes 401(k) contributions in 1996, 1995 and 1994 of $21,035, $24,618 and
$20,309, respectively, for Mr. Manning and $21,149, $24,440 and $19,972,
respectively, for Mr. McNeese.
EMPLOYMENT AND OTHER AGREEMENTS
In 1992, Mr. Waycaster entered into an employment agreement with TOC and
TPC which provides for an annual base salary of $300,000 and a minimum annual
cash bonus of $300,000. The agreement expires on April 1, 1997. In the event of
Mr. Waycaster's retirement, death or disability, salary payments will continue
for the term of the agreement. In the event of the involuntary termination of
his employment, Mr. Waycaster would receive amounts prescribed in the agreement.
In addition, Mr. Waycaster has entered into a non-competition agreement with TOC
and TPC covering the three-year period following the last date he receives
compensation from the Company.
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In connection with his employment, Mr. Waycaster also received a grant of
options to purchase up to 50,000 shares of TPC common stock at a purchase price
of $40 per share. The options were cancelled in connection with the
Transactions.
In 1994, TPC entered into agreements with each of Messrs. Swalm, Shelton
and Woliver which provide a benefit in the event of death while an employee of
TPC. Provided the individual is survived by his wife, the death benefit
continues monthly for the shorter of the life of the wife (or in the case of Mr.
Woliver, so long as he also has minor children) or 60 months, and is $25,000 per
month with respect to Mr. Swalm, $10,000 per month with respect to Mr. Shelton
and $10,000 per month with respect to Mr. Woliver. Each agreement terminates on
termination of employment for any reason other than death or disability of the
individual.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Transactions, Finance Co. established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees, including executive officers, of the Company who satisfy the
requirements described below. The ESOP, which invests primarily in shares of
Common Stock, borrowed $10.0 million from Finance Co. pursuant to a loan (the
"Company ESOP Loan") to purchase 100,000 shares of Common Stock at the Closing.
Finance Co. funded the Company ESOP Loan from the ESOP Term Loan. The Company
ESOP Loan matures on June 30, 2001, and bears interest at interest rates based
on the Alternative Base Rate (as defined) or the LIBOR Rate (as defined). The
outstanding principal of the Company ESOP Loan is payable in twenty equal
quarterly installments of $500,000 during the period beginning September 30,
1996 and ending June 30, 2001. The shares of Common Stock purchased by the ESOP
were pledged (the "ESOP Pledge") as security for the Company ESOP Loan, and such
shares will be released and allocated to ESOP participants' accounts as the
Company ESOP Loan is discharged. The Company may make contributions to the ESOP
as determined by the Board of Directors in an amount anticipated to be equal to
a certain percentage of the total annual earnings of all ESOP participants (the
"Discretionary Contributions"). The Company intends to make Discretionary
Contributions in amounts sufficient to enable the ESOP to discharge its
indebtedness under the Company ESOP Loan; however, the Company has no legal
obligation to make Discretionary Contributions. Shares released under the ESOP
Pledge are allocated to each participant based on such participant's base
compensation relative to total base compensation for all ESOP participants.
Until the Company ESOP Loan is paid in full, Discretionary Contributions will be
used to pay the outstanding principal and interest on the Company ESOP Loan. For
employees whose employment commenced prior to October 1, 1996 and who have
attained the age of 21 years, participation begins as of the later to occur of
the Closing Date or the date of commencement of the participant's employment. A
participant's ESOP account vests at the rate of 20% per year. Distributions from
the ESOP are made in cash or Common Stock upon a participant's retirement,
death, disability or termination of employment. In the event of retirement,
death or disability, the entire balance of a participant's ESOP account will
become distributable without regard to the ordinary vesting schedule. In the
event of termination of employment for any other reason, the vested portion of a
participant's ESOP account will become distributable and the remaining portion,
if any, will be forfeited. If Common Stock is distributed to a participant, the
participant may, within two 60-day periods, require the Company to purchase all
or a portion of such Common Stock at the fair market value of the Common Stock
as determined under the ESOP (the "Put Options"). The first 60-day period
commences on the date the participant receives a distribution of Common Stock
and the second 60-day period commences a year from such date. If a participant
fails to exercise either of the two Put Options, the participant may transfer
the shares of Common Stock only upon receipt of a bona fide third party offer
and only after first offering the shares to the ESOP and then to the Company.
Employees of the Company own approximately 20% of the outstanding Common Stock
through the ESOP after the Acquisition.
PROFIT SHARING PLAN
Prior to the date of the Acquisition, TPC maintained a Profit Sharing Plan
(the "Profit Sharing Plan") covering substantially all of its employees,
including executive officers. The Profit Sharing Plan is designed
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to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"). Each participant has the option to defer taxation
of a portion of such participant's earnings by directing TPC to contribute a
percentage of such earnings to the Profit Sharing Plan. A participant may direct
a minimum of 1% and a maximum of 10% of eligible earnings to the Profit Sharing
Plan, subject to certain limitations set forth in the Internal Revenue Code. TPC
currently makes a matching contribution monthly equal to 25% of the amount of
compensation deferred by each participant in such month, up to 6% of the
participant's base compensation for such month. TPC may also make a
discretionary contribution to the Profit Sharing Plan. Participants' Profit
Sharing Plan accounts become distributable at retirement, upon disability, death
or termination of employment, or under certain circumstances, upon attainment of
age 59. Participants are fully vested at all times in all amounts deferred by
them to the Profit Sharing Plan, and they become vested in the Company's
matching and discretionary contributions under a five-year graded vesting
schedule.
The Company is continuing the Profit Sharing Plan in substantially the same
form as TPC maintained such plan prior to the Acquisition, provided that the
discretionary contribution will be made only if certain levels of earnings
before interest, taxes, depreciation and amortization are satisfied by the
Company in accordance with the Nonqualified Profit Sharing Incentive Plan (as
described below).
CASH BONUS PLAN
Prior to the date of the Acquisition, TPC established the Cash Bonus Plan
covering substantially all employees of TPC (or certain affiliates of TPC) and
covering the employees of certain third-party contractors who have contributed
to the success of TPC (or certain affiliates thereof). Upon the occurrence of a
Change of Control (as defined below), an employee participant as of July 2, 1996
will be distributed a portion of $3,200,000 within forty-five days of the date
of the Change of Control and will be distributed a portion of $1,800,000 plus
interest in each of sixteen quarterly installments following the date of the
Change of Control so long as the employee is an employee of TPC (or certain
successors or affiliates of TPC) on the corresponding quarterly installment
date. Upon the occurrence of a Change of Control, an eligible employee of a
third-party contractor who is providing services to TPC (or certain successors
or affiliates thereof) on July 2, 1996 will be distributed a portion of $300,000
within forty-five days of the date of the Change of Control, and will be
distributed a portion of $168,750 plus interest in each of sixteen quarterly
installments following the date of the Change of Control so long as the employee
of the third-party contractor is providing services to TPC on the corresponding
quarterly installment date. Each participant's allocable share of the bonus
payments to be made under the Cash Bonus Plan is based on a formula which
considers a participant's compensation and length of service with TPC. If a
participant retires, dies, becomes disabled, or whose employment is terminated
without cause after July 2, 1996, such participant's beneficiary or
representative will continue to receive a portion of the bonus payments through
the sixteenth installment payment even though such participant is no longer
employed by TPC or the third-party contractor which is providing services to
TPC. Under the Cash Bonus Plan, a "Change of Control" is deemed to occur when
the outstanding stock of TOC is acquired, or more than 50% of the shares of
TPC's common stock is sold, in a cash tender offer, exchange offer, merger,
third-party private purchase or other means of acquisition, or when
substantially all of the assets of TPC are sold to an unrelated third party. The
Transactions effect a Change of Control and distributions from the Cash Bonus
Plan have commenced.
STOCK OPTION PLAN
Holdings established a stock option plan (the "Option Plan") immediately
prior to the consummation of the Transactions. The Option Plan will be
administered by a committee (the "Committee") of the Board of Directors of
Holdings. Option grants under the Option Plan will be permitted to be made to
directors and key employees of Holdings and its subsidiaries, including the
Company, selected by the Committee. The Committee may grant "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code and also
will be permitted to grant "nonstatutory options," which are not intended to
conform to Section 422 of the Internal Revenue Code. The Option Plan will
provide for the discretionary grant of options to purchase shares of Common
Stock. The exercise price of incentive stock options shall not be less
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than the fair market value of a share of Common Stock on the date of grant, and
the exercise price of nonstatutory options shall not be less than 85% of the
fair market value of a share of Common Stock on the date of grant. The Committee
will be permitted to provide that the options will vest immediately or in
increments. No option will be transferable by a grantee other than upon death.
On the termination of employment or disability of any grantee, any unvested
options will either expire or continue to be exercisable as determined by the
Committee, in its sole discretion. The Option Plan will terminate no later than
10 years after its adoption; however, any options outstanding upon termination
of the Option Plan will remain in effect until exercised or terminated pursuant
to the terms of the agreement under which they were granted. A participant in
the Option Plan may, upon receiving approval from the Committee, relinquish all
or a portion of such participant's options for an amount in cash equal to the
difference between the fair market value of the Common Stock corresponding to
the options being relinquished on the day of relinquishment, less the total
option price for such corresponding shares.
NONQUALIFIED PROFIT SHARING INCENTIVE PLAN
The Company is in the process of establishing two separate Nonqualified
Profit Sharing Incentive Plans, both of which will be administered by the
Committee. Amounts paid to employees in cash under the Nonqualified Profit
Sharing Incentive Plans will constitute taxable income in the year received and
will be based on the Company's financial performance each fiscal quarter. One of
the Nonqualified Profit Sharing Incentive Plans is only for officers of the
Company who are selected by the Committee (the "Officers' Plan"). If earnings
before interest, taxes, depreciation, amortization and profit sharing
("EBITDAPS") exceed certain prescribed levels, the officers participating in the
Officers' Plan will receive distributions in cash from the Company equal to a
certain percentage of EBITDAPS as determined by the Committee on the basis of
the officer's level of authority. Under the other Nonqualified Profit Sharing
Incentive Plan which is for all employees not participating in the Officers'
Plan, if EBITDAPS exceeds certain prescribed levels, a percentage of EBITDAPS
will be used: first, to satisfy any required contributions to the ESOP; second,
to satisfy any required matching contributions to the Profit Sharing Plan;
third, to contribute annually to the Profit Sharing Plan for the benefit of its
participants up to the maximum amount allowable under the Internal Revenue Code
for qualification and deduction purposes; and fourth, to distribute any
remaining excess in cash to employees based on the number of base hours they
worked for the Company in the fiscal quarter and their base compensation for
such period. The Nonqualified Profit Sharing Incentive Plans will not be
qualified under Section 401(a) of the Internal Revenue Code.
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COMMON STOCK PLACEMENT
In connection with the Acquisition, Holdings offered an aggregate of
437,782 shares of Common Stock to the ESOP, certain directors and officers of
Holdings and the Company, certain employees of the Company and the Investor
Group, including Sterling. See "Related Transactions" and "Beneficial Ownership
of Holdings' Common Stock." The Common Stock was sold pursuant to separate
subscription agreements between Holdings and the various purchasers. The Common
Stock Placement formed an integral part of the Acquisition and, in addition to
providing funds to be used to finance a portion of the Acquisition, is intended
to provide equity incentives to the Company's directors, officers, managers and
employees. Prior to the Common Stock Placement, there had been no public market
for the Common Stock, and no public market is likely to develop. The offering
price for the Common Stock was determined by Holdings based on considerations
relating to the financing of the Acquisition. See "The Transactions."
Purchasers of the Common Stock in the Common Stock Placement entered into
stockholders' agreements pursuant to which they have certain rights to
participate in private sales of Common Stock by other purchasers in the Common
Stock Placement and are subject to certain restrictions on transfer, including
certain rights of first refusal. Holdings and certain purchasers in the Common
Stock Placement entered into a registration rights agreement pursuant to which
such purchasers have certain demand and piggy-back registration rights with
respect to their Common Stock.
RELATED TRANSACTIONS
TPC historically engaged in certain raw material purchase transactions with
Clarkston, which prior to the consummation of the Transactions was owned by
several of the same individuals (including Mr. Swalm) who were stockholders of
TOC and/or TPC. In the twelve months ended May 31, 1996, the Company made
purchases of raw materials from Clarkston of approximately $113.4 million. As
part of the Transactions, the Company assumed from Clarkston a contract between
Clarkston and a certain supplier for the purchase of isobutane. In connection
with the Transactions, Clarkston was dissolved.
As indicated under "The Transactions," the 80% of the outstanding capital
stock owned by TOC of The Texas Falls Corporation was sold to Mr. Swalm. Messrs.
Swalm, Shelton, Woliver and Waycaster collectively own the remaining 20% of the
outstanding capital stock of The Texas Falls Corporation.
Sterling entered into an agreement with Holdings and TPC Holding pursuant
to which Sterlingprovided consulting and advisory services with respect to the
organization of Holdings, TPC Holding and Finance Co., the structuring of the
Transactions, employee benefit and compensation arrangements and other matters.
The agreement also provides that Holdings and TPC Holding, jointly and
severally, indemnify Sterling against liabilities relating to its services. At
the Closing, the Company paid Sterling a one-time transaction fee of
approximately $4.0 million for these services, and reimbursed Sterling for its
expenses. In addition, each of Holdings, TPC Holding and the Company has agreed
that if it or any of its subsidiaries determines within two years of the date of
the agreement to dispose of or acquire any assets or business, to offer its
securities for sale or to raise any debt or equity, either Holdings, TPC
Holding, the Company or the relevant subsidiary will retain Sterling as a
consultant with respect to the transaction, provided that Sterling's fees are on
terms no less favorable to Holdings, TPC Holding, the Company or the relevant
subsidiary than would be available from unaffiliated third parties.
Holdings, TPC Holding and Finance Co. were organized by Sterling for the
purpose of effecting the Acquisition. Ms. Susan Rheney, a principal of Sterling,
and Mr. Gordon A. Cain, are directors of Holdings, TPC Holding and the Company.
See "Management." Mr. Cain and Ms. Rheney purchased 76,150 and 5,000 shares of
Common Stock, respectively, in connection with the Transactions at a price of
$100 per share, the same price at which all shares were sold in the Common Stock
Placement referred to above.
As a matter of policy, the agreement between the Company and Sterling is,
and all future transactions between the Company and its respective directors,
officers and affiliates will be, on terms no less favorable to the Company than
those available from unaffiliated third parties.
See "-- Employment and Other Agreements" for a description of Mr.
Waycaster's employment agreement.
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BENEFICIAL OWNERSHIP OF HOLDINGS' COMMON STOCK
The following table sets forth as of August 1, 1996, 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....................... 76,150 14.4%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
James J. Collis(1)................... -- --
380 Madison Avenue
New York, New York 10017
William R. Huff(2)................... -- --
67 Park Place
Morristown, New Jersey 07960
Claude E. Manning.................... 4,000 0.8%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
William A. McMinn.................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese...................... 2,000 0.4%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Susan O. Rheney...................... 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
John T. Shelton...................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
B. W. Waycaster...................... 40,000 7.6%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Ronald W. Woliver.................... 10,000 1.9%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
All directors and Named Executive
Officers as a group (10 persons)... 157,150 29.8%
Texas Petrochemicals Corporation
Employee Stock Ownership Plan(3)... 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) Excludes 60,000 shares of Common Stock owned of record and beneficially by
Chase Venture Capital Associates L.P. ("CVCA"). Mr. Collis is Vice
President of Chase Capital Partners, the general partner of CVCA. Mr. Collis
disclaims beneficial ownership of shares of Common Stock owned by CVCA.
(2) Excludes indirect beneficial ownership of 57,778 shares of Common Stock held
by The Huff Alternative Income Fund, L.P. (the "Fund") and reflected
elsewhere in the table. Mr. Huff is President and sole director of the
general manager of WRH Partners, L.L.C., the general partner of the Fund.
(3) The trustee of the ESOP (the "ESOP Trustee") will vote all shares of Common
Stock held by the ESOP pursuant to the direction of the Board of Directors
or by a committee to be designated by the Board of Directors, except that
participants are entitled to direct the ESOP Trustee to vote the shares of
Common Stock allocated to their accounts with respect to the approval or
disapproval of any corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all assets
of a trade or business or such similar transaction as may be prescribed in
regulations under the Internal Revenue Code. No shares of Common Stock held
by the ESOP have yet been allocated to participant's accounts.
As explained under "The Transactions," subject to distribution of TPC
shares from the Subsequent Escrow, all the capital stock of the Company is owned
by TPC Holding.
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DESCRIPTION OF THE BANK CREDIT AGREEMENT
GENERAL
Finance Co. and TPC entered into the Bank Credit Agreement with a syndicate
of lenders (the "Lenders"), and Texas Commerce Bank National Association, as
Agent for such Lenders (the "Agent") and effected the initial borrowings
described below on the Closing Date. The following description summarizes
certain provisions which the Company currently expects will be included in the
Bank Credit Agreement. The following description does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
provisions of the Bank Credit Agreement. All capitalized terms in this
"Description of the Bank Credit Agreement" section not defined in this
Prospectus have the meanings assigned thereto in the Bank Credit Agreement.
The Bank Credit Agreement provides for secured facilities consisting of (i)
a six and one-half year revolving credit facility providing for up to $40.0
million in revolving loans, a specified portion of which was used for letters of
credit (the "Revolving Credit Facility") and (ii) a term loan facility providing
for $140.0 million in term loans consisting of (x) a six and one-half year term
loan of $85.0 million (the "Tranche A Term Loan"), (y) an eight-year term loan
of $45.0 million (the "Tranche B Term Loan," and, together with the Tranche A
Term Loan, the "Senior Term Loans") and (z) a five-year term loan of $10.0
million (the "ESOP Term Loan," and, together with the Senior Term Loans, the
"Term Loans").
The Revolving Credit Facility permits, at the option of the Company, the
issuance of letters of credit in principal amounts to be determined thereunder.
Loans and letters of credit under the Revolving Credit Facility are subject to a
borrowing base consisting of 85% of Eligible Accounts and 65% of Eligible
Inventory (collectively, the "Borrowing Base"), provided that at no time shall
more than 50% of the Borrowing Base be comprised of 65% of Eligible Inventory.
At the Closing, Finance Co. borrowed the entire amount of the Senior Term Loans
and $0.5 million under the Revolving Credit Facility and lent the proceeds of
such borrowings to TPC Holding to finance a portion of the purchase price of the
Acquisition and pay a portion of the fees and expenses related to the
Transactions. At the Closing, Finance Co. also borrowed the full amount of the
ESOP Term Loan and lent such amount to the ESOP. The ESOP used those funds to
purchase Common Stock at the Closing.
AMORTIZATION; PREPAYMENTS
The Bank Credit Agreement required the principal amount of the Senior Term
Loans to be reduced in twelve quarterly principal installments of $2.75 million
beginning on September 30, 1996, four quarterly principal installments of $3.25
million beginning on September 30, 1999, four quarterly principal installments
of $4.0 million beginning on September 30, 2000, four quarterly principal
installments of $4.75 million beginning on September 30, 2001, four quarterly
principal installments of $6.0 million beginning on September 30, 2002, and four
quarterly principal installments of $6.25 million beginning on September 30,
2003. The ESOP Term Loan will be amortized in 20 equal quarterly installment
amounts of $0.5 million during its five-year term.
The Senior Term Loans are subject to mandatory prepayment prior to
September 30 of each fiscal year (commencing in fiscal 1997) in which more than
$75.0 million is outstanding on the Senior Term Loans on or before June 30 of
any year, of an amount equal to 75% of the difference between EBITDA (as
defined) for the prior fiscal year and the sum of certain capital expenditures,
taxes, dividends, interest expense, and principal payments made on the Senior
Term Loans during such prior year, and certain distributions made to TPC Holding
for certain expenses (such difference being the "Excess Cash Flow"), and prior
to September 30 of each year after the Senior Term Loans are reduced to $75.0
million or less, a payment in the amount of 50% of the Excess Cash Flow
generated during the prior fiscal year. All mandatory prepayments are required
to be applied pro rata to each Senior Term Loan based on the outstanding
principal amount of the Senior Terms Loans and pro rata to future scheduled
principal installments. In addition, the Senior Term Loans are further subject
to mandatory prepayment in the amount of any cash proceeds received by the
Company from an offering of its Capital Stock.
The Senior Term Loans may be prepaid on notice at any time without premium
or penalty in a minimum amount of $1.0 million. All optional prepayments of the
Term Loans will be applied pro rata to each Senior Term Loan based on the
outstanding principal amount of the Senior Term Loans unless, at the Company's
option, lenders of the Tranche B Term Loan decline to accept such prepayment, in
which case
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the amount of prepayment declined shall be applied pro rata to the Tranche A
Term Loan and will be applied pro rata to future scheduled principal
installments.
The amount available under the Revolving Credit Facility is payable in full
on its maturity date. Additionally, if the aggregate amount of borrowings
outstanding under the Revolving Credit Facility, plus the undrawn face amount of
letters of credit plus unreimbursed drawings on letters of credit, exceeds the
Borrowing Base, an immediate prepayment in an amount to eliminate such excess
will be payable.
Prepayments of Eurodollar borrowings on any day other than the last day of
an interest period will be required to be accompanied by a payment to the
Lenders of all costs, expenses or losses, if any, incurred as a result of such
prepayment.
SECURITY; GUARANTEES
Borrowings under the Revolving Credit Facility and the Term Loans are
guaranteed by Holdings and TPC Holding. The obligations of the Company under the
Revolving Credit Facility and the Term Loans and the obligations under the
guarantees are secured by a first priority lien on the capital stock of TPC
Holding and the Company and on substantially all of the assets of the Company.
INTEREST RATES; LETTER OF CREDIT FEES
The Term Loans and the Revolving Credit Facility bear interest (i) through
December 31, 1996, at a rate per annum, at the Company's option, of either the
Alternate Base Rate (which is the greater of (a) the Prime Rate or (b) the
Federal Funds Effective Rate plus 1/2 of 1%) plus 1% or the LIBOR Rate plus 2%
and (ii) after December 31, 1996, at a rate per annum, at the Company's option,
within the range of either (A) the Alternate Base Rate to the Alternate Base
Rate plus 1.5% or (B) the LIBOR Rate plus .625% to the LIBOR Rate plus 2.5%, in
each case based upon the ratio of Total Debt (as defined) to EBITDA for the most
recent four-quarter period.
Under the Revolving Credit Facility, fees will be charged for letters of
credit as follows: (i) a fronting fee of 1/8% per annum on the undrawn face
amount of the letters of credit plus (ii) the greater of (x) for each letter of
credit outstanding (A) prior to the Financial Statement Delivery Date for the
fiscal quarter ending December 31, 1996, 2% per annum of the undrawn face amount
of such letter of credit, and (B) during any Margin Period commencing after the
Financial Statement Delivery Date for any fiscal quarter ending after December
31, 1996, the applicable margin for LIBOR Rate Loans, and (y) $500.
FEES, EXPENSES AND COSTS; REVOLVING CREDIT FACILITIES
The terms of the Bank Credit Agreement require the Company to pay the
following fees in connection with the maintenance of borrowings under the
Revolving Credit Facility: (i) commitment fees to be paid to the Lenders in
amounts equal to (A) through the Financial Statement Delivery Date for the
fiscal quarter ending December 31, 1996, 1/2% per annum, and (B) thereafter,
1/2% per annum, if the Company's ratio of Total Debt to EBITDA for the most
recent four-quarter period is greater than or equal to 3.0 to 1.0, and 3/8% if
the Company's ratio of Total Debt to EBITDA for the most recent four-quarter
period is less than 3.0 to 1.0, in each case with respect to the unused
commitment under the Revolving Credit Facility payable quarterly in arrears
until such time as it is terminated; and (ii) administration fees payable
annually to the Agent. In addition, the Company paid various underwriting and
arrangement fees and closing costs on the Closing Date in connection with the
origination and syndication of the Term Loans and the Revolving Credit Facility.
The Company also is required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation,
syndication and administration of the Bank Credit Agreement and to reimburse the
Lenders for all reasonable costs and expenses incurred in connection with the
enforcement of their rights in connection with a default or the enforcement of
the Bank Credit Agreement. The Company agreed to indemnify the Agent and the
Lenders and their respective officers, directors, shareholders, employees,
agents and attorneys against certain costs, expenses (including fees and
disbursements of counsel) and liabilities arising out of or relating to the Bank
Credit Agreement, the Stock Purchase Agreement and the transactions contemplated
thereby. Furthermore, the Lenders are entitled to be reimbursed for increases in
reserve requirements, changes in law and circumstances, possible future
illegality of interest options, taxes (other than on gross receipts or income),
possible inability to determine market rate, capital adequacy, and consequential
costs.
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COVENANTS
The Bank Credit Agreement contains substantial restrictive covenants
limiting the ability of the Company to, among other things: (i) incur
contractual contingent obligations; (ii) pay subordinated debt or amend
subordinated debt documents without the prior consent of the Lenders; (iii)
create or allow to exist liens or other encumbrances; (iv) transfer assets
outside the Company except for sales and other transfers of inventory or
surplus, immaterial or obsolete assets in the ordinary course of business of the
Company; (v) enter into mergers, consolidations and asset dispositions of all or
substantially all of its properties; (vi) make investments; (vii) extend credit
to any entity; (viii) sell, transfer or otherwise dispose of any class of stock
or the voting rights of any subsidiary of TPC; (ix) enter into transactions with
related parties other than in the ordinary course of business on an arm's-length
basis on terms no less favorable to the Company than those available from third
parties; (x) amend certain agreements, without the prior consent of the Majority
Lenders; (xi) make any material change in the nature of the business conducted
by the Company; (xii) pay cash dividends or redeem shares of capital stock;
(xiii) make capital expenditures; and (xiv) pay dividends or repurchase stock.
In addition, the Bank Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company to: (i) maintain the
existence, qualification and good standing of the Company; (ii) comply in all
material respects with all material applicable laws; (iii) maintain material
rights, franchise agreements, business contracts, patents, trademarks, licenses
and Material Contracts; (iv) deliver certain financial and other information;
(v) maintain specified insurance; and (vi) notify the Lenders of any default
under the Loan Documents and of certain other material events.
Under the Bank Credit Agreement, the Company is required to satisfy the
following financial covenants: (1) a ratio of (a) EBITDA minus cash taxes for
the prior four quarter period to (b) the sum of scheduled principal payments on
the Term Loans for such period, cash interest expense for such period, the
lesser of Scheduled Capital Expenditures for such period and actual capital
expenditures for such period, actual Employee Bonuses paid during such period
and certain distributions to Holdings of at least (i) 1.05 to 1.00 through June
30, 1999 and (ii) 1.15 to 1.00 thereafter; (2) a ratio of (a) Total Debt to (b)
EBITDA for the prior four quarter period of no greater than (a) 4.50 to 1.00
through June 30, 1997, (b) 4.00 to 1.00 from July 1, 1997 to June 30, 1998, (c)
3.75 to 1.00 from July 1, 1998 through June 30, 1999, (d) 3.50 to 1.00 from July
1, 1999 through June 30, 2001, and (e) 3.00 to 1.00 thereafter; (3) a minimum
Net Worth of $65,000,000.00 plus 75% of cumulative positive net income from the
closing date and 100% of the proceeds of any equity offering; and (4) a minimum
ratio of Current Assets to Current Liabilities of 1.25 to 1.00.
EVENTS OF DEFAULT
Events of Default under the Bank Credit Agreement include, subject to
applicable notice, grace and cure periods, the following: (i) a default in the
payment when due of any principal, interest or fees under the Bank Credit
Agreement; (ii) a default by the Company under any debt instruments in excess of
$5.0 million, or the occurrence of any event or condition that enables the
holder of such debt to accelerate the maturity thereof; (iii) any material
breach of any representation, warranty or statement in, or failure to perform
any duty or covenant under the Bank Credit Agreement or any of the other Loan
Documents; (iv) commencement of voluntary or involuntary bankruptcy, insolvency
or similar proceedings by or against Holdings, TPC Holding, TPC or any
subsidiary thereof; (v) the Term Loans and the Revolving Credit Facility cease
to be secured by substantially all of the assets of the Company; (vi) material
defaults related to employee benefits plans subject to Title I or IV of the
Employee Retirement Income Security Act of 1974, as amended; (vii) any uninsured
judgment or order in excess of $2.0 million remaining undischarged or unstayed
for longer than certain periods; (viii) a default by the Company in the payment
when due of principal of, interest or premium, if any, on the Notes, or the
failure to observe, perform or comply with any agreement beyond any grace period
with respect thereto that enables the holder of such debt to accelerate the
maturity thereof or the Company becoming obligated to redeem, repurchase, or
repay all or any portion of any principal, interest or premium on the Notes
prior to its scheduled payment; (ix) a default by Holdings in the payment when
due of principal of, interest or premium, if any, on the Discount Notes, or the
failure to observe, perform or comply with any agreement beyond any grace period
with respect thereto that enables the holder of such debt to accelerate the
maturity thereof; and (x) the occurrence of any change of control.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, as amended, dated as of July
1, 1996 (the "Indenture"), between the Company and Fleet National Bank, as
Trustee (the "Trustee").
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of the form of which Indenture and the form of Notes is filed as
an exhibit to the Registration Statement. Upon the effectiveness of the Exchange
Offer Registration Statement, the Indenture became subject to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture and the Notes (i) is a
description of such provisions after giving effect to the consummation of the
Transactions, and (ii) does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture
and the Notes, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act. As used in this
"Description of the Notes" section, the term "Company" means Texas
Petrochemicals Corporation.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York or the State of
Connecticut (which initially shall be the offices of the Trustee, at Shawmut
Trust Company of New York, c/o First Chicago Trust Co. of N.Y., 14 Wall Street,
8th Floor / Window #2, New York, New York 10005 or at 777 Main Street, Hartford,
Connecticut 06115, respectively), except that, at the option of the Company,
payment of interest may be made by check mailed to the address of the Holders as
such address appears in the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. See "-- Book-Entry,
Delivery and Form." No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $175 million aggregate principal amount, and will mature on July 1,
2006. The Notes will bear interest at the rate per annum shown on the cover page
hereof from July 1, 1996, or from the most recent date to which interest has
been paid or provided for, payable semiannually to Holders of record at the
close of business on the December 15 or June 15 immediately preceding the
interest payment date on January 1 and July 1 of each year, commencing January
1, 1997. The Company will pay interest on overdue principal at 1% per annum in
excess of such rate, and it will pay interest on overdue installments of
interest at such higher rate to the extent lawful. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to July 1, 2001. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
July 1 of the years set forth below:
REDEMPTION
PERIOD PRICE
------ ----------
2001................................. 105.562%
2002................................. 103.708
2003................................. 101.854
2004 and thereafter.................. 100.000
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In addition, at any time and from time to time prior to July 1, 1999, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price (expressed as a percentage
of principal amount) of 110% plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least $113.75 million aggregate principal amount of the Notes must
remain outstanding after each such redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes represents senior subordinated,
unsecured obligations of the Company. The payment of the principal of, premium
(if any) and interest on the Notes is subordinate in right of payment, as set
forth in the Indenture, to the prior payment in full of all Senior Indebtedness
of the Company, whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company under the Bank Credit Agreement. The
Notes are also effectively subordinated to all Secured Indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
As of June 30, 1996, after giving pro forma effect to the Transactions as
if they had occurred on such date, the Company's Senior Indebtedness would have
been approximately $140.0 million, all of which is Secured Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "-- Certain Covenants -- Limitation on
Indebtedness" and "-- Limitation on Indebtedness and Preferred Stock of
Subsidiaries."
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank PARI PASSU with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is subordinate or
junior in ranking in right of payment to its Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is
not deemed to be subordinated or junior to secured indebtedness merely because
it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Designated Senior Indebtedness is not
paid when due or (ii) any other default on Designated Senior Indebtedness occurs
and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Designated Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders
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of such Designated Senior Indebtedness specifying an election to effect a
Payment Blockage Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Trustee and
the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this
paragraph), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Notes after the end
of such Payment Blockage Period. The Notes shall not be subject to more than one
Payment Blockage Period in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness of
the Company will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment, and
until the Senior Indebtedness of the Company is paid in full, any payment or
distribution to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of such Senior Indebtedness
as their interests may appear. If a distribution is made to Noteholders that,
due to the subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the Noteholders, and
creditors of the Company who are not holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
The Notes sold will be issued in the form of a Global Note. The Global Note
will be deposited with, or on behalf of, the Depository and registered in the
name of the Depository or its nominee. Except as set forth below, the Global
Note may be transferred, in whole and not in part, only to the Depository or
another nominee of the Depository. Investors may hold their beneficial interests
in the Global Note directly through the Depository if they have an account with
the Depository or indirectly through organizations which have accounts with the
Depository.
Notes that were (i) originally issued to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) who are not qualified institutional buyers ("QIBs") or (ii) issued as
described below under "Certificated Notes" will be issued in definitive,
certificated form. Upon the transfer of a Note in definitive, certificated form,
such Note will, unless the Global Note has previously been exchanged for Notes
in definitive, certificated form, be exchanged for an interest in the Global
Note representing the principal amount of Notes being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Depository was created to hold
securities of institutions that have
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accounts with the Depository ("participants") and to facilitate the clearance
and settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. The accounts to
be credited shall be designated by the Initial Purchasers of such Notes.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such participants
(with respect to the owners of beneficial interests in the Global Note other
than participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for all
purposes of such Notes and the Indenture. Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or be
entitled to receive physical delivery of certificated Notes in definitive form
and will not be considered to be the owners or holders of any Notes under the
Global Note. The Company understands that under existing industry practice, in
the event an owner of a beneficial interest in the Global Note desires to take
any action that the Depository, as the holder of the Global Note, is entitled to
take, the Depository would authorize the participants to take such action, and
that the participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
Payment of principal of and interest on Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole by
the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its
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participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of $1,000
and integral multiples thereof if (i) the Depository notifies the Company that
it is unwilling or unable to continue as Depository for the Global Note or if at
any time the Depository ceases to be a clearing agency registered under the
Exchange Act, (ii) the Company in its discretion at any time determines not to
have all of the Notes represented by the Global Note or (iii) a default
entitling the holders of the Notes to accelerate the maturity thereof has
occurred and is continuing. Any Note that is exchangeable pursuant to the
preceding sentence is exchangeable for certificated Notes issuable in authorized
denominations and registered in such names as the Depository shall direct.
Subject to the foregoing, the Global Note is not exchangeable, except for a
Global Note of the same aggregate denomination to be registered in the name of
the Depository or its nominee. In addition, such certificates will bear
substantially the legend referred to under "Transfer Restrictions" (unless the
Company determines otherwise in accordance with applicable law) subject, with
respect to such Notes, to the provisions of such legend.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the then outstanding Voting Stock of the
Company; PROVIDED, HOWEVER, that the Permitted Holders beneficially own
(for purposes of this clause (i), the Permitted Holders shall be deemed to
beneficially own any Voting Stock of a corporation (the "specified
corporation") held by any other corporation (the "parent corporation") so
long as the Permitted Holders beneficially own (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the Voting
Stock of the parent corporation), directly or indirectly, in the aggregate
a lesser percentage of the total voting power of the then outstanding
Voting Stock of the Company than such other person and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the
purposes of this clause (i), such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person is the beneficial owner (as
defined in this clause (i)), directly or indirectly, of more than 35% of
the voting power of the Voting Stock of such parent corporation and the
Permitted Holders beneficially own (as defined above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of 66 2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
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(iii) the merger or consolidation of Holdings, TPC Holding or the
Company with or into another Person or the merger of another Person with or
into Holdings, TPC Holding or the Company, or the sale of all or
substantially all the assets of Holdings, TPC Holding or the Company to
another Person (in each case other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of Holdings, TPC Holding or the Company, as applicable, that
are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of Holdings, TPC
Holding or the Company, as applicable, are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation or a parent
corporation that owns all of the capital stock of such corporation that
represent immediately after such transaction, at least 35% of the aggregate
voting power of the Voting Stock of the surviving corporation or such
parent corporation, as the case may be.
Within 30 days following any Change of Control, the Company shall mail a
notice to the Trustee and to each Holder stating: (1) that a Change of Control
has occurred and that such Holder has the right to require the Company to
purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The use of the terms "all or substantially all" and "substantially as an
entirety" in Indenture provisions such as clause (iii) of the definition of
"Change in Control" and under "-- Merger and Consolidation" has no clearly
established meaning under New York law (which governs the Indenture) and has
been the subject of limited judicial interpretation in few jurisdictions.
Accordingly, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a person, or a disposition of such assets "substantially as an
entirety," which uncertainty should be considered by prospective investors in
the Notes.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company, TPC Holding or Holdings would decide to do so in the future.
Subject to the limitations discussed below, the Company, TPC Holding or Holdings
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect the Company's, TPC Holding's or
Holdings' capital structure or credit ratings. Restrictions on the ability of
the Company to incur additional Indebtedness are contained in the covenants
described under "-- Certain Covenants -- Limitation on Indebtedness" and "--
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries." Such
restrictions can only be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. Except for the limitations
contained in such covenants, however, the Indenture will not contain any
covenants or provisions that may afford holders of the Notes protection in the
event of a highly leveraged transaction. The Indenture will not contain any
covenants that restrict the ability of Holdings or TPC Holding to incur
Indebtedness.
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If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be delivered by holders of the Notes seeking to accept
the Change of Control offer. The failure of the Company to make or consummate
the Change of Control offer or pay the purchase price when due will give the
Trustee and the holders of the Notes the rights described under "-- Events of
Default."
The existence of a holder's right to require the Company to offer to
repurchase such holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Bank Credit Agreement, under certain circumstances, prohibits the
Company from purchasing any Notes prior to June 30, 2004, and also provides that
the occurrence of certain change of control events with respect to the Company,
TPC Holding and Holdings constitutes a default thereunder. In the event a Change
of Control occurs at a time when the Company is prohibited from purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Bank Credit Agreement. In such circumstances, the subordination provisions
in the Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repaid or repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders of Notes following the occurrence of a Change of Control may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Indenture relating to the Company's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence, the
Consolidated Coverage Ratio exceeds 2.0 to 1.0 if such Indebtedness is Incurred
from the Issue Date through June 30, 1999, and 2.25 to 1.0 if such Indebtedness
is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur any
or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the
Term Loan Provisions of the Bank Credit Agreement or any indenture or term loan
provisions of any other credit or loan agreement in an aggregate principal
amount which, when taken together with the principal amount of all other
Indebtedness Incurred pursuant to this clause (1) and then outstanding, does not
exceed (A) $140.0 million LESS (B) the aggregate amount of all principal
repayments of any such Indebtedness made after the Issue Date (other than any
such principal repayments made as a result of the Refinancing of any such
Indebtedness); (2) Indebtedness Incurred pursuant to the Revolving Credit
Provisions of the Bank Credit Agreement or any other revolving credit facility
in a principal amount which, when taken together with all letters of credit and
the principal amount of all other Indebtedness Incurred pursuant to this clause
(2) and then outstanding does not exceed the greater of $40.0 million and the
sum of (A) 65% of the book value of the inventory of the Company and its
Restricted Subsidiaries and (B) 85% of the book value of the accounts
receivables of the Company and its Restricted Subsidiaries; (3) Indebtedness
owed to and held by a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock which results in any such
Wholly
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Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to another Wholly Owned Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the Company; (4) the Notes or any Indebtedness, the proceeds of which are
used to Refinance the Notes in full; (5) Indebtedness outstanding on the Issue
Date (other than Indebtedness described in clause (1), (2), (3) or (4) of this
covenant); (6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (4) or (5) or this clause (6) or
pursuant to the covenant described under "-- Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries" below; (7) Hedging Obligations
consisting of Interest Rate Agreements directly related to Indebtedness
permitted to be Incurred by the Company pursuant to the Indenture; (8)
Indebtedness of the Company consisting of obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of assets by
the Company or any Restricted Subsidiary permitted under the Indenture; (9)
Capital Lease Obligations in an aggregate principal amount not exceeding $5
million at any one time outstanding; and (10) Indebtedness in an aggregate
principal amount which, together with all other Indebtedness of the Company
outstanding on the date of such Incurrence (other than Indebtedness permitted by
clauses (1) through (9) above or paragraph (a)) does not exceed $10 million at
any one time outstanding.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall constitute Refinancing Indebtedness and shall be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the covenant entitled "--
Limitation on Indebtedness," (i) in the event that an item of Indebtedness meets
the criteria of more than one of the types of Indebtedness described above, the
Company, in its sole discretion, will classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
the above clauses and (ii) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not
Incur (i) any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness or (ii) any Secured Indebtedness
that is not Senior Indebtedness unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED SUBSIDIARIES.
The Company shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness or Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the Company
or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness or Preferred Stock (other than to the Company
or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the issuance of such Indebtedness or Preferred Stock by the issuer thereof;
(b) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of additional Indebtedness pursuant to clause
(a) of the covenant described under "-- Limitation on Indebtedness;"
(c) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness described in clause (a) or (b) of this paragraph);
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(d) Indebtedness of any Restricted Subsidiary consisting of
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets by the Company or any Restricted
Subsidiary permitted under the Indenture;
(e) Preferred Stock which is not Disqualified Stock; PROVIDED,
HOWEVER, that such Restricted Subsidiary shall not pay cash dividends on
such Preferred Stock; and
(f) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (b) or (c) of this paragraph or this
clause (f); PROVIDED, HOWEVER, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Subsidiary described in clause (b), such Refinancing
Indebtedness shall be Incurred only by such Subsidiary.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes, and
after giving effect to, the proposed Restricted Payment: (i) a Default shall
have occurred and be continuing (or would result therefrom); (ii) the Company is
not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
of the covenant described under "-- Limitation on Indebtedness;" or (iii) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net
Income accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the fiscal quarter during
which the Notes are originally issued to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit); PROVIDED, HOWEVER, that if the Notes achieve an Investment Grade
Rating during any fiscal quarter, the percentage for such fiscal quarter (and
for any other fiscal quarter where, on the first day of such fiscal quarter, the
Notes shall have an Investment Grade Rating) will be 100% of Consolidated Net
Income during such fiscal quarter; PROVIDED FURTHER, HOWEVER, that if such
Restricted Payment is to be made in reliance upon an additional amount permitted
pursuant to the immediately preceding proviso, the Notes must have an Investment
Grade Rating at the time such Restricted Payment is declared or, if not
declared, made; (B) the aggregate Net Cash Proceeds received by the Company from
the issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of
the Company and other than an issuance or sale to an employee stock ownership
plan or to a trust established by Holdings or any of its Subsidiaries for the
benefit of their employees); (C) the aggregate Net Cash Proceeds received by the
Company subsequent to the Issue Date from the issue or sale of its Capital Stock
(other than Disqualified Stock) to an employee stock ownership plan or a trust
established by Holdings or any of its Subsidiaries for the benefit of their
employees; PROVIDED, HOWEVER, that with respect to any such Net Cash Proceeds
received from such an employee stock ownership plan or trust through the
Incurrence of Indebtedness in connection with such issue or sale of Capital
Stock, which Indebtedness also constitutes Indebtedness of the Company, such
aggregate Net Cash Proceeds shall be limited to an amount equal to any increase
in the Consolidated Net Worth of the Company resulting from principal repayments
made by such employee stock ownership plan with respect to such Indebtedness;
(D) the amount by which Indebtedness of the Company is reduced on the Company's
balance sheet upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date, of any Indebtedness of the Company for
Capital Stock (other than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed by the Company
upon such conversion or exchange), whether pursuant to the terms of such
Indebtedness or pursuant to an agreement with a creditor to engage in an equity
for debt exchange; (E) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends, repayments of
loans or advances or other transfers of assets, in each case to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary; PROVIDED,
HOWEVER, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by the Company or any Restricted Subsidiary in such
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Unrestricted Subsidiary; and (F) to the extent not covered in clauses (A)
through (E) above, the aggregate net cash proceeds received after the date of
the Indenture by the Company as capital contributions (other than from any of
its Restricted Subsidiaries) plus $5 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than (A) Disqualified
Stock, (B) Capital Stock issued or sold to a Subsidiary of the Company or (C)
Capital Stock issued or sold to an employee stock ownership plan or to a trust
established by Holdings or any of its Subsidiaries for the benefit of their
employees to the extent that such employee stock ownership plan or trust has
Incurred Indebtedness to finance the purchase of such Capital Stock, which
Indebtedness also constitutes Indebtedness of the Company); PROVIDED, HOWEVER,
that (A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "-- Limitation on Indebtedness;" PROVIDED, HOWEVER,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; PROVIDED, HOWEVER, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (iv) a payment
by the Company to TPC Holding, Holdings or the ESOP, or directly by the Company,
to be used to repurchase, redeem, acquire or retire for value any Capital Stock
of Holdings pursuant to any stockholders' agreement, management equity
subscription plan or agreement, stock option plan or agreement, or other
employee plan or agreement or employee benefit plan in effect as of the Issue
Date or such similar employee plan or agreement or employee benefit plan as may
be adopted by the Company from time to time; PROVIDED, HOWEVER, that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Capital Stock shall not exceed $2,000,000 in any fiscal year; PROVIDED FURTHER,
HOWEVER, that such amount shall be excluded in the calculation of Restricted
Payments; (v) a payment by the Company to Holdings, TPC Holding or the ESOP to
be used to repurchase Capital Stock of Holdings pursuant to the requirements of
the ESOP in an aggregate amount in any fiscal year not to exceed the minimum
amount required to be paid in cash under the ESOP as in effect on the Issue
Date; PROVIDED, HOWEVER, that such amount shall be excluded in the calculation
of Restricted Payments; (vi) a payment by the Company to TPC Holding or Holdings
pursuant to the Tax Sharing Agreement; PROVIDED, HOWEVER, that the amount of any
such payment shall not exceed the sum of (A) the amount of taxes which the
Company would have been liable for on a stand-alone basis plus (B) the amount of
any state net worth tax applicable to Holdings and TPC Holding; PROVIDED
FURTHER, HOWEVER, such amount shall be excluded in the calculation of Restricted
Payments; and (vii) a payment by the Company to TPC Holding or Holdings to pay
their operating and administrative expenses, including, without limitation,
directors' fees, legal and audit expenses, SEC compliance expenses and corporate
franchise and other taxes, in an amount not to exceed the greater of $1,000,000
per fiscal year and 0.125% of the consolidated net sales of the Company for the
preceding fiscal year; PROVIDED, HOWEVER, that such amount shall be excluded in
the calculation of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary (a) to
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) to make any loans or advances to the Company or (c) to transfer any of its
property or assets to the Company, except: (i) any encumbrance or restriction
pursuant to an agreement in effect at or entered into on the Issue Date; (ii)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to an agreement relating to any Indebtedness Incurred by such Restricted
Subsidiary on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other
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than Indebtedness Incurred as consideration in, or to provide all or any portion
of the funds or credit support utilized to consummate, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on such
date; (iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of this covenant or
this clause (iii); PROVIDED, HOWEVER, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the Noteholders than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) any such encumbrance or restriction
consisting of customary non-assignment provisions in leases to the extent such
provisions restrict the transfer of the lease or the property leased thereunder
or in purchase money financings; (v) in the case of clause (c) above,
restrictions contained in security agreements or mortgages securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements or mortgages; (vi)
encumbrances or restrictions imposed by operation of applicable law; and (vii)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition, and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) FIRST, to the extent the
Company elects (or is required by the terms of any Senior Indebtedness), to
prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other
than any Disqualified Stock) of a Wholly Owned Subsidiary or such Restricted
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company) within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to the
extent of the balance of such Net Available Cash after application in accordance
with clause (A), to the extent the Company elects, to acquire Additional Assets;
PROVIDED, HOWEVER, that the Company shall be required to commit such Net
Available Cash to the acquisition of Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net Available
Cash (the "Receipt Date") and shall be required to consummate the acquisition of
such Additional Assets within 18 months from the Receipt Date; (C) THIRD, to the
extent of the balance of such Net Available Cash after application in accordance
with clauses (A) and (B), to make an offer pursuant to paragraph (b) below to
the holders of the Notes (and to holders of other Senior Subordinated
Indebtedness designated by the Company) to purchase Notes (and such other Senior
Subordinated Indebtedness) pursuant to and subject to the conditions contained
in the Indenture; and (D) FOURTH, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A), (B) and (C) to
(x) the acquisition by the Company or any Wholly Owned Subsidiary or such
Restricted Subsidiary of Additional Assets or (y) the prepayment, repayment or
purchase of Indebtedness (other than any Disqualified Stock) of the Company
(other than Indebtedness owed to an Affiliate of the Company) or Indebtedness of
any Subsidiary (other than Indebtedness owed to the Company or an Affiliate of
the Company), in each case within one year from the later of the receipt of such
Net Available Cash and the date the offer described in clause (b) below is
consummated; PROVIDED, HOWEVER, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above,
the Company or such Restricted Subsidiary shall retire such Indebtedness and
shall cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this paragraph, the Company and the
Restricted Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent
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that the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this paragraph exceeds $2.5 million. Pending
application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Permitted Investments. Notwithstanding anything
contained in this "-- Certain Covenants" section to the contrary, the Company
shall not sell, convey, pledge, hypothecate or otherwise transfer the Houston
Facility substantially as an entirety in one transaction or a series of related
transactions to any Person, including, but not limited to, any Subsidiary,
except for (i) pledges or security interests granted in connection with securing
Indebtedness borrowed under the Bank Credit Agreement, and (ii) transactions
that comply with the "-- Merger and Consolidation" covenant described below.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Indebtedness of the Company or
any Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are converted by the Company or such
Restricted Subsidiary into cash within 90 days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(ii)(C)
above, the Company will be required to purchase Notes tendered pursuant to an
offer by the Company for the Notes (and other Senior Subordinated Indebtedness)
at a purchase price of 100% of their principal amount (without premium) plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of Notes (and any other Senior
Subordinated Indebtedness) tendered pursuant to such offer is less than the Net
Available Cash allotted to the purchase thereof, the Company will be required to
apply the remaining Net Available Cash in accordance with clause (a)(ii)(D)
above. The Company shall not be required to make such an offer to purchase Notes
(and other Senior Subordinated Indebtedness) pursuant to this covenant if the
Net Available Cash available therefor is less than $10 million (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any transaction (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
a comparable transaction on arm's-length dealings with a Person who is not such
an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of
$2.5 million, (i) are set forth in writing and (ii) have been approved by a
majority of the members of the Board of Directors having no material personal
financial stake in such Affiliate Transaction and (3) if such Affiliate
Transaction involves an amount in excess of $5 million, have been determined by
a nationally recognized investment banking firm to be fair, from a financial
standpoint, to the Company or its Restricted Subsidiary, as the case may be.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," or any payment or transaction
specifically excepted from the definition of Restricted Payment, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of
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Directors or the board of directors of the relevant Restricted Subsidiary, (iii)
the grant of stock options or similar rights to employees and directors pursuant
to plans approved by the Board of Directors or the board of directors of the
relevant Restricted Subsidiary, (iv) loans or advances to officers, directors or
employees in the ordinary course of business, (v) the payment of reasonable fees
to directors of the Company and its Restricted Subsidiaries who are not
employees of the Company or its Restricted Subsidiaries, (vi) any Affiliate
Transaction between the Company and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries, (vii) the purchase of or the payment of Indebtedness of or
monies owed by the Company or any of its Restricted Subsidiaries for goods or
materials purchased, or services received, in the ordinary course of business,
(viii) the purchase of or the payment of Indebtedness of or monies owed by the
Company or any of its Restricted Subsidiaries or fees to be paid to Sterling or
any Affiliate of Sterling, in each case pursuant to a written agreement in
existence on the date of the Indenture and (ix) any Tax Sharing Agreement;
PROVIDED, HOWEVER, that the aggregate amount payable by the Company pursuant
thereto shall not exceed the sum of (A) the amount of taxes which the Company
would have been liable for on a stand-alone basis plus (B) the amount of any
state net worth tax applicable to Holdings and TPC Holding.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary or (ii) if, immediately after giving effect to such issuance, sale or
other disposition, such Restricted Subsidiary remains a Restricted Subsidiary;
PROVIDED, HOWEVER, that in connection with any such sale or disposition of
Capital Stock the Company or any such Restricted Subsidiary complies with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock."
MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, its assets substantially as an entirety to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by an indenture supplemental
thereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Certain Covenants -- Limitation on Indebtedness;" (iv)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company prior to such transaction minus any costs incurred in
connection with such transaction; and (v) the Company shall have delivered to
the Trustee an officer's certificate and an opinion of counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor company, only in the case
of a conveyance, transfer or lease, shall not be released from the obligation to
pay the principal of and interest on the Notes.
SEC REPORTS. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide within 15 days to the
Trustee and Noteholders with such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections;
PROVIDED, HOWEVER, that if Holdings shall have become a Guarantor with respect
to all obligations
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relating to the Notes (or the Exchange Notes), the reports, information and
other documents required to be filed and provided as described hereunder may, at
the Company's option, be filed by and be those of Holdings rather than the
Company; PROVIDED FURTHER, HOWEVER, that in the event Holdings conducts,
directly or indirectly, any business or holds, directly or indirectly, any
significant assets other than the capital stock of TPC Holding or the Company at
the time of filing and providing any such report, information or other document
containing financial statements of Holdings, Holdings shall include in such
report, information or other document summarized financial information (as
defined in Rule 1-02(bb) of Regulation S-X promulgated by the SEC) with respect
to the Company.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under "--
Certain Covenants -- Merger and Consolidation" above, (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations in the
covenants described above under "Change of Control" (other than a failure to
purchase Notes) or under "-- Certain Covenants" under "-- Limitation on
Indebtedness," "-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries," "-- Limitation on Restricted Payments," "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries," -- "Limitation on
Sales of Assets and Subsidiary Stock," " -- Limitation on Affiliate
Transactions," "Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries," or "-- SEC Reports," (v) the failure by the Company to
comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
Holdings, TPC Holding, the Company or any Significant Subsidiary (the
"bankruptcy provisions") or (viii) any judgment or decree for the payment of
money in excess of $5 million is entered against the Company or any Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision"). However, a default under clause (iv) or (v) will
not constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Company of the default and
the Company does not cure such default within the time specified after receipt
of such notice.
If an Event of Default (other than the bankruptcy provisions relating to
the Company) occurs and is continuing, the Trustee or the holders of at least
25% in principal amount of the outstanding Notes may declare the principal of
and accrued but unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and payable
immediately. If an Event of Default relating to the bankruptcy provisions
relating to the Company occurs and is continuing, the principal of and interest
on all the Notes will IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee
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has not complied with such request within 60 days after the receipt thereof and
the offer of security or indemnity and (v) the holders of a majority in
principal amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder of a Note or
that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as the board of directors, the executive committee or a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding.
Without the consent of each holder of an outstanding Note affected thereby,
no amendment may (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above, (v) make any Note payable in money other than that stated in
the Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders.
Without the consent of any holder of the Notes, the Company and the Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder of the Notes or to comply with any requirement of the
SEC in connection with the qualification of the Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
their Representative) consent to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
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After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at its option at any time may terminate all its obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. In addition, the Company at its option at any time may terminate its
obligations under "Change of Control" and under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger and
Consolidation") (and any omission to comply with such obligations shall not
constitute a Default or Event of Default with respect to the Notes), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under "-- Defaults" above and the limitations contained in clauses (iii) and
(iv) of the first paragraph under, "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
Fleet National Bank is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
Such bank may also act as a depository of funds for or makes loans to, and
performs other services for, the Company or its affiliates in the ordinary
course of business in the future. The corporate trust office of the Trustee is
located at 777 Main Street, Hartford, Connecticut 06115.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder
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shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture. The Trustee may resign at any time or may be removed
by the Company. If the Trustee resigns, is removed or becomes incapable of
acting as Trustee or if a vacancy occurs in the office of the Trustee for any
cause, a successor Trustee shall be appointed in accordance with the provisions
of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and the Indenture. The Indenture also
contains certain limitations on the right of the Trustee, as a creditor of the
Company, to obtain payment of claims in certain cases, or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger or
consolidation (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (ii) all
or substantially all the assets of any division or line of business of the
Company or any Restricted Subsidiary or (iii) any other assets of the Company or
any Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and
(iii) above, (x) a disposition of the Excluded Assets, (y) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of the covenant
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" or a disposition specifically excepted from the definition
of Restricted Payment).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
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redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Credit Agreement" means the Bank Credit Agreement, dated as of the
date of the Indenture, among the Company, as successor to Finance Co., Texas
Commerce Bank National Association, as agent, and the lenders party thereto, as
such agreement, in whole or in part, may be amended, renewed, extended,
increased (but only so long as such increase is permitted under the terms of the
Indenture), substituted, refinanced, restructured, replaced (including, without
limitation, any successive renewals, extensions, increases, substitutions,
refinancings, restructurings, replacements, supplements or other modifications
of the foregoing). Subsequent to the date of the Indenture, there may be
multiple Bank Credit Agreements and the term "Bank Credit Agreement" shall mean
all such Bank Credit Agreements.
"Bank Indebtedness" means any and all amounts payable by the Company under
or in respect of the Bank Credit Agreement, as amended, refinanced or replaced
from time to time, including principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not a claim for post-filing
interest is allowed in such proceeding), fees, charges, expenses, reimbursement
obligations, Guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means the Board of Directors of the Company or (except
for the purposes of the covenant described under " -- Certain Covenants --
Change of Control") any committee thereof duly authorized to act on behalf of
such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted
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Subsidiaries are no longer liable for such Indebtedness after such sale), (3) if
since the beginning of such period the Company or any Restricted Subsidiary (by
merger or otherwise) shall have made an Investment in any Restricted Subsidiary
(or any person which becomes a Restricted Subsidiary) or an acquisition of
assets, including any acquisition of assets occurring in connection with a
transaction requiring a calculation to be made hereunder, which constitutes all
or substantially all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period, (4) if since
the beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Disposition, any
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (2) or (3) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Disposition, Investment or acquisition occurred on the first day of such
period, and (5) in calculating EBITDA and Consolidated Interest Expense for any
period prior to the Issue Date for the purposes of calculating the Consolidated
Coverage Ratio, without duplicating adjustments made pursuant to clauses (1)
through (4) above, EBITDA and Consolidated Interest Expense for such period
shall be calculated giving effect to the pro forma adjustments set forth under
"Pro Forma Combined Financial Information" above and to a one-time employee
compensation expense incurred in connection with the Transactions. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
of assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to capital leases and one-third of the rental expense attributable
to operating leases, (ii) amortization of debt discount and debt issuance cost,
(iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary, and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iii) any net income of any Restricted Subsidiary to
the extent
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that such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to another
Restricted Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for such period
shall be included in determining such Consolidated Net Income; (iv) any gain
(but not loss) realized upon the sale or other disposition of any assets of the
Company or its consolidated Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purposes of the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments"
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(iii)(E) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository" means The Depository Trust Company, its nominees and their
respective successors.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $15 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Notes; PROVIDED, HOWEVER, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain Covenants --
Limitation on Sales of Assets and Subsidiary Stock" and "-- Certain Covenants --
Change of Control."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all
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income tax expense of the Company, (b) depreciation expense, (c) amortization
expense, and (d) all other non-cash items reducing such Consolidated Net Income
(excluding any non-cash item to the extent it represents an accrual of, or
reserve for, cash disbursement for any subsequent period) less all non-cash
items increasing such Consolidated Net Income (such amount calculated pursuant
to this clause (d) not to be less than zero), in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Employee Offering" means any registration of shares of Common Stock by
Holdings for sale to certain employees of Holdings and its Subsidiaries
following the Acquisition.
"ESOP" means the Company's Employee Stock Ownership Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" means (i) .4547 acres at 145343 Memorial Drive, Houston,
Texas; (ii) 30.007 acres located at Highway 6 and Briarforest, Houston, Harris
County, Texas; (iii) 8.8962 acres located on Richmond and West Hollow Drive,
Houston, Harris County, Texas; (iv) 2.9613 acres located at 8705-8707 Katy
Freeway, Houston, Harris County, Texas; (v) a 4.14560 acre tract of land located
at Highway 288 and South MacGregor Drive, Houston, Harris County, Texas; (vi)
lots 11, 12, 13, 14, 15, 16, 17, 18, 19 and 20, Block 133 located at 206 North
Kaufman, Ennis, Texas; and (vii) one airplane.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) in statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) in the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
The term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Houston Facility" means the Company's plant located at 8600 Park Place
Boulevard, Houston, Texas 77017, together with all land owned or leased by the
Company adjacent or in proximity thereto, all improvements or additions to such
plant or land, including docks, pipelines and facilities for traincar and truck
service, all equipment, catalysts and other items used in the production,
processing, purification, finishing, extraction, hydrogenation, dehydrogenation,
dimerization, oxo-dehydrogenation, back-cracking, skeletal isomerization or
fractionation of chemical products, feedstocks or intermediaries.
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"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for Indebtedness; PROVIDED, HOWEVER, that any Indebtedness of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit); (v) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured; and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed solely
to protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. "Investment"
shall not include payments by the Company to the ESOP (i) for the purpose of
servicing Indebtedness of the ESOP, (ii) for the purpose of paying
administrative expenses of the ESOP, and (iii) on behalf of employees of the
Company or its Subsidiaries that do not exceed, during any fiscal year, 10% of
the aggregate compensation expense during such fiscal year attributable to
employees of the Company and its Subsidiaries who are eligible to participate in
the ESOP. For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
PROVIDED, HOWEVER, that if such designation is made in connection with the
acquisition of such Subsidiary or the assets owned by such Subsidiary, the
"Investment" in such Subsidiary shall be deemed to be the consideration paid in
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connection with such acquisition; PROVIDED FURTHER, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Investment Grade Rating" means a rating of BBB - or higher by S&P and Baa3
or higher by Moody's or the equivalent of such rating by S&P and Moody's or by
any other Rating Agency selected as provided in the definition of Rating Agency.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, brokerage commissions,
underwriting discounts or commissions or sales commissions and other reasonable
fees and expenses (including, without limitation, fees and expenses of counsel,
accountants and investment bankers) related to such Asset Disposition or
converting to cash any other proceeds received, and any relocation and severance
expenses as a result thereof, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition or made in order to
obtain a necessary consent to such Asset Disposition or to comply with
applicable law, (iii) all distributions and other payments required to be made
to minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and (iv) appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition, including,
without limitation, pension and other post- employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Disposition. Further,
with respect to an Asset Disposition by a Subsidiary which is not a wholly-owned
Subsidiary, Net Available Cash shall be reduced pro rata for the portion of the
equity of such Subsidiary which is not owned by the Company.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means (i) each Person who owns Capital Stock of
Holdings on the date of issuance of (a) the Notes or (b) the Common Stock in
connection with the Employee Offering, (ii) any Person who on the date of
issuance of the Notes is or was before such date an officer, director,
stockholder, employee or consultant of Sterling, (iii) the ESOP, (iv) any
savings or investment plan sponsored by the Company or Holdings, (v) with
respect to any Person covered by the preceding clauses (i) through (iv) (A) in
the case of an entity, any Affiliate of such Person, and (B) in the case of an
individual, any spouse, parent, sibling, child or grandchild (in each case,
whether such relationship arises from birth, adoption or through marriage), or
(vi) any trust, limited liability company, corporation, limited or general
partnership or
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other entity, a majority of interest of the beneficiaries, stockholders,
partners or owners (direct or beneficial) of which are Persons of the type
referred to in the preceding clauses (i) through (v).
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; PROVIDED, HOWEVER, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of the Company or such Restricted Subsidiary; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; and (viii) any Person to the extent
such Investment represents the non-cash portion of the consideration received
for an Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings, TPC Holding or the Company pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offeringhas been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Holdings, TPC Holding or the Company, as applicable, has been
distributed by means of an effective registration statement under the Securities
Act or sales pursuant to Rule 144 under the Securities Act.
"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by the
Company (as certified by a resolution of the Board of Directors) which shall be
substituted for S&P or Moody's or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount
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(or if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; PROVIDED FURTHER,
HOWEVER, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company on the Issue Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person), other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation), (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition), or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions in the Bank Credit
Agreement pursuant to which the lenders have committed to make available to the
Company a revolving credit facility in a maximum principal amount of $40
million.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means (i) Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent
post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes;
PROVIDED, HOWEVER, that Senior Indebtedness shall not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for Federal, state, local or
other taxes owed or owing by the Company, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of the Company (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of the Company or (5) that portion of any Indebtedness which
at the time of Incurrence is Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank PARI PASSU with the Notes in right of payment
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and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Stock Purchase Agreement" means the stock purchase agreement dated as of
May 14, 1996, by and among TPC Holding, Holdings, certain shareholders of TOC,
and certain shareholders of the Company.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
limited liability company, limited or general partnership or other business
entity of which more than 50% of the total voting power of shares of Capital
Stock or other interests (including partnership interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means any tax sharing agreement between the
Company, TPC Holding and Holdings or any other person with which the Company is
required to, or is permitted to, file a consolidated tax return or with which
the Company is or could be part of a consolidated group for tax purposes.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P, and (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by S&P or "A" by Moody's.
"Term Loan Provisions" means the provisions in the Bank Credit Agreement
pursuant to which the lenders have committed to make available to the Company
$140 million of credit facilities in the form of amortizing term loans.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary
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unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; PROVIDED, HOWEVER, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) if such Unrestricted Subsidiary at such time has
Indebtedness, the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Certain Covenants --
Limitation on Indebtedness" and (y) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be by the
Company to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the principal federal
income tax matters of general application relating to the Exchange Offer and the
holding and disposing of the Original Notes and the Exchange Notes and reflects
the opinion provided by Bracewell & Patterson, L.L.P. ("Counsel"), counsel to
the Company, as to these matters. There can be no assurance that the Internal
Revenue Service will take a similar view as to any of the tax consequences
described below. The discussion is based on current provisions of the Internal
Revenue Code, existing Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all of which are subject to
change. The discussion does not purport to describe all aspects of federal
income taxation that may be relevant to a holder in light of its particular tax
status and its other income, deductions and credits and does not discuss any
state, local or foreign tax matters. Moreover, certain holders (including
insurance companies, tax-exempt organizations and foreign persons) may be
subject to special rules not discussed below. The discussion is limited to
investors who hold the Original Notes, and will hold any Exchange Notes acquired
pursuant to the Exchange Offer, as capital assets (generally, property held for
investment).
DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH HOLDER OF ORIGINAL
NOTES IS URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF THE EXCHANGE OF ITS ORIGINAL NOTES FOR EXCHANGE NOTES, AND
THE OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE EFFECT OF POSSIBLE CHANGES
IN THE TAX LAWS.
EXCHANGE OF ORIGINAL NOTES FOR EXCHANGE NOTES
Under Treasury Regulations, a "significant modification" of a debt
instrument is deemed to constitute a sale or exchange therefor for federal
income tax purposes, resulting (in appropriate circumstances) in gain or loss to
the holder of the modified debt instrument, cancellation of indebtedness to the
issuer of the modified debt instrument, and various changes under the original
issue discount rules.
Although there is no precedent directly on point or closely analogous,
because the economic rights of the holder of Original Notes VIS-A-VIS the
Company will not be modified as a result of an exchange of such notes for
Exchange Notes, such exchange should not be a significant modification for these
purposes and the Exchange Notes will be treated as a continuation of the
corresponding Original Notes. The Company will take this position and intends to
report the transaction in this manner for federal income tax purposes. Even if
the exchange of Exchange Notes for Original Notes is not treated as a
continuation of the Original Notes, the exchange will constitute a
recapitalization of the Company within the meaning of section 368(a)(1)(E) of
the Internal Revenue Code, which would be a tax-free transaction of the holders
of Original Notes, except to the extent the principal amount of securities
received exceeds the principal amount of securities surrendered therefor. Thus,
the holder of an Original Notes will not recognize gain or loss upon the
exchange of such security for Exchange Notes; the holder's basis in the Exchange
Notes will be the same as its basis in the Original Notes, and the holder's
holding period for the Exchange Notes for federal income tax purposes will
include any holding period for the Original Notes.
If the exchange of Exchange Notes for Original Notes were not viewed as a
continuation of the Original Notes, then notwithstanding that the Original Notes
were issued without original issue discount, if the issue price of the Exchange
Notes is less than that of the Original Notes, the Exchange Notes would be
viewed as possessing original issue discount. However, the holder would also
have amortizable bond premium (see " -- AMORTIZABLE BOND PREMIUM" below) with
respect to the Exchange Notes to the extent the holder's tax basis in the
Exchange Notes exceeds the issue price for such notes. It is likely that any
original issue discount income attributable to the Exchange Notes and any
amortizable bond premium on such notes would offset one another, leaving the
holder with substantially the same taxable interest income for each period under
the Exchange Notes as it would have had under the Original Coupon Notes.
The remaining summary of federal income tax consequences of owning and
disposing of the Exchange Notes also applied to holders of Original Notes who do
not accept the Exchange Offer.
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THE NOTES
STATED INTEREST. A holder of a Note is required to report as ordinary
income the stated interest earned on the Note in accordance with such holder's
method of tax accounting.
AMORTIZABLE BOND PREMIUM. If a holder purchases a Note after issuance and
its tax basis in the Note as of the date of purchase exceeds the greater of the
principal amount or the amount payable on a call date prior to maturity, the
holder may be entitled to elect to treat such excess as bond premium which is
amortizable over the term of the Note in accordance with a constant yield to
maturity method that takes into account the compounding of interest. An election
to amortize bond premium applies to all debt obligations acquired by the
taxpayer in the taxable year of the election and all subsequent years, unless
revoked with the consent of the Internal Revenue Service ("IRS"). If amortizable
bond premium for a holder is determined by reference to a call price, and if the
Note is not subsequently redeemed on the call date, then, for purposes of
determining future amounts of amortizable bond premium, the Note will be
considered to be reissued on such date for an amount equal to the nonexercised
call price. The amount of amortizable bond premium with respect to a Note
generally will be treated as a reduction in the holder's interest income on the
Note. The holder's tax basis in the Note will be reduced by any bond premium it
is allowed to amortize. Purchasers of Notes should consult their tax advisors
concerning the existence of amortizable bond premium and the effect of the
associated election.
DISPOSITION. In general, upon the sale, redemption or other disposition of
a Note, the holder will recognize (i) ordinary interest income to the extent of
any interest that has accrued while the holder held the Note but has not yet
been taken into income by the holder and (ii) gain or loss equal to the
difference between the amount realized from such disposition (exclusive of any
amounts treated as ordinary interest income under clause (i)) and the holder's
tax basis in the Note. Except as provided under " -- MARKET DISCOUNT" below, the
gain or loss described in clause (ii) of the preceding sentence will be capital
gain or loss and will be long-term if the Note was held for more than one year.
MARKET DISCOUNT. If a holder purchases a Note after issuance, there will be
market discount equal to the excess, if any, of the principal amount of the Note
over the holder's tax basis in the Note at the time of acquisition, unless such
excess qualified for a de minimis exception. Under the market discount rules,
any gain recognized by a holder upon the sale or other disposition of a Note
with market discount will be taxable as ordinary interest income to the extent
of the portion of the market discount that accrued on a straight-line basis (or,
at the election of the holder, on a constant yield to maturity basis) while the
holder held the Note. Market discount income may be recognized on a gift of a
Note as if the Note had been sold for its fair market value. A holder of a Note
with market discount may be required to defer deductions for a portion of such
holder's interest expense on any indebtedness incurred or maintained to purchase
or carry the Note.
As an alternative to the foregoing, a holder of a Note with market discount
may elect under certain circumstances to accrue such market discount income
currently (in which case its tax basis in the Note will be increased by such
accrued market discount income and the deduction-deferral rule described in the
preceding paragraph will not apply to the Note). Any such election applies to
all obligations acquired by the holder in the taxable year of the election and
all subsequent years, unless revoked with the consent of the IRS.
BACKUP WITHHOLDING. Under certain circumstances, the failure of a holder of
Notes to provide sufficient information to establish that such holder is exempt
from the backup withholding provisions of the Internal Revenue Code will subject
such holder to backup withholding at a rate of 31% of interest paid with respect
to the Notes and on the proceeds of a sale or redemption of the Notes. In
general, backup withholding applies if a holder fails to furnish a correct
taxpayer identification number, fails to report dividends and interest income in
full, or fails to certify that such holder has provided a correct taxpayer
identification number and that the holder is not subject to withholding. An
individual taxpayer's identification number is such person's Social Security
number.
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LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Bracewell
& Patterson, L.L.P., Houston, Texas. Certain members of Bracewell & Patterson,
L.L.P. own less than 0.5% of the outstanding Common Stock of Holdings.
EXPERTS
The combined financial statements of TOC, its subsidiaries and Clarkston as
of May 31, 1995 and as of June 30, 1996, for the years ended May 31, 1994 and
1995, the twelve months ended May 31, 1996 and the one month ended June 30, 1996
and the financial statements of Finance Co. as of June 30, 1996 included in this
Prospectus and Registration Statement have been audited by Coopers & Lybrand
L.L.P., independent public accountants, as stated in their reports included
herein and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
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INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
TPC Finance Corp.
Report of Independent
Accountants.................... F-2
Balance Sheet as of June 30,
1996........................... F-3
Texas Olefins Company, subsidiaries
and affiliate
Report of Independent
Accountants.................... F-4
Combined Balance Sheets as of
June 30, 1996 and as of May 31,
1995........................... F-5
Combined Statements of
Operations for the one month
ended June 30, 1996 and 1995
(1995 unaudited), for the
twelve months ended May 31,
1996, and for the years ended
May 31, 1995 and 1994......... F-6
Combined Statements of
Stockholders' Equity for the
one month ended June 30, 1996,
for the twelve months ended May
31, 1996, and for the years
ended May 31, 1995 and 1994.... F-7
Combined Statements of Cash
Flows for the one month ended
June 30, 1996 and 1995 (1995
unaudited), for the twelve
months ended May 31, 1996, and
for the years ended
May 31, 1995 and 1994......... F-8
Notes to Combined Financial
Statements..................... F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
TPC Finance Corp.:
We have audited the accompanying balance sheet of TPC Finance Corp.
("Finance Co.") as of June 30, 1996. This balance sheet is the responsibility
of Finance Co.'s management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Finance Co. as of June 30, 1996 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 16, 1996
F-2
<PAGE>
TPC FINANCE CORP.
BALANCE SHEET
JUNE 30, 1996
ASSETS
Cash ......................................................... $1,000
------
Total .............................................. $1,000
======
STOCKHOLDER'S EQUITY
Common stock $0.01 par value; 1,000 shares authorized; 1,000
shares issued and outstanding .............................. $ 10
Additional paid-in capital ................................... 990
------
Total .............................................. $1,000
======
NOTE: TPC Finance Corp. ("Finance Co.") was incorporated in Texas on May 2,
1996. On May 14, 1996, Finance Co.'s parent, TPC Holding Corp. ("TPC
Holding") entered into an agreement to purchase the outstanding capital
stock of Texas Olefins Company ("TOC") and the outstanding capital stock
(not already owned by TOC) of Texas Petrochemicals Corporation and its
subsidiaries. Effective July 1, 1996, the acquisition closed for total
consideration of approximately $377 million. In connection with the
acquisition, Finance Co. incurred indebtedness of approximately $315
million and loaned the combined net proceeds to TPC Holding. Finance Co.
was then merged with and into Texas Petrochemicals Corporation.
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Olefins Company:
We have audited the accompanying combined balance sheet of Texas Olefins
Company, subsidiaries and affiliate as of June 30, 1996 and May 31, 1995, and
the related combined statements of operations, stockholders' equity, and cash
flows for the one month period ended June 30, 1996, the twelve month period
ended May 31, 1996 and for the years ended May 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects the combined financial position of Texas
Olefins Company, subsidiaries and affiliate as of June 30, 1996 and May 31,
1995, and the combined results of their operations and their cash flows for the
one month period ended June 30, 1996, the twelve month period May 31, 1996 and
for the years ended May 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
As further described in Note 2 to the combined financial statements,
effective July 1, 1996 the Company was acquired for approximately $377 million
in a series of transactions.
As discussed in Note 1 to the combined financial statements, effective June
1, 1993 and June 1, 1994, the Company changed its method of accounting for
income taxes and its method of accounting for investment securities,
respectively.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 16, 1996
F-4
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
COMBINED BALANCE SHEET
JUNE 30, MAY 31,
1996 1995
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 4,780,401 $ 17,829,432
Investment securities........... 6,794,395 21,125,602
Accounts receivable:
Trade...................... 35,278,643 40,097,811
Due from broker............ -- 4,497,600
Inventories (Note 4)............ 11,933,478 17,232,101
Prepaid expenses................ 9,665,174 8,245,440
Other current assets............ 2,087,740 2,225,000
--------------- ---------------
Total current
assets............. 70,539,831 111,252,986
Property, plant and equipment, net
(Note 5)........................... 81,814,284 90,071,528
Investments in land held for sale in
1996 (Note 6)...................... 6,180,907 18,773,019
Investment in and advances to limited
partnership (Note 7)............... 2,824,251 3,216,608
Other assets, net of accumulated
amortization of $1,410,701 and
$1,178,558 at June 30, 1996 and May
31, 1995, respectively............. 6,522,776 7,422,870
--------------- ---------------
Total assets.......... $ 167,882,049 $ 230,737,011
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade....... $ 40,130,860 $ 35,957,817
Notes payable to stockholders
and former stockholder (Note
9)............................ -- 697,445
Accrued expenses (Note 10)...... 4,382,657 6,795,234
Dividends payable............... 677,000 --
--------------- ---------------
Total current
liabilities........ 45,190,517 43,450,496
--------------- ---------------
Revolving line of credit (Note 8).... 13,000,000 --
Notes payable to stockholders and
former stockholder (Note 9)........ -- 325,045
Other liabilities.................... 344,000 502,862
Deferred income taxes (Note 11)...... 15,763,393 22,125,000
Minority interest in net assets of
consolidated subsidiary............ 1,107,070 1,061,410
Commitments and contingencies (Note
12)................................
Stockholders' equity:
Class A common stock, $1 par
value, 500,000 shares
authorized, 200,000 shares
issued and outstanding........ 200,000 200,000
Class B common stock, $1 par
value, nonvoting, 10,000,000
shares authorized, 3,800,000
and 5,021,200 shares
outstanding at June 30, 1996
and May 31, 1995,
respectively.................. 3,800,000 5,021,200
Common stock (Affiliate) $1 par
value, 1,000,000 shares
authorized and issued,
1,000,000 shares outstanding
at
May 31, 1995.................. -- 1,000,000
Retained earnings............... 89,864,328 161,169,582
Unrealized loss on investment
securities, net of taxes...... (1,387,259) (3,650,584)
Treasury stock at cost, 7,200
shares at May 31, 1995........ -- (468,000)
--------------- ---------------
Total stockholders'
equity............. 92,477,069 163,272,198
--------------- ---------------
Total
liabilities
and
stockholders'
equity........ $ 167,882,049 $ 230,737,011
=============== ===============
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED YEAR ENDED MAY 31,
JUNE 30, JUNE 30, MAY 31, --------------------------------
1996 1995 1996 1995 1994
-------------- -------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 41,383,797 $ 36,187,002 $ 455,585,097 $ 474,676,801 $ 352,447,026
Cost of goods sold................... 35,991,859 29,407,893 379,467,795 396,360,220 268,813,284
Depreciation and amortization........ 1,277,144 1,210,082 14,981,820 14,298,015 13,571,905
-------------- -------------- --------------- --------------- ---------------
Gross profit.................... 4,114,794 5,569,027 61,135,482 64,018,566 70,061,837
Selling, general and administrative
expenses........................... 1,682,536 2,245,682 19,070,256 16,571,150 16,729,941
-------------- -------------- --------------- --------------- ---------------
Income from operations..... 2,432,258 3,323,345 42,065,226 47,447,416 53,331,896
-------------- -------------- --------------- --------------- ---------------
Interest income (expense), net....... (75,769) 149,314 (1,630,078) 720,118 (237,838)
Other income (expense):
Dividend income................. -- 28,961 252,211 361,625 487,402
Charitable contributions........ (51,520) -- (655,536) (656,509) (5,115,991)
Gain (loss) on disposal of
assets and investment
securities, net............... (279,686) 297,577 (3,098,725) 1,112,092 3,385,362
Impairment of investment in
land.......................... -- -- (12,592,112) -- --
Other, net...................... (37,130) (261,209) 167,145 283,475 452,592
-------------- -------------- --------------- --------------- ---------------
(368,336) 65,329 (15,927,017) 1,100,683 (790,635)
-------------- -------------- --------------- --------------- ---------------
Income before income taxes
and minority interest... 1,988,153 3,537,988 24,508,131 49,268,217 52,303,423
Provision for income taxes (Note
10)................................ 761,000 1,263,543 7,902,549 16,880,010 18,396,363
Minority interest in net loss of
consolidated subsidiary............ 8,774 7,325 143,037 128,630 5,051
-------------- -------------- --------------- --------------- ---------------
Net income................. $ 1,235,927 $ 2,281,770 $ 16,748,619 $ 32,516,837 $ 33,912,111
============== ============== =============== =============== ===============
Pro Forma net income to reflect
income taxes for Affiliate (Note
11)................................ $ 1,235,927 $ 2,177,910 $ 15,097,813 $ 30,447,872 $ 32,755,480
============== ============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
CLASS A CLASS B AFFILIATE LOSS ON
COMMON COMMON COMMON RETAINED INVESTMENT TREASURY
STOCK STOCK STOCK EARNINGS SECURITIES STOCK TOTAL
-------- --------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1993................ $200,000 $5,042,800 $1,000,000 $123,780,734 $(1,872,000) $128,151,534
Net income........................... 33,912,111 33,912,111
Dividends............................ (21,404,500) (21,404,500)
Purchase of 60,000 shares of treasury
stock.............................. (250,743) (250,743)
Cancellation of 14,400 shares of
Class B common stock............... (14,400) (921,600) 936,000
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1994................ 200,000 5,028,400 1,000,000 135,366,745 (1,186,743) 140,408,402
Net income........................... 32,516,837 32,516,837
Dividends............................ (6,253,200) (6,253,200)
Sale of 60,000 shares of treasury
stock.............................. 250,743 250,743
Cancellation of 7,200 shares of Class
B common stock..................... (7,200) (460,800) 468,000
Unrealized loss on investment
securities, net of taxes........... $(3,650,584) (3,650,584)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1995................ 200,000 5,021,200 1,000,000 161,169,582 (3,650,584) (468,000) 163,272,198
Net income........................... 16,748,619 16,748,619
Redemption of 25,000 shares of Class
A common stock and 1,565,670 shares
of Class B common stock............ (95,440,200)
(95,440,200)
Sale of 376,670 shares of treasury
stock.............................. 22,600,200 22,600,200
Dividends............................ (16,526,000) (16,526,000)
Change in unrealized loss on
investment securities, net of
taxes.............................. 3,007,034 3,007,034
Cancellation of 1,214,000 shares of
Class B Common Stock............... (1,214,000) (71,626,000) 72,840,000
Cancellation of 7,200 shares of Class
B common stock..................... (7,200) (460,800) 468,000
Redemption and cancellation of
1,000,000 shares of Affiliate
common stock....................... (1,000,000) (1,000,000)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1996................ 200,000 3,800,000 -- 89,305,401 (643,550) -- 92,661,851
Net income........................... 1,235,927 1,235,927
Net change in unrealized loss on
investment securities, net of
taxes.............................. (743,709) (743,709)
Liquidating dividend to affiliate
shareholders....................... (677,000) (677,000)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance June 30, 1996................ $200,000 $3,800,000 $ -- $89,864,328 $(1,387,259) $ -- $92,477,069
======== ========= ========= =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
ONE MONTH ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED YEAR ENDED MAY 31,
JUNE 30, JUNE 30, MAY 31, ----------------------------
1996 1995 1996 1995 1994
------------- ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................... $ 1,235,927 $ 2,281,770 $ 16,748,619 $ 32,516,837 $ 33,912,111
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
of fixed assets............. 1,259,287 1,192,225 14,767,534 14,071,933 13,307,619
Amortization of other assets... 17,857 17,857 214,286 226,082 264,286
(Gain) loss on disposal of
assets and investment
securities, net............. 279,686 (297,577) 3,098,725 (1,112,092) (3,385,362)
Impairment of investment in
land........................ -- -- 12,592,112 -- --
Earnings from limited
partnership................. 190,000 (35,000) 202,357 (260,000) (576,687)
Minority interest in net loss
of consolidated
subsidiary.................. (8,774) (7,325) (143,037) (128,630) (5,051)
Deferred income taxes.......... (237,000) (142,476) (5,829,000) 818,000 272,000
Change in:
Accounts receivable......... 7,723,615 8,188,953 1,593,153 (18,099,625) 5,630,239
Inventories................. 3,068,781 (6,119,679) 2,229,842 12,954,019 (20,902,013)
Other current assets........ 726,761 230,814 (3,586,208) (822,816) (3,669,581)
Other assets................ 697,341 (367,933) (29,390) (30,825) 2,927,143
Accounts payable............ (107,025) (6,198,691) 4,280,068 9,786,553 1,027,441
Other liabilities........... (152,713) 41,138 (6,149) 153,562 5,296
Accrued expenses............ (779,778) 3,082,400 (1,632,799) 227,082 1,434,238
------------- ------------ ------------- ------------- -------------
Net cash provided by
operating activities.... 13,913,965 1,866,476 44,500,113 50,300,080 30,241,679
------------- ------------ ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures............. (1,997,002) (470,780) (5,462,265) (8,679,630) (12,549,782)
Purchase of investment securities
available for sale............. -- -- (19,138,418) (33,998,414) (35,017,639)
Proceeds from sale of investment
securities available for
sale........................... 701,872 6,394,764 32,821,193 16,777,979 42,240,795
------------- ------------ ------------- ------------- -------------
Net cash provided by (used
in) investing
activities................ (1,295,130) 5,923,984 8,220,510 (25,900,065) (5,326,626)
------------- ------------ ------------- ------------- -------------
Cash flows from financing activities:
Bank overdraft................... (12,382,192) -- 12,382,192 -- --
Proceeds from revolving line of
credit......................... 17,100,000 -- 100,050,001 25,000,000 88,100,000
Payments of revolving line of
credit......................... (14,100,000) -- (90,050,000) (36,000,001) (87,100,000)
Proceeds from notes payable...... -- -- -- 1,000,000 1,000,000
Payments of notes payable........ -- (716,565) (1,022,490) (4,697,445) (1,487,120)
Redemption of common stock....... -- -- (96,440,200) -- (518,428)
Dividends paid................... -- (3,763,000) (16,526,000) (9,082,700) (18,575,000)
Proceeds from sale of common
stock.......................... -- -- 22,600,200 450,744 1,000,000
------------- ------------ ------------- ------------- -------------
Net cash used in financing
activities................ (9,382,192) (4,479,565) (69,006,297) (23,329,402) (17,580,548)
------------- ------------ ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents................... 3,236,643 3,310,895 (16,285,674) 1,070,613 7,334,505
Cash and cash equivalents, at
beginning of year.................. 1,543,758 17,829,432 17,829,432 16,758,819 9,424,314
------------- ------------ ------------- ------------- -------------
Cash and cash equivalents, at end of
year $ 4,780,401 $ 21,140,327 $ 1,543,758 $ 17,829,432 $ 16,758,819
============= ============ ============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................... $ 61,646 $ -- $ 2,330,285 $ 526,970 $ 662,731
Income taxes................ 877,211 -- 14,756,310 14,740,083 16,992,041
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Texas Olefins Company, its subsidiaries and its affiliate, Clarkston
Corporation ("Affiliate") (collectively, the "Company") are principally
engaged through its facility in Houston, Texas in the manufacturing and sale of
various petrochemical products in North America.
The Company is the largest producer of butadiene and butene-1, and the
second largest producer of methyl tertiary-butyl ether ("MTBE"), in North
America, in terms of production capacity. In addition, the Company is the sole
producer of diisobutylene and isobutylene concentrate in the United States and
the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings.
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.
For the twelve months ended May 31, 1996 and for the one month ended June
30, 1996, approximately 43% and 45%, respectively, of the Company's total
revenues were derived from products sold on a fixed profit basis or whose
selling prices were linked, directly or indirectly, to raw material costs. The
Company believes that the combination of its fixed profit contracts, competitive
cost position and specialty product sales provides stability to its cash flows
and helps to offset the effects of cyclical downturns.
The significant accounting policies of the Company are described below.
CHANGE IN FISCAL YEAR END
In June 1996 the Company's board of directors approved a change in the
Company's fiscal year end to June 30 from May 31. Accordingly, the accompanying
combined financial statements include results of operations and cash flows for
the one month transition period.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Texas Olefins
Company, its subsidiaries and Affiliate. Texas Olefins Company's subsidiaries
include Texas Petrochemicals Corporation (the "Corporation"), an 80.7%
majority-owned subsidiary, and its wholly-owned subsidiary, Texas Butylene
Chemical Company. All significant intercompany transactions have been
eliminated. For purposes of these combined financial statements, the minority
interest in the investment and earnings of the Corporation has been presented as
if the Corporation was a wholly-owned subsidiary of the Company. The minority
interest reflected in the accompanying financial statements reflects
approximately 20% of the common stock of The Texas Falls Corporation not owned
by the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENT SECURITIES
Effective June 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (SFAS 115). Management has classified all investments as
available-for-sale. Cost is determined by specific identification. Purchases and
F-9
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
sales are reflected on a trade date basis. Investment securities are carried at
fair value with any unrealized gains or losses reported as a component of
stockholders' equity, net of tax.
INVENTORIES
Inventories consist of raw materials, finished goods and chemicals used in
processing and are valued at the lower of average cost or market.
The Company may enter into product exchange agreements with suppliers
whereby certain inventories are exchanged for raw materials. These exchanges are
recorded at the lower of cost or market. Any resulting gains or losses from the
utilization of these exchanges are reflected in cost of chemical products sold.
Balances related to quantities due to or payable by the Company are included in
inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs and
other maintenance and repairs are charged to expense as incurred while
significant improvements are capitalized. Upon retirement or sale of an asset,
the asset and the related accumulated depreciation is 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 1/2
years, with the plants being depreciated over 12 years.
OTHER ASSETS
Other assets include certain intangible assets and catalysts which are
amortized using the straight-line method over their useful lives ranging from 2
to 10 years.
IMPAIRMENT OF ASSETS
Prior to June 1, 1995, the Company recognized impairment of investments in
land and property, plant and equipment at the time when a decline in value of an
asset was determined to be permanent. Effective June 1, 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Impairment of Long-Lived Assets and Assets to be Disposed of."
REVENUE RECOGNITION
The Company recognizes revenue from sales of refined products in the period
of delivery.
INCOME TAXES
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
adoption had no effect on financial position or net income. Under SFAS No. 109,
deferred taxes are provided at the enacted tax rate on temporary differences
between assets and liabilities for financial and tax reporting purposes.
Deferred taxes are recorded to reflect the effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The Affiliate of the Company has elected for federal tax purposes to be
taxed under provisions of Subchapter S of the Internal Revenue Code. This
election requires the stockholders to include the Affiliate's net earnings,
losses and credits in their own income for tax purposes. Accordingly, the
Affiliate generally is not liable for federal income taxes and no provision for
federal income taxes is included in the accompanying financial statements. Pro
Forma net income to reflect the effect on the combined company of income taxes
for the Affiliate as if it were a taxable entity has been included or face the
income statement. The Affiliate's articles of incorporation require its board of
directors to declare a payment of a cash dividend to
F-10
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
its shareholders of no less than 110% of the maximum individual federal income
tax rate under the Internal Revenue Code for each calendar year, payable within
30 days after the Affiliate files its tax return.
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 PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123, which is effective for fiscal years beginning
after December 31, 1995, encourages but does not require companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. The Company
has not yet determined if it will adopt this new fair value-based method of
accounting for its stock-based incentive plans or elect the disclosure
provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation. There is no resulting impact
on stockholders' equity or net income.
2. ACQUISITION OF THE COMPANY:
Effective July 1, 1996, the Company, including a raw material supply
contract of the Affiliate, was acquired for approximately $377 million in a
series of transactions. After the transactions Texas Olefins Company 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
incurred $175 million of Senior Subordinated Notes due 2006 and approximately
$140.0 million pursuant to a bank debt agreement. In June 1996, Clarkston
Corporation was dissolved and a $677,000 liquidating dividend was declared to
its shareholders.
F-11
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
The following unaudited pro forma combined balance sheet assumes the
acquisition of the Company occurred on June 30, 1996. The unaudited pro forma
combined statements of operations assumes the acquisition occurred on June 1,
1995 for the twelve months ended May 31, 1996 and on June 1, 1996 for the one
month ended June 30, 1996.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 7.6
Investment securities ................................... --
Accounts receivable ..................................... 35.3
Inventories ............................................. 11.9
Other current assets .................................... 11.0
--------
Total current assets ............................... 65.8
--------
Property, plant and equipment, net ........................... 260.5
Investments in land .......................................... 3.9
Investment in and advances to limited
partnership ................................................ 2.8
Other assets ................................................. 207.6
--------
Total assets ....................................... $ 540.6
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 40.1
Accrued expenses ........................................ 4.2
Dividends payable ............................................ 0.7
--------
Total current
liabilities .......................................... 45.0
Revolving line of credit ..................................... --
Senior Term Loans ............................................ 130.0
Senior Subordinated Notes .................................... 175.0
ESOP Term Loan ............................................... 10.0
Other liabilities ............................................ 35.3
Deferred income taxes ........................................ 79.1
Minority interest in net assets of
consolidated subsidiary .................................... --
Common Stock held by ESOP .................................... 10.0
Less: Note receivable from
ESOP ................................................... (10.0)
Stockholders' equity ......................................... 66.2
--------
Total liabilities and
stockholders' equity .............................. $ 540.6
========
F-12
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
(UNAUDITED)
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
-------------- --------------
Revenues............................. $ 41.2 $454.2
Cost of goods sold................... 35.4 367.3
Depreciation and amortization........ 3.1 36.3
-------------- --------------
Gross profit.................... 2.7 50.6
Selling, general and administrative
expenses........................... 1.5 12.7
-------------- --------------
Income from operations..... 1.2 37.9
Interest expense, net................ 2.6 31.9
Other income (expense):
Dividend income................. -- --
Charitable contribution......... -- --
Loss on disposal of assets and
investment securities, net..... (0.3) (3.1)
Impairment of investment in
land........................... -- (12.6)
Other, net...................... 0.1 0.1
-------------- --------------
Loss before income taxes and minority
interest........................... (1.6) (9.6)
Provision for income taxes........... -- --
Minority interest in net loss of
consolidated subsidiary............ -- --
Net loss................... $ (1.6) $ (9.6)
============== ==============
3. INVESTMENT SECURITIES:
As of June 30, 1996 the Company held $6,794,700 of equity securities with
an unamortized cost of $8,996,394 and gross unrealized losses of $2,201,999.
Unrealized losses of $643,550 and $1,387,259 (net of deferred tax) related to
these securities is recorded as a component of stockholders' equity for the
twelve months ended May 31, 1996 and the one month ended June 30, 1996,
respectively. During the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, gross realized gains of approximately $1,897,000 and $0,
respectively, and gross realized losses of approximately $4,996,000 and
$280,000, respectively, were recognized on the sale of securities.
The Company held $3,680,409 of bankers acceptance notes at May 31, 1995,
with scheduled maturities of less than one year. The Company also held
approximately $17,445,193 of equity securities at May 31, 1995. Unrealized
losses of $3,650,584 (net of deferred tax) related to these securities is
recorded as a component of stockholders' equity for the year ended May 31, 1995.
During the year ended May 31, 1995, gross realized gains of approximately
$1,163,000 and gross realized losses of approximately $51,000 were recognized on
the sale of securities.
F-13
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
The amortized cost and estimated market values of investment securities at
May 31, 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COSTS GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Bankers acceptance notes............. $ 3,680,409 $ 3,680,409
Equity securities.................... 23,061,776 $ 350,000 $ 5,966,583 17,445,193
-------------- -------------- -------------- --------------
Total........................... $ 26,742,185 $ 350,000 $ 5,966,583 $ 21,125,602
============== ============== ============== ==============
</TABLE>
Included in cash and cash equivalents at May 31, 1995 and June 30, 1996 was
$22,959,113 and $5,500,000 of commercial paper with scheduled maturities of less
than three months. Aggregate cost approximated market value at May 31, 1995 and
June 30, 1996.
4. INVENTORIES:
Inventories at June 30, 1996 and May 31, 1995 are summarized as follows:
JUNE 30, MAY 31,
1996 1995
-------------- --------------
Finished goods....................... $ 5,480,723 $ 6,756,936
Raw materials........................ 4,533,037 8,787,386
Chemicals and supplies............... 1,919,718 1,687,779
-------------- --------------
$ 11,933,478 $ 17,232,101
============== ==============
5. PROPERTY, PLANT AND EQUIPMENT:
Following is a summary of the Company's property, plant and equipment at
June 30, 1996 and May 31, 1995:
JUNE 30, MAY 31,
1996 1995
---------------- ---------------
Chemical plants...................... $ 173,369,404 $ 161,129,527
Construction in progress............. 5,377,880 10,294,420
Land................................. 2,805,363 2,805,363
Buildings............................ 325,140 325,140
Leased buildings and improvements.... 2,308,260 2,273,694
Automotive equipment................. 566,441 624,579
Furniture and fixtures............... 384,623 411,611
Machinery and equipment.............. 2,867,684 2,864,221
Other................................ 4,554,967 4,396,870
---------------- ---------------
192,559,762 185,125,425
Less allowance for depreciation,
depletion and amortization......... (110,745,478) (95,053,897)
---------------- ---------------
Total........................... $ 81,814,284 $ 90,071,528
================ ===============
F-14
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
6. INVESTMENT IN LAND HELD FOR SALE:
Land which is held for sale at June 30, 1996 consists principally of
unimproved real estate and is summarized as follows:
JUNE 30, MAY 31,
LOCATION 1996 1995
- ------------------------------------- ---------------- ---------------
Highway 6
Houston, Texas....................... $ 1,306,800 $ 6,798,538
Macgregor-Highway 288
Houston, Texas....................... 521,320 5,619,549
Richmond West Hollow
Houston, Texas....................... 975,000 2,977,145
The Falls,
New Ulm, Texas....................... 2,295,000 2,295,000
Baytown, Texas....................... 1,067,787 1,067,787
Other miscellaneous.................. 15,000 15,000
---------------- ---------------
$ 6,180,907 $ 18,773,019
================ ===============
During the twelve months ended May 31, 1996, the Company evaluated the
carrying of its investment in land in light of the possible sale of these assets
in the foreseeable future and considering the criteria of SFAS No. 121,
determined that an impairment write-down was necessary. As a result, the Company
recorded a provision for estimated impairment of $12,592,112, with an associated
tax benefit of $4,660,000, to writedown certain investments in land to estimated
fair market value. Actual sales proceeds from investments in land may differ
from the carrying amounts at June 30, 1996.
7. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP:
The Company and Hollywood Marine, Inc. formed a limited partnership,
Hollywood/Texas Olefins, Ltd., to operate four barges capable of transporting
chemicals. Texas Olefins 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 combined 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.
8. REVOLVING LINE OF CREDIT:
The Corporation has a revolving line of credit agreement with a bank which
permits borrowings up to $30,000,000 of which $13,000,000 was outstanding at
June 30, 1996. The agreement expires September 30, 1997, bears interest at the
Corporation's option of the prime rate or the Eurodollar rate plus 1% and
requires a commitment fee of 0.375% on the unused portion of the line of credit.
The line of credit is collateralized by the Corporation's accounts receivable
and inventory. The agreement also contains various restrictive covenants which,
among other things, requires the Corporation to maintain certain financial
ratios and restricts the Corporation's ability to incur additional indebtedness.
The above requirement to maintain certain financial ratios effectively restricts
the amount of dividends that may be declared in any given year. The Company's
weighted average borrowing rate under this agreement was 7.49%, 6.70% and 6.06%
for the one month ended June 30, 1996, the twelve months ended May 31, 1996 and
the year ended May 31, 1995, respectively. The Company's weighted average
borrowing rate under various other agreements which expired in 1996 was
approximately 8%.
F-15
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
On July 1, 1996, Texas Petrochemicals Corporation through the merger of TPC
Finance Corp. into Texas Petrochemicals Corporation, incurred $175 million of
Senior Subordinated Notes due 2006 (the "Subordinated Notes") under an
indenture, pursuant to which the Subordinated Notes were issued. The
Subordinated Notes bear interest at a rate per annum equal to 11 1/8% payable
semiannually on July 1 and January 1. The indenture governing the Subordinated
Notes contains certain restrictive covenants which include, but are not limited
to, limitations on indebtedness and limitations on sales of assets and
subsidiary stock.
Additionally, on July 1, 1996, Texas Petrochemicals Corporation in
connection with the merger of TPC Finance Corp. into Texas Petrochemicals
Corporation, incurred $140.0 million of bank debt under a credit agreement. The
debt initially bears interest at the greater of the prime rate and the federal
funds effective rate plus 1/2% plus a margin of 1% payable quarterly beginning
September 30, 1996. The credit agreement contains certain restrictive covenants
including, but not limited to, the maintenance of certain financial ratios, and
limitations on capital expenditures, indebtedness and investments.
9. NOTES PAYABLE TO STOCKHOLDERS AND FORMER STOCKHOLDER:
At June 30, 1996 and May 31, 1995, notes payable consisted of the
following:
JUNE 30, MAY 31,
1996 1995
---------- -----------
7% note payable to stockholder;
principal payable in four equal
annual installments through May 1,
1996, collateralized by treasury
stock.............................. $ -- $ 468,000
5.23% note payable to a former
stockholder for the redemption of
common stock; principal and
interest payable in 42 monthly
installments of $19,120, balance
due at maturity and collateralized
by treasury stock.................. -- 554,490
8% note payable to an officer, due
October 1, 1995 and
uncollateralized................... -- --
---------- -----------
Total........................... -- 1,022,490
Less current portion................. -- 697,445
---------- -----------
Non-current portion.................. $ -- $ 325,045
========== ===========
During the year ended May 31, 1995, proceeds of $1,000,000 were borrowed
and payments of $4,000,000 were made on an 8% note payable to an officer. There
were no borrowings outstanding under the note at May 31, 1995.
10. ACCRUED EXPENSES:
At June 30, 1996 and May 31, 1995, accrued expenses consisted of the
following:
JUNE 30, MAY 31,
1996 1995
------------ ------------
Federal and state taxes.............. $ 959,336 $ 3,013,024
Accrued interest..................... 81,157 23,958
Property and sales taxes............. 2,369,815 2,144,497
Accrued shipping costs............... 456,351 79,468
Charitable contributions............. -- 1,264,316
Other expenses....................... 515,998 269,971
------------ ------------
$ 4,382,657 $ 6,795,234
============ ============
F-16
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
11. FEDERAL AND STATE INCOME TAXES:
Significant components of the Company's deferred tax asset and liability at
June 30, 1996 and May 31, 1995 are as follows:
JUNE 30, MAY 31,
1996 1995
--------------- ---------------
Deferred tax asset -- current:
Unrealized loss on investment
securities.................... $ 814,740 $ 1,966,000
Costs capitalized to
inventory..................... -- 259,000
--------------- ---------------
$ 814,740 $ 2,225,000
=============== ===============
Deferred tax asset (liability) -- noncurrent:
Investment in land.............. $ 4,660,000 $ --
Property, plant and equipment... $ (20,423,393) $ (22,125,000)
--------------- ---------------
Net deferred tax
(liability) -- noncurrent..... $ (15,763,393) $ (22,125,000)
=============== ===============
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:
<TABLE>
<CAPTION>
ONE MONTH ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31, MAY 31,
1996 1995 1996 1995 1994
------------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current:
Federal........................ $ 880,000 $ 1,281,108 $12,149,599 $ 14,314,000 $ 16,173,000
State.......................... 118,000 124,911 1,581,950 1,748,010 1,951,363
------------ ------------ ------------- -------------- --------------
998,000 1,406,019 13,731,549 16,062,010 18,124,363
------------ ------------ ------------- -------------- --------------
Deferred:
Federal........................ (210,000) (122,476) (5,461,000) 895,000 250,000
State.......................... (27,000) (20,000) (368,000) (77,000) 22,000
------------ ------------ ------------- -------------- --------------
(237,000) (142,476) (5,829,000) 818,000 272,000
------------ ------------ ------------- -------------- --------------
Total provision for income
taxes.................. $ 761,000 $ 1,263,543 $ 7,902,549 $ 16,880,010 $ 18,396,363
============ ============ ============= ============== ==============
Pro Forma income tax
provision.............. $ 761,000 $ 1,363,958 $ 9,553,355 $ 18,948,975 $ 19,552,994
============ ============ ============= ============== ==============
</TABLE>
The Affiliate is a Subchapter S corporation and accordingly pays no federal
income tax. The Pro Forma income tax provision assumes that the income of the
Affiliate was taxable to the Company based on the Company's effective tax rate.
F-17
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income from continuing operations. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
ONE MONTH ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31, MAY 31,
1996 1995 1996 1995 1994
------------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Statutory federal income
tax rate.......................... 35% 35% 35% 35% 35%
Computed "expected" federal income
tax............................... $ 695,854 $ 1,247,090 $ 8,577,845 $ 17,437,711 $ 18,306,198
Increase (decrease) in tax resulting
from:
Affiliate earnings not subject
to federal income tax........ -- (100,415) (1,650,806) (2,068,965) (1,156,631)
State income taxes, net of
federal benefit.............. 59,150 68,192 789,067 1,086,157 1,282,686
Other, net..................... 13,746 56,426 279,443 518,107 (150,654)
Amortization................... (7,750) (7,750) (93,000) (93,000) (93,000)
Effect of 1% increase in
statutory federal income tax
rate......................... 207,764
------------ ------------ ------------- -------------- --------------
Provision for income taxes.......... $ 761,000 $ 1,263,543 $ 7,902,549 $ 16,880,010 $ 18,396,363
============ ============ ============= ============== ==============
</TABLE>
12. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Corporation leases tank cars under noncancelable operating leases.
Under the terms of the lease agreements, the Corporation is reimbursed by
customers at a fixed rate per mile, based on the distance the tank cars travel.
Reimbursements were approximately $35,000, $800,000, $650,000, and $800,000 for
the one month period ended June 30, 1996, for the twelve months ended May 31,
1996 and for the years ended May 31, 1995 and 1994, respectively. The
Corporation is also obligated under two operating leases to Hollywood/Texas
Olefins, Ltd. for the rental of four barges.
Total rent expense was approximately $421,000, $4,800,000, $4,400,000 and
$4,300,000 (net of reimbursements described above and including $160,000,
$2,000,000, $2,000,000 and $2,000,000 for the rental of four barges) for the one
month period ended June 30, 1996, for the twelve months ended May 31, 1996 and
for the years ended May 31, 1995 and 1994, respectively.
Future minimum lease payments at June 30, 1996 are as follows:
FISCAL YEAR
- -------------------------------------
1997............................... $ 2,934,739
1998............................... 1,578,812
1999............................... 1,208,707
2000............................... 825,748
2001............................... 282,365
STOCK PURCHASE AGREEMENT
The Company entered into a stock purchase agreement with a certain minority
stockholder who owns 20,000 shares of the Company's outstanding Class A common
stock and 80,000 shares of the Company's
F-18
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
outstanding Class B common stock. Under the terms of this agreement, in the
event of the stockholder's death, the Company must redeem all shares owned by
the deceased stockholder at a formula price, which is adjusted annually. At May
31, 1995, the formula price per share was approximately $58.
The Company has entered into a death benefit agreement with an officer of
the Company who owns 660,000 shares of Class B common stock of the Company. This
agreement provides that in the event of the death of the officer, the Company is
obligated to redeem the shares at a price of $60 per share with twenty-five
percent of the purchase price payable at closing and the balance payable in five
equal annual installments plus interest at the rate of eight percent per annum.
This agreement replaces a previous agreement that obligated the Company to
redeem the shares in the event of the death of the officer at a price of $80 per
share.
The Corporation has entered into a stock purchase agreement with certain of
its minority stockholders who own 171,000 shares of the Corporation's
outstanding common stock. Under the terms of this agreement, such stockholders
may sell their shares to the Corporation at a formula price, which is adjusted
annually. Under this agreement, the Corporation is obligated to redeem the
shares in the event of the death of the stockholder at the formula price. At May
31, 1995, the formula price per share was approximately $54.
The Corporation has also entered into a Section 303 stock purchase
agreement with an officer of the Corporation who owns 85,000 shares of the
Corporation's outstanding common stock. This agreement allows for the officer's
estate to require the Corporation to redeem the necessary shares so as to pay
estate taxes and funeral and administrative expenses upon the death of the
officer. Under the terms of this agreement, the redemption price per share will
be based upon the value of the shares as reflected on the federal estate tax
return.
Additionally, the Corporation entered into separate stock purchase
agreements with an officer of the Corporation and his spouse who own 500,000
shares of the Corporation's outstanding common stock as part of a community
estate. The agreement with the officer requires the Corporation to redeem
250,000 shares from the community estate upon the officer's death at a price of
$90 per share with twenty five percent of the redemption price payable at
closing and the balance payable in five annual installments plus interest at the
rate of eight percent per annum. The agreement with the officer's spouse allows
her to require the Corporation to redeem the 250,000 shares from the community
estate not redeemed as part of the officer's agreement for a period of one year
subsequent to the officer's death at the same price and payable in the same
manner as set forth in the officer's agreement. Additionally, the spouse's
agreement requires the Corporation to redeem 250,000 shares of the stock from
the community estate in the event that she predeceases the officer at a price of
$90 per share with sixty percent of the redemption price payable at closing and
the balance payable in thirty-six equal monthly installments plus interest at
the rate of eight percent per annum.
All of the Affiliate's common stock is subject to a stock purchase
agreement. Under the terms of the stock purchase agreement, the Affiliate is
obligated to redeem all of a stockholder's shares in the event of death and has
an option to redeem all of a stockholder's shares in certain other instances.
The redemption price is equal to the Affiliate's adjusted book value, as defined
in the agreement, divided by the number of outstanding shares. At May 31, 1995,
the redemption price per share was $8.15. Of the total redemption amount, 25% is
to be paid in cash with the remaining balance to be paid in 42 equal monthly
installments as evidenced by an interest bearing promissory note.
STOCK OPTION AGREEMENTS
The Corporation has entered into stock option agreements with two of its
officers which granted them the option to purchase 100,000 shares of common
stock. The option purchase price for the shares is $40 per
F-19
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
share. At May 31, 1995, 30,000 shares were exercisable. During the fiscal year
ended May 31, 1994, one of the officers forfeited his option to purchase 50,000
shares of common stock.
In the event the option is exercised, the Corporation and the officers will
enter into stock purchase agreements. Under the terms of the agreement, transfer
of the stock is restricted and only the Corporation, at its option, may redeem
the stock. However, upon death of the officer, the Corporation is obligated to
redeem the officer's shares. In all instances the redemption price will be the
greater of the formula price in the agreement or $40 per share. At May 31, 1995
the formula price was approximately $54 per share.
SALARY CONTINUATION AGREEMENTS
The Corporation has entered into salary continuation agreements with three
of its officers. The agreements provide that if the officer is an employee of
the Corporation upon death, an amount ranging from $10,000 to $25,000 would be
payable monthly to his estate for a period of five years.
PURCHASE COMMITMENTS
The Company and the Affiliate have 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 rates for such
products. These commitments generally have cancellation provisions given proper
notification.
LITIGATION
The Company is involved in various legal proceedings which arose during the
normal course of 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 effect on the Company. See Note 17.
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 compliances with all such
laws and regulations. While management does not expect that compliance with
existing environmental laws will have a material adverse effect on the Company's
financial condition, 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.
13. PROFIT SHARING PLANS:
The Corporation 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 Corporation at the rate of $.25 per one dollar contributed by
the employee up to 6% of the employee's base compensation. The Corporation's
expense to match employee contributions was approximately $14,786, $195,627,
$180,000 and $150,000 for the one month period ended June 30, 1996, for the
twelve month period ended May 31, 1996 and for the years ended May 31, 1995 and
1994, respectively. Additionally, the Corporation made additional discretionary
contributions to the plan which amounted to approximately $240,000, $2,430,783,
$2,570,000 and $2,200,000 for the one month period ended June 30, 1996, for the
twelve month period ended May 31, 1996 and for the years ended May 31, 1995 and
1994, respectively. The Corporation's contributions vest with the employee at a
rate of 20% per year.
F-20
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
14. RELATED PARTY TRANSACTIONS:
The Company makes contributions from time to time to a charitable
organization that is an affiliate of the Company.
15. CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the one month period ended June 30, 1996, for
the twelve month period ended May 31, 1996 and for the years ended May 31, 1995
and 1994 approximately 46%, 50%, 35% and 53% of the Company's sales were to four
customers. The Company had two customers which represented 14% and 16% of sales
during the one month period ended June 30, 1996 and 16% and 19% of sales during
the twelve month period ended May 31, 1996. The Company had one customer which
represented 12% of sales during the year ended May 31, 1995. The Company had
three customers which represented 12%, 20% and 13% of sales during the year
ended May 31, 1994. 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.
16. FINANCIAL INSTRUMENTS:
At June 30, 1996 the Company estimated that the carrying value and fair
value of its financial instruments other than investment securities were
approximately the same. The methods and assumptions used to estimate the fair
value of each class of financial instruments were as follows:
CASH AND CASH EQUIVALENTS -- Fair value was considered to be the same as
the carrying value.
ACCOUNTS RECEIVABLE -- The Company estimated that the net carrying amount
of its accounts receivable was not materially different from the fair value of
such receivables.
ACCOUNTS PAYABLE -- Fair value was considered to be the same as the
carrying value.
DEBT -- In the absence of an active trading market, and considering such
debt has floating interest rates the Company estimated that the carrying amount
of its debt, both current and non-current, was not materially different from the
fair value of such debt.
17. STOCK REDEMPTION:
Effective July 28, 1995 the Company's Board of Directors approved the
redemption of 25,000 shares of Class A common stock and 1,565,670 shares of
Class B common stock from certain stockholders for total consideration of
approximately $95,000,000. The redemption was paid with cash of approximately
$80,000,000 and with the issuance to a former stockholder of a $15,000,000
promissory note due November 1, 1995 collateralized by 915,000 shares of Class B
common stock and the personal guarantee of an officer of the Company.
In connection with the above redemption the Company's Board of Directors
approved the sale of (1) 351,670 shares of Class B treasury stock to certain
officers of the Company and to a trust at the price of $60 per share, and (2)
25,000 shares of Class A treasury stock to an officer of the company at a price
of $60 per share.
STOCKHOLDER ACTION
On September 12, 1995, the stock redemption and other transactions
described above, the management bonus and other transactions previously approved
by the Board of Directors were not ratified by the Company's stockholders. Those
items were not ratified due to the abstention of the trustee representing a
F-21
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE ONE MONTH ENDED JUNE 30, 1995 IS UNAUDITED)
majority of Class B common stock. The abstaining stockholder has the right, for
up to two years from September 12, 1995, to vote in favor of or against the
aforementioned transaction or take other action on behalf of the trust
beneficiaries. The Company cannot predict what action the abstaining stockholder
will take. Accordingly, the Company cannot determine the effect, if any, of this
uncertainty on the combined financial position, results of operations or cash
flows of the Company.
STOCK PURCHASE AGREEMENTS
The Company's Board of Directors has also approved a stock purchase
agreement with certain officers who own 185,000 shares of the Company's
outstanding Class A common stock and 1,081,670 shares of the Company's
outstanding Class B common stock. Under the terms of this agreement in the event
any of these officers ceases full time employment with the Company or in the
event of the stockholder's death, the Company must redeem all of the
stockholder's shares at a redemption price of $60 per share. This agreement
supersedes the previous stock purchase agreements of the Company which are
described in Note 12. During 1996, the Company's board of directors approved the
cancellation of such stock purchase agreement in anticipation of the acquisition
of the Company.
F-22
<PAGE>
ANNEX A
TEXAS PETROCHEMICALS CORPORATION
LETTER OF TRANSMITTAL
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
11 1/8% SENIOR SUBORDINATED NOTES DUE 2006
OF
TEXAS PETROCHEMICALS CORPORATION
PURSUANT TO THE PROSPECTUS
DATED , 1996
THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1996, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION
DATE"). TENDERS OF NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION
DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FLEET NATIONAL BANK
BY MAIL: BY FACSIMILE:
Fleet National Bank (860) 986-7908
Corporate Trust Operations
777 Main Street, Lower Level Confirm by Telephone:
Hartford, CT 06115
Attention: Patricia Williams (860) 986-2910
BY HAND:
Fleet National Bank
Corporate Trust Operations
777 Main Street, Lower Level
Hartford, CT 06115
Attention: Patricia Williams
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
A-1
<PAGE>
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES PURSUANT TO THE
EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR ORIGINAL NOTES TO
THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
This Letter of Transmittal is to be used by holders ("Holders") of
11 1/8% Senior Subordinated Notes due 2006 (the "Original Notes") of Texas
Petrochemicals Corporation (the "Company") if: (i) certificates representing
Original Notes are to be physically delivered to the Exchange Agent herewith by
such Holders; (ii) tender of Original Notes is to be made by book-entry transfer
to the Exchange Agent's account at The Depository Trust Company ("DTC")
pursuant to the procedures set forth under the caption "The Exchange
Offer -- Procedures for Tendering Original Notes -- BOOK-ENTRY DELIVERY
PROCEDURES" in the Prospectus dated , 1996 (the
"Prospectus"); or (iii) tender of Original Notes is to be made according to
the guaranteed delivery procedures set forth under the caption "The Exchange
Offer -- Procedures for Tendering Original Notes -- GUARANTEED DELIVERY" in the
Prospectus, and, in each case, instructions are not being transmitted through
the DTC Automated Tender Offer Program ("ATOP"). The undersigned hereby
acknowledges receipt of the Prospectus. All capitalized terms used herein and
not defined shall have the meanings ascribed to them in the Prospectus.
Holders of Original Notes that are tendering by book-entry transfer to the
Exchange Agent's account at DTC can execute the tender through ATOP, for which
the transaction will be eligible. DTC participants that are accepting the
exchange offer as set forth in the Prospectus and this Letter of Transmittal
(together, the "Exchange Offer") must transmit their acceptance to DTC which
will edit and verify the acceptance and execute a book-entry delivery to the
Exchange Agent's account at DTC. DTC will then send an Agent's Message to the
Exchange Agent for its acceptance. Delivery of the Agent's Message by DTC will
satisfy the terms of the Offer as to execution and delivery of a Letter of
Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a notice of
guaranteed delivery through ATOP.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If a Holder desires to tender Original Notes pursuant to the Exchange Offer
and time will not permit this Letter of Transmittal, certificates representing
such Original Notes and all other required documents to reach the Exchange
Agent, or the procedures for book-entry transfer cannot be completed, on or
prior to the Expiration Date, then such Holder must tender such Original Notes
according to the guaranteed delivery procedures set forth under the caption
"The Exchange Offer -- Procedures for Tendering Original Notes -- GUARANTEED
DELIVERY" in the Prospectus. See Instruction 2.
The undersigned should complete, execute and deliver this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
A-2
<PAGE>
TENDER OF ORIGINAL NOTES
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY
THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _____________________________________
Account Number: ____________________________________________________
Transaction Code Number: __________________________________________
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s): ___________________________________
Window Ticket Number (if any): ____________________________________
Date of Execution of Notice of Guaranteed Delivery: _______________
Name of Eligible Institution that Guaranteed Delivery: ____________
- --------------------------------------------------------------------------------
A-3
<PAGE>
List below the Original Notes to which this Letter of Transmittal relates.
The name(s) and address(es) of the registered Holder(s) should be printed, if
not already printed below, exactly as they appear on the Original Notes tendered
hereby. The Original Notes and the principal amount of Original Notes that the
undersigned wishes to tender should be indicated in the appropriate boxes. If
the space provided is inadequate, list the certificate number(s) and principal
amount(s) on a separately executed schedule and affix the schedule to this
Letter of Transmittal.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
DESCRIPTION OF ORIGINAL NOTES
- -------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES)
OF REGISTERED HOLDER(S) AGGREGATE PRINCIPAL
(PLEASE FILL IN IF BLANK) CERTIFICATE PRINCIPAL AMOUNT AMOUNT
SEE INSTRUCTION 3. NUMBER(S)* REPRESENTED** TENDERED**
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL
AMOUNT OF
ORIGINAL NOTES
- -------------------------------------------------------------------------------------------------------
* NEED NOT BE COMPLETED BY HOLDERS TENDERING BY BOOK-ENTRY TRANSFER.
** UNLESS OTHERWISE SPECIFIED, THE ENTIRE AGGREGATE PRINCIPAL AMOUNT REPRESENTED BY THE ORIGINAL NOTES
DESCRIBED ABOVE WILL BE DEEMED TO BE TENDERED. SEE INSTRUCTION 4.
- -------------------------------------------------------------------------------------------------------
</TABLE>
A-4
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
The undersigned hereby tenders to Texas Petrochemicals Corporation ("the
Company"), upon the terms and subject to the conditions set forth in its
Prospectus dated ___________________________, 1996 (the "Prospectus"), receipt
of which is hereby acknowledged, and in accordance with this Letter of
Transmittal (which together constitute the "Exchange Offer"), the principal
amount of Original Notes indicated in the foregoing table entitled "Description
of Original Notes" under the column heading "Principal Amount Tendered." The
undersigned represents that it is duly authorized to tender all of the Original
Notes tendered hereby which it holds for the account of beneficial owners of
such Original Notes ("Beneficial Owner(s)") and to make the representations
and statements set forth herein on behalf of such Beneficial Owner(s).
Subject to, and effective upon, the acceptance for purchase of the
principal amount of Original Notes tendered herewith in accordance with the
terms and subject to the conditions of the Exchange Offer, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company, all
right, title and interest in and to all of the Original Notes tendered hereby.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that the Exchange Agent also acts as the agent of the Company) with
respect to such Original Notes, with full powers of substitution and revocation
(such power of attorney being deemed to be an irrevocable power coupled with an
interest) to (i) present such Original Notes and all evidences of transfer and
authenticity to, or transfer ownership of, such Original Notes on the account
books maintained by DTC to, or upon the order of, the Company, (ii) present such
Original Notes for transfer of ownership on the books of the Company, and (iii)
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Original Notes, all in accordance with the terms and conditions of the
Exchange Offer as described in the Prospectus.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) except as indicated below, neither the
undersigned nor any Beneficial Owner is an "affiliate," as defined in Rule 405
under the Securities Act of 1933, as amended (together with the rules and
regulations promulgated thereunder, the "Securities Act"), of the Company and
(iv) the undersigned and each Beneficial Owner acknowledge and agree that (x)
any person participating in the Exchange Offer with the intention or for the
purpose of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale of the Exchange Notes acquired by such person with a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities and Exchange Commission
(the "Commission") and cannot rely on the interpretation of the Staff of the
Commission set forth in the no-action letters that are noted in the section of
the Prospectus entitled "The Exchange Offer -- Registration Rights" and (y)
any broker-dealer that pursuant to the Exchange Offer receives Exchange Notes
for its own account in exchange for Original Notes which it acquired for its own
account as a result of market-making activities or other trading activities must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. If the undersigned is a
broker-dealer that will receive Exchange Notes for its own account, it
represents and warrants that the Original Notes to be exchanged for the Exchange
Notes were acquired as the result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus in connection
with any resale of such Exchange Notes. By so acknowledging and by delivering a
prospectus, a broker-dealer shall not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned understands that tenders of Original Notes may be withdrawn
by written notice of withdrawal received by the Exchange Agent at any time prior
to the Expiration Date in accordance with the
A-5
<PAGE>
Prospectus. In the event of a termination of the Exchange Offer, the Original
Notes tendered pursuant to the Exchange Offer will be returned to the tendering
Holders promptly (or, in the case of Original Notes tendered by book-entry
transfer, such Original Notes will be credited to the account maintained at DTC
from which such Original Notes were delivered). If the Company makes a material
change in the terms of the Exchange Offer or the information concerning the
Exchange Offer or waives a material condition of such Exchange Offer, the
Company will disseminate additional Exchange Offer materials and extend such
Exchange Offer, if and to the extent required by law.
The undersigned understands that the tender of Original notes pursuant to
any of the procedures set forth in the Prospectus and in the instructions hereto
will constitute the undersigned's acceptance of the terms and conditions of the
Exchange Offer. The Company's acceptance for exchange of Original Notes tendered
pursuant to any of the procedures described in the Prospectus will constitute a
binding agreement between the undersigned and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer. For purposes of the
Exchange Offer, the undersigned understands that validly tendered Original Notes
(or defectively tendered Original Notes with respect to which the Company has,
or has caused to be, waived such defect) will be deemed to have been accepted by
the Company if, as and when the Company gives oral or written notice thereof to
the Exchange Agent.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Original Notes
tendered hereby, and that when such tendered Original Notes are accepted for
purchase by the Company, the Company will acquire good title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim or right. The undersigned and each Beneficial Owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or by the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Original Notes tendered hereby.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall not be affected by, and shall survive the death or incapacity
of the undersigned and any Beneficial Owner(s), and any obligation of the
undersigned or any Beneficial Owner(s) hereunder shall be binding upon the
heirs, executors, administrators, trustees in bankruptcy, personal and legal
representatives, successors and assigns of the undersigned and such Beneficial
Owner(s).
The undersigned understands that the delivery and surrender of any Original
Notes is not effective, and the risk of loss of the Original Notes does not pass
to the Exchange Agent, until receipt by the Exchange Agent of this Letter of
Transmittal, or a manually signed facsimile hereof, properly completed and duly
executed, together with all accompanying evidences of authority and any other
required documents in form satisfactory to the Company. All questions as to form
of all documents and the validity (including time of receipt) and acceptance of
tenders and withdrawals of Original Notes will be determined by the Company, in
its sole discretion, which determination shall be full and binding.
Unless otherwise indicated herein under "Special Issuance Instructions,"
the undersigned hereby requests that any Original Notes representing principal
amounts not tendered or not accepted for exchange be issued in the name(s) of
the undersigned (and in the case of Original Notes tendered by book-entry
transfer, by credit to the account of DTC), and Exchange Notes issued in
exchange for Original Notes pursuant to the Exchange Offer be issued to the
undersigned. Similarly, unless otherwise indicated herein under "Special
Delivery Instructions," the undersigned hereby requests that any Original Notes
representing principal amounts not tendered or not accepted for exchange and
Exchange Notes issued in exchange for Original Notes pursuant to the Exchange
Offer be delivered to the undersigned at the address shown below the
undersigned's signature(s). In the event that the "Special Issuance
Instructions" box or the "Special Delivery Instructions" box is, or both are,
completed, the undersigned hereby requests that any Original Notes representing
principal amounts not tendered or not accepted for purchase be issued in the
name(s) of, certificates for such Original Notes be delivered to, and Exchange
Notes issued in exchange for Original Notes pursuant to the Exchange Offer be
issued in the name(s) of, and be delivered to, the person(s) at the address(es)
so indicated, as applicable. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" box or "Special
Delivery Instructions" box to transfer any Original Notes from the name of the
registered Holder(s) thereof if the Company does not accept for exchange any of
the principal amount of such Original Notes so tendered.
A-6
<PAGE>
[ ] CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL NOTES
IS AN AFFILIATE OF THE COMPANY.
[ ] CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL NOTES
TENDERED HEREBY IS A BROKER-DEALER WHO ACQUIRED SUCH NOTES DIRECTLY FROM THE
COMPANY OR AN AFFILIATE OF THE COMPANY.
[ ] CHECK HERE AND COMPLETE THE LINES BELOW IF YOU OR ANY BENEFICIAL OWNER FOR
WHOM YOU HOLD ORIGINAL NOTES TENDERED HEREBY IS A BROKER-DEALER
WHO ACQUIRED SUCH NOTES IN MARKET-MAKING OR OTHER TRADING ACTIVITIES.
IF THIS BOX IS CHECKED, THE COMPANY WILL SEND 10 ADDITIONAL COPIES OF THE
PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO TO YOU OR
SUCH BENEFICIAL OWNER AT THE ADDRESS SPECIFIED IN THE FOLLOWING LINES.
Name: ________________________________
Address: ____________________________
____________________________
A-7
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Original Notes in a
principal amount not tendered or not accepted for
exchange are to be issued in the name of, or
Exchange Notes are to be issued in the name of,
someone other than the person(s) whose
signature(s) appear(s) within this Letter of
Transmittal or issued to an address different from
that shown in the box entitled "Description of
Original Notes" within this Letter of
Transmittal.
Issue: [ ] Original Notes
[ ] Exchange Notes
(check as applicable)
Name..............................................
(PLEASE PRINT)
Address...........................................
(PLEASE PRINT)
..................................................
(ZIP CODE)
..................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 HEREIN)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Original Notes in a
principal amount not tendered or not accepted for
exchange or Exchange Notes are to be sent to some-
one other than the person(s) whose signature(s)
appear(s) within this Letter of Transmittal or to
an address different from that shown in the box
entitled "Description of Original Notes" within
this Letter of Transmittal.
Delivery: [ ] Original Notes
[ ] Exchange Notes
(check as applicable)
Name..............................................
(PLEASE PRINT)
Address...........................................
(PLEASE PRINT)
..................................................
(ZIP CODE)
..................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 HEREIN)
- --------------------------------------------------------------------------------
A-8
<PAGE>
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(To be completed by all tendering
Holders of Original Notes regardless of whether Original Notes
are being physically delivered herewith)
This Letter of Transmittal must be signed by the registered Holder(s) exactly
as name(s) appear(s) on certificate(s) for Original Notes or, if tendered by a
participant in DTC exactly as such participant's name appears on a security
position listing as owner of Original Notes, or by the person(s) authorized to
become registered Holder(s) by endorsements and documents transmitted
herewith. If signature is by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, please set forth full title and see Instruction 5.
................................................................................
................................................................................
Signature(s) of Registered Holder(s) or Authorized Signatory
(SEE GUARANTEE REQUIREMENT BELOW)
Dated: ................................................................ 1996
Name(s): .....................................................................
.....................................................................
(Please Print)
Capacity (Full Title).........................................................
Address: .....................................................................
.....................................................................
(Including Zip Code)
Area Code and
Telephone Number .............................................................
Tax Identification or
Social Security Number:.......................................................
(Complete Accompanying Substitute Form W-9)
SIGNATURE GUARANTEE
(IF REQUIRED-SEE INSTRUCTIONS 1 AND 5)
Authorized Signature..........................................................
Name of Firm..................................................................
[PLACE SEAL HERE]
- --------------------------------------------------------------------------------
A-9
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. SIGNATURE GUARANTEES. Signatures of this Letter of Transmittal must be
guaranteed by a recognized member of the Medallion Signature Guarantee Program
or by any other "eligible guarantor institution," as such term is defined in
Rule 17Ad-15 promulgated under the Exchange Act (each of the foregoing, an
"Eligible Institution"), unless the Original Notes tendered hereby are
tendered (i) by a registered Holder of Original Notes (or by a participant in
DTC whose name appears on a security position listing as the owner of such
Original Notes) that has not completed either the box entitled "Special
Issuance Instructions" or the box entitled "Special Delivery Instructions" on
this Letter of Transmittal, or (ii) for the account of an Eligible Institution.
If the Original Notes are registered in the name of a person other than the
signer of this Letter of Transmittal, if Original Notes not accepted for
exchange or not tendered are to be returned to a person other than the
registered Holder or if Exchange Notes are to be issued in the name of or sent
to a person other than the registered Holder, then the signatures on this Letter
of Transmittal accompanying the tendered Original Notes must be guaranteed by an
Eligible Institution as described above. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND ORIGINAL NOTES. This Letter of
Transmittal is to be completed by Holders if (i) certificates representing
Original Notes are to be physically delivered to the Exchange Agent herewith by
such Holders; (ii) tender of Original Notes is to be made by book-entry transfer
to the Exchange Agent's account at DTC pursuant to the procedures set forth
under the caption "The Exchange Offer -- Procedures for Tendering Original
Notes -- BOOK-ENTRY DELIVERY PROCEDURES" in the Prospectus; or (iii) tender of
Original Notes is to be made according to the guaranteed delivery procedures set
forth under the caption "The Exchange Offer -- Procedures for Tendering
Original Notes -- GUARANTEED DELIVERY" in the Prospectus. All physically
delivered Original Notes, or a confirmation of a book-entry transfer into the
Exchange Agent's account at DTC of all Original Notes delivered electronically,
as well as a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof), any required signature guarantees and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the cover page hereto on or
prior to the Expiration Date, or the tendering Holder must comply with the
guaranteed delivery procedures set forth below. DELIVERY OF DOCUMENTS TO DTC
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
If a Holder desires to tender Original Notes pursuant to the Exchange Offer
and time will not permit this Letter of Transmittal, certificates representing
such Original Notes and all other required documents to reach the Exchange
Agent, or the procedures for book-entry transfer cannot be completed, on or
prior to the Expiration Date, such Holder must tender such Original Notes
pursuant to the guaranteed delivery procedures set forth under the caption "The
Exchange Offer -- Procedures for Tendering Original Notes -- GUARANTEED
DELIVERY" in the Prospectus. Pursuant to such procedures, (i) such tender must
be made by or through an Eligible Institution; (ii) a properly completed and
duly executed Notice of Guaranteed Delivery, substantially in the form provided
by the Company, or an Agent's Message with respect to guaranteed delivery that
is accepted by the Company, must be received by the Exchange Agent, either by
hand delivery, mail, telegram, or facsimile transmission, on or prior to the
Expiration Date; and (iii) the certificates for all tendered Original Notes, in
proper form for transfer (or confirmation of a book-entry transfer or all
Original Notes delivered electronically into the Exchange Agent's account at DTC
pursuant to the procedures for such transfer set forth in the Prospectus),
together with a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) and any other documents required by this
Letter of Transmittal, or in the case of a book-entry transfer, a properly
transmitted Agent's Message, must be received by the Exchange Agent within two
business days after the date of the execution of the Notice of Guaranteed
Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE ORIGINAL NOTES
AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC AND ANY
ACCEPTANCE OR AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE ELECTION AND
RISK OF THE TENDERING HOLDER AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
A-10
<PAGE>
INSTRUCTION 2, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE
PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their
Original Notes for exchange.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and/or the principal amount represented by Original Notes
should be listed on a separate signed schedule attached hereto.
4. PARTIAL TENDERS. (Not applicable to Holders who tender by book-entry
transfer). If Holders wish to tender less than the entire principal amount
evidenced by any Original Note submitted, such Holders must fill in the
principal amount that is to be tendered in the column entitled "Principal
Amount Tendered." The minimum permitted tender is $1,000 in principal amount of
Original Notes. All other tenders must be in integral multiples of $1,000 in
principal amount. In the case of a partial tender of Original Notes, as soon as
practicable after the Expiration Date, new certificates for the remainder of the
Original Notes that were evidenced by such Holder's old certificates will be
sent to such Holder, unless otherwise provided in the appropriate box on this
Letter of Transmittal. The entire principal amount that is represented by
Original Notes delivered to the Exchange Agent will be deemed to have been
tendered, unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, INSTRUMENTS OF TRANSFER AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
Holder(s) of the Original Notes tendered hereby, the signatures must correspond
with the name(s) as written on the face of the certificate(s) without
alteration, enlargement or any change whatsoever. If this Letter of Transmittal
is signed by a participant in DTC whose name is shown as the owner of the
Original Notes tendered hereby, the signature must correspond with the name
shown on the security position listing as the owner of the Original Notes.
If any of the Original Notes tendered hereby are registered in the name of
two or more Holders, all such Holders must sign this Letter of Transmittal. If
any of the Original Notes tendered hereby are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations of
certificates.
If this Letter of Transmittal or any Original Note or instrument of
transfer is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and proper evidence satisfactory to the Company of such person's
authority to so act must be submitted.
When this Letter of Transmittal is signed by the registered Holder(s) of
the Original Notes listed herein and transmitted hereby, no endorsements of
Original Notes or separate instruments of transfer are required unless Exchange
Notes are to be issued, or Original Notes not tendered or exchanged are to be
issued, to a person other than the registered Holder(s), in which case
signatures on such Original Notes or instruments of transfer must be guaranteed
by an Eligible Institution.
IF THIS LETTER OF TRANSMITTAL IS SIGNED OTHER THAN BY THE REGISTERED
HOLDER(S) OF THE ORIGINAL NOTES LISTED HEREIN, THE ORIGINAL NOTES MUST BE
ENDORSED OR ACCOMPANIED BY APPROPRIATE INSTRUMENTS OF TRANSFER, IN EITHER CASE
SIGNED EXACTLY AS THE NAME(S) OF THE REGISTERED HOLDER(S) APPEAR ON THE ORIGINAL
NOTES AND SIGNATURES ON SUCH ORIGINAL NOTES OR INSTRUMENTS OF TRANSFER ARE
REQUIRED AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION, UNLESS THE SIGNATURE
IS THAT OF AN ELIGIBLE INSTITUTION.
A-11
<PAGE>
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If certificates for
Exchange Notes or unexchanged or untendered Original Notes are to be issued in
the name of a person other than the signer of this Letter of Transmittal, or if
Exchange Notes or such Original Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
herein, the appropriate boxes on this Letter of Transmittal should be completed.
All Original Notes tendered by book-entry transfer and not accepted for payment
will be returned by crediting the account at DTC designated herein as the
account for which such Original Notes were delivered.
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company
will pay or cause to be paid any transfer taxes with respect to the transfer and
sale of Original Notes to it, or to its order, pursuant to the Exchange Offer.
If Exchange Notes, or Original Notes not tendered or exchanged are to be
registered in the name of any persons other than the registered owners, of if
tendered Original Notes are registered in the name of any persons other than the
persons signing this Letter of Transmittal, the amount of any transfer taxes
(whether imposed on the registered Holder or such other person) payable on
account of the transfer to such other person must be paid to the Company or the
Exchange Agent (unless satisfactory evidence of the payment of such taxes or
exemption therefrom is submitted) before the Exchange Notes will be issued.
8. WAIVER OF CONDITIONS. The conditions of the Exchange Offer may be
amended or waived by the Company, in whole or in part, at any time and from time
to time in the Company's sole discretion, in the case of any Original Notes
tendered.
9. SUBSTITUTE FORM W-9. Each tendering owner of a Note (or other payee)
is required to provide the Exchange Agent with a correct taxpayer identification
number ("TIN"), generally the owner's social security or federal employer
identification number, and with certain other information, on Substitute Form
W-9, which is provided hereafter under "Important Tax Information," and to
certify that the owner (or other payee) is not subject to backup withholding.
Failure to provide the information on the Substitute Form W-9 may subject the
tendering owner (or other payee) to a $50 penalty imposed by the Internal
Revenue Service and 31% federal income tax withholding on the payment of the
Purchase Price. The box in Part 3 of the Substitute Form W-9 may be checked if
the tendering owner (or other payee) has not been issued a TIN and has applied
for a TIN or intends to apply for a TIN in the near future. If the box in Part 3
is checked and the Exchange Agent is not provided with a TIN by the time of
payment, the Exchange Agent will withhold 31% on all such payments of the
Purchase Price until a TIN is provided to the Exchange Agent.
10. BROKER-DEALERS PARTICIPATING IN THE EXCHANGE OFFER. If no
broker-dealer checks the last box on page 7 of this Letter of Transmittal, the
Company has no obligation under the Registration Rights Agreement to allow the
use of the Prospectus for resales of the Exchange Notes by broker-dealers or to
maintain the effectiveness of the Registration Statement of which the Prospectus
is a part after the consummation of the Exchange Offer.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or
requests for assistance or additional copies of the Prospectus, this Letter of
Transmittal or the Notice of Guaranteed Delivery may be directed to the Exchange
Agent at the telephone numbers and location listed above. A Holder or owner may
also contact such Holder's or owner's broker, dealer, commercial bank or trust
company or nominee for assistance concerning the Exchange Offer.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER
WITH CERTIFICATES REPRESENTING THE ORIGINAL NOTES AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE EXCHANGE
AGENT ON OR PRIOR TO THE EXPIRATION DATE.
A-12
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax law, an owner of Original Notes whose tendered
Original Notes are accepted for exchange is required to provide the Exchange
Agent with such owner's current TIN on Substitute Form W-9 below. If such owner
is an individual, the TIN is his or her social security number. If the Exchange
Agent is not provided with the correct TIN, the owner or other recipient of
Exchange Notes may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, any interest on Exchange Notes paid to such owner or other
recipient may be subject to 31% backup withholding tax.
Certain owners of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that owner must submit to the Exchange Agent a properly
completed Internal Revenue Service Form W-8 (a "Form W-8"), signed under
penalties of perjury, attesting to that individual's exempt status. A Form W-8
can be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
Backup withholding is not an additional tax. Rather, the federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding, the owner is required to notify the Exchange
Agent of the owner's current TIN (or the TIN of any other payee) by completing
the following form, certifying that the TIN provided on Substitute Form W-9 is
correct (or that such owner is awaiting a TIN), and that (i) the owner has not
been notified by the Internal Revenue Service that the owner is subject to
backup withholding as a result of failure to report all interest or dividends or
(ii) the Internal Revenue Service has notified the owner that the owner is no
longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the owner of the Original
Notes. If the Original Notes are registered in more than one name or are not
registered in the name of the actual owner, consult the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9,"
for additional guidance on which number to report.
A-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: FLEET NATIONAL BANK
- ------------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY Social security number(s) or
SIGNING AND DATING BELOW. Employer Identification Number(s)
DEPARTMENT OF THE TREASURY ---------------------------------
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN")
PART 2--Certification--Under the penalties of
perjury, I certify that:
(1) The number shown on this form is my
correct taxpayer identification number (or I
am waiting for a number to be issued to me),
and
(2) I am not subject to backup withholding
because: (a) I am exempt from backup
withholding, or (b) I have not been notified
by the Internal Revenue Service (IRS) that
I am subject to backup withholding as a
result of a failure to report all interest
or dividends, or (c) the IRS has notified
me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS--You must cross
out item (2) above if you have been
notified by the IRS that you are currently
subject to backup withholding because of
under reporting interest or dividends on
your tax return.
PART 3--
SIGNATURE _______________________________
DATE ____________________________________ Awaiting TIN [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHOLDING OF 31%.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me will be withheld until I provide a taxpayer
identification number.
Signature ___________________ Date ___________________________________________
A-14
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR HOLDINGS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY OR HOLDINGS SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information................... 3
Prospectus Summary...................... 5
Risk Factors............................ 16
The Transactions........................ 22
The Exchange Offer...................... 26
Use of Proceeds......................... 35
Capitalization.......................... 36
Pro Forma Combined Financial
Information........................... 37
Selected Historical Financial Data...... 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 46
Business................................ 56
Management.............................. 74
Common Stock Placement.................. 80
Related Transactions.................... 80
Beneficial Ownership of Holdings' Common
Stock................................. 81
Description of the Bank Credit
Agreement............................. 82
Description of the Notes................ 85
Certain Federal Income Tax
Considerations........................ 112
Legal Matters........................... 114
Experts................................. 114
Index to Combined Financial
Statements............................ F-1
Annex A-Texas Petrochemicals Corporation
Letter of Transmittal................. A-1
Until , 1996 (90 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This requirement is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
[Texas Petrochemicals Corporation Logo]
Texas Petrochemicals
Corporation
PROSPECTUS
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Article 2.02A of the Texas Business Corporation Act (the "TBCA")
provides, in relevant part, as follows:
Subject to the provisions of Section B and C of this Article, each
corporation shall have the power:
(16) To indemnify directors, officers, employees, and agents of the
corporation, and to purchase and maintain liability insurance for those
persons.
Pursuant to policies of Directors and Officers Liability and Company
Reimbursement insurance with total limits of $10,000,000, the Directors and
Officers of the Company are insured, subject to the limits, retention,
exceptions and other terms and conditions of such policies, against liability
for any actual or alleged error or misstatement or misleading statement or act
or omission or neglect or breach of duty while acting in their capacities as
Directors or Officers of the Company.
In addition, Section 5(b) of the Registration Rights Agreement filed as
Exhibit 4.2 hereto provides for indemnification of the Company and the
Directors, Officers and Controlling Persons of the Company by holders of the
Notes.
The Company has entered into Indemnity Agreements with its directors and
certain officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
TBCA, as described above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1 -- Certificate of Incorporation of the Company, as amended
3.2 -- Bylaws of the Company
4.1 -- Indenture, as supplemented, dated as of July 1, 1996 by and between TPC and Fleet National
Bank, as Trustee, with respect to the 11 1/8% Senior Subordinated Notes due 2006,
including the form of the Note
4.2 -- Registration Rights Agreement by and between TPC, CS First Boston Corporation, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, effective as of June 25, 1996
5* -- Opinion of Bracewell & Patterson, L.L.P. as to the validity of the Exchange Notes being
offered
8* -- Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters
10.1 -- Holdings' 1996 Stock Option Plan
10.2 -- TPC Employee Stock Ownership Plan
10.3 -- TPC Employee Stock Ownership Plan Trust Agreement
10.4 -- TPC Cash Bonus Plan
10.5 -- Security Agreement by and between Boatmen's Trust Company of Texas and TPC
10.6 -- TPC Profit Sharing Plan
10.7 -- Lease for Calcasieu Parish, Louisiana
10.8 -- Credit Agreement dated as of July 1, 1996 among TPC, Texas Commerce Bank, National
Association, ABN AMRO North America, Inc., and The Bank of Nova Scotia
10.9 -- Security Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association
II-1
<PAGE>
10.10 -- Pledge Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association
10.11 -- Letter Agreement dated May 6, 1996, by and among The Sterling Group, Inc., Holdings, TPC
Holding, and TPC
10.12 -- Form of Indemnity Agreement between TPC and each of its officers and directors
10.13 -- Form of Tax Sharing Agreement among Holdings, TPC Holding, TPC and Texas Butylene Chemical
Corporation
10.14* -- Employment Agreement with Bill W. Waycaster, as amended
12 -- Statement re Computation of Ratio of Earnings to Fixed Charges
21 -- Subsidiaries of the Registrant
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consents of Bracewell & Patterson, L.L.P. (included in their opinions filed as Exhibits 5
and 8 hereto)
24 -- Powers of Attorney
25 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture
</TABLE>
- ------------
* Filed herewith
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission
II-2
<PAGE>
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TEXAS
PETROCHEMICALS CORPORATION HAS DULY CAUSED THIS REGISTRATION STATEMENT OR
AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON OCTOBER 11, 1996.
TEXAS PETROCHEMICALS CORPORATION
By: B. W. WAYCASTER
B. W. WAYCASTER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON OCTOBER 11, 1996.
SIGNATURE TITLE
- ---------------------------- --------------------------------------------------
WILLIAM A. McMINN* Chairman
WILLIAM A. MCMINN
B. W. WAYCASTER Director, President and Chief Executive Officer
B. W. WAYCASTER (principal executive officer)
CLAUDE E. MANNING Chief Financial Officer
CLAUDE E. MANNING (principal financial and accounting officer)
GORDON A. CAIN* Director
GORDON A. CAIN
JAMES J. COLLIS* Director
JAMES J. COLLIS
WILLIAM B. HUFF* Director
WILLIAM B. HUFF
SUSAN O. RHENEY* Director
SUSAN O. RHENEY
JOHN T. SHELTON* Director
JOHN T. SHELTON
*By: CLAUDE E. MANNING
CLAUDE E. MANNING
(ATTORNEY-IN-FACT FOR PERSONS INDICATED)
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
3.1 -- Certificate of Incorporation of the Company, as amended
3.2 -- Bylaws of the Company
4.1 -- Indenture, as supplemented, dated as of July 1, 1996 by and between TPC and Fleet National
Bank, as Trustee, with respect to the 11 1/8% Senior Subordinated Notes due 2006,
including the form of the Note
4.2 -- Registration Rights Agreement by and between TPC, CS First Boston Corporation, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, effective as of June 25, 1996
5* -- Opinion of Bracewell & Patterson, L.L.P. as to the validity of the Exchange Notes being
offered
8* -- Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters
10.1 -- Holdings' 1996 Stock Option Plan
10.2 -- TPC Employee Stock Ownership Plan
10.3 -- TPC Employee Stock Ownership Plan Trust Agreement
10.4 -- TPC Cash Bonus Plan
10.5 -- Security Agreement by and between Boatmen's Trust Company of Texas and TPC
10.6 -- TPC Profit Sharing Plan
10.7 -- Lease for Calcasieu Parish, Louisiana
10.8 -- Credit Agreement dated as of July 1, 1996 among TPC, Texas Commerce Bank, National
Association, ABN AMRO North America, Inc., and The Bank of Nova Scotia
10.9 -- Security Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association
10.10 -- Pledge Agreement dated as of July 1, 1996 by and between TPC and Texas Commerce Bank,
National Association
10.11 -- Letter Agreement dated May 6, 1996, by and among The Sterling Group, Inc., Holdings, TPC
Holding, and TPC
10.12 -- Form of Indemnity Agreement between TPC and each of its officers and directors
10.13 -- Form of Tax Sharing Agreement among Holdings, TPC Holding, TPC and Texas Butylene Chemical
Corporation
10.14* -- Employment Agreement with Bill W. Waycaster, as amended
12 -- Statement re Computation of Ratio of Earnings to Fixed Charges
21 -- Subsidiaries of the Registrant
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consents of Bracewell & Patterson, L.L.P. (included in their opinions filed as Exhibits 5
and 8 hereto)
24 -- Powers of Attorney
25 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture
</TABLE>
- ------------
* Filed herewith
EXHIBIT 5
[LETTERHEAD OF BRACEWELL & PATTERSON, L.L.P.]
October 11, 1996
Texas Petrochemicals Corporation
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Ladies and Gentlemen:
We have acted as counsel to Texas Petrochemicals Corporation (the "Company"), a
Texas corporation, in connection with the offer by the Company to exchange
$1,000 principal amount at final maturity of its 111/8% Exchange Senior
Subordinated Notes due 2006 (the "Exchange Notes") for each $1,000 principal
amount at final maturity of its 111/8% Senior Subordinated Notes due 2006 (the
"Original Notes"), of which an aggregate of $175,000,000 principal amount is
outstanding (the "Exchange Offer"). The Company has filed with the Securities
and Exchange Commission (the "Commission") a registration statement on Form S-4
(Registration No. 333-11569) with respect to the Exchange Offer (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"Securities Act").
We have examined originals or copies certified by officers of the Company of (a)
the Indenture, as supplemented and amended, dated as of July 1, 1996 (the
"Indenture"), by and between the Company and Fleet National Bank, as Trustee
(the "Trustee"), pursuant to which the Original Notes were issued and the
Exchange Notes will be issued, (b) the Articles of Incorporation, as amended, of
the Company, (c) the Bylaws of the Company, (d) certified copies of certain
resolutions adopted by the Board of Directors of the Company, and (e) such other
documents and records as we have deemed necessary and relevant for the purposes
hereof. In addition, we have relied on certificates of officers of the Company
and of public officials and others as to certain matters of fact relating to
this opinion and have made such investigations of law as we have deemed
necessary and relevant as a basis hereof. We have assumed the genuineness of all
signatures, the authenticity of all documents and records submitted to us as
copies, the conformity to authentic original documents and records of all
documents and records submitted to us as copies, and the truthfulness of all
statements of fact contained therein. We have also assumed the due execution and
delivery of the Indenture by a duly authorized officer of the Trustee.
<PAGE>
Texas Petrochemicals Corporation
October 11, 1996
Page 2
Based on the foregoing, subject to the limitations, assumptions and
qualifications set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. the Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Texas; and
2. the Original Notes and the Exchange Notes have been validly
authorized and issued, and (subject to the Registration Statement
becoming effective, the Indenture being qualified under the Trust
Indenture Act of 1939 and any state securities or Blue Sky laws
being complied with) when (i) the Exchange Notes have been duly
executed by duly authorized officers of the Company, (ii) the
Exchange Notes have been duly authenticated by the Trustee under the
Indenture, and (iii) the Original Notes have been validly tendered
and not withdrawn and have been received and accepted by the
Company, all in accordance with the terms of the Exchange Offer as
set forth in the Registration Statement, the Exchange Notes issued
in exchange for the Original Notes in accordance with the terms of
the Exchange Offer will be validly issued and legally binding
obligations of the Company entitled to the benefits of the
Indenture.
We advise you that members of this firm own less than 0.5% of the outstanding
common stock of Texas Petrochemical Holdings, Inc., the parent corporation of
the Company.
We hereby consent to the filing of this opinion with the Commission as Exhibit 5
to the Registration Statement and to the references to our firm under the
heading "Legal Matters" in the Prospectus included in the Registration
Statement. By giving such consent, we do not admit that we are experts with
respect to any part of the Registration Statement, including this Exhibit,
within the meaning of the term "expert" as used in the Securities Act or the
rules and regulations thereunder.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
EXHIBIT 8
[LETTERHEAD BRACEWELL & PATTERSON, L.L.P.]
October 11, 1996
Texas Petrochemicals Corporation
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Ladies and Gentlemen:
We have acted as counsel to Texas Petrochemicals Corporation, a Texas
corporation (the "Company") and an indirect, wholly-owned subsidiary of Texas
Petrochemical Holdings, Inc., a Delaware corporation, in connection with the
offer by the Company to exchange $1,000 principal amount of its 111/8% Senior
Subordinated Notes due 2006, [Series B] (the "Exchange Notes") for each
outstanding $1,000 principal amount of its 111/8% Senior Subordinated Notes due
2006 (the "Original Notes") of which an aggregate of $175,000,000 principal
amount is outstanding (the "Exchange Offer"). The Company has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-4 (Registration No. 333-11569), as amended, with respect to the
Exchange Offer (the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act").
We have examined originals or copies of the Registration Statement and of (a)
the Indenture dated as of July 1, 1996 (the "Indenture") by and between the
Company and Fleet National Bank, as Trustee (the "Trustee"), pursuant to which
the Original Notes were issued and pursuant to which the Exchange Notes will be
issued, (b) the Articles of Incorporation and Bylaws of the Company, each as
amended to date, (c) certain resolutions of the Board of Directors of the
Company, and (d) such other documents and records as we have deemed necessary
and relevant for the purposes hereof. In addition, we have relied on
certificates of officers of the Company and of public officials and others as to
certain matters of fact relating to this opinion and have made such
investigations of law as we have deemed necessary and relevant as a basis
hereof. We have assumed the genuineness of all signatures, the authenticity of
all documents and records submitted to us as originals, the conformity to
authentic original documents and records of all documents and records submitted
to us as copies and the truthfulness of all statements of fact contained
therein.
<PAGE>
Texas Petrochemicals Corporation
October 11, 1996
Page 2
Based on the foregoing, we are of the opinion that the statements under the
caption "Certain Federal Income Tax Considerations" in the Prospectus included
in the Registration Statement, insofar as they are statements of law or legal
conclusions, are correct in all material respects.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 8 to the Registration Statement and to the references to
our firm under the caption "Certain Federal Income Tax Considerations" in the
Prospectus included in the Registration Statement.
Very truly yours,
/s/ LANCE W. BEHNLE
Bracewell & Patterson, L.L.P.
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
Upon execution by both parties hereto, this instrument shall serve as an
Employment Agreement whereby BILL W. WAYCASTER (hereinafter referred to as
"Employee") shall be employed by TEXAS OLEFINS COMPANY and TEXAS PETROCHEMICALS
CORPORATION (hereinafter referred to as "TOC/TPC") under the following terms and
conditions:
1. POSITION.
At the initial time of employment, the Employee shall be elected as
President and a Director of TOC/TPC. Upon completion of a corporate assimilation
period of no less than four months, but not to exceed twelve months, the
Employee will be elected President and Chief Executive Officer (CEO) of TOC/TPC.
While in the capacity of President only, the Employee will report to the
Chairman of the Board of TOC/TPC and shall perform such duties as assigned.
While in the position of President and CEO, the Employee shall report to the
Executive Committee and shall be responsible for all day-to-day operations of
TOC/TPC, including, but not limited to, procurement, manufacturing, marketing,
and development. As CEO, the Employee shall also assist the Executive Committee
in the areas of planning and corporate expansion and shall perform such
additional duties as assigned by the Executive Committee.
The Employee shall devote his full time, attention, and energies to the
business of TOC/TPC and its affiliates and shall not, during the Term hereof,
engage in any other business activities, directly or indirectly, whether or not
such business activities are pursued for gain, profit, or other pecuniary
advantage. The Employee shall be permitted to make passive investments which do
not contravene the provisions of the Non-Competition Agreement between Employee
and TOC/TPC dated the date of this Agreement.
2. TERM.
The Term of this Agreement ("Term") shall commence on the date of initial
employment and, unless sooner terminated pursuant to paragraph 5, shall
terminate and expire five (5) years from date of this Agreement, unless extended
as mutually agreed upon by TOC/TPC and Employee.
3. COMPENSATION.
As full compensation for his services under this Agreement, the Employee
shall be entitled to receive a base salary and additional compensation, as
follows:
a) During the term of this Agreement, Employee shall receive a base salary
at the annual rate of TWO-HUNDRED AND FORTY THOUSAND & NO/100
($240,000.00) DOLLARS, payable semi-monthly.
b) Employee shall be entitled to a minimum cash bonus equal to $240,000.00
per year, payable quarterly, in the amount of $60,000 per quarter.
c) All payments made pursuant to this paragraph 3 will be made net of such
deductions as are required to be withheld by applicable law or
regulations.
d) If the Employee: (i) retires with TOC/TPC's consent; (ii) is totally
disabled (as hereinafter defined); or (iii) dies during the term
hereof, TOC/TPC shall continue to pay him his base salary semi-monthly
and his bonus quarterly, as hereinabove set forth for the remaining
Term of this Agreement, or to his estate if he dies, in the same manner
as set forth herein.
e) As used in this Agreement, "disability" or "totally disabled" shall
mean the physical or mental incapacity of the Employee for any
consecutive ninety (90) day period or any aggregate period of
one-hundred twenty (120) days in any twelve (12) month period, of such
a nature that the Employee shall be unable to perform a substantial
portion of his duties as an Executive Employee of TOC/TPC.
4. EXPENSES; BENEFITS.
TOC/TPC shall reimburse the Employee for all reasonable expenses properly
incurred by him in connection with the performance of his duties as an Employee.
The Employee shall also be entitled to associated appropriate benefits
compatible with his position.
<PAGE>
5. TERMINATION.
a) TOC/TPC shall have the right to terminate this Agreement for cause upon
TOC/TPC's giving ten (10) days prior written notice. As used in this Agreement,
"cause" shall mean the Employee's engagement in gross or persistent misconduct;
the commission of any act of disloyalty, dishonesty, or breach of trust which
would be injurious to TOC or any of its affiliates; the conviction of a crime
involving moral turpitude, or the material breach of this Agreement or of the
Non-Competition Agreement. Misconduct shall be considered persistent if such
misconduct continues for more than ten (10) days after written notice thereof is
given, or if such misconduct shall re-occur after written notice thereof is
given.
b) TOC/TPC shall have no liabilities or obligations to the Employee in the
event that this Agreement is terminated by the Employee for any reason or if
this Agreement is terminated pursuant to subparagraph a), above, except that the
Employee (or his estate) shall be entitled to receive his full compensation
under paragraph 3, a) and b), and any fringe benefits and unreimbursed expenses
under paragraph 4), which have accrued until the date of termination (less the
amount of any disability payments received by him under any disability insurance
coverage provided by TOC/TPC to its employees).
c) Except for payments, as set forth herein, TOC/TPC shall have no
liabilities or obligations whatsoever to the Employee as a result of any
termination.
6. LIQUIDATED DAMAGES.
TOC/TPC reserves the right, in its sole discretion, to terminate the
Employee's employment under this Agreement without cause, provided it pays the
Employee the "liquidated damages" as hereinafter set forth. It is anticipated
and acknowledged by TOC/TPC and the Employee that if TOC/TPC should terminate
the Employee's employment without cause, the Employee will sustain actual
damages, the amount of which is indefinite, uncertain, and difficult to
determine. In order to avoid dispute as to the amount of such damages and the
mutual expenses and inconvenience such a dispute would entail, TOC/TPC and the
Employee do hereby agree and stipulate that, in the event TOC/TPC terminates the
Employee's employment without cause, at any time prior to the end of the Term of
this Agreement, then, in such event,TOC/TPC will pay the Employee as agreed
liquidated damages the amount of the sum of: (i) a base salary portion of
$1,200,000.00, less any base salary previously paid under this Agreement,
payable at the rate of $20,000.00 per month; plus (ii) a bonus portion of
$1,200,000.00, less any bonus previously paid under this Agreement, payable at
the rate of $60,000.00 per quarter. Said liquidated damages shall be paid,
beginning with the first month of termination and continuing monthly and
quarterly, as the case may be, thereafter until paid in full. TOC/TPC and the
Employee do hereby stipulate and agree that such amount is their mutually
agreed, best, fair, and reasonable estimate of the actual damages that the
Employee will sustain in the event of such termination, based upon the facts and
circumstances of the parties.
7. NON-COMPETE; CONFIDENTIAL INFORMATION.
In consideration of the Employee's covenants contained in this Agreement,
TOC/TCP agree to pay to Employee, simultaneously with the execution and delivery
of this Agreement ONE THOUSAND & NO/100 ($1,000.00) DOLLARS (U.S.), as
independent consideration and not part of his compensation as herein set forth.
For a period of two (2) years from the last day the Employee receives
compensation pursuant to this Agreement, the Employee shall not, directly or
indirectly, through an affiliate or otherwise: (i) engage or be interested
(whether as owner, partner, lender, consultant, employee, agent, supplier,
distributor, or otherwise) in any business, activity, or enterprise which
competes with any aspect of the businesses currently being conducted by TOC or
TPC or conducted by TOC or TPC at any time during the Term (including, without
limitation, the purchase and sale of, or the trading in any commodities
currently purchased, sold, or traded by TOC or TPC), or in any business or
enterprise that, on the date the Employee ceases to be employed by TOC/TPC, is a
customer or supplier of TOC or TPC; (ii) employ, or otherwise engage, or offer
to employ or otherwise engage, any person who is then (or was at any time within
one year prior to the time of such employment, engagement, or offer of
employment or engagement) an employee, sales representative, or agent of TOC or
TPC, except with the prior approval of the Board of Directors of TOC; (iii)
solicit any business from any person or entity that has been a customer or
supplier of TOC or TPC, or induce or influence any customer, supplier, or other
person that has a business relationship with TOC/TPC or TOC to discontinue or
reduce the extent of such relationship; or (iv) use or divulge any trade
<PAGE>
secrets, customer, or supplier lists, pricing information, marketing
arrangements, or strategies, business plans, internal performance statistics,
training manuals or other information concerning TOC or TPC that is
competitively sensitive or confidential. For purposes of this Agreement, an
"affiliate" shall mean, with respect to TOC or TPC, any individual, corporation,
partnership, joint venture, trust, foundation, association, unincorporated
organization, or other entity or group which, directly or indirectly, is
controlled by, controls, or is under common control with, TOC or TPC.
8. ASSIGNMENT
This Agreement is not assignable by either party, except that TOC/TPC may
assign this Agreement to a purchaser of or successor to TOC/TPC, in which case
this Agreement shall be binding upon such successor or assign.
9. ENTIRE AGREEMENT; AMENDMENTS; WAIVERS.
This Agreement, together with the Stock Option Agreement, constitutes the
entire agreement of the parties with respect to the subject matter hereof and
supersedes all prior negotiations, understandings, and agreements. This
Agreement may not be amended, supplemented, or otherwise modified except by
mutual written consent of both parties. No waiver by either party of any of the
provisions of this Agreement shall be effective unless set forth in writing and
executed by the party so waiving. The waiver by any party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
10. GOVERNING LAW.
This Agreement shall be governed by, and construed and interpreted in
accordance with, the internal laws of the State of Texas without reference to
its conflicts of law principles.
BILL W. WAYCASTER
BILL W. WAYCASTER
Address: 11823, Parkriver Dr.
Houston, TX 77070
"Employee"
TEXAS OLEFINS COMPANY and
TEXAS PETROCHEMICALS CORPORATION
ATTEST:
By: DAVE C. SWALM
Dave C. Swalm
Chairman and CEO
LANELL COOKE
Secretary
"TOC/TPC"
<PAGE>
NON-COMPETITION AGREEMENT
APRIL 1, 1992
THE PARTIES TO THIS AGREEMENT are BILL W. WAYCASTER ("Non-Competing
Party"), TEXAS OLEFINS COMPANY, a Texas corporation ("TOC") and TEXAS
PETROCHEMICALS CORPORATION, a Texas corporation ("TPC").
By virtue of the Non-Competing Party's employment with TOC/TPC (TOC and TPC
and their respective subsidiaries being collectively referred to as
"Companies"), the Non-Competing Party will have access to, and become familiar
with, certain confidential information, including the customers and suppliers of
the Companies, the communication of which to third parties would irrevocably
injure the business of the Companies, and, consequently, it is a condition to
entering into an Employment Agreement and Stock Option Agreement that
Non-Competing Party enter into this Agreement restricting his participation in
any business which competes with the business of the Companies, on the terms and
conditions set forth herein.
It is, therefore, agreed as follows:
1. PAYMENT BY THE COMPANIES.
In consideration of Non-Competing Party's covenants contained in this
Agreement, the Companies agree to pay to Non-Competing Party, simultaneously
with the execution and delivery of this agreement, ONE THOUSAND & NO/100
($1,000.00) DOLLARS (U.S.).
2. NON-COMPETE.
For a period of three (3) years from the last day the Non-Competing Party
receives compensation from the Companies, Non-Competing Party shall not,
directly or indirectly, through an affiliate or otherwise: (i) engage or be
interested (whether as owner, partner, lender, consultant, employee, agent,
supplier, distributor, or otherwise) in any business, activity, or enterprise
which competes with any aspect of the businesses currently being conducted by
any of the Companies (including, without limitation, the purchase and sale of,
or the trading in, any commodities currently purchased, sold, or traded by the
Companies or in any business or enterprise that, on the date of this Agreement,
is a customer or supplier of any of the Companies; (ii) employ, or otherwise
engage, or offer to employ or otherwise engage (except with the prior consent of
TOC approved by the Board of Directors of TOC) any person who is then (or was at
any time within one year prior to the time of such employment, engagement, or
offer of employment or engagement) an employee, sales representative, or agent
of any of the Companies; or (iii) solicit any business from any person or entity
that has been a customer or supplier of any of the Companies, or induce or
influence any customer, supplier, or other person that has a business
relationship with any of the Companies to discontinue or reduce the extent of
such relationship. For purposes of this Agreement, an "affiliate" shall mean,
with respect to any party, any individual, corporation, partnership, joint
venture, trust, foundation, association, unincorporated organization, or other
entity or group which, directly or indirectly, is controlled by, controls, or is
under common control with, such party.
3. CONFIDENTIALITY.
Non-Competing Party shall not use or divulge any trade secrets, customer or
supplier lists, pricing information, marketing arrangements or strategies,
business plans, internal performance statistics, training manuals, or other
information concerning the Companies that is competitively sensitive or
confidential, except to the extent such information or data is, or becomes by
action of others, published or otherwise in the public domain.
4. PARTIES IN INTEREST.
This Agreement shall be binding upon, and is solely for the benefit of, the
parties hereto and TOC's and TPC's successors and assigns, respectively, and
nothing expressed or implied herein is intended or shall be construed to confer
upon any person other than the parties hereto or TOC's or TPC's successors and
assigns, respectively, any rights, remedies, obligations, or liabilities under
or by reason of this Agreement.
5. ENTIRE AGREEMENT; AMENDMENTS; WAIVERS.
<PAGE>
This Agreement is the entire agreement of the parties with respect to the
subject matter hereof. The provisions of this Agreement are in addition to an
independent of any agreements or covenants contained in any employment,
consulting, or other agreement between either TOC or TPC and Non-Competing
Party. This Agreement may not be amended, supplemented, or otherwise modified,
except upon the execution and delivery of a written agreement executed by the
parties hereto. No waiver by any party of any of the provisions hereof shall be
effective unless set forth in writing and executed by the party so waiving. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
6. GOVERNING LAW.
This Agreement is being made and delivered and is intended to be performed
in the State of Texas and shall be governed by, and construed, enforced, and
interpreted in accordance with, the internal laws of the State of Texas, without
reference to its conflicts of law principles.
7. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute a single
agreement.
8. EFFECT OF HEADINGS.
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
9. SPECIFIC PERFORMANCE.
The parties acknowledge that there may be no adequate remedy at law and
that money damages may not be an adequate remedy for a breach, actual or
threatened, of this Agreement. Therefore, the parties agree that each of them
shall have the right, in addition to other rights they may have, to injunctive
relief and specific performance of this Agreement in the event of any breach
hereof, actual or threatened, by the other. The remedy set forth in the
preceding two sentences is cumulative and shall in no way limit any other remedy
any party hereto has at law, in equity, or pursuant hereto.
10. SEVERABILITY.
If any provision contained in this Agreement shall for any reason be held
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provisions of this Agreement, but
this Agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein. It is the intention of the parties
that if any of the restrictions or covenants contained herein is in any way
construed to be too broad or to any extent invalid, such provision shall not be
construed to be null, void, and of no effect, but, to the extent such provision
would be valid or enforceable under applicable law, a court of competent
jurisdiction shall construe and interpret or reform this Agreement to provide
for a covenant having the maximum enforceable time period and other provisions
(not greater than those contained herein) as shall be valid and enforceable
under such applicable law.
11. ATTORNEY'S FEES.
Should any litigation be commenced between the parties to this Agreement,
arising out of this Agreement, the party prevailing in such litigation shall be
entitled to recover from the defaulting party, in addition to such other relief
as may be granted, a reasonable sum as and for its attorney's fees in such
litigation, which such shall be determined by the Court in litigation or in a
separate action brought for that purpose.
12. INTERPRETATION.
It is acknowledged by the parties that this Agreement has undergone several
drafts with the negotiated suggestions by the parties hereto; and, therefore, no
presumption shall arise favoring any party by virtue of the authorship of any of
its provisions.
<PAGE>
BILL W. WAYCASTER
BILL W. WAYCASTER
Address: 11322 Bassdale
Houston, TX 77070
"Non-Competing Party"
TEXAS OLEFINS COMPANY and
TEXAS PETROCHEMICALS CORPORATION
By: DAVE C. SWALM
Dave C. Swalm
Chairman of the Board
"TOC" "TPC"
Attest:
LANELL COOKE
Secretary
<PAGE>
EMPLOYEE AGREEMENT AMENDMENT
The EMPLOYMENT AGREEMENT, dated as of April 1, 1992, between BILL W.
WAYCASTER (Employee) and TEXAS PETROCHEMICALS CORPORATION (TOC/TPC) is hereby
amended, effective as of June 1, 1993, as follows:
1. Section 3, (a), is hereby amended as follows:
Commencing June 1, 1993, and for the remaining term of this Agreement,
Employee shall receive a base salary of $300,000.00 per fiscal year, payable
semi-monthly.
2. Section 3, (b), is hereby amended as follows:
Commencing June 1, 1993, and for the remaining term of this Agreement,
Employee shall receive a minimum cash bonus of $300,000.00 per fiscal year,
payable quarterly.
3. Except as herein amended, all other terms and provisions of the
Employment Agreement shall remain unchanged.
4. In the event of any conflict between the Employment Agreement and this
Amendment No. 1 thereto, the terms and provisions of this Amendment shall govern
and control.
IN WITNESS WHEREOF, the parties have executed this Amendment as of June 1,
1993.
BILL W. WAYCASTER
BILL W. WAYCASTER
11823 Parkriver Drive
Houston, TX 77070
"Employee"
TEXAS OLEFINS COMPANY and
TEXAS PETROCHEMICALS CORPORATION
By: DAVE C. SWALM
DAVE C. SWALM
Chairman of the Board
"TOC/TPC"
ATTEST:
LANELL COOKE
LANELL COOKE, Secretary
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our reports dated August 16, 1996, on our audits of the financial statements of
TPC Finance Corp. and Texas Olefins Company, subsidiaries and affiliate, which
includes explanatory paragraphs relating to the acquisition of Texas Olefins
Company and changes in accounting principles. We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
October 11, 1996
