AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION NO. 333-26821
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TEXAS PETROCHEMICALS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TEXAS 2869 74-1778313
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
STEPHEN R. WRIGHT
THREE RIVERWAY, SUITE 1500 THREE RIVERWAY, SUITE 1500
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 627-7474 (713) 627-7474
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES) AGENT FOR SERVICE OF PROCESS)
</TABLE>
------------------------
COPY TO:
GARY W. ORLOFF
BRACEWELL & PATTERSON, L.L.P.
SOUTH TOWER PENNZOIL PLACE, SUITE 2900
711 LOUISIANA STREET
HOUSTON, TEXAS 77002-2781
(713) 223-2900
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
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
$175,000,000 11 1/8% SENIOR SUBORDINATED NOTES DUE 2006
$50,000,000 11 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
The 11 1/8% Senior Subordinated Notes due 2006 (the "Original Notes") and
the 11 1/8% Series B Senior Subordinated Notes due 2006 (the "Notes" and,
together with the Original Notes, the "Securities") were issued by Texas
Petrochemicals Corporation (the "Company" or "TPC") pursuant to the Original
Indenture (as defined under "Description of the Securities -- General") and
the Indenture (as defined under "Description of the Securities -- General"),
respectively. As of the date of this Prospectus, there are $175,000,000
aggregate principal amount of the Original Notes and $50,000,000 aggregate
principal amount of the Notes outstanding.
Interest on the Securities is payable semiannually on January 1 and July 1
of each year. Except as described below, the Securities are not redeemable at
the option of the Company prior to July 1, 2001. Thereafter, the Securities 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 aggregate principal
amount of the Original Notes and 35% of the original aggregate 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 Securities -- Certain
Definitions") following which there is a Public Market (as defined under
"Description of the Securities -- 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
65% of the original aggregate principal amount of the Original Notes and at
least 65% of the original aggregate principal amount of the Notes must remain
outstanding after each such redemption with respect to the Original Notes and
the Notes, respectively. Upon a Change in Control (as defined under
"Description of the Securities -- Change of Control"), each holder of
Securities may require the Company to purchase all or a portion of such holder's
Securities at 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. The Securities 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 Securities -- Certain Definitions") of the Company.
As of June 30, 1997 the Company had approximately $89.8 million of Senior
Indebtedness outstanding. For a more complete description of the Securities, see
"Description of the Securities."
This Prospectus is being used by Chase Securities Inc. ("Chase
Securities") in connection with offers and sales of the Securities in
market-making transactions in the over-the-counter market, in private
transactions, or otherwise at negotiated prices related to prevailing market
prices at the time of sale. Chase Securities may act as principal or agent in
such market-making transactions. The Company will not receive any proceeds from
the sale of the Securities in such market-making transactions. See "Plan of
Distribution."
Promptly following the Company's filing of quarterly reports or other
documents, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Company will attach such documents as
appendices to include as part of this Prospectus.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass any and all
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to,
among other things, the Securities 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 Securities, reference is hereby
made to the Registration Statement and such exhibits and schedules filed as a
part thereof, which may be inspected, without charge, at the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission, upon payment of prescribed fees. The Commission
maintains a Web site that contains reports and information regarding registrants
that file electronically with the Commission at Web site (http://www.sec.gov).
Pursuant to the Original Indenture and the Indenture, so long as any of the
Original Notes or Notes, respectively, 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
Securities -- Certain Definitions") with respect to all obligations relating to
the Original Notes or the Notes, as the case may be, the reports, information
and other documents required to be filed and provided pursuant to the Original
Indenture or the Indenture, as the case may be, 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
Securities, and file with the Trustee (as defined under "Description of the
Securities"), 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 Securities and to
securities analysts and broker-dealers upon their request.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR THE
PERIODS PRIOR TO JULY 1, 1996, THE FINANCIAL STATEMENTS AND OTHER INFORMATION
SET FORTH HEREIN COMBINE THE HISTORICAL RESULTS OF TEXAS OLEFINS COMPANY, A
TEXAS CORPORATION ("TOC"), ITS SUBSIDIARIES AND CLARKSTON CORPORATION
("CLARKSTON"). UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM
"COMPANY" REFERS TO TOC AND ITS SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE
ACQUISITION (AS DEFINED), AND TO TPC AND ITS SUBSIDIARIES FOLLOWING THE
CONSUMMATION OF THE ACQUISITION. 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.
MARKET-MAKING PROSPECTUS
This Prospectus is being used by Chase Securities in connection with offers
and sales of the Securities in market-making transactions in the
over-the-counter market, in private transactions, or otherwise at negotiated
prices related to prevailing market prices at the time of sale. Chase Securities
may act as principal or agent in such market-making transactions. The Company
will not receive any proceeds from the sale of the Securities in such
market-making transactions. See "Plan of Distribution."
THE COMPANY
The Company is the largest producer of butadiene and butene-1, and the
third largest producer of methyl TERTIARY-butyl ether ("MTBE"), in North
America, in terms of production capacity. In addition, the Company is the sole
producer of diisobutylene and isobutylene concentrate in the United States and
the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings. For the year ended June 30, 1997, and the
twelve months ended May 31, 1996, butadiene represented 27% and 25% of the
Company's total revenues, respectively, MTBE represented 47% and 41%,
respectively, n-butylenes 10% and 11%, respectively, specialty isobutylenes 13%
and 16%, respectively, and other revenues the remaining 3% and 7%, respectively.
The Company's revenues for the year ended June 30, 1997, the twelve months ended
May 31, 1996 and the one month ended June 30, 1996 were $490.2 million, $455.6
million and $41.4 million, respectively, and EBITDA (as defined) for the year
ended June 30, 1997, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 were $50.4 million, $57.0 million and $3.7 million,
respectively.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in North America, the Company believes that many of its customers
place significant value on its ability to
3
<PAGE>
provide a reliable domestic supply of butadiene and as a result have entered
into long-term sales contracts with the Company.
The Company extracts butadiene from crude butadiene, which is generated
from the production of ethylene and is comprised of a number of valuable
components, including butadiene, isobutylene,
n-butylenes, isobutane and n-butane. Many U.S. ethylene producers rely on third
parties such as the Company to process their crude butadiene streams, as the
crude butadiene volumes they produce are not sufficient to justify the
construction of on-site butadiene recovery facilities. The Company estimates
that producers accounting for 65% of U.S. and Canadian ethylene production
capacity do not internally process crude butadiene by-product streams. The
Company is the largest non-integrated crude butadiene processor in North America
and as a result of its strategic importance to ethylene producers, the Company
has been able to secure long-term supply contracts covering the majority of its
crude butadiene requirements. Such contracts provide for a fixed profit based on
the Company's selling prices for butadiene, and account for the relatively
stable profitability of the Company's butadiene operations.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major component of,
reformulated gasoline ("RFG") and is used in over 30% of the U.S. gasoline
pool. MTBE is produced by reacting methanol and isobutylene, and the Company's
ability to produce isobutylene by three alternative methods enables it to
produce MTBE by the most economical processes available to the Company. In
addition, the Company has the ability to add incremental capacity to capitalize
on expected future growth, at a significantly lower cost than the cost of adding
new capacity. The Company believes that this incremental capacity gives it a
competitive advantage over other producers who would have to incur greater cost
to increase capacity. The Company sells MTBE to oil refiners and gasoline
producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and
CITGO Petroleum Corporation on both a contract and spot basis at prices linked
to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally to produce MTBE for sale in the spot
market. The Company maintains the production flexibility to upgrade n-butylenes
contained in crude butadiene streams to either isobutylene or butene-1 using its
patented skeletal isomerization process ("SKIP"). This flexibility allows the
Company to meet its customers' needs through the most economical process, to
produce additional products and to capitalize on favorable market conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to
4
<PAGE>
several of its customers and raw materials suppliers through an extensive
pipeline network. In addition, the Company's facility is serviced by rail, tank
truck and barge.
The Company's principal executive offices are located at Three Riverway,
Suite 1500, Houston, Texas 77056. The Company's telephone number is (713)
627-7474.
BACKGROUND INFORMATION
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
July 1, 1996, Holdings issued and sold $43.8 million of its common stock
("Common Stock") to an investor group led by Gordon A. Cain and The Sterling
Group, Inc. ("Sterling"), issued $6.2 million of its Common Stock for the
shares contributed by certain shareholders of TOC and TPC, sold a sufficient
amount of 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 from the sale at such time of $175 million aggregate principal
amount of the Original Notes and loaned the combined net proceeds to TPC
Holding. TPC Holding used the capital contributions received from Holdings, cash
on hand and the proceeds of the loan from Finance Co. to effect the Acquisition
pursuant to a stock purchase agreement dated as of May 14, 1996 (the "Stock
Purchase Agreement"), to fund the ESOP (as defined) and pay fees and expenses
in connection with the transactions associated with the Acquisition. TOC and
Finance Co. then merged into TPC.
As a result of the foregoing, TPC is the primary obligor on the Original
Notes and the loans made pursuant to the Bank Credit Agreement, is a
wholly-owned subsidiary of TPC Holding (which in turn is wholly-owned by
Holdings) and operates the principal business of the Company.
On March 13, 1997, the Company issued and sold $50,000,000 aggregate
principal amount of the Notes, the proceeds of which were used to, among other
things, reduce the Company's indebtedness under the Bank Credit Agreement. Chase
Securities acted as the initial purchaser of the Notes.
This Prospectus is being used by Chase Securities in connection with offers
and sales of the Securities in market-making transactions. The Company
determined that such efforts would enhance the liquidity of the market and would
therefore benefit the Company and the holders of the Securities. This Prospectus
has been prepared for use by Chase Securities in connection with offers and
sales of the Securities in market-making transactions. Chase Securities is not
obligated to make a market in the Original Notes or the Notes and any such
market making may be discontinued at any time.
5
<PAGE>
THE SECURITIES
<TABLE>
<S> <C>
Securities........................... $175,000,000 aggregate principal amount of 11 1/8% Senior Subordinated
Notes due 2006 and $50,000,000 aggregate principal amount of 11 1/8%
Series B Subordinated Notes due 2006.
Maturity Date........................ July 1, 2006.
Interest Payment Dates............... January 1 and July 1 of each year.
Optional Redemption.................. Except as described below, the Company may not redeem the Securities
prior to July 1, 2001. On or after such date, the Company may redeem the
Securities, in whole or in part, at any time at the redemption prices
set forth herein plus accrued interest to the date of redemption. In
addition, at any time and from time to time on or prior to July 1, 1999,
the Company may redeem in the aggregate up to 35% of the original
aggregate principal amount of the Original Notes and 35% of the original
aggregate principal amount of the Notes with the net proceeds of one or X
more Public Equity Offerings following which there is a Public Market at
a redemption price equal to 110% of the principal amount to be redeemed,
together with accrued and unpaid interest, if any, to the date of
redemption, provided that at least 65% of the original aggregate
principal amount of the Original Notes and at least 65% of the original X
aggregate principal amount of the Notes remains outstanding after each
such redemption with respect to the Original Notes and the Notes,
respectively. See "Description of the Securities -- Optional
Redemption."
Change of Control.................... Upon the occurrence of a Change of Control, each holder will have the
right to require the Company to make an offer to repurchase the
Securities at a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. See "Description
of the Securities -- Change of Control."
Ranking.............................. The Securities are unsecured and subordinated to all existing and future
Senior Indebtedness of the Company. The Securities rank PARI PASSU with
all Senior Subordinated Indebtedness of the Company and will rank senior
to all other subordinated indebtedness of the Company. As of June 30,
1997, the Company had outstanding approximately $89.8 million (exclusive
of unused commitments) in aggregate amount of Senior Indebtedness and
$225.0 million of Senior Subordinated Indebtedness. See "Description of
Securities -- Ranking."
Restrictive Covenants................ The Indentures (as defined under "Description of Securities --
General") each contain certain covenants that, among other things,
limit the ability of the Company 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 substan-
tially all of its assets to, another person. The Indentures also limit
the ability of the Company'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 distribu-
tions. In addition, the Company is obligated, under certain circum-
stances, to offer to repurchase Securities at a purchase price equal to
100% of the principal amount thereof, plus accrued and unpaid interest, X
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 will be subject to a number of important
qualifications. See "Description of the Securities -- Certain
Covenants."
</TABLE>
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities 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
Securities.
SUMMARY SELECTED FINANCIAL AND OTHER INFORMATION
The summary selected financial information set forth below has been derived
from the combined financial statements of TOC, its subsidiaries and Clarkston
for the period prior to July 1, 1996 (the "Predecessor") and from the
consolidated financial statements of the Company since July 1, 1996, and should
be read in conjunction with, and is qualified in its entirety by reference to,
financial statements which appear elsewhere in this Prospectus and their
accompanying notes. Such combined financial information is combined to reflect
the assumption by the Company of a raw material supply contract. The combined
financial information set forth below for each of the years in the three-year
period ended May 31, 1995, the twelve month period ended May 31, 1996 and the
one-month period ended June 30, 1996 has been derived from the financial
statements of TOC, its subsidiaries and Clarkston, which were audited by Coopers
& Lybrand L.L.P., independent auditors for such entities. The consolidated
financial statements for the year ended June 30, 1997 were audited by Deloitte &
Touche LLP. The results of the one-month and interim periods are not necessarily
indicative of the results of the entire year or any other period. The
information presented below should be read in conjunction with the consolidated
financial statements of the Company and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Selected Financial Information and the related notes
thereto included elsewhere herein.
7
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------- ----------
TWELVE ONE
MONTHS MONTH
ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, YEAR ENDED
------------------------------- ------- -------- JUNE 30,
1993 1994 1995 1996 1996 1997
--------- --------- --------- ------- -------- ----------
(DOLLARS IN MILLIONS)
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues............ $ 410.7 $ 352.4 $ 474.7 $ 455.6 $ 41.4 $490.2
Cost of goods
sold(1)........... 340.8 268.8 396.3 379.5 36.0 433.7
Depreciation and
amortization...... 12.6 13.6 14.3 15.0 1.3 29.8
--------- --------- --------- ------- -------- ----------
Gross profit........ 57.3 70.0 64.1 61.1 4.1 26.7
Selling, general and
administrative
expenses(1)....... 14.4 16.7 16.6 19.1 1.7 8.4
--------- --------- --------- ------- -------- ----------
Income from
operations........ 42.9 53.3 47.5 42.0 2.4 18.3
Interest income
(expense), net.... (0.6) (0.2) 0.7 (1.6) (0.1) (35.2)
Other income
(expense)(2)...... (1.2) (0.8) 1.1 (15.9) (0.3) 2.3
--------- --------- --------- ------- -------- ----------
Income (loss) before
income taxes and
minority
interest.......... 41.1 52.3 49.3 24.5 2.0 (14.6)
Provision (benefit)
for income
taxes............. 13.0 18.4 16.9 7.9 0.8 (3.3)
Extraordinary
loss.............. -- -- -- -- -- 1.4
Minority interest in
net loss of
consolidated
subsidiary........ -- -- 0.1 0.1 -- --
--------- --------- --------- ------- -------- ----------
Net income (loss)... 28.1 33.9 32.5 16.7 1.2 (12.7)
OPERATING DATA:
Revenues by product:
Butadiene(3)... $ 81.3 $ 68.7 $ 106.2 $ 112.6 $ 10.2 $130.9
MTBE........... 211.0 175.2 199.1 187.4 21.0 230.3
n-Butylenes.... 21.7 28.1 42.7 48.2 3.2 49.4
Specialty
Isobutylenes... 54.8 59.9 75.5 74.5 5.5 62.3
Other(4)....... 41.9 20.5 51.2 32.9 1.5 17.3
Sales volumes (in
millions of
pounds):
Butadiene...... 556.2 484.4 580.8 622.6 64.6 750.3
MTBE(5)........ 225.1 194.8 211.1 219.8 26.6 274.1
n-Butylenes.... 114.7 150.8 245.9 284.6 17.1 266.4
Specialty
Isobutylenes... 309.0 312.2 398.0 368.2 23.0 275.7
PREDECESSOR COMPANY
----------------------------------------- -------
JUNE
MAY 31, JUNE 30, 30,
------------------------------- -------- -------
1993 1994 1995 1996 1997
--------- --------- --------- -------- -------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ 11.1
Property, plant and equipment, net... 101.6 95.9 90.1 81.8 240.0
Total assets......................... 194.1 214.6 230.7 167.9 521.1
Long-term debt (including current
portion)........................... 10.9 11.0 -- 13.0 317.7
Total stockholders' equity........... 128.2 140.4 163.3 92.5 55.1
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------- --------
TWELVE ONE
MONTHS MONTH YEAR
ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, JUNE 30,
------------------------------- ------- -------- --------
1993 1994 1995 1996 1996 1997
--------- --------- --------- ------- -------- --------
(DOLLARS IN MILLIONS)
OTHER DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA(6)............................ $ 55.5 $ 66.9 $ 61.8 $57.0 $3.7 $ 50.4
Employee profit sharing and
bonuses(1)......................... 18.6 23.6 20.9 23.5 1.0 2.7
Capital expenditures................. 12.0 12.5 8.7 5.5 2.0 (7.6)
Net cash provided by (used in)
operating activities............... 44.5 30.2 50.3 44.5 13.9 (1.8)
Net cash provided by (used in)
investing activities............... (7.2) (5.3) (25.9) 8.2 (1.3) (352.3)
Net cash provided by (used in)
financing activities............... (29.9) (17.6) (23.3) (69.0) (9.4) 354.2
Cash dividends....................... 23.7 21.4 6.2 16.5 -- --
Ratio of earnings to fixed
charges(7)......................... 16.1x 26.0x 26.3x 7.2x 9.4x --
</TABLE>
- ------------
(1) Historically, the Company has allocated employee profit sharing and bonuses
to cost of goods sold and selling, general and administrative expenses. For
the period subsequent to July 1, 1996, all profit sharing and bonuses have
been allocated to 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 (for the periods
prior to July 1, 1996), utility revenues, revenues realized from the
Company's terminalling facilities and sales of chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income before income taxes, extraordinary loss and
minority interest before taking into consideration interest expense,
depreciation and amortization and certain other non-recurring charges.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be construed
by an investor as an alternative to income from operations (as determined in
accordance with generally accepted accounting principles), as an indicator
of the operating performance of the Company or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
(7) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the twelve months
ended May 31, 1996, income before taxes and minority interest includes a
$12.6 million non-cash provision for the impairment of certain non-strategic
properties which TPC intends to sell. For the year ended June 30, 1997,
earnings were insufficient to cover fixed charges by the amount of $14.6
million.
9
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PURCHASERS OF THE
SECURITIES OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH
BELOW.
SUBSTANTIAL LEVERAGE
The Company has incurred a significant amount of indebtedness and has
significant debt service requirements. As of June 30, 1997, the Company had
outstanding indebtedness of $317.7 million and the Company's stockholders'
equity was $55.1 million. See "Capitalization" and "Selected Financial
Data." In addition, the Company may incur additional indebtedness in the
future, subject to limitations imposed by its debt instruments including,
without limitation, the Original Indenture, the Indenture and the Bank Credit
Agreement. 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 Securities, 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 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 Securities; 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 Securities."
The Company began making scheduled principal payments under the Bank Credit
Agreement commencing on September 30, 1996. See "Description of the Bank Credit
Agreement." The Company's ability to make scheduled payments or to refinance
its obligations with respect to its indebtedness, including the Securities, 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 Securities).
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 Securities). 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 each
of the Indentures restrict the Company's ability to sell assets and use the
proceeds therefrom. See "Description of the Bank Credit Agreement" and
"Description of the Securities." There can be no assurance as to the ability
of the Company to consummate such sales or the proceeds which the Company could
realize therefrom or that such proceeds would be adequate to meet the
obligations then due.
In the event that the Company is unable to generate sufficient cash flow
and the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its
10
<PAGE>
indebtedness, or if the Company otherwise fails to comply with the various
covenants in the instruments governing such indebtedness (including covenants in
each of the Indentures and the Bank Credit Agreement), the Company could be in
default under the terms of the agreements governing such indebtedness, including
each of the Indentures 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 Securities and on the market
value of the Securities. See "Description of the Securities" 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
Securities or amend the Indentures, 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. The Company
received waivers of compliance with certain of these ratios as of December 31,
1996, March 28, 1997 and June 30, 1997. The Company also obtained amendments to
the Bank Credit Agreement as of March 28, 1997 and June 30, 1997 to update these
financial ratios. See "Description of the Bank Credit Agreement." Each of the
Indentures also contain a number of restrictive covenants. See "Description of
the Securities -- Certain Covenants."
The Company's ability to comply with the covenants and restrictions
contained in the Bank Credit Agreement and each of the Indentures 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 each of the Indentures
which would permit the lenders under the Bank Credit Agreement or the holders of
the Original Notes or 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 Securities. See "Description of the
Securities -- 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 Securities.
SUBORDINATION OF THE SECURITIES; UNSECURED STATUS OF THE SECURITIES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Securities is subordinated in right of payment
to the prior payment in full of all existing and future Senior Indebtedness of
the Company, including all amounts owing under the Bank Credit Agreement. As of
June 30, 1997, the aggregate principal amount of such Senior Indebtedness of the
Company was $89.8 million. Therefore, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Company,
the assets of the Company will be available to pay obligations on the Securities
only after all Senior Indebtedness of the Company 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 Securities. In addition, the Company may not
pay principal of, premium, if any, or interest on the Securities, or purchase,
11
<PAGE>
redeem or otherwise retire the Securities, if any principal, premium, if any, or
interest on any Designated Senior Indebtedness (as defined under "Description
of the Securities -- 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, the Company may
not make any payments on the Securities 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 Securities -- Ranking."
Each of the Indentures 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 the Company
and TPC Holding. The Securities 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 Securities. 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 Securities and
other unsecured indebtedness.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined under "Description
of the Securities -- Certain Definitions"), the Company is required to offer to
purchase all of the outstanding Securities at a price equal to 101% of the
principal amount thereof at the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase. The occurrence of certain of the
events which would constitute a Change of Control constitutes a default under
the Bank Credit Agreement. In addition, the Bank Credit Agreement prohibits the
purchase of the Securities by the Company in the event of a Change of Control,
unless and until such time as the indebtedness under the Bank Credit Agreement
is repaid in full. The Company's failure to purchase the Securities in such
instance would result in a default under each of the Indentures 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 each
of the Indentures, which could have materially adverse consequences to the
Company and to the holders of the Securities. 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
Securities. See "Description of the Securities -- Change of Control" and
"Description of the Bank Credit Agreement."
CYCLICAL INDUSTRIES
The Company's primary business consists of the production of butadiene,
MTBE, n-butylenes and specialty isobutylenes. The prices of certain of these
products have historically been cyclical and have been sensitive to overall
production capacity relative to demand, the availability and price of feedstocks
and the level of general business activity. In the past, certain of these
products have experienced market shortages, accompanied by relatively high
prices, and periods of oversupply, accompanied by relatively low prices.
While the Company has achieved relatively stable profitability on its sales
of butadiene due to the nature of the supply contracts under which it purchases
crude butadiene, industry profitability for MTBE has fluctuated considerably
over the past several years. In the early 1990s, considerable additional
production capacity was installed in the U.S. in anticipation of demand for MTBE
created by the Federal Clean Air Act Amendments of 1990 ("CAAA"). This demand
did not completely materialize due to states opting-out of the programs
promulgated by the CAAA as well as less than anticipated demand in states not
required to comply with such programs, resulting in an industry overcapacity
condition that has resulted in lower average selling prices and margins.
12
<PAGE>
HIGHLY COMPETITIVE INDUSTRY
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors are larger and have greater
financial resources than the Company. Among the Company's competitors are some
of the world's largest chemical companies and major integrated petroleum
companies that have their own raw material resources. In addition, a significant
portion of the Company's business is based upon widely available technology.
Accordingly, barriers to entry, apart from capital availability, may be low in
the commodity product section of the Company's business, and the entrance of new
competitors into the industry may reduce the Company's ability to capture
improving profit margins in circumstances where overcapacity in the industry is
diminishing. Furthermore, petroleum-rich countries have recently become more
significant participants in the petrochemical industry and may expand such role
significantly in the future. Any of these developments could have a negative
impact on the Company's financial position, results of operations and cash
flows. See "Business -- Competition."
DEPENDENCE ON KEY CUSTOMERS
Certain of the Company's largest customers account for a significant
percentage of the Company's sales. In the year ended June 30, 1997 approximately
41% of the Company's sales were made to four customers. In addition, in the year
ended June 30, 1997 approximately 16.7% of the Company's total revenues were
derived from a single customer and 11.4% of the Company's total revenues were
derived from an additional single customer. Although the Company believes its
relationships with its largest customers are good, the loss of a significant
customer or a number of significant customers would have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. There can be no assurance that the historic levels of business from these
customers or the Company's ability to replace a lost customer will be maintained
in the future.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive Federal, state and local
laws, regulations and decrees governing, among other things, emissions to air,
discharges to waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. The Company's production facilities
require operating permits that are subject to revocation, modification and
renewal, violations of which may provide for substantial fines and civil or
criminal sanctions. The operation of any chemical manufacturing plant entails
risk of adverse environmental effect, including exposure to chemical products
and by-products from the Company's operations, and there can be no assurance
that material costs or liabilities will not be incurred to rectify any such
damage. In addition, potentially significant expenditures could be required in
order to comply with environmental, health and safety laws and regulations that
may be adopted or imposed in the future. To meet changing licensing and
regulatory standards, the Company may be required to make additional significant
site or operational modifications, potentially involving substantial
expenditures or the reduction or suspension of certain operations. See
"-- Dependence on Single Facility" and "Business -- Environmental
Regulation."
PRICE VOLATILITY OF PETROCHEMICAL FEEDSTOCKS
The Company uses large amounts of petrochemical feedstocks in the
manufacturing of its chemical products. While the Company tries to match cost
increases with corresponding price increases, there may be periods of time
during which increases in feedstock prices are not recovered by the Company due
to an inability to increase the selling prices of its products because of
weakness in demand for, or oversupply of, such products.
The principal raw material feedstocks purchased by the Company are crude
butadiene, isobutane and methanol. A number of the Company's raw material
suppliers provide the Company with a significant amount of its raw materials,
and if one significant supplier or a number of significant suppliers were unable
to meet their obligations under present supply arrangements, or if such
arrangements could not be renewed upon expiration, the Company could be required
to incur increased costs for its raw materials. The ability to pass on increases
in raw material prices to the Company's customers is, to a large extent,
dependent on
13
<PAGE>
market conditions. There may be periods of time in which increases in feedstock
prices are not recovered by the Company due to an inability to increase the
selling prices of its products because of weakness in demand for, or oversupply
of, such products, and therefore, certain increases in raw materials prices may
have a material adverse effect on the operations of the Company.
DEPENDENCE ON SINGLE FACILITY
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. Effective February 1997,
the Occupational Safety and Health Administration lowered substantially the
employee permissible exposure limit for butadiene. Although the Company believes
that it is in compliance with the new regulatory limit and may maintain
compliance without incurring significant costs, there can be no assurance that
future scientific studies regarding the health effects of butadiene or any other
product handled by the Company will not result in more stringent regulations or
in restrictions on the use of, or exposure to, such products. See
"Business -- Environmental Regulation."
FRAUDULENT TRANSFER CONSIDERATIONS
TPC has incurred substantial indebtedness, including through its incurrence
of indebtedness under the Bank Credit Agreement and the Original Notes and the
refinancing of a portion of such indebtedness with 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 any
such indebtedness was incurred by TPC, (a) TPC incurred such indebtedness 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 incurring such indebtedness and (ii) TPC (A) was insolvent or was rendered
insolvent by reason of any of the transactions relating to the incurrence of
such indebtdness, (B) was engaged, or about to engage, in a business or
transaction for which
14
<PAGE>
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 void the
obligations under the Original Notes or the Notes or subordinate the Original
Notes or the Notes to presently existing and future indebtedness of TPC or take
other action detrimental to the holders of the Original Notes or the Notes,
including, under certain circumstances, invalidating the Original Notes or the
Notes. In that event, there can be no assurance that any repayment on the
Original Notes or the Notes would ever be recovered by holders of the Original
Notes or 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 Original Notes or the
Notes, as the case may be, 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 Original Notes or the Notes, as the case may be, would not be avoided on
another of the grounds set forth above.
LACK OF PUBLIC MARKET FOR THE NOTES
At the time of the private placement of the Original Notes, the Original
Initial Purchasers (as defined in "Description of the Securities -- Certain
Definitions") advised the Company that they intended to make a market in the
Original Notes and, at the time of the private placement of the Notes, the
Initial Purchaser (as defined in "Description of the Securities -- Certain
Definitions") advised the Company that it intended to make a market in the
Notes. However, neither the Original Initial Purchasers nor the Initial
Purchaser are obligated to make a market in the Original Notes or the Notes,
respectively, and any such market-making may be discontinued at any time at the
sole discretion of the Original Initial Purchasers or the Initial Purchaser, as
applicable. No assurance can be given as to the liquidity of or trading market
for the Original Notes or the Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of securities
registered under this market-making Prospectus.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997. The information set forth below should be read in conjunction with the
"Selected Financial Data" and the Company's Consolidated Financial Statements
and related notes thereto included elsewhere herein.
AS OF
JUNE 30, 1997
-------------
Cash and investment securities ............................. $ 0.1
======
Long-term debt, including current
maturities:
Existing revolving line of
credit ............................................... 12.0
Tranche A Term Loan ................................... 25.8
Tranche B Term Loan ................................... 44.0
ESOP Term Loan ........................................ 8.0
Original Notes ........................................ 175.0
Notes ................................................. 52.9
------
Total long-term debt,
including current
maturities .................................... 317.7
Common stock held by ESOP .................................. 8.0
Less -- Note receivable
from ESOP ..................................... (8.0)
Total stockholders'
equity ........................................ 55.1
------
Total
capitalization ........................... $372.8
======
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
combined financial statements of TOC, its subsidiaries and Clarkston for periods
prior to July 1, 1996 and from the consolidated financial statements of the
Company since July 1, 1996, and should be read in conjunction with, and is
qualified in its entirety by reference to, financial statements which appear
elsewhere in this Prospectus and their accompanying notes. Such combined
financial information is combined to reflect the assumption by the Company of a
raw material supply contract. The combined financial information set forth below
for each of the years in the three-year period ended May 31, 1995, the
twelve-month period ended May 31, 1996 and the one-month period ended June 30,
1996 has been derived from the financial statements of TOC, its subsidiaries and
Clarkston, which were audited by Coopers & Lybrand L.L.P., independent auditors
for such entities. The consolidated financial information of the Company set
forth below for the year ended June 30, 1997 was audited by Deloitte & Touche
LLP. The results of the one month and interim periods are not necessarily
indicative of the results of the entire year or any other period. The
information presented below should be read in conjunction with the combined
financial statements of TOC, its subsidiaries and Clarkston, the consolidated
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------- --------
TWELVE ONE
MONTHS MONTH YEAR
ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, JUNE 30,
------------------------------- ------- -------- --------
1993 1994 1995 1996 1996 1997
--------- --------- --------- ------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4 $490.2
Cost of goods sold(1)................ 340.8 268.8 396.3 379.5 36.0 433.7
Depreciation and amortization........ 12.6 13.6 14.3 15.0 1.3 29.8
--------- --------- --------- ------- -------- --------
Gross profit......................... 57.3 70.0 64.1 61.1 4.1 26.7
Selling, general and administrative
expenses(1)........................ 14.4 16.7 16.6 19.1 1.7 8.4
--------- --------- --------- ------- -------- --------
Income from operations............... 42.9 53.3 47.5 42.0 2.4 18.3
Interest income (expense), net....... (0.6) (0.2) 0.7 (1.6) (0.1) (35.2)
Other income (expense)(2)............ (1.2) (0.8) 1.1 (15.9) (0.3) 2.3
--------- --------- --------- ------- -------- --------
Income (loss) before income taxes and
minority interest.................. 41.1 52.3 49.3 24.5 2.0 (14.6)
Provision (benefit) for income
taxes.............................. 13.0 18.4 16.9 7.9 0.8 (3.3)
Extraordinary loss................... -- -- -- -- -- 1.4
Minority interest in net loss of
consolidated subsidiary............ -- -- 0.1 0.1 -- --
--------- --------- --------- ------- -------- --------
Net income (loss).................... 28.1 33.9 32.5 16.7 1.2 (12.7)
OPERATING DATA:
Revenues by product:
Butadiene(3).................... $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2 $130.9
MTBE............................ 211.0 175.2 199.1 187.4 21.0 230.3
n-Butylenes..................... 21.7 28.1 42.7 48.2 3.2 49.4
Specialty Isobutylenes.......... 54.8 59.9 75.5 74.5 5.5 62.3
Other(4)........................ 41.9 20.5 51.2 32.9 1.5 17.3
Sales volumes (in millions of
pounds):
Butadiene....................... 556.2 484.4 580.8 622.6 64.6 750.3
MTBE(5)......................... 225.1 194.8 211.1 219.8 26.6 274.1
n-Butylenes..................... 114.7 150.8 245.9 284.6 17.1 266.4
Specialty Isobutylenes.......... 309.0 312.2 398.0 368.2 23.0 275.7
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------ --------
MAY 31,
------------------------------- JUNE 30, JUNE 30,
1993 1994 1995 1996 1997
--------- --------- --------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ 11.1
Property, plant and equipment, net... 101.6 95.9 90.1 81.8 240.0
Total assets......................... 194.1 214.6 230.7 167.9 521.1
Long-term debt (including current
portion)........................... 10.9 11.0 -- 13.0 317.7
Total stockholders' equity........... 128.2 140.4 163.3 92.5 55.1
PREDECESSOR COMPANY
----------------------------------------------------- --------
TWELVE ONE
MONTHS MONTH YEAR
ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, JUNE 30,
------------------------------- ------- -------- --------
1993 1994 1995 1996 1996 1997
--------- --------- --------- ------- -------- --------
(DOLLARS IN MILLIONS)
OTHER DATA:
EBITDA(6)............................ $ 55.5 $ 66.9 $ 61.8 $ 57.0 $ 3.7 $ 50.4
Employee profit sharing and
bonuses(1)......................... 18.6 23.6 20.9 23.5 1.0 2.7
Capital expenditures................. 12.0 12.5 8.7 5.5 2.0 7.6
Net cash provided by (used in)
operating activities............... 44.5 30.2 50.3 44.5 13.9 (1.8)
Net cash provided by (used in)
investing
activities......................... (7.2) (5.3) (25.9) 8.2 (1.3) (352.3)
Net cash provided by (used in)
financing activities............... (29.9) (17.6) (23.3) (69.0) (9.4) 354.2
Cash dividends....................... 23.7 21.4 6.2 16.5 -- --
Ratio of earnings to fixed
charges(7)......................... 16.1x 26.0x 26.3x 7.2 x 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. For
the period subsequent to July 1, 1996 all profit sharing and bonuses have
been allocated to 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 (for the periods
prior to July 1, 1996), utility revenues, revenues realized from the
Company's terminalling facilities and sales of chemical by-products.
(5) Volumes in millions of gallons.
(6) EBITDA represents income before income taxes, extraordinary loss and
minority interest before taking into consideration interest expense,
depreciation and amortization and certain other non-recurring charges.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be construed
by an investor as an alternative to income from operations (as determined in
accordance with generally accepted accounting principles), as an indicator
of the operating performance of the Company or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
(7) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the twelve months
ended May 31, 1996, income before taxes and minority interest includes a
$12.6 million non-cash provision for the impairment of certain non-strategic
properties which TPC intends to sell. For the year ended June 30, 1997,
earnings were insufficient to cover fixed charges by the amount of $14.6
million.
18
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials), and, from time
to time, other external factors, such as the implementation of the CAAA, which
has significantly increased the demand for MTBE. Historically, the Company has
successfully mitigated the cyclicality of the markets for certain of its end
products by entering into contracts with pricing which allows for a fixed profit
by linking prices directly or indirectly to raw material costs. In addition, the
Company has attempted to optimize the use of isobutylene, an intermediate
feedstock produced by the Company, to produce MTBE or higher margin, specialty
products depending on prevailing market conditions.
REVENUES
The Company's revenues are primarily a function of the volume of products
sold by the Company and the prices for such products. The following tables set
forth the Company's: (i) historical revenues and the percentages of historical
revenues by product; (ii) volume of products sold; and (iii) average selling
prices for such products, exclusive of tolling fees, in each case for the year
ended May 31, 1995, the twelve-month period ended May 31, 1996, the one-month
period ended June 30, 1996 and the year-ended June 30, 1997.
REVENUES
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------- --------------------
TWELVE MONTHS
ONE MONTH YEAR
YEAR ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30,
-------------------- -------------------- -------------------- --------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Butadiene............... $ 106.2 22% $ 112.6 25% $ 10.2 25% $ 130.9 27%
MTBE.................... 199.1 42 187.4 41 21.0 50 230.3 47
n-Butylenes............. 42.7 9 48.2 11 3.2 8 49.4 10
Specialty
Isobutylenes.......... 75.5 16 74.5 16 5.5 13 62.3 13
Other(1)................ 51.2 11 32.9 7 1.5 4 17.3 3
--------- --- --------- --- --------- --- --------- ---
Total.............. $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 490.2 100%
========= === ========= === ========= === ========= ===
</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>
PREDECESSOR COMPANY
----------------------------------------- ------------
TWELVE MONTHS ONE MONTH YEAR
YEAR ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30,
---------- ------------- ---------- ------------
1995 1996 1996 1997
---------- ------------- ---------- ------------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C>
Butadiene............................... 580.8 622.6 64.6 750.3
MTBE(1)................................. 211.1 219.8 26.6 274.1
n-Butylenes............................. 245.9 284.6 17.1 266.4
Specialty Isobutylenes.................. 398.0 368.2 23.0 275.7
</TABLE>
- ------------
(1) Volumes in millions of gallons.
19
<PAGE>
AVERAGE SELLING PRICES
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------- ------------
TWELVE MONTHS ONE MONTH YEAR
YEAR ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, JUNE 30,
---------- ------------- ---------- ------------
1995 1996 1996 1997
---------- ------------- ---------- ------------
(DOLLARS PER POUND, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C>
Butadiene............................ $ 0.21 $0.20 $ 0.18 $ 0.19
MTBE(1).............................. 0.94 0.85 0.80 0.84
n-Butylenes(2)....................... 0.17 0.17 0.19 0.20
Specialty Isobutylenes(2)............ 0.19 0.20 0.24 0.23
</TABLE>
- ------------
(1) Prices in dollars per gallon.
(2) Weighted average of the products under these categories.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations .
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------------------------------------
TWELVE MONTHS COMPANY
ONE MONTH --------------------
YEAR ENDED MAY 31, ENDED ENDED YEAR ENDED
MAY 31, JUNE 30, JUNE 30,
-------------------- -------------------- -------------------- --------------------
1995 1996 1996 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 490.2 100%
Cost of goods sold...................... 396.3 84 379.5 84 36.0 87 433.7 88
Depreciation and amortization........... 14.3 3 15.0 3 1.3 3 29.8 6
--------- --- --------- --- --------- --- --------- ---
Gross profit............................ 64.1 13 61.1 13 4.1 10 26.7 6
Selling, general and administrative
expenses.............................. 16.6 3 19.1 4 1.7 4 8.4 2
--------- --- --------- --- --------- --- --------- ---
Income from operations.................. $ 47.5 10% $ 42.0 9% $ 2.4 6% $ 18.3 4%
========= === ========= === ========= === ========= ===
</TABLE>
YEAR ENDED JUNE 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED MAY 31, 1996
REVENUES
The Company's revenues increased by approximately 8%, or $34.6 million, to
$490.2 million for the year ended June 30, 1997 from $455.6 for the twelve
months ended May 31, 1996. The increase was primarily attributable to increased
sales volumes of MTBE and butadiene, partially offset by decreases in sales
volume of specialty isobutylenes.
Butadiene revenues increased by approximately 16%, or $18.3 million, to
$130.9 for the year ended June 30, 1997 from $112.6 million for the twelve
months ended May 31, 1996. The increase was attributable to an increase in sales
volume of approximately 21%, or 127.7 million pounds, as a result of increased
production levels due to the availability of crude butadiene, processing
efficiencies and strong customer demand. The volume increase was partially
offset by a decline in butadiene sales prices. Prices declined slightly in the
current year as a result of the build up of U.S. tire inventory to record levels
in the prior year.
MTBE revenues increased by approximately 23%, or $42.9 million, to $230.3
million for the year ended June 30, 1997 from $187.4 million for the twelve
months ended May 31, 1996. With the decrease in demand for isobutylene
concentrate for the first half of the fiscal year, the Company shifted its
isobutylene production, an intermediate feedstock, to the production of MTBE.
Demand for MBTE in the market remained strong, allowing the Company to supply
increased volumes to its customers.
n-Butylenes revenues increased by approximately 2%, or $1.2 million, to
$49.4 million for the year ended June 30, 1997 from $48.2 million for the twelve
months ended May 31, 1996. Sales volumes and
20
<PAGE>
prices of butene-1 increased in the current year compared to the prior. The
increases were the result of strong demand from polyethylene producers and
successful marketing efforts by the Company. Sales volumes of butene-2 decreased
in the current year as a result of alternative feedstocks entering the market.
Specialty isobutylene revenues decreased by approximately 16%, or 12.2
million, to $62.3 million for the year ended June 30, 1997 from $74.5 million
for the twelve months ended May 31, 1996. The decrease was primarily
attributable to lower sales volumes of isobutylene concentrate. Product demand
was adversely affected in the first half of the year by high isobutane prices.
Significant improvements in isobutane pricing and demand occurred in the latter
half of the year. Sales revenues for high purity isobutylene and diisobutylene
decreased in the current year as a result of lower sales prices and slightly
lower sales volumes due to market competition.
Other revenues decreased by approximately 47%, or $15.6 million, to $17.3
million for the year ended June 30, 1997 from $32.9 million for the twelve
months ended May 31, 1996. The decrease in revenues is due to the elimination of
a former affiliate's trading revenues from third parties. The affiliate was
dissolved in June 1996 as part of the Acquisition.
GROSS PROFIT
Gross profit decreased by approximately 56%, or $34.4 million, to $26.7 for
the year ended June 30, 1997 from $61.1 million for the twelve months ended May
31, 1996. Gross margin during the period decreased to 5.4% from 13.4%. The
decrease was primarily attributable to lower margins on MTBE and specialty
isobutylene sales. MTBE margins were adversely affected by higher feedstock
costs. Average isobutane and methanol prices were approximately 13% and 25%
higher, respectively, than in the prior year. In December 1996, as a result of
the decline in MTBE margins, the Company shut down for 52 days its Dehydro-1
unit which has a production capacity of approximately 9,000 barrels per day of
isobutylene. Additionally, during October 1996, the Company temporarily shut
down Dehydro-1 for 21 days as a result of a scheduled turnaround in order to
install a new waste heat boiler. Higher natural gas prices also contributed to a
lower gross profit during fiscal 1997. Gross profits from sales of butadiene and
butene-1 increased over the prior year and were used to offset partially the
above-referenced decrease. Gross profit was also negatively impacted by
increased depreciation and amortization expense during fiscal 1997 as a result
of the increased basis in fixed assets and goodwill from the Acquisition.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 56%, or $23.7 million, to
$18.3 million for the year ended June 30, 1997 from $42.0 million for the twelve
months ended May 31, 1996. Operating margin during the period decreased to 3.7%
from 9.2%. This decrease in income from operations and operating margin was
primarily due to the same factors contributing to the decrease in gross profit
and gross margin described above. The decrease was partially offset by a
decrease in selling, general and administrative costs as a result of cost
savings subsequent to the Acquisition.
INTEREST EXPENSE
Interest expense increased by approximately $33.6 million, to $35.2 million
for the year ended June 30, 1997 from $1.6 million for the twelve months ended
May 31, 1996. The increase in interest expense was associated with long-term
debt incurred by the Company as a result of the Acquisition.
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
REVENUES
The Company's revenues increased by approximately 14%, or $5.2 million, to
$41.4 million for the one month ended June 30, 1996 from $36.2 million for the
one month ended June 30, 1995. This increase was attributable to increased
volumes for butadiene and MTBE. Volumes for n-butylenes and specialty
isobutylenes were down compared to the prior period. Prices for butadiene were
up slightly and MTBE prices were down. Other product prices remained constant
with the prior period.
21
<PAGE>
GROSS PROFIT
Gross profit decreased by approximately 27%, 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.
Butadiene revenues increased by approximately 6%, or $6.4 million, to
$112.6 million for the twelve months ended May 31, 1996 from $106.2 million for
the year ended May 31, 1995. This increase was primarily attributable to an
increase in sales volumes of approximately 7%, or 41.8 million pounds, as a
result of increased contractual volumes sold at then current prices to a major
customer as the Company gained a larger share of this customer's business and as
this customer increased its requirements. In addition, sales prices decreased
slightly due to customers drawing down inventory thereby decreasing overall
product demand.
MTBE revenues decreased by approximately 6%, or $11.7 million, to $187.4
million for the twelve months ended May 31, 1996 from $199.1 million for the
year ended May 31, 1995. This decrease was primarily attributable to a decrease
in selling prices due to the expiration of significant sales contracts in which
pricing was based on a fixed profit above cost, in accordance with industry
trends. In addition, sales volumes increased by approximately 4%, or 8.7 million
gallons, due to the full year implementation of mandated oxygenate requirements.
n-Butylenes revenues increased by approximately 13%, or $5.5 million, to
$48.2 million for the twelve months ended May 31, 1996 from $42.7 million for
the year ended May 31, 1995. This increase was attributable to increased sales
volumes of approximately 16%, or 38.7 million pounds, as the Company expanded
its customer base and increased its contractual volumes to a significant
existing customer. A decrease in average selling prices resulted from the
Company matching competitors' pricing for certain products, which partially
offset the increase in sales volumes.
Specialty isobutylenes revenues decreased by approximately 1%, or $1.0
million, to $74.5 million for the twelve months ended May 31, 1996 from $75.5
million for the year ended May 31, 1995. This decrease was the result of a major
specialty isobutylene customer increasing purchases of a low price specialty
isobutylene product from a competing supplier offering an alternate, lower
purity product during this period. The Company offset a portion of these lower
volumes by sales of higher priced specialty isobutylene products to other
customers at prices which were lower than prevailing contract prices.
Other revenues decreased by approximately 36%, or $18.3 million, to $32.9
million for the twelve months ended May 31, 1996, from $51.2 million for the
year ended May 31, 1995. This decrease was
22
<PAGE>
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.
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 $2.5 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."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
YEAR ENDED JUNE 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED MAY 31, 1996
Net cash provided by (used in) operating activities was $(1.8) million for
the year ended June 30, 1997 compared to $44.5 million for the twelve months
ended May 31, 1996. The change of $46.3 million was primarily attributable to
the decrease in overall profitability and changes in working capital. Net cash
provided by (used in) investing activities was $(352.3) million for the year
ended June 30, 1997 compared to $8.2 million for the twelve months ended May 31,
1996. The change of $360.5 million was primarily attributable to the Acquisition
on July 1, 1996, partially offset by proceeds from the sale of non-plant assets
and Company assets and investments. Net cash provided by (used in) financing
activities was $354.2 million for the year ended June 30, 1997 compared to
$(69.0) million for the twelve months ended May 31, 1996. The change of $423.2
million was primarily attributable to the issuance of long-term debt and an
investment from Holdings, in order to finance the Acquisition.
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
Net cash provided by operating activities was $13.9 million for the one
month ended June 30, 1996 compared to $1.9 million for the one month ended June
30, 1995. This increase of $12.0 million was primarily attributable to changes
in working capital, partially offset by a decrease in net income. Net cash used
in investing activities was $1.3 million for the one month ended June 30, 1996
compared to net cash 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.
23
<PAGE>
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
Net cash provided by operating activities was $44.5 million for the twelve
months ended May 31, 1996 compared to $50.3 million for the year ended May 31,
1995. This decrease of $5.8 million was primarily attributable to a decrease in
net income adjusted for non-cash items and a decrease in changes in working
capital. Net cash provided by investing activities was $8.2 million for the
twelve months ended May 31, 1996 compared to net cash used in investing
activities of $25.9 million for the year ended May 31, 1995. This change of
$34.1 million was due to decreases in capital expenditures, an increase in
proceeds from the sales of investment securities and a decrease in purchases of
investment securities. Net cash used in financing activities was $69.0 million
for the twelve months ended May 31, 1996 compared to $23.3 million for the year
ended May 31, 1995. This increase of $45.7 million was primarily due to the
purchase by the Company of common stock for a total consideration of $95.4
million in August 1995 and an increase in dividends and distributions paid,
partially offset by the sale by the Company of common stock to certain officers
of the Company for $22.6 million and decreased repayments under revolving credit
lines.
LIQUIDITY
The Company's liquidity needs arise primarily from principal and interest
payments under the $140 million Bank Credit Agreement and $175 million principal
amount of Original Notes incurred in connection with the Acquisition, as well as
the $50 million principal amount of Notes, the net proceeds of which were used
to reduce indebtedness under the Bank Credit Agreement. The Company's primary
source of funds to meet debt service requirements is net cash flow provided by
operating activities. Operating cash flow is significantly impacted by raw
materials cost as well as the selling price and volume variances of finished
goods. The Company enters into supply contracts for certain of its products in
order to mitigate the impact of changing prices. Additionally, the Company has a
$40 million Revolving Credit Facility of which only $12 million was in use at
June 30, 1997, to provide adequate funds for ongoing operations, working
capital, planned capital expenditures and debt service during the terms of such
Revolving Credit Facility. The Company believes that the availability of funds
under the Revolving Credit Facility are sufficient to cover any current
liquidity needs which could arise as a result of negative working capital. The
Company's ability to borrow is limited by the terms of the Bank Credit Agreement
and the Indentures. The Bank Credit Agreement, the Original Notes and the Notes
include certain restrictive covenants which include, but are not limited to,
limitations on capital expenditures, indebtedness, investments and sales of
assets and subsidiary stock. Additionally, the Bank Credit Agreement requires
the Company to maintain certain financial ratios. The Company obtained waivers
under the Bank Credit Agreement for compliance with certain financial ratios
relating to fixed charge coverage, debt to equity, and net worth as of December
31, 1996, March 28, 1997 and June 30, 1997. The Company also obtained amendments
to the Bank Credit Agreement as of March 28, 1997 and June 30, 1997 to update
these financial ratios. See "Risk Factors -- "Restrictive Financing
Covenants," "Description of the Bank Credit Agreement" and "Description of
the Securities."
CASH BONUS PLAN
In connection with the Acquisition, the Company established a $35 million
Cash Bonus Plan for certain employees of the Company and certain employees of
its independent contractors. In August 1996, 10% of this amount was paid to
eligible participants and the remaining payments will be made in sixteen
quarterly installments.
CAPITAL EXPENDITURES
The Company's capital expenditures for fiscal 1997 related principally to
improving operating efficiencies and maintaining environmental compliance
(including the installation of an environmentally superior waste-heat boiler in
one of the Company's dehydrogenation units). Capital expenditures for the year
ended June 30, 1997 were $7.6 million, compared to $5.5 million for the twelve
months ended May 31, 1996 and $8.7 million for the year ended May 31, 1995. The
Company expenses approximately $20 million annually for plant maintenance. These
maintenance costs are not treated as capital expenditures.
24
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," SFAS
No. 129 "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. SFAS No. 129 is effective for periods ending after December
15, 1997. SFAS No. 130 and SFAS 131 are effective for fiscal years beginning
after December 15, 1997. Adoption of these pronouncements is not expected to
have a material effect on the Company's financial position, results of
operations or cash flows.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Part 1, Items 1 and 2 of this document include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Although the Company believes that the expectations reflected in such
forward looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in conjunction with the forward looking statements included herein
("Cautionary Disclosures"). Subsequent written or oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
25
<PAGE>
BUSINESS
GENERAL
The Company is the largest producer of butadiene and butene-1, and the
third largest producer of MTBE, in North America, in terms of production
capacity. In addition, the Company is the sole producer of diisobutylene and
isobutylene concentrate in the United States and the largest domestic merchant
supplier of high purity isobutylene to the chemical market. The Company's
products include: (i) butadiene, primarily used to produce synthetic rubber;
(ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-
butylenes (butene-1 and butene-2), used in the manufacture of plastic resins,
fuel additives and synthetic alcohols; and (iv) specialty isobutylenes,
primarily used in the production of specialty rubbers, lubricant additives,
detergents and coatings. For the year ended June 30, 1997, and the twelve months
ended May 31, 1996, butadiene represented 27% and 25% of the Company's total
revenues, respectively, MTBE represented 47% and 41%, n-butylenes 10% and 11%,
respectively, specialty isobutylenes 13% and 16%, respectively and other
revenues the remaining 3% and 7%, respectively. The Company's revenues for the
year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 were $490.2 million, $455.6 million and $41.4 million,
respectively, and EBITDA (as defined) for the year ended June 30, 1997, the
twelve months ended May 31, 1996 and the one month ended June 30, 1996 were
$50.4 million, $57.0 million and $3.7 million, respectively.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in North America, the Company believes that many of its customers
place significant value on its ability to provide a reliable domestic supply of
butadiene and as a result have entered into long-term sales contracts with the
Company.
The Company extracts butadiene from crude butadiene, which is generated
from the production of ethylene and is comprised of a number of valuable
components, including butadiene, isobutylene, n-butylenes, isobutane and
n-butane. Many U.S. ethylene producers rely on third parties such as the Company
to process their crude butadiene streams, as the crude butadiene volumes they
produce are not sufficient to justify the construction of on-site butadiene
recovery facilities. The Company estimates that producers accounting for 65% of
U.S. and Canadian ethylene production capacity do not internally process crude
butadiene by-product streams. The Company is the largest non-integrated crude
butadiene processor in North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major component of, RFG
and is used in over 30% of the U.S. gasoline pool. MTBE is produced by reacting
methanol and isobutylene, and the Company's ability to produce isobutylene by
three alternative methods enables it to produce MTBE by the most economical
processes available to the Company. In addition, the Company has the ability to
add incremental isobutylene capacity to capitalize on expected future growth, at
a significantly lower cost than new grass root, on-purpose capacity. The Company
believes that this incremental capacity gives it a competitive advantage over
other producers who would have to incur greater cost to increase capacity. The
Company sells MTBE to oil refiners and gasoline producers, including Mobil Oil
Corporation, Lyondell Petrochemical Company and CITGO Petroleum Corporation on
both a contract and spot basis at prices linked to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal
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customers for n-butylenes include Union Carbide Corporation, The Dow Chemical
Company, NOVA Chemicals Ltd., Shell Chemical Company and Lyondell Petrochemical
Company. The Company's principal customers for specialty isobutylenes include
Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc Inc., The Lubrizol
Corporation and Schenectady International, Inc. Historically, the profitability
of the Company's n-butylenes sales has been relatively stable as the majority of
the sales of these products are made under contracts which link their selling
prices to the prices of products (principally gasoline and butanes) whose prices
fluctuate closely with those of the raw materials used to manufacture
n-butylenes and specialty isobutylenes.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally, to produce MTBE for sale in the spot
market. In addition, the Company maintains the production flexibility to upgrade
n-butylenes contained in crude butadiene streams to either isobutylene or
butene-1 using its patented SKIP process. This flexibility allows the Company to
meet its customers' needs through the most economical process, to produce
additional products and to capitalize on favorable market conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
the Company acquired from Tenneco, Inc. the assets (principally comprised of the
Houston facility) of Petro-TexChemical Corporation ("Petro-Tex"), the prior
owner of the Company's manufacturing facility.
COMPANY STRATEGY
The Company believes that it has become the industry leader in the
production of the majority of its products by capitalizing on its production
flexibility, its ability to add significant incremental capacity across its
product lines, the marketing experience of its management team, its competitive
cost position and its customer focus. The Company's strategy is to strengthen
its established presence in its selected markets by focusing on the following
factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS -- The markets in which the Company
competes are cyclical. The Company intends to mitigate the effects of this
cyclicality while benefiting from potential upturns in industry profitability by
optimizing the proportion of its sales made under contracts allowing for a fixed
profit or at prices linked directly or indirectly to raw material prices.
CAPITALIZE ON PRODUCTION FLEXIBILITY -- The Company has the ability to
produce a number of its intermediate and finished products (I.E. crude
butadiene, isobutylene and butene-1) by a variety of processes. The Company
intends to capitalize on this ability by shifting production to the most
economical process and production level based upon market conditions, thus
ensuring a reliable source of supply for its customers.
UTILIZE INCREMENTAL CAPACITY -- The Company can increase its capacity to
produce butadiene, isobutylene and its derivatives at significantly lower cost
than that of new construction. While the Company currently has no plans to
increase its production capacity, it continuously evaluates these strategic
options in light of prevailing market conditions. In addition, the Company
believes that its ability to add low-cost incremental capacity acts as a
deterrent to other producers and new entrants considering capacity expansions.
The Company's ability to add incremental butadiene capacity and its
relationships with several North American ethylene producers are expected to
enable it to capture the benefit of increased U.S. crude
27
<PAGE>
butadiene supply. In addition, announced butadiene capacity expansions by other
U.S. producers are minimal. The Company believes that growth in global demand
for butadiene will be consistent with gross domestic product growth based on
increased tire production and potential substitution of synthetic rubber for
natural rubber.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS -- The Company's production
flexibility and its ability to add low-cost capacity are crucial to its
capitalizing on the attractive demand/supply outlook for a number of its
products.
o BUTADIENE. The U.S. supply of crude butadiene is increasing in line
with domestic ethylene production, although it is currently
insufficient to meet U.S. demand. Industry operating rates are
expected to remain at current high levels as the increase in domestic
crude butadiene production is expected to replace imports with
butadiene demand remaining strong in support of derivative businesses.
o MTBE. While the Company expects U.S. demand for MTBE to grow less
quickly than it has over the past fifteen years, it believes that
future growth in foreign demand may be considerable. In addition,
recently announced U.S. MTBE capacity additions are minimal.
o BUTENE-1. Demand for butene-1 is closely linked to polyethylene
production growth. The Company expects global production of
polyethylene to increase at higher than historical rates in the next
four years. In addition, the Company expects demand for butene-1 used
in other applications to be strong.
SUSTAIN CUSTOMER FOCUS -- The Company believes that producing quality
products and providing quality service with dependable supply are key factors in
its ability to compete in the market place for its products. Management believes
that its focus on customer service has resulted in strong customer relationships
and a high degree of customer loyalty. This is evidenced by the fact that
approximately 60% of the Company's current customers have purchased products
from the Company for more than ten years.
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The following table summarizes the Company's products.
<TABLE>
<CAPTION>
REVENUES FOR
YEAR ENDED INTERMEDIATE
COMPANY PRODUCT JUNE 30, 1997 CHEMICAL PRODUCTS PRINCIPAL APPLICATIONS
- ------------------------------------ ------------------------------ ------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
BUTADIENE $ 130.9 Styrene-Butadiene Rubber Tires, gaskets, pipes and hoses
Styrene-Butadiene Latex Paints, adhesives and paper coatings
Acrylonitrile Butadiene Styrene High-performance plastics
Polybutadiene Rubber Tires
Hexamethylenediamine Nylon
MTBE $ 230.3 Reduces automotive emissions and
improves engine performance
N-BUTYLENES $ 49.4
Butene-1 High Density and Linear Low Trash bags, film wrap, pipe and
Density Polyethylene plastic containers
Butylene Oxide Detergent packages used in new
gasoline formulations to improve
engine performance
Butene-2 SEC-Butyl and other Alcohols Used in the production of coatings,
adhesives and plasticizers
SPECIALTY
ISOBUTYLENES $ 62.3
Isobutylene
Concentrate Butyl Rubber High-performance synthetic rubbers
used in tires
Polybutenes Lubricant additives
High Purity
Isobutylene Butyl Rubber High-performance synthetic rubbers
used in tires
Alkylphenols Resins and antioxidants
Agricultural Intermediates Herbicides and insecticides
Hydrocarbon Resins Sealants, paints, coatings and rubber
chemicals
Sulfurized Isobutylene Synthetic lubricant oils
Diisobutylene Alkylphenols Phenolic resins, tackifier and ink
resins, surfactants
Rubber Chemicals Specialty additives
Dispersants Lubricant oil additives
Polycarboxylate Polymers Water treatment, detergent and
mineral processing chemicals
</TABLE>
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<PAGE>
INDUSTRY OVERVIEW
BUTADIENE. Butadiene is an important raw material used in the production
of a number of products, including styrene-butadiene rubber ("SBR"),
polybutadiene rubber, styrene-butadiene ("SB") latex, acrylonitrile butadiene
styrene ("ABS") and hexamethylenediamine ("HMDA"). These products are
utilized in the manufacture of tires and other rubber products, engineered
plastics, nylon fibers and other uses.
Demand for butadiene depends to a large extent on trends in the housing and
automotive sectors, principally the replacement tire market. The tire
replacement market has historically been less cyclical than the market for
original equipment tires and accounts for approximately 75% of all U.S. car and
commercial vehicle tire production. The Company expects continued growth in
butadiene end-use demand over the next several years consistent with global
gross domestic product growth. The Company believes that U.S. tire production
could increase as a result of higher volumes of domestic automobile production
due to foreign "transplant" production.
The most important butadiene derivative is SBR, which is primarily used in
the manufacture of tires, gaskets and hoses. Since 1990, the demand for SBR has
increased at a compound annual growth rate of approximately 3%. Although SBR
markets are mature, the Company expects that demand for higher performance tires
and truck tires may contribute to growth in demand for SBR at higher than
historical levels.
Polybutadiene rubber provides higher abrasion resistance than other rubbers
which makes it preferential for high performance tires, plastics applications
and other heavy duty uses. Other types of synthetic rubber produced from
butadiene include polychloroprene rubber, used in wire and cable applications,
and nitrile rubber, which, due to its high tensile strength and abrasion
resistance, is used in specialty applications, such as hoses, tubes and belts.
Butadiene derivatives which are not used to produce synthetic rubber
primarily consist of HMDA, SB latex and ABS. Historically, demand for these
products has generally reflected global gross domestic product growth. HMDA is
an intermediate in the production of nylon fiber. SB latex demand is driven by
its use in paints, adhesives and paper coatings. ABS resins are used in the
production of high-performance plastics with a wide range of applications in the
automotive, appliance and electronics industries.
Butadiene producers are currently operating at historically high rates and
the Company believes that no new capacity is expected to come on-line in the
U.S. in the next five years. Management believes that the Company's existing
capacity and low-cost expansion alternatives act as an effective deterrent to
the construction of new facilities by others in the United States.
The major source of supply for butadiene is extraction from crude
butadiene, a by-product of ethylene production. In the U.S., volumes of crude
butadiene from ethylene facilities are inadequate to meet domestic demand. The
U.S. imports a large portion of its requirements of butadiene and crude
butadiene, especially from Western Europe, where most ethylene facilities use
feedstocks which result in the production of proportionately more crude
butadiene than in the U.S. Historically, the price of butadiene has been
determined by supply, which is influenced by the amount of ethylene produced and
the availability of crude butadiene, and butadiene demand, which is determined
by demand for end-use products, such as tires, engineered plastics and nylon
fibers.
MTBE. MTBE has been one of the fastest growing petrochemicals, in terms of
volume, during the past fifteen years, with global production rising from
approximately 15,000 barrels per day in 1980 to approximately 382,000 barrels
per day in 1995. MTBE's dramatic growth has been a result of two significant
factors. First, MTBE has a high octane rating, which makes it a valuable
gasoline blendstock for adding octane to gasoline. Second, MTBE contains a high
percentage weight (approximately 18%) of oxygen. Its high oxygen level, which
results in improved combustion and reduces the level of carbon monoxide and
ozone-depleting emissions from automobile engines, contributes to MTBE's use as
a blending agent in oxygenated and reformulated gasolines. These properties and
its large scale global production capacity have made it the preferred oxygenate
and a major component of RFG in the U.S.
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<PAGE>
The use of lead additives in gasoline declined dramatically during the
1980s as a result of environmental legislation. Following such legislation,
octane needs increased, which increased world MTBE use considerably. The passage
of the CAAA in 1990 in the U.S. has caused another round of MTBE production
capacity additions and blending use increases during the past four years.
The two programs mandated by the CAAA which have the most significant
effect on the MTBE market are the oxygenated gasoline and the RFG programs. The
oxygenated gasoline program was initiated in 1992, with the goal of reducing
winter carbon monoxide emissions. With the implementation of the RFG program in
1995, the use of RFG was required in the nine major urban areas with the most
severe ozone pollution. High RFG prices and public health concerns, particularly
in cold weather climates, kept MTBE use below the levels that had been
anticipated in the industry at the time of the passage of the CAAA. Despite the
problems with the implementation of the CAAA, the Company expects continued
growth in the use of MTBE, although at slower rates than in the 1980s as the
regulations requiring "cleaner" gasoline have, in large measure, gone into
effect in the U.S. The Company anticipates that higher rates of growth in MTBE
use will continue to prevail in certain regions of the U.S. and internationally,
due to consumer preference or where RFG use is now optional but may be required
by state or local governments. For example, California has mandated greater
usage of oxygenates in a gasoline reformulated for use in that state, and the
use of lead in gasoline continues to decline in certain European, South American
and Far Eastern countries. The Company also expects new capacity expansions to
be minimal over the next several years due to current industry overcapacity as a
result of large increases in U.S. production capacity in the early 1990s in
anticipation of the implementation of the CAAA programs.
MTBE pricing is primarily determined by the price of RFG due to its value
as an octane enhancer and as an oxygenate. The price difference between regular
unleaded and higher octane, premium unleaded gasoline provides a valuation for
octane from which the value of MTBE as an octane enhancer can be derived. At
various times, depending on the supply and demand for MTBE, MTBE pricing enjoys
a premium over this octane value, reflecting its value as an oxygenate. MTBE
pricing is relatively volatile. The MTBE market has experienced alternating
periods of tight supply and rising prices and profit margins, followed by
periods of capacity additions resulting in oversupply and declining prices and
margins. Historically, MTBE was sold in the U.S. under sales contracts which
allowed suppliers to recover raw material costs and earn a fixed profit. Sales
prices under these contracts were higher than the then prevailing spot prices.
Prices decreased substantially from 1985 to 1986 based on low gasoline prices.
As gasoline prices recovered in 1988 and 1989, MTBE prices followed. Prices
increased substantially prior to and during the Persian Gulf war beginning in
late 1990, although prices fell back sharply from 1991 to 1993 as supply
outpaced demand. MTBE prices increased in 1994 due to high methanol prices (that
were passed on to users) until methanol prices decreased significantly in the
first quarter of 1995. More recently, MTBE prices have rebounded from their 1995
lows as a result of much higher demands from the RFG program.
There are a number of competing oxygenate products to MTBE, including
ethanol, ethyl TERTIARY-butyl ether (ETBE) and TERTIARY-amyl methyl ether
(TAME). However, management believes that MTBE will continue to be the U.S.
gasoline industry's oxygenate of choice due to a number of factors, including
price, available capacity, chemical properties and the EPA's CAAA rules
regarding minimum oxygen content in fuels.
BUTENE-1. Butene-1 is used as a comonomer in the production of high
density polyethylene ("HDPE") and linear low density polyethylene ("LLDPE").
Both HDPE and LLDPE are raw materials for the production of trash bags, film
wrap, pipe and plastic containers. Comonomers are added to polyethylene to
improve characteristics such as tear and crack resistance. The Company expects
global HDPE and LLDPE demand to increase at an annual compound growth rate of 6%
and 14%, between 1994 and 1999, respectively. In the U.S., butene-1 is facing
increased competition from other comonomers such as hexene-1 which, although
more expensive than butene-1, improves certain properties of polyethylene
resins. The Company believes that butene-1 demand for use in polyethylene will
continue to grow in line with demand for polyethylene. Historically, pricing of
butene-1 has been determined by demand based on its use as a polyethylene
comonomer, and its competitive position with other comonomers such as hexene-1.
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<PAGE>
Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations.
BUTENE-2. Butene-2 is recovered as part of the crude butadiene stream that
remains after extraction of butadiene, isobutylene and butene-1. The Company
sells purified butene-2 primarily for use in the production of coatings and
plasticizers. Due to the high quality of the butene-2 produced by the Company,
it has historically received a higher than market price.
ISOBUTYLENE CONCENTRATE. Isobutylene concentrate is similar to high purity
isobutylene in composition, although its purity is 88% isobutylene compared to
99.9% in high purity isobutylene. The Company markets isobutylene concentrate
for use in the growing lubricant additives business as well as for use in the
production of butyl rubber. The Company is the sole U.S. producer of isobutylene
concentrate.
HIGH PURITY ISOBUTYLENE. High purity isobutylene is used in the production
of butyl rubber, which is used to produce tires and in specialty chemical
applications such as in the production of resins, antioxidants, paints and
coatings, synthetic lubricant oils and rubber chemicals. The Company is
currently the largest domestic merchant supplier of high purity isobutylene to
the chemical market and competes with ARCO Chemical Company and Exxon Chemical
Company.
DIISOBUTYLENE. Diisobutylene is used primarily as an intermediate in the
manufacturing of alkylphenols for the surfactant and phenolic resins markets.
Other uses include the production of tackifier and ink resins, dispersants for
lubricant oil additives, and rubber and processing chemicals. The Company is the
sole U.S. producer of diisobutylene.
PRODUCTION PROCESS
The Company's production operations are based on a number of key factors:
(i) UPGRADING BY-PRODUCT STREAMS: The Company has contracted to purchase
certain volumes of crude butadiene from its suppliers. This volume
determines the Company's ability to produce butadiene and n-butylenes
and also provides some isobutylene (typically 10% of total
isobutylene production) for the production of MTBE and specialty
isobutylenes.
(ii) MAXIMIZING USE OF ISOBUTYLENE: Under normal operating conditions,
the Company maximizes isobutylene production from its
dehydrogenation units. The isobutylene processed is first processed
into specialty isobutylenes to satisfy customer demand, secondly
used to produce MTBE to satisfy contractual demand and thirdly, used
to produce MTBE for sale in the spot market.
(iii) INCREMENTAL PRODUCTION CAPABILITY: The Company has the ability to
augment its isobutylene and butene-1 production by the processing of
butene-2 in its SKIP unit, depending on the relative profitability
from additional isobutylene production (for use in either MTBE or
specialty isobutylenes) or butene-1 sales. In addition, "on
purpose" crude butadiene can be produced from butene-2 using the
OXO-D process, as well as from n-butane using dehydrogenation.
BUTADIENE PRODUCTION PROCESS
The Company has the largest butadiene production and finishing facilities
in North America and has an annual production capacity of 840 million pounds of
butadiene, representing approximately 18% of U.S. and Canadian production
capacity. In the year ended June 30, 1997, the Company sold and toll-processed
750 million pounds of butadiene.
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<PAGE>
[DIAGRAM SHOWING SOURCES OF BUTADIENE PRODUCTION]
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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<PAGE>
MTBE PRODUCTION PROCESS
The Company owns two MTBE units with a combined capacity to produce 25,000
barrels per day, which represents approximately 9% of North American production
capacity. The Company sold an average of 17,873 barrels per day in the year
ended June 30, 1997.
[DIAGRAM SHOWING PROCESS TO PRODUCE MTBE]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
MTBE is produced by reacting isobutylene and methanol. The Company produces
isobutylene, the principal raw material for MTBE, using any one of three
processes: (i) extraction from raffinate-1, which is produced after butadiene
has been extracted from crude butadiene; (ii) dehydrogenation of purchased
isobutane; and (iii) production from n-butylenes (predominantly butene-2) using
the Company's patented SKIP process. The other primary raw material, methanol,
is purchased from third parties in the spot market and under contract and is
transported to the Company's facility by barge.
Isobutylene is removed from the raffinate-1 stream by processing
raffinate-1 through the Company's MTBE unit. The MTBE reaction is highly
selective and efficiently removes isobutylene from the stream. The stream
remaining is called raffinate-2.
The Company has three dehydrogenation units, two of which have been
completely refurbished and are fully operational. Using these two units, the
Company has the ability to produce a total of 18,000 barrels per day of
isobutylene. The Company estimates that the third dehydrogenation unit, with an
additional capacity of 8,000 barrels per day, could be refurbished at a cost of
approximately $100 million, substantially less than the cost of a new
dehydrogenation unit. This refurbishment would increase the Company's capacity
to produce isobutylene for use either in MTBE or specialty isobutylenes by
approximately one third. The Company currently does not have any plans to
undertake this refurbishment, although this could change depending on market
conditions. The Company has fully paid-up rights to the technology used in its
dehydrogenation units and no royalty or other licensing payments are required.
Isobutane is purchased under long-term contract and supplemented with spot
purchases.
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The Company currently has sufficient additional MTBE capacity to enable it
to take advantage of future expected growth. The Company believes that this
additional capacity gives it a competitive advantage over other producers which
would have to incur greater cost to increase capacity.
The Company's SKIP unit upgrades butene-2 to either butene-1 or isobutylene
depending on requirements. Isobutylene production is normally operated so that a
portion of the isobutylene produced by dehydrogenation is used in the production
of isobutylene concentrate and diisobutylene and the remainder is used to
produce MTBE. In addition, a small amount of MTBE production is used in the
production of high purity isobutylene. The configuration of the plant provides
the flexibility to vary the relative quantities of MTBE and isobutylene products
produced.
n-BUTYLENE PRODUCTION PROCESS
The Company has the largest butene-1 processing capacity in North America
and has an annual production capacity of 275 million pounds of butene-1,
representing approximately 40% of North American production capacity. In the
year ended June 30, 1997 the Company sold 197 million pounds of butene-1 and 34
million pounds of butene-2.
[DIAGRAM SHOWING PRODUCTION OF BUTENE-1, BUTENE-2 AND BUTANES]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
The Company has the ability to produce butene-1 using two different
processes: (i) fractionation from raffinate-2, which is produced after
isobutylene has been extracted from raffinate-1; and (ii) production from
n-butylenes (predominantly butene-2) using the Company's patented SKIP process.
After the removal of butene-1, the remaining n-butylenes stream (containing
principally butene-2 and n-butane) is either: (i) further purified to butene-2
which the Company sells intermittently based on customer demand; (ii) used as a
feedstock in the Company's SKIP process to produce butene-1 or isobutylene; or
(iii) used as a feedstock in the OXO-D process to produce crude butadiene. The
remaining product stream, containing principally n-butane, is sold to third
parties as a chemical by-product.
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SPECIALTY ISOBUTYLENE PRODUCTION PROCESSES
[DIAGRAM SHOWING PRODUCTION OF HIGH PURITY ISOBUTYLENE,
ISOBUTYLENE CONCENTRATE AND DIISOBUTYLENE]
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 year ended June 30, 1997, it sold 68 million pounds.
The Company uses its patented dimerization process to produce diisobutylene
and has an annual production capacity of 50 million pounds. In the year ended
June 30, 1997 the Company sold 37 million pounds of diisobutylene principally on
a contractual basis.
Some of the isobutylene produced by the Company is sold as concentrate. The
Company has an annual production capacity of 380 million pounds of isobutylene
concentrate and, in the year ended June 30, 1997, it sold 170 million pounds of
isobutylene concentrate. The Company has been successful in working with
customers to demonstrate the viability of concentrate as an alternative to high
purity isobutylene or lower purity raffinate-1 feedstock. The Company sells
isobutylene concentrate under contracts at prices linked to the cost of
isobutane feedstock and including energy costs and other components of
isobutylene concentrate, plus a fixed profit, as well as on the spot market.
While produced in smaller volumes than the Company's more commodity-type
products, specialty isobutylenes have historically had high margins due to the
niche sales markets for their end-use products.
OTHER OPERATIONS
The Company operates a large scale cogeneration power plant that supplies
electricity and processes steam to the facility's chemical processing
operations. Excess capacity of this power plant, as well as steam and boiler
feed water are currently sold to neighboring facilities under contracts at a
price equal to the cost of fuel plus a fixed profit. In addition, the Company
generates revenues from its terminals in Baytown, Texas and Lake Charles,
Louisiana and from chemical by-product sales to third parties.
CONTRACTS
The Company enters into three general types of contracts in connection with
its production processes: feedstock supply contracts, product sales contracts
and, to a lesser extent, toll manufacturing agreements. The majority of these
contracts have terms of two to three years and provide for successive one-year
renewals unless either party objects to such renewal in a timely manner. There
can be no assurance that these agreements will remain in effect beyond their
current terms or, if extended, that the same provisions would continue to apply.
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<PAGE>
FEEDSTOCK SUPPLY. The Company typically purchases its principal feedstock,
crude butadiene, under contracts which require suppliers to deliver a percentage
(varying from 50% to 100%) of their total crude butadiene production. The price
of crude butadiene to the Company is typically based on the price of its
principal components: butadiene, n-butylenes, isobutylene and n-butane. The
price for the butadiene component of crude butadiene is generally set at the
Company's average selling price for butadiene less a fixed dollar amount, which
includes a variable component for energy costs. The prices for the n-butylene
and isobutylene components of crude butadiene are linked to spot gasoline prices
and the n-butane and isobutane components are linked to spot n-butane prices.
The Company typically purchases methanol under contracts which require the
supplier to deliver minimum volumes of methanol. Methanol is generally purchased
at a discount to the prevailing market price, subject to specified minimum and
maximum price ranges.
The majority of the Company's isobutane is purchased under contract from
EPC Venture, Inc. which provides 450,000 barrels per month. This supplier also
provides storage and pipeline transportation. Isobutane is purchased at the
prevailing average market price for each month.
PRODUCT SALES. The Company's sales contracts typically require customers
to purchase minimum volumes expressed either in absolute terms or as a
percentage of the customer's product needs. Pricing for butadiene is generally
set at a small discount to the recognized U.S. Gulf Coast contract market price,
while MTBE pricing is typically based on the average U.S. Gulf Coast spot market
price. Butene-1 is sold under contracts at prices based on formulae which links
the butene-1 selling price to the price of gasoline. Butene-1 is also sold on
the spot market at prevailing prices. Butene-2 is sold at negotiated market
prices. Pricing for isobutylene concentrate is generally linked to the cost of
its principal raw material, isobutane, and fuel plus a transportation fee and
other components, which are linked to relevant average spot market prices.
Pricing for high purity isobutylene and diisobutylene is typically based on
market prices.
TOLL MANUFACTURING AGREEMENTS. The Company toll processes crude butadiene
under contracts on behalf of third parties, including The Dow Chemical Company,
The Goodyear Tire & Rubber Company and Phillips 66 Company. Typically, the
Company returns butadiene to the customer and purchases the other butylenes and
butanes contained in the crude butadiene stream. The toll process fees allow the
Company to recover its energy production costs plus a fixed dollar amount. In
addition, the Company returns purified butene-1 to certain of its crude
butadiene suppliers under similar arrangements.
OTHER. The Company also provides storage and terminalling services under
contract to certain of its customers at its Baytown and Lake Charles facilities.
COMPETITION
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemical industry, are larger and have greater financial resources than the
Company. Among the Company's competitors are some of the world's largest
chemical companies and major integrated petroleum companies that have their own
raw material resources. In addition, a significant portion of the Company's
business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Further,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may continue to expand their role in this
industry in the future. Any of these developments would have a negative impact
on the Company's financial position, results of operations and cash flows.
Given the nature of the markets in which it competes, the Company believes
it has two primary competitive advantages over its competitors. First, the
Company's position as the most significant merchant crude butadiene processor in
the U.S. has allowed it to secure supply arrangements for crude butadiene, which
provide for a fixed profit based on the Company's selling prices for the
finished product. The Company believes that this partially limits its exposure
to fluctuations in raw materials prices. Secondly, the Company's flexible
production processes enable it to take advantage of increases in demand for its
products at a lower cost than its competitors, thus allowing the Company to meet
its customers' needs through the most economic processes.
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The Company's primary competitors in the sales of butadiene in the U.S. are
Exxon Chemical Company, Shell Chemical Company, Lyondell Petrochemical Company
and the Huntsman Group. With respect to MTBE, the Company competes primarily
with ARCO Chemical Company, Exxon Chemical Company, Valero Energy Corporation,
Texaco Inc. and Enron Corp. For sales of butene-1 the Company competes primarily
with Exxon Chemical Company, Chevron Chemical Company, Amoco Chemical Company,
Shell Chemical Company and Huls AG. For high purity isobutylene, the Company
competes in the U.S. with ARCO Chemical Company and Exxon Chemical Company.
Although the Company is the only North American producer of isobutylene
concentrate and diisobutylene, diisobutylene is also imported from Japan and
Europe.
SALES AND MARKETING
The majority of the Company's sales are made pursuant to long-term sales
contracts with initial terms ranging from one to five years. The Company enjoys
long-standing relationships with its customers and approximately 85% of its
total sales over each of the last three years were made to the same customers.
The Company believes that its ability to maintain long-term customer contracts
has been facilitated by the extensive market knowledge and experience in the
petrochemical industry of its sales executives as well as the Company's emphasis
on customer relationships. The Company's strategy is to continue to increase
sales to existing customers and to attract new customers by providing
reliability of supply, competitive prices and superior customer service.
CUSTOMERS
The Company's products are generally sold to major refining, chemical and
end-user corporations primarily located in the United States and Canada. The
Company believes that its butadiene customers place significant value on its
ability to provide a reliable domestic supply of butadiene due to its raw
material purchase contracts and its ability to produce butadiene through two
alternative methods. As a result, some of the largest and most established users
of butadiene in the industry have contracted to purchase butadiene from the
Company. Typically, the Company's butadiene sales contracts require these
customers to purchase a percentage of their total requirements from the Company
subject to a minimum volume. Pricing is based on prevailing market prices.
The Company's principal butadiene customers include American Synthetic
Rubber Inc., The Dow Chemical Company, The Goodyear Tire & Rubber Company,
Enichem Elastomers Inc., E.I. du Pont de Nemours and Company and
Bridgestone/Firestone, Inc. In the year ended June 30, 1997, The Goodyear Tire &
Rubber Company accounted for approximately 11.4% of the Company's total
revenues.
The Company's principal MTBE customers include Lyondell Petrochemical
Company, CITGO Petroleum Corporation and Mobil Oil Corporation.
The Company's principal butene-1 customers include Union Carbide
Corporation, Shell Chemical Company, Lyondell Petrochemical Company, NOVA
Chemicals Ltd. and The Dow Chemical Company. The Company's principal butene-2
customers include Shell Chemical Company.
The Company's principal specialty isobutylene customers include Bayer Inc.,
The Lubrizol Corporation, Schenectady International, Inc., Rhone-Poulenc Inc.
and Mobil Chemical Company Inc.
PATENTS AND LICENSES
The Company presently owns, controls or holds rights to approximately 21
patents. The Company believes that its patents, particularly its patents
relating to the SKIP, OXO-D and diisobutylene production processes, are
important to its business and provide the Company with certain competitive
advantages. 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 policy is to be in compliance with all applicable
environmental laws. The Company is also committed to Responsible CareT, a
chemical industry initiative to enhance the industry's responsible management of
chemicals. The Company's operations are subject to federal, state, and local
laws and
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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 financial position, results of operations or cash flows. In
addition, under the terms of the 1984 purchase agreement, the prior owner of the
Houston facility, Petro-Tex, has indemnified the Company for liability arising
from off-site disposal of any materials prior to June 1984. Notwithstanding the
terms of the indemnity, in July 1994 Petro-Tex filed a claim for indemnity
against the Company for any costs that may be attributable to Petro-Tex for the
cleanup of the Malone Service Company ("Malone") site in Texas City, Texas.
Petro-Tex and many other companies along the Gulf Coast allegedly sent wastes to
the Malone site for disposal in the 1970s and possibly the early 1980s. Malone
has been subject to several state enforcement actions regarding its waste
disposal practices, and TNRCC has revoked Malone's permits to operate its
facilities. It is not known whether the site will require remediation or at what
cost. The Company believes that it has meritorious defenses to Petro-Tex's claim
and intends to contest the claim vigorously. Although no on-site contamination
has been identified as requiring remediation, management believes that certain
areas of the Houston facility were historically used for waste disposal. Based
on limited, currently available information about these waste disposal areas and
their contents, the Company believes that, if such remediation becomes
necessary, any remediation costs would not have a material adverse effect on the
Company's financial condition or results of operations. The Petro-Tex indemnity
does not extend to these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive
regulation under the Resource Conservation and Recovery Act, the Federal Clean
Water Act, the CAAA and similar requirements of state law. In particular, under
the CAAA, the EPA and TNRCC have promulgated, or are required to promulgate,
numerous regulations which affect or will affect the operations of the Company.
The most significant of these are the so-called Hazardous Organics National
Emission Standard for Hazardous Air Pollutants or HON Rule, the requirements of
Title V of the CAAA and rules relating to the controls of oxides of nitrogen,
which are known as the Nitrogen Oxides Reasonably Available Control Technology
rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethyl formamide and
MTBE, which are manufactured, used and/or processed by the Company, have been
identified as HAPs for purposes of regulation under the CAAA. Areas of concern
in the Company's operations for HAPs emissions include equipment leaks, process
vents, product storage, transfer operations and emissions from wastewater
streams. The Company has examined each of these areas and believes that it is in
substantial compliance with the HON Rule.
The NOx RACT Rules require compliance by May 1999. The Company has examined
the rules and believes that the main expenditure required to achieve compliance
will involve purchase and installation of monitoring equipment for NOx
emissions, which can be either continuous emission monitors, predictive emission
monitors or other approved monitoring methods. Based on its preliminary study,
management estimates that the cost to comply with the NOx RACT Rules will be $2
million over the next three years.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAAA.
Accordingly, the State of Texas has developed a State Implementation Plan
("SIP") which requires reductions in emissions of ozone precursors, including
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<PAGE>
volatile organic compounds and NOx, as well as carbon monoxide, in Harris
County. To comply with the SIP, the Company installed new controls at a cost of
approximately $7.8 million. The Company anticipates that, at some time in the
future, the State of Texas may promulgate rules which will require the Company
to modify existing controls or to install additional controls for fugitive air
emissions. The Company estimates that, if these rules are promulgated, it will
incur costs of between $1 million and $2 million in order to modify or install
such controls over a five- or six-year period.
EPA has recently finalized more stringent standards for ozone and
particulate matter. Moreover, the Texas Legislature recently passed legislation
directing TNRCC to develop a plan to address the permitting of so-called
"grandfathered" emissions sources which are unpermitted sources constructed
prior to promulgation of permitting regulations. Because implementing
regulations for these standards have not yet been proposed, the Company cannot
predict whether their impact on the Company's operations will be material.
Title III of the CAAA requires prevention of accidental releases of certain
listed extremely hazardous substances. The EPA's rules implementing portions of
Title III, promulgated on June 20, 1996, will require the Company to conduct a
hazards assessment and develop a risk management plan by June 1999 for each
extremely hazardous substance that the facility manufactures, uses, generates or
processes.
The regulations under Title V of the CAAA, which will require a
facility-wide inventory of emissions sources at the Houston facility and a
single operating permit for the facility's air emissions, have not been
promulgated. Based on a preliminary review of the draft requirements, however,
the Company believes that it will have to undertake substantial efforts to
conduct an emissions source inventory. It may also be required to upgrade its
on-going monitoring program once it has received its operating permit; however,
the Company does not expect any costs associated therewith to be significant. It
is also possible that the Company may be required to make modifications to some
of its equipment in order to comply with the terms of the facility-wide permit.
The Company has an active program to manage asbestos-containing material at
its Houston facility in accordance with federal and state environmental, health
and safety regulations. The Company does not believe that these materials pose a
hazard to the health of its employees. There is no requirement to remove these
materials, provided they are properly managed. As the plant is reconfigured or
additions are made, asbestos-containing materials are removed or encapsulated by
a certified contractor.
The wastewater treatment system for the Houston facility is 75% owned by
the Company and 25% owned by Bayer Corporation ("Bayer"), the owner of an
adjacent facility. Bayer operates the treatment system, but the federal and
state discharge permits are held jointly by the Company and Bayer. The Company
believes that the system has sufficient capacity for the Company's projected
needs.
In February 1996, the EPA issued an order to the Company and Bayer
requiring the companies to resolve the exceedances of their discharge permit
limits for copper and total suspended solids that had occurred since 1992. The
Company believes that these issues have been resolved by raising the limits in
the new discharge permit and by other corrective actions. No penalties were
assessed.
To meet rules expected to be promulgated concerning stormwater runoff, the
Company has budgeted to spend approximately $500,000 by 2000 for additional
stormwater control and collection. The Company has also budgeted $600,000
through fiscal 1999 to purchase noise barriers for certain equipment.
The terminals in Baytown and Lake Charles are in substantial compliance
with applicable environmental laws and regulations, and management believes that
no significant expenditures will be required at these facilities to allow them
to continue to comply with such laws and regulations.
MTBE and butadiene are the subject of continuing health effects studies.
While there have been some questions about the health effects of MTBE, a
multi-agency review, released June 30, 1997 by the White House's Office of
Science and Technology Policy ("OSTP"), concluded that health studies have
shown that "persons are not at increased risk of experiencing acute health
effects due to the use of fuels blended with oxygenates like MTBE." In
addition, 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. While the EPA,
California and other states are expected to adopt limits for MTBE levels in
drinking water, these
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limits are not expected to be overly restrictive since that same OSTP report
concluded that drinking water is "not a major route of exposure" for MTBE. The
EPA has also determined that butadiene is a probable human carcinogen. Effective
February 1997, the Occupational Safety and Health Administration lowered the
employee permissible exposure limit ("PEL") over an 8-hour time-weighted
average for butadiene from 1000 parts per million ("ppm") to 1 ppm. The
Company has conducted employee exposure monitoring and believes that it already
meets the PEL at most of its operations. For some operations, the Company
anticipates that affected employees will need to use respirators and that
additional emissions controls may be necessary. The Company does not expect 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, 1997, the Company had approximately 319 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 145 contract employees to perform routine
maintenance on and around its Houston facility. The Company believes its
relationship with its employees is satisfactory.
SAFETY RECORD
The Company maintains one of the best workman's compensation records in
Texas, equivalent to most clerical operations. Over the last seven years, the
Company has experienced only three lost time injuries. The Company believes this
record is accomplished through extensive classroom and on-the-job training as
well as the efforts of its highly trained, 67-member volunteer emergency
response team.
PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile
from the Houston Ship Channel and near one of the chemical industry's largest
domestic processing facilities. Approximately 230 acres is owned by the Company,
and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the
Port of Houston two ship docks which accommodate barge and ocean-going vessels,
and has the facilities to be served by rail and by truck. In addition, the
facility is connected by pipeline to customers and suppliers of raw materials,
directly and through other major pipelines in the immediate area as well as in
Texas City, and with salt dome storage facilities of other companies located at
both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a
laboratory for sampling and testing. The Company owns and operates a storage and
terminal facility at Baytown, Texas, leases a storage and terminal facility in
Lake Charles, Louisiana and Linden, New Jersey, and leases tank storage capacity
in Bayonne, New Jersey. The Company also leases office space in Three Riverway
Plaza, Houston, Texas as its principal executive offices. The Company believes
that is has adequate facilities for the conduct of its current and planned
operations.
LEGAL PROCEEDINGS
In addition to the matters disclosed under "-- Environmental Regulation,"
the Company is a party to various claims and litigation arising in the ordinary
course of its business. Management recognizes the uncertainties of litigation
and the possibility that one or more adverse rulings could materially impact
operating results. However, although no assurances can be given, management
believes that other than as disclosed, based on the nature of and its
understanding of the facts and circumstances which give rise to such claims and
litigation, and after considering appropriate reserves that have been
established, that the ultimate resolution of such issues, individually and in
the aggregate, will not have a material adverse effect on the Company's
financial statements.
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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....................... 85 Director 13
William R. Huff...................... 47 Director 1
William A. McMinn.................... 67 Director and Chairman 13
Steve A. Nordaker.................... 50 Director 1
Susan O. Rheney...................... 38 Director 1
John T. Shelton...................... 66 Director 13
B. W. Waycaster...................... 58 Director, President and Chief 4
Executive Officer
Claude E. Manning.................... 51 Chief Financial Officer 24
Ronald W. Woliver.................... 57 Vice President, Marketing 28
Stephen R. Wright.................... 49 Vice President and General Counsel 1
Bill R. McNeese...................... 62 Vice President, Operations 9
</TABLE>
Mr. Cain is Chairman of the Board of Agennix Inc. and Lexicon Genetics,
Inc., biotechnology companies. From August 1982 until his retirement in December
31, 1992, he was Chairman of the Board of Sterling. Mr. Cain was the Chairman of
the Board of Sterling Chemicals, Inc. from 1986 until it was sold in August 1996
and was on the Board of Directors of Arcadian Corporation from May 1989 until it
was sold in April 1997. Prior to organizing The Sterling Group, Inc.
("Sterling"), Mr. Cain was involved in the purchase of a variety of businesses
and provided consulting services to these and other companies. Mr. Cain was also
Chairman of the Board of UltraAir, Inc. from 1991 to 1994, Chairman of the Board
of Cain Chemical Inc. from its organization in March 1987 until its acquisition
by Occidental Petroleum Corporation in May 1988 and the Chairman of the Board of
Vista Chemical Company from 1984 until 1986.
Mr. Huff is President of the General Manager of WRH Partners, L.L.C., the
General Partner of The Huff Alternative Income Fund, L.P. (the "Huff Fund").
He also has been President of one of the general managers of W.R. Huff Asset
Management Co., L.L.C., an investment management firm, since 1984. Mr. Huff
serves on the Board of Directors as the designee of the Huff Fund. See "Related
Transactions."
Mr. McMinn has been Chairman of the Board of the Company since 1996. He was
Corporate Vice President and Manager of the Industrial Chemical Group of FMC
Corporation, a manufacturer of machinery and chemical products, from 1973
through 1985. He became President and Chief Executive Officer of Cain Chemical
Inc., a producer of petrochemicals, in 1987 and served in that capacity until
its acquisition by Occidental Petroleum in May 1988. He became Chairman of the
Board of Directors of Arcadian Corporation in August 1990 and served in that
capacity until it was sold in April 1997.
Mr. Nordaker has been a Managing Director of Chase Securities since August
1995. From 1982 to 1995, he was a Group Manager at Texas Commerce Bank National
Association and, in addition, served in several capacities at Texas Commerce
Bank in the Energy Group, including Section Manager and Division Manager. From
May 1977 to March 1982, Mr. Nordaker was a Manager of Projects for The Frantz
Company, an engineering consulting firm servicing the oil refinery and
petrochemical industry. Prior thereto, he was a chemical engineer with Universal
Oil Products. Mr. Nordaker serves on the Board of Directors as the Designee of
Chase Venture, an affiliate of Chase Securities. See "Related Transactions."
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Ms. Rheney has been a principal of Sterling since February 1992. She worked
as an independent financial consultant from December 1990 to January 1992. Prior
to that time, from June 1987 to November 1990, she was an associate at Sterling.
Ms. Rheney is also a director of Mail-Well, Inc.
Mr. 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 Energy, Inc.
Mr. McNeese has been Vice President -- Operations of the Company since
1992. He joined the Company in 1986 and has held positions in manufacturing,
production and utilities. From 1984 to 1986, Mr. McNeese served as General
Manager -- Operations of Engineering for Paktank Corporation. Prior thereto, Mr.
McNeese held various positions in a number of Atlantic Richfield Company
businesses. Mr. McNeese has over 30 years of experience in the chemicals
industry.
COMPENSATION OF DIRECTORS
Directors of Holdings and the Company who are not employees of the Company
receive an annual retainer of $15,000 and a fee of $500 for each meeting of the
Board or any committee thereof that they attend. Directors who are also
employees of the Company do not receive Director compensation. No compensation
is paid to any directors of TPC Holding for attendance at TPC Holding's board
meetings.
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EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the four most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company (the "Named Executive Officers") for services rendered
in all capacities to the Company for the year ended June 30, 1997, the twelve
months ended May 31, 1996 and the year ended May 31, 1995.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2)
- ------------------------------------- -------- ---------- ------------
B. W. Waycaster, President and Chief
Executive Officer.................. 1997 $ 300,000 $ 326,787
1996 300,000 2,899,100
1995 300,000 565,300
Ronald W. Woliver, Vice President,
Marketing.......................... 1997 $ 180,000 $ 127,393
1996 180,000 1,012,300
1995 180,000 1,084,900
Stephen R. Wright, Vice President,
General Counsel.................... 1997 $ 165,000 $ 50,104
Claude E. Manning, Chief Financial
Officer............................ 1997 $ 148,500 $ 63,649
1996 132,000 72,966
1995 121,000 100,811
Bill R. McNeese, Vice President,
Operations......................... 1997 $ 148,500 $ 63,869
1996 132,000 72,293
1995 121,000 100,133
- ------------
(1) None of the executive officers has received perquisites, the value of which
exceeded the lesser of $50,000 or 10% of the salary and bonus of such
executive officer.
(2) Includes 401(k) contributions in 1996 and 1995 of $21,035 and $24,618,
respectively, for Mr. Manning and $21,149 and $24,440, respectively, for Mr.
McNeese.
EMPLOYMENT AND OTHER AGREEMENTS
In 1992, Mr. Waycaster entered into an employment agreement with TOC and
TPC which provided for an annual base salary of $300,000 and a minimum annual
cash bonus of $300,000. The agreement expired on April 1, 1997. Mr. Waycaster
remains employed with the Company without an employment agreement. In addition,
Mr. Waycaster has entered into a non-competition agreement with TOC and TPC
covering the three-year period following the last date he receives compensation
from the Company.
In connection with his employment, Mr. Waycaster also received a grant of
options to purchase up to 50,000 shares of TPC common stock at a purchase price
of $40 per share. The options were cancelled in connection with the Acquisition.
In 1994, TPC entered into an agreement with each of Mr. Shelton, a director
of the Company, and Mr. Woliver which provides a benefit in the event of death
while an employee of TPC. Provided the individual is survived by his wife, the
death benefit continues monthly for the shorter of the life of the wife (or in
the case of Mr. Woliver, so long as he also has minor children) or 60 months,
and is $10,000 per month with respect to Mr. Shelton and $10,000 per month with
respect to Mr. Woliver. Each agreement terminates on termination of employment
for any reason other than death or disability of the individual.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, Finance Co. established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees, including executive officers, of the Company who satisfy the
requirements described below. The ESOP, which invests primarily in shares of
Common Stock, borrowed $10.0 million from Finance Co. pursuant to a loan (the
"Company ESOP Loan") to
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purchase 100,000 shares of Common Stock. Finance Co. funded the Company ESOP
Loan from the ESOP Term Loan. The Company ESOP Loan matures on June 30, 2001,
and bears interest at interest rates based on the Alternative Base Rate (as
defined) or the LIBOR Rate (as defined). The outstanding principal of the
Company ESOP Loan is payable in twenty equal quarterly installments of $500,000
during the period beginning September 30, 1996 and ending June 30, 2001. The
shares of Common Stock purchased by the ESOP were pledged (the "ESOP Pledge") as
security for the Company ESOP Loan, and such shares will be released and
allocated to ESOP participants' accounts as the Company ESOP Loan is discharged.
The Company may make contributions to the ESOP as determined by the Board of
Directors in an amount anticipated to be equal to a certain percentage of the
total annual earnings of all ESOP participants (the "Discretionary
Contributions"). The Company intends to make Discretionary Contributions in
amounts sufficient to enable the ESOP to discharge its indebtedness under the
Company ESOP Loan; however, the Company has no legal obligation to make
Discretionary Contributions. Shares released under the ESOP Pledge are allocated
to each participant based on such participant's base compensation relative to
total base compensation for all ESOP participants. Until the Company ESOP Loan
is paid in full, Discretionary Contributions will be used to pay the outstanding
principal and interest on the Company ESOP Loan. For employees whose employment
commenced prior to October 1, 1996 and who have attained the age of 21 years,
participation begins as of the later to occur of July 1, 1996 or the date of
commencement of the participant's employment. A participant's ESOP account vests
at the rate of 20% per year. Distributions from the ESOP are made in cash or
Common Stock upon a participant's retirement, death, disability or termination
of employment. In the event of retirement, death or disability, the entire
balance of a participant's ESOP account will become distributable without regard
to the ordinary vesting schedule. In the event of termination of employment for
any other reason, the vested portion of a participant's ESOP account will become
distributable and the remaining portion, if any, will be forfeited. If Common
Stock is distributed to a participant, the participant may, within two 60-day
periods, require the Company to purchase all or a portion of such Common Stock
at the fair market value of the Common Stock as determined under the ESOP (the
"Put Options"). The first 60-day period commences on the date the participant
receives a distribution of Common Stock and the second 60-day period commences a
year from such date. If a participant fails to exercise either of the two Put
Options, the participant may transfer the shares of Common Stock only upon
receipt of a bona fide third party offer and only after first offering the
shares to the ESOP and then to the Company. Employees of the Company own
approximately 20% of the outstanding Common Stock through the ESOP after the
Acquisition.
PROFIT SHARING PLAN
Prior to the date of the Acquisition, TPC maintained a Profit Sharing Plan
(the "Profit Sharing Plan") covering substantially all of its employees,
including executive officers. The Profit Sharing Plan is designed to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Each participant has the option to defer taxation of
a portion of such participant's earnings by directing TPC to contribute a
percentage of such earnings to the Profit Sharing Plan. A participant may direct
a minimum of 1% and a maximum of 10% of eligible earnings to the Profit Sharing
Plan, subject to certain limitations set forth in the Internal Revenue Code. TPC
currently makes a matching contribution monthly equal to 25% of the amount of
compensation deferred by each participant in such month, up to 6% of the
participant's base compensation for such month. TPC may also make a
discretionary contribution to the Profit Sharing Plan. Participants' Profit
Sharing Plan accounts become distributable at retirement, upon disability, death
or termination of employment, or under certain circumstances, upon attainment of
age 59. Participants are fully vested at all times in all amounts deferred by
them to the Profit Sharing Plan, and they become vested in the Company's
matching and discretionary contributions under a five-year graded vesting
schedule.
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).
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CASH BONUS PLAN
Prior to the date of the Acquisition, TPC established the Cash Bonus Plan
covering substantially all employees of TPC (or certain affiliates of TPC) and
covering the employees of certain third-party contractors who have contributed
to the success of TPC (or certain affiliates thereof). Upon the occurrence of a
Change of Control (as defined below), an employee participant as of July 2, 1996
will be distributed a portion of $3,200,000 within forty-five days of the date
of the Change of Control and will be distributed a portion of $1,800,000 plus
interest in each of sixteen quarterly installments following the date of the
Change of Control so long as the employee is an employee of TPC (or certain
successors or affiliates of TPC) on the corresponding quarterly installment
date. Upon the occurrence of a Change of Control, an eligible employee of a
third-party contractor who is providing services to TPC (or certain successors
or affiliates thereof) on July 2, 1996 will be distributed a portion of $300,000
within forty-five days of the date of the Change of Control, and will be
distributed a portion of $168,750 plus interest in each of sixteen quarterly
installments following the date of the Change of Control so long as the employee
of the third-party contractor is providing services to TPC on the corresponding
quarterly installment date. Each participant's allocable share of the bonus
payments to be made under the Cash Bonus Plan is based on a formula which
considers a participant's compensation and length of service with TPC. If a
participant retires, dies, becomes disabled, or whose employment is terminated
without cause after July 2, 1996, such participant's beneficiary or
representative will continue to receive a portion of the bonus payments through
the sixteenth installment payment even though such participant is no longer
employed by TPC or the third-party contractor which is providing services to
TPC. Under the Cash Bonus Plan, a "Change of Control" is deemed to occur when
the outstanding stock of TOC is acquired, or more than 50% of the shares of
TPC's common stock is sold, in a cash tender offer, exchange offer, merger,
third-party private purchase or other means of acquisition, or when
substantially all of the assets of TPC are sold to an unrelated third party. The
Acquisition effected a Change of Control and distributions from the Cash Bonus
Plan have commenced.
STOCK OPTION PLAN
Holdings has established a stock option plan (the "Option Plan"). The
Option Plan is administered by a committee (the "Committee") of the Board of
Directors of Holdings. Option grants under the Option Plan will be permitted to
be made to directors and key employees of Holdings and its subsidiaries,
including the Company, selected by the Committee. The Committee may grant
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code and also will be permitted to grant "nonstatutory options," which
are not intended to conform to Section 422 of the Internal Revenue Code. The
Option Plan will provide for the discretionary grant of options to purchase
shares of Common Stock. The exercise price of incentive stock options shall not
be less than the fair market value of a share of Common Stock on the date of
grant, and the exercise price of nonstatutory options shall not be less than 85%
of the fair market value of a share of Common Stock on the date of grant. The
Committee will be permitted to provide that the options will vest immediately or
in increments. No option will be transferable by a grantee other than upon
death. On the termination of employment or disability of any grantee, any
unvested options will either expire or continue to be exercisable as determined
by the Committee, in its sole discretion. The Option Plan will terminate no
later than 10 years after its adoption; however, any options outstanding upon
termination of the Option Plan will remain in effect until exercised or
terminated pursuant to the terms of the agreement under which they were granted.
A participant in the Option Plan may, upon receiving approval from the
Committee, relinquish all or a portion of such participant's options for an
amount in cash equal to the difference between the fair market value of the
Common Stock corresponding to the options being relinquished on the day of
relinquishment, less the total option price for such corresponding shares.
NONQUALIFIED PROFIT SHARING INCENTIVE PLAN
The Company has established two separate Nonqualified Profit Sharing
Incentive Plans, both of which will be administered by the Committee. Amounts
paid to employees in cash under the Nonqualified Profit Sharing Incentive Plans
will constitute taxable income in the year received and will be based on the
Company's financial performance for the period commencing on the first day of
the Company's fiscal year
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and ending on the last day of each fiscal quarter during such year. One of the
Nonqualified Profit Sharing Incentive Plans is only for officers of the Company
who are selected by the Committee (the "Officers' Plan"). If the Company's
EBITDA exceeds certain prescribed levels, the officers participating in the
Officers' Plan will receive distributions in cash from the Company equal to a
certain percentage of EBITDA recommended by the Chief Executive Officer of the
Company and approved by the Committee. Under the other Nonqualified Profit
Sharing Incentive Plan which is for all employees not participating in the
Officers' Plan, if EBITDA exceeds certain prescribed levels, a percentage of
EBITDA will be used: first, to satisfy any required contributions to the ESOP;
second, to satisfy any required matching contributions to the Profit Sharing
Plan; third, to contribute annually to the Profit Sharing Plan for the benefit
of its participants up to the maximum amount allowable under the Internal
Revenue Code for qualification and deduction purposes; fourth, to distribute
cash to employees in an amount equal to $1.00 multiplied by the number of base
hours an employee worked during a fiscal quarter (up to a maximum of 520 hours);
and fifth, to distribute any remaining excess in cash to employees based on
their base compensation for such period. The Nonqualified Profit Sharing
Incentive Plans will not be qualified under Section 401(a) of the Internal
Revenue Code.
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RELATED TRANSACTIONS
TPC historically engaged in certain raw material purchase transactions with
Clarkston, which prior to the consummation of the Acquisition was owned by
several of the same individuals who were stockholders of TOC and/or TPC. In the
twelve months ended May 31, 1996, the Company made purchases of raw materials
from Clarkston of approximately $113.4 million. As part of the Acquisition, the
Company assumed from Clarkston a contract between Clarkston and a certain
supplier for the purchase of isobutane. In connection with the Acquisition,
Clarkston was dissolved and 80% of the outstanding capital stock owned by TOC of
The Texas Falls Corporation was sold to a prior stockholder of TOC and/or TPC.
Messrs. Shelton, Woliver, Waycaster and a prior stockholder of TOC and/or TPC
collectively own the remaining 20% of the outstanding capital stock of The Texas
Falls Corporation.
Sterling entered into an agreement with Holdings and TPC Holding pursuant
to which Sterling provided consulting and advisory services with respect to the
organization of Holdings, TPC Holding and Finance Co., the structuring of the
transactions associated with the Acquisition, employee benefit and compensation
arrangements and other matters. The agreement also provides that Holdings and
TPC Holding, jointly and severally, indemnify Sterling against liabilities
relating to its services. 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 Acquisition at a price of
$100 per share, the same price at which all shares were sold in connection with
the Acquisition.
As a matter of policy, the agreement between the Company and Sterling is,
and all future transactions between the Company and its respective directors,
officers and affiliates will be, on terms no less favorable to the Company than
those available from unaffiliated third parties.
Certain stockholders of Holdings, representing a majority of the
outstanding capital stock of Holdings entitled to vote for the election of
directors of Holdings, have entered into a Voting Agreement with Holdings
pursuant to which they have agreed to vote for a designee nominated by the Huff
Fund and a designee nominated by Chase Venture for election to the Board of
Directors of Holdings. As a result of the Voting Agreement, each of the Huff
Fund and Chase Venture have the right to control one seat on the Board of
Directors of the Company.
Chase Securities, an affiliate of Chase Venture, acted as the Initial
Purchaser of the Notes, receiving customary fees.
See "-- Employment and Other Agreements" for a description of Mr.
Waycaster's employment agreement.
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BENEFICIAL OWNERSHIP OF HOLDINGS' COMMON STOCK
The following table sets forth as of August 1, 1997, the number and
percentage of the outstanding shares of Common Stock beneficially owned by (a)
each person known by the Company to beneficially own more than 5% of such stock,
(b) each director of the Company, (c) each of the Named Executive Officers of
the Company, and (d) all directors and executive officers of the Company as a
group.
AMOUNT AND NATURE % OF
OF BENEFICIAL OWNERSHIP OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
- ------------------------------------- ----------------------- ------------
Gordon A. Cain....................... 69,000 13.1%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
William R. Huff(1)................... -- --
67 Park Place
Morristown, New Jersey 07960
Claude E. Manning.................... 4,000 0.8%
Three Riverway, Suite 1500
Houston, Texas 77056
William A. McMinn.................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese...................... 2,000 0.4%
Three Riverway, Suite 1500
Houston, Texas 77056
Steve A. Nordaker(2)................. -- --
707 Travis, 7th Floor
Houston, TX 77002
Susan O. Rheney...................... 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
John T. Shelton...................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
B. W. Waycaster...................... 40,000 7.6%
Three Riverway, Suite 1500
Houston, Texas 77056
Ronald W. Woliver.................... 10,000 1.9%
Three Riverway, Suite 1500
Houston, Texas 77056
Stephen R. Wright.................... 1,150 0.2%
Three Riverway, Suite 1500
Houston, TX 77056
All directors and Named Executive
Officers as a group (11 persons)... 151,150 28.6%
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.(4)(5)......................... 60,000 11.4%
380 Madison Avenue
New York, New York 10017
The Huff Alternative Income Fund,
L.P.(5)............................ 57,778 10.9%
67 Park Place
Morristown, New Jersey 07960
- ------------
(1) Excludes indirect beneficial ownership of 57,778 shares of Common Stock held
by the Huff Fund and reflected elsewhere in the table. Mr. Huff is President
and sole director of the general manager of WRH Partners, L.L.C., the
general partner of the Huff Fund.
(2) Mr Nordaker disclaims beneficial ownership of any shares of Common Stock
owned by Chase Venture.
(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 Plan
Administrative Committee, except that participants are entitled to direct
the ESOP Trustee to vote the shares of Common Stock allocated to their
accounts with respect to the approval or disapproval of any corporate merger
or consolidation, recapitalization, reclassification, liquidation,
dissolution, sale of substantially all assets of a trade or business or such
similar transaction as may be prescribed in regulations under the Internal
Revenue Code. No shares of Common Stock held by the ESOP have yet been
allocated to participant's accounts.
(4) Chase Venture is an affiliate of Chase Securities.
(5) Certain stockholders of Holdings have entered into the Voting Agreement with
Holdings which results in each of the Huff Fund and Chase Venture
controlling one seat on the Company's Board of Directors. See "Related
Transactions."
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 July 1, 1996. The following description summarizes certain
provisions of the Bank Credit Agreement, but such description does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, the provisions of the Bank Credit Agreement, a copy of which is filed as an
exhibit to the Registration Statement. All capitalized terms in this
"Description of the Bank Credit Agreement" section not defined in this
Prospectus have the meanings assigned thereto in the Bank Credit Agreement.
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.
AMORTIZATION; PREPAYMENTS
The Bank Credit Agreement requires the principal amount of the Senior Term
Loans to be reduced in twelve quarterly principal installments of $2.75 million
beginning on September 30, 1996, four quarterly principal installments of $3.25
million beginning on September 30, 1999, four quarterly principal installments
of $4.0 million beginning on September 30, 2000, four quarterly principal
installments of $4.75 million beginning on September 30, 2001, four quarterly
principal installments of $6.0 million beginning on September 30, 2002, and four
quarterly principal installments of $6.25 million beginning on September 30,
2003. The ESOP Term Loan will be amortized in 20 equal quarterly installment
amounts of $0.5 million during its five-year term.
The Senior Term Loans are subject to mandatory prepayment prior to
September 30 of each fiscal year (commencing in fiscal 1997) in which more than
$75.0 million is outstanding on the Senior Term Loans on or before June 30 of
any year, of an amount equal to 75% of the difference between EBITDA (as
defined) for the prior fiscal year and the sum of certain capital expenditures,
taxes, dividends, interest expense, and principal payments made on the Senior
Term Loans during such prior year, and certain distributions made to TPC Holding
for certain expenses (such difference being the "Excess Cash Flow"), and prior
to September 30 of each year after the Senior Term Loans are reduced to $75.0
million or less, a payment in the amount of 50% of the Excess Cash Flow
generated during the prior fiscal year. All mandatory prepayments are required
to be applied pro rata to each Senior Term Loan based on the outstanding
principal amount of the Senior Terms Loans and pro rata to future scheduled
principal installments. In addition, the Senior Term Loans are further subject
to mandatory prepayment in the amount of any cash proceeds received by the
Company from an offering of its Capital Stock.
The Senior Term Loans may be prepaid on notice at any time without premium
or penalty in a minimum amount of $1.0 million. All optional prepayments of the
Term Loans will be applied pro rata to each Senior Term Loan based on the
outstanding principal amount of the Senior Term Loans unless, at the Company's
option, lenders of the Tranche B Term Loan decline to accept such prepayment, in
which case the amount of prepayment declined shall be applied pro rata to the
Tranche A Term Loan and will be applied pro rata to future scheduled principal
installments.
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The amount available under the Revolving Credit Facility is payable in full
on its maturity date. Additionally, if the aggregate amount of borrowings
outstanding under the Revolving Credit Facility, plus the undrawn face amount of
letters of credit plus unreimbursed drawings on letters of credit, exceeds the
Borrowing Base, an immediate prepayment in an amount to eliminate such excess
will be payable.
Prepayments of Eurodollar borrowings on any day other than the last day of
an interest period will be required to be accompanied by a payment to the
Lenders of all costs, expenses or losses, if any, incurred as a result of such
prepayment.
SECURITY; GUARANTEES
Borrowings under the Revolving Credit Facility and the Term Loans are
guaranteed by Holdings and TPC Holding. The obligations of 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 at a rate
per annum, at the Company's option, within the range of either (i) the Alternate
Base Rate to the Alternate Base Rate plus 1.5% or (ii) the LIBOR Rate plus .625%
to the LIBOR Rate plus 2.5%, in each case based upon the ratio of Total Debt (as
defined) to EBITDA for the most recent four-quarter period.
Under the Revolving Credit Facility, fees will be charged for letters of
credit as follows: (i) a fronting fee of 1/8% per annum on the undrawn face
amount of the letters of credit plus (ii) the greater of (x) for each letter of
credit outstanding, the applicable margin for LIBOR Rate Loans, and (y) $500.
FEES, EXPENSES AND COSTS; REVOLVING CREDIT FACILITIES
The terms of the Bank Credit Agreement require the Company to pay the
following fees in connection with the maintenance of borrowings under the
Revolving Credit Facility: (i) commitment fees to be paid to the Lenders in
amounts equal to 1/2% per annum, if the Company's ratio of Total Debt to EBITDA
for the most recent four-quarter period is greater than or equal to 3.0 to 1.0,
and 3/8% if the Company's ratio of Total Debt to EBITDA for the most recent
four-quarter period is less than 3.0 to 1.0, in each case with respect to the
unused commitment under the Revolving Credit Facility payable quarterly in
arrears until such time as it is terminated; and (ii) administration fees
payable annually to the Agent. In addition, the Company paid various
underwriting and arrangement fees and closing costs on July 1, 1996 in
connection with the origination and syndication of the Term Loans and the
Revolving Credit Facility.
The Company also is required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation,
syndication and administration of the Bank Credit Agreement and to reimburse the
Lenders for all reasonable costs and expenses incurred in connection with the
enforcement of their rights in connection with a default or the enforcement of
the Bank Credit Agreement. The Company agreed to indemnify the Agent and the
Lenders and their respective officers, directors, shareholders, employees,
agents and attorneys against certain costs, expenses (including fees and
disbursements of counsel) and liabilities arising out of or relating to the Bank
Credit Agreement, the Stock Purchase Agreement and the transactions contemplated
thereby. Furthermore, the Lenders are entitled to be reimbursed for increases in
reserve requirements, changes in law and circumstances, possible future
illegality of interest options, taxes (other than on gross receipts or income),
possible inability to determine market rate, capital adequacy, and consequential
costs.
COVENANTS
The Bank Credit Agreement contains substantial restrictive covenants
limiting the ability of the Company to, among other things: (i) incur
contractual contingent obligations; (ii) pay subordinated debt or amend
subordinated debt documents without the prior consent of the Lenders; (iii)
create or allow to exist liens or other encumbrances; (iv) transfer assets
outside the Company except for sales and other transfers of inventory or
surplus, immaterial or obsolete assets in the ordinary course of business of the
Company; (v) enter into mergers, consolidations and asset dispositions of all or
substantially all of its properties;
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<PAGE>
(vi) make investments; (vii) extend credit to any entity; (viii) sell, transfer
or otherwise dispose of any class of stock or the voting rights of any
subsidiary of TPC; (ix) enter into transactions with related parties other than
in the ordinary course of business on an arm's-length basis on terms no less
favorable to the Company than those available from third parties; (x) amend
certain agreements, without the prior consent of the Majority Lenders; (xi) make
any material change in the nature of the business conducted by the Company;
(xii) pay cash dividends or redeem shares of capital stock; (xiii) make capital
expenditures; and (xiv) pay dividends or repurchase stock.
In addition, the Bank Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company to: (i) maintain the
existence, qualification and good standing of the Company; (ii) comply in all
material respects with all material applicable laws; (iii) maintain material
rights, franchise agreements, business contracts, patents, trademarks, licenses
and Material Contracts; (iv) deliver certain financial and other information;
(v) maintain specified insurance; and (vi) notify the Lenders of any default
under the Loan Documents and of certain other material events.
Under the Bank Credit Agreement, the Company is required to satisfy the
following financial covenants: (1) a ratio of (a) EBITDA minus cash taxes for
the prior four quarter period to (b) the sum of scheduled principal payments on
the Term Loans for such period, cash interest expense for such period, the
lesser of Scheduled Capital Expenditures for such period and actual capital
expenditures for such period, actual Employee Bonuses paid during such period
and certain distributions to Holdings of at least (i) 1.00 to 1.00 through June
30, 1997; (ii) .8 to 1.00 from July 1, 1997 through September 30, 1997; (iii) .9
to 1.00 from October 1, 1997 through December 31, 1997; (iv) 1.00 to 1.00 from
January 1, 1998 through June 30, 1998; (v) 1.05 to 1.00 from July 1, 1998
through June 30, 1999; and (vi) 1.15 to 1.00 thereafter; (2) a ration of (a)
Total Debt to (b) EBITDA for the prior four quarter period of no greater than
(a) 7.2 to 1.00 from September 30, 1997 through December 30, 1997, (b) 6.25 to
1.00 from December 31, 1997 through March 30, 1998, (c) 5.75 to 1.00 from March
31, 1998 through June 29, 1998, (d) 4.75 to 1.00 from June 30, 1998 through
September 24, 1998, (e) 3.75 to 1.00 from July 1, 1998 through June 30, 1999,
(f) 3.5 to 1.00 from July 1, 1999 through June 30, 2001, and (g) 3.00 to 1.00
thereafter; (3) a minimum Net Worth of $52,000,000.00 plus 75% of cumulative
positive net income from the closing date and 100% of the proceeds of any equity
offering; and (4) a minimum ratio of Current Assets to Current Liabilities of
1.25 to 1.00. The Company received from the Lenders a waiver of compliance with
certain of these ratios as of December 31, 1996, March 28, 1997, and June 30,
1997.
EVENTS OF DEFAULT
Events of Default under the Bank Credit Agreement include, subject to
applicable notice, grace and cure periods, the following: (i) a default in the
payment when due of any principal, interest or fees under the Bank Credit
Agreement; (ii) a default by the Company under any debt instruments in excess of
$5.0 million, or the occurrence of any event or condition that enables the
holder of such debt to accelerate the maturity thereof; (iii) any material
breach of any representation, warranty or statement in, or failure to perform
any duty or covenant under the Bank Credit Agreement or any of the other Loan
Documents; (iv) commencement of voluntary or involuntary bankruptcy, insolvency
or similar proceedings by or against Holdings, TPC Holding, TPC or any
subsidiary thereof; (v) the Term Loans and the Revolving Credit Facility cease
to be secured by substantially all of the assets of the Company; (vi) material
defaults related to employee benefits plans subject to Title I or IV of the
Employee Retirement Income Security Act of 1974, as amended; (vii) any uninsured
judgment or order in excess of $2.0 million remaining undischarged or unstayed
for longer than certain periods; (viii) a default by the Company in the payment
when due of principal of, interest or premium, if any, on the Original Notes or
the Notes, or the failure to observe, perform or comply with any agreement
beyond any grace period with respect thereto that enables the holder of such
debt to accelerate the maturity thereof or the Company becoming obligated to
redeem, repurchase, or repay all or any portion of any principal, interest or
premium on the Original Notes or the Notes prior to its scheduled payment; (ix)
a default by Holdings in the payment when due of principal of, interest or
premium, if any, on the Discount Notes, or the failure to observe, perform or
comply with any agreement beyond any grace period with respect thereto that
enables the holder of such debt to accelerate the maturity thereof; and (x) the
occurrence of any change of control.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Original Notes were issued under an Indenture dated as of July 1, 1996
(the "Original Indenture"), between the Company and Fleet National Bank, as
Trustee (the "Original Trustee"). The Notes were issued under an Indenture
dated as of March 1, 1997 (the "Indenture", and together with the Original
Indenture, the "Indentures"), between the Company and Fleet National Bank, as
Trustee (the "Series B Trustee" and, together with the Original Trustee, the
"Trustees").
The following is a summary of certain provisions of the Indentures and the
Securities. Each Indenture is subject to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Indentures and the Securities (i) is a description of such
provisions after giving effect to the consummation of the transactions
associated with the Acquisition, and (ii) does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indentures and the Securities, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act. Each
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Any reference to a "Trustee" means the Original Trustee
or the Series B Trustee, as the context may require. Any reference to a
"Holder" or a "Noteholder" or a "Securityholder" means the Holders of the
Original Notes or the Notes, or both, as the context may require.
Principal of, premium, if any, and interest on the Securities are payable,
and the Securities 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 Securities are issuable 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 Securities, 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 SECURITIES
The Securities are unsecured senior subordinated obligations of the
Company. As of the date of this Prospectus, there is $175,000,000 aggregate
principal amount of the Original Notes and $50,000,000 aggregate principal
amount of the Notes outstanding. The Securities will mature on July 1, 2006. The
Securities will bear interest at the rate per annum shown on the cover page
hereof from July 1, 1996 in the case of the Original Notes, or from March 13,
1997 in the case of the Notes, or in the case of the Original Notes and the
Notes, 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. Interest payments on the Original Notes
commenced on January 1, 1997 and interest payments on the Notes commenced on
July 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 Securities
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 Securities will not be
redeemable at the option of the Company prior to July 1, 2001. Thereafter, the
Securities 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
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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
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 aggregate
principal amount of the Original Notes and 35% of the original aggregate
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 65% of the original aggregate principal amount
of the Original Notes and 65% of the original aggregate principal amount of the
Notes must remain outstanding after each such redemption with respect to the
Original Notes and the Notes, respectively.
Notwithstanding the preceding two paragraphs, the Company will not be
permitted to redeem the Original Notes unless, substantially concurrently with
such redemption, the Company redeems an aggregate principal amount of Notes
(rounded to the nearest integral multiple of $1000) equal to the product of: (1)
a fraction, the numerator of which is the aggregate principal amount of Original
Notes to be so redeemed and the denominator of which is the aggregate principal
amount of Original Notes outstanding immediately prior to such proposed
redemption, and (2) the aggregate principal amount of Notes outstanding
immediately prior to such proposed redemption.
In the case of any partial redemption, selection of the Original Notes or
the Notes, as the case may be, for redemption will be made by the applicable
Trustee on a pro rata basis, by lot or by such other method as the applicable
Trustee in its sole discretion shall deem to be fair and appropriate, although
no Security of $1,000 in original principal amount or less shall be redeemed in
part. If any Security is to be redeemed in part only, the notice of redemption
relating to such Security shall state the portion of the principal amount
thereof to be redeemed. A new Security in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Security.
RANKING
The indebtedness evidenced by the Securities represents senior
subordinated, unsecured obligations of the Company. The payment of the principal
of, premium (if any) and interest on the Securities is subordinate in right of
payment, as set forth in each of the Indentures, to the prior payment in full of
all Senior Indebtedness of the Company, whether outstanding on the Original
Issue Date or thereafter incurred, including the obligations of the Company
under the Bank Credit Agreement. The Securities 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, 1997 the Company's Senior Indebtedness was approximately
$89.8 million, all of which is Secured Indebtedness. Although each of the
Indentures contain 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 Securities in accordance with the provisions of the Indentures.
The Original Notes rank PARI PASSU with the Notes, and the Securities in all
respects rank PARI PASSU with all other and future Senior Subordinated
Indebtedness of the Company. The Company has agreed in each of the Indentures
that it will not Incur, directly or indirectly,
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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
Securities or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Securities (collectively, "pay the Securities") 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 Securities 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 Original Notes or the
Notes, as the case may be, for a period (a "Payment Blockage Period")
commencing upon the receipt by the applicable Trustee (with a copy to the
Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders 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
Securities after the end of such Payment Blockage Period. Each of the Original
Notes and 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 Securityholders are entitled to receive any payment, and
until the Senior Indebtedness of the Company is paid in full, any payment or
distribution to which Securityholders would be entitled but for the
subordination provisions of each of the Indentures will be made to holders of
such Senior Indebtedness as their interests may appear. If a distribution is
made to Securityholders that, due to the subordination provisions, should not
have been made to them, such Securityholders 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 Securities 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 each of the
Indentures, in the event of insolvency, creditors of the Company who are holders
of Senior Indebtedness of the Company may recover more, ratably, than the
Securityholders, 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 Securityholders.
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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 Securities
pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
Original Notes sold to qualified institutional buyers ("QIBs") were
issued in the form of a Global Note (the "Original Global Note"). The Original
Global Note was registered in the name of Cede & Co. as nominee of the
Depository.
The Notes were initially issued in the form of two registered Global Notes
in global form (each a "Series B Global Note", and together with the Original
Global Note, the "Global Notes"). Each Series B Global Note was registered in
the name of Cede & Co., as nominee of the Depository.
Original Notes that (i) were originally issued to institutional
"accredited investors" (as defined in Rules 501(a) (1), (2), (3) or (7) under
the Securities Act) who were not QIBs or (ii) are issued as described below
under "Certificated Notes" were, or will be, as the case may be, issued in
definitive, certificated form. Upon the transfer of an Original Note in
definitive, certificated form, such Original Note will, unless the Original
Global Note has previously been exchanged for Original Notes in definitive,
certificated form, be exchanged for an interest in the applicable Global Note
representing the principal amount of Original Notes being transferred.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing
Agency" registered pursuant to Section 17A of the Exchange Act. The Depository
was created to hold securities for its participation (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchasers), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Holders who are not Participants may beneficially own
securities held by or on behalf of the Depository only through Participants or
Indirect Participants.
The Company believes that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository credited the
accounts of Participants designated by the Original Initial Purchasers or the
Initial Purchaser, as applicable with an interest in the Global Note and (ii)
ownership of the Original Notes or the Notes, as the case may be, is shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Securities or to pledge the Securities as
collateral is impaired.
So long as the Depository or its nominee is the registered owner of a
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global Note
for all purposes under the Indentures. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have Securities
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of certificated securities (the
"Certificated Securities"), and will not be considered the owners or Holders
thereof under the Indentures for any purpose, including with respect to giving
of any directions, instruction, or approval to the applicable Trustee
thereunder. As a result, the ability of a person having a beneficial interest in
Securities represented by a Global Note to pledge or transfer such interest to
persons or entities that do not participate in the Depository's system or to
otherwise take action with respect to such interest, may be impaired by the lack
of a physical certificate evidencing such interest. The Company understands that
if there is an Event of Default
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under the Securities, the Depository will exchange the Global Notes for
Certificated Notes, which it will distribute to its Participants in accordance
with its customary procedures.
Accordingly, each holder owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such holder owns its interest, to exercise any rights of a holder
of Securities under the Indentures or such Global Note. The Company understands
that under existing industry practice, in the event the Company requests any
action of holders of Securities or a holder that is an owner of a beneficial
interest in a Global Note desires to take any action that the Depository, as the
holder of such Global Note, is entitled to take, the Depository would authorize
the Participants to take such action and the Participant would authorize holders
owning through such Participants to take such action or would otherwise act upon
the instruction of such holders. Neither the Company nor the applicable Trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of Securities by the Depository, or for
maintaining, supervising or reviewing any records of the Depository relating to
such Securities, or to assure that any notices are forwarded by the Depository
to any Participant or by any Participant to holders of beneficial interests.
Payments with respect to the principal of, premium, if any, and interest
on, any Securities represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
applicable Trustee to or at the direction of the Depository or its nominee in
its capacity as the registered holder of the Global Note representing such
Securities under the Indentures. Under the terms of the Indentures, the Company
and the applicable Trustee may treat the persons in whose names the Securities,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payment and for any and all other purposes whatsoever.
Consequently, neither the Company nor the applicable Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of interest in a Global Note (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in a Global Note as shown on the records
of the Depository. Payments by the Participants and the Indirect Participants to
the beneficial owners of interests in the Global Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants and the Depository.
CERTIFICATED SECURITIES
If (i) the Company notifies the applicable Trustee in writing that the
Depository is no longer willing or able to act as a depository or Depository
ceases to be registered as a clearing agency under the Exchange Act and the
Company is unable to locate a qualified successor within 90 days, (ii) the
Company, at its option, notifies the applicable Trustee in writing that it
elects to cause the issuance of Securities in definitive form under the
Indentures or (iii) upon the occurrence of certain other events, then, upon
surrender by the Depository of its Global Notes, Certificated Securities will be
issued to each person that the Depository identifies as the beneficial owner of
the Securities represented by the Global Notes. Upon any such issuance, the
applicable Trustee is required to register such Certificated Securities in the
name of such person or persons (or the nominee of any thereof), and cause the
same to be delivered thereto.
Neither the Company nor the applicable Trustee shall be liable for any
delay by the Depository or any Participant or Indirect Participant in
identifying the beneficial owners of the related Securities and each such person
may conclusively rely on, and shall be protected in relying on, instructions
from the Depository for all purposes (including with respect to the registration
and delivery, and the respective principal amounts, of the Securities to be
issued).
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of
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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
(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 Securities 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
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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 Securities 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 Securities pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The use of the terms "all or substantially all" and "substantially as an
entirety" in provisions of each of the Indentures 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 each of the
Indentures) 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 Securities.
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 each of the Indentures, 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 Original Notes or the
Notes, as the case may be, then outstanding. Except for the limitations
contained in such covenants, however, the Indentures do not contain any
covenants or provisions that may afford holders of the Securities protection in
the event of a highly leveraged transaction. The Indentures do not contain any
covenants that restrict the ability of Holdings or TPC Holding to incur
Indebtedness.
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 Securities that might be delivered by holders of the Securities 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 applicable Trustee and the holders of the Securities 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 Securities 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 Securities 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 Securities, the Company could seek the consent of its lenders to the
purchase of Securities 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 Securities. In
such case, the Company's failure to purchase tendered Securities would
constitute an Event of Default under each of the Indentures which would, in
turn, constitute a default under the Bank Credit Agreement. In such
circumstances, the subordination provisions in each of the Indentures would
likely restrict payment to the Holders of Securities.
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
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Change of Control. Moreover, the exercise by the holders of their right to
require the Company to repurchase the Securities 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 Securities 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 each of
the Indentures relating to the Company's obligation to make an offer to
repurchase the Securities 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 Original Notes or the Notes, as the case may be.
CERTAIN COVENANTS
The Indentures each 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 Original 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 Original Issue Date (other
than any such principal repayments made as a result of the Refinancing of any
such Indebtedness); (2) Indebtedness Incurred pursuant to the Revolving Credit
Provisions of the Bank Credit Agreement or any other revolving credit facility
in a principal amount which, when taken together 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 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 Original Notes, the Notes (with respect to
the Indenture only) or any Indebtedness, the proceeds of which are used to
Refinance the Original Notes or the Notes (with respect to the Indenture only)
in full; (5) Indebtedness outstanding on the Original Issue Date (other than
Indebtedness described in clause (1), (2), (3) or (4) of this paragraph (b))
and, with respect to the Indenture only, Indebtedness Incurred pursuant to
paragraph (a) of this covenant under the Original Indenture prior to the Issue
Date (other than Indebtedness described in clause (4) of this paragraph (b));
(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.
With respect to the Indenture only, Indebtedness Incurred pursuant to clauses
(b)(1) and (b)(2) of this covenant in the Original Indenture prior to the Issue
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Date has been deemed to have been Incurred pursuant to clause (1) and (2),
respectively, of paragraph (b) of this covenant under the Indenture.
(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 Securities 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 Securities 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 Original Issue
Date (other than Indebtedness described in clause (a) or (b) of this
paragraph);
(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 Indentures;
(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
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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 Original 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
Original Notes were 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 Securities 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
Securities 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 Securities 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 Original 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 Original 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 Original
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 Unrestricted Subsidiary; and
(F) to the extent not covered in clauses (A) through (E) above, the aggregate
net cash proceeds received after the Original Issue Date 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
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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, and for purposes of the Indenture only, the Net
Cash Proceeds from any such sales which occurred prior to the Issue Date have
been 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 Original
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 Original
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
Original 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 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 Securityholders than encumbrances and
restrictions with respect to such Restricted
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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 Securities (and to holders of other Senior
Subordinated Indebtedness designated by the Company) to purchase Securities (and
such other Senior Subordinated Indebtedness) pursuant to and subject to the
conditions contained in the Indentures; 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 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
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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
Securities (and other Senior Subordinated Indebtedness) pursuant to clause
(a)(ii)(C) above, the Company will be required to purchase Securities tendered
pursuant to an offer by the Company for the Securities (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 each of the Indentures. If the aggregate purchase price of Securities (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 Securities (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 Securities 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 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
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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 (A) the Original Indenture, for purposes of the Original Notes or (B) the
Indenture for purposes of the Notes 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 such Trustee, in form satisfactory to the
applicable Trustee, all the obligations of the Company under the Original Notes
or the Notes, as the case may be, and the applicable 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 applicable 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 applicable 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 applicable 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 Original Notes or the
Notes, as the case may be.
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 Securityholders 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 relating to the Original Notes or the Notes, as
the case may be, the reports, information and other documents required to be
filed and provided pursuant to the Indenture or the Original Indenture, as the
case may be, 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,
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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 each of the Indentures as (i) a default
in the payment of interest on any Original Note or Note, as the case may be,
when due, continued for 30 days, (ii) a default in the payment of principal of
any Original Note or Note, as the case may be, 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 Securities) 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 applicable 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 applicable Trustee or the holders of 25% in principal amount
of the outstanding Original Notes or Notes, as the case may be, 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 applicable Trustee or the holders of
at least 25% in principal amount of the outstanding Original Notes or Notes, as
the case may be, may declare the principal of and accrued but unpaid interest on
all the Original Notes or Notes, as the case may be, 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 Securities 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 Securities. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Original Notes or Notes, as the case may be,
may rescind any such acceleration with respect to the Original Notes or the
Notes, as the case may be, and its consequences.
Subject to the provisions of each of the Indentures relating to the duties
of the applicable Trustee, in case an Event of Default occurs and is continuing,
such Trustee will be under no obligation to exercise any of the rights or powers
under the applicable Indenture at the request or direction of any of the holders
of the Securities unless such holders have offered to the applicable 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 Security may pursue any remedy with respect to
the applicable Indenture or the Securities unless (i) such holder has previously
given the applicable Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Original Notes or
Notes, as the case may be, have requested the applicable Trustee to pursue the
remedy, (iii) such
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holders have offered the applicable Trustee reasonable security or indemnity
against any loss, liability or expense, (iv) the applicable Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount of the outstanding Original Notes or Notes, as the case may be, have not
given the applicable 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 Original Notes or Notes, as the case may
be, are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the applicable Trustee or of exercising
any trust or power conferred on the applicable Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the applicable
Indenture or that the applicable Trustee determines is unduly prejudicial to the
rights of any other holder of an Original Note or a Note, as the case may be, or
that would involve the applicable Trustee in personal liability.
Each Indenture provides that if a Default occurs and is continuing and is
known to the applicable Trustee, such Trustee must mail to each holder of the
Securities 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 Original
Note or any Note, as the case may be, the applicable 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 Original Notes or the Notes, as the case may be.
In addition, the Company is required to deliver to the applicable 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 applicable
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 Indentures may each be amended with the
consent of the holders of a majority in principal amount of the Original Notes
or Notes, as the case may be, then outstanding (including consents obtained in
connection with a tender offer or exchange for the Original Notes or Notes, as
the case may be) 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 Original Notes or Notes, as the case may be, then outstanding.
Without the consent of each holder of an outstanding Original Note or Note,
as the case may be, affected thereby, no amendment may (i) reduce the amount of
Original Notes or Notes, as the case may be, whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Original Note or any Note, as the case may be, (iii) reduce the principal of
or extend the Stated Maturity of any Original Note or Note, as the case may be,,
(iv) reduce the premium payable upon the redemption of any Original Note or
Note, as the case may be, or change the time at which any Original Note or Note,
as the case may be, may be redeemed as described under "-- Optional
Redemption" above, (v) make any Original Note or Note payable in money other
than that stated in the Original Note or Note, as the case may be, (vi) impair
the right of any holder of the Original Notes or the Notes, as the case may be,
to receive payment of principal of and interest on such holder's Original Notes
or Notes, as the case may be, 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
Original Notes or Notes, as the case may be, (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
applicable Indenture that would adversely affect the holders of the Notes or
Original Notes, as the case may be.
Without the consent of any holder of the Original Notes or Notes, as the
case may be, the Company and the applicable Trustee may amend the applicable
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 applicable Indenture, to provide for uncertificated Securities in
addition to or in place of certificated Securities (provided that the
uncertificated Securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Securities are
described in
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Section 163(f)(2)(B) of the Code), to add guarantees with respect to the
Securities, to secure the Securities, to add to the covenants of the Company for
the benefit of the holders of the Securities 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 Securities or to comply with any requirement of
the SEC in connection with the qualification of the applicable Indenture under
the Trust Indenture Act. However, no amendment may be made to the subordination
provisions of the Indentures 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 Original Notes or the Notes, as the case
may be, is not necessary under each of the Indentures to approve the particular
form of any proposed amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
After an amendment under the Original Indenture or the Indenture becomes
effective, the Company is required to mail to holders of the Original Notes or
the Notes, as the case may be, a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Original Notes or
the Notes, as the case may be, or any defect therein, will not impair or affect
the validity of the amendment.
TRANSFER
The Securities were issued in registered form and will be transferable only
upon the surrender of the Securities 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 Original Notes or the Notes, as the case may be, and the Original
Indenture or the Indenture, as the case may be, ("legal defeasance"), except
for certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Original Notes or the
Notes, as the case may be, to replace mutilated, destroyed, lost or stolen
Original Notes or Notes, as the case may be, and to maintain a registrar and
paying agent in respect of the Original Notes or the Notes, as the case may be.
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 Original Notes or
the Notes, as the case may be), 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 Original Notes or the Notes, as the case
may be, may not be accelerated because of an Event of Default with respect
thereto. If the Company exercises its covenant defeasance option, payment of the
Original Notes or the Notes, as the case may be, 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 applicable Trustee money or
U.S. Government Obligations for the payment of principal of and interest on the
Original Notes or the Notes, as the case may be, to redemption or maturity, as
the case may be, and must comply with certain other conditions, including
delivery to the applicable Trustee of an Opinion of Counsel to the effect that
holders of the Original Notes or the Notes, as the case
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may be, 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 each of the Indentures and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Original Notes and 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 Original
Notes or Notes, as the case may be, have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the applicable Trustee, subject to certain exceptions. Each of the Indentures
provide that if an Event of Default occurs (and is not cured), the applicable
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 applicable Trustee will be under no obligation to exercise any
of its rights or powers under the applicable Indenture at the request of any
Holder of Original Notes or Notes, as the case may be, unless such Holder shall
have offered to the applicable 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 Original Indenture or the Indenture, as the case may be. The
Trustee may resign from its duties with respect to either the Original Indenture
or the Indenture 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 applicable 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 Indentures. Each of the
Indentures also contain 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
Each of the Indentures provide that they and the Securities 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
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contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or 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 Securities, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Credit Agreement" means the Bank Credit Agreement, dated as of the
date of the Original 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 Indentures), 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.
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"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 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, and (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. 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
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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 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.
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"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 applicable 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 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 Original 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.
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"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
The term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name an Original
Note or Note, as the case may be, is registered on the Registrar's books.
"Holdings" means Texas Petrochemical Holdings, Inc., a Delaware
corporation.
"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.
"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
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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.
"Initial Purchaser" means Chase Securities Inc.
"Initial Purchasers" means the Original Initial Purchasers and the
Initial Purchaser.
"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 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.
"Issue Date" means March 13, 1997.
"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,
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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.
"Original Initial Purchasers" means CS First Boston and Merrill Lynch &
Co,
"Original Issue Date" means the closing date for the sale and original
issuance of the Original Notes, which was July 1, 1996.
"Permitted Holders" means (i) each Person who owns Capital Stock of
Holdings on the date of issuance of (a) (x) the Original Notes for purposes of
the Original Indenture and (y) the Notes for purposes of the Indenture or (b)
the Common Stock in connection with the Employee Offering, (ii) any Person who
on the date of issuance of (x) the Original Notes for purposes of the Original
Indenture and (y) the Notes for purposes of the Indenture 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 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."
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"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 Offering has
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 Securities publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by the
Company (as certified by a resolution of the Board of Directors) which shall be
substituted for S&P or Moody's or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the
Original Issue Date or Incurred in compliance with the Indenture including
Indebtedness that Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that
(i) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; PROVIDED FURTHER,
HOWEVER, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of 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 Original 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
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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 Original Issue Date (with respect to the Original Notes) or
the Issue Date (with respect to the Notes) 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 Securities;
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 applicable Indenture.
"Senior Subordinated Indebtedness" means the Original Notes (with respect
to the Original Indenture), the Notes (with respect to the Indenture) and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank PARI PASSU with the Original Notes (with respect to the
Original Indenture) or the Notes (with respect to the Indenture) in right of
payment 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 Original Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
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"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.
"TOC" means Texas Olefins Company, a Texas Corporation.
"TPC Holding" means TPC Holding Corp., a Delaware corporation.
"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 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 applicable Trustee by promptly filing with the applicable
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.
80
<PAGE>
"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.
PLAN OF DISTRIBUTION
This Prospectus is being used by Chase Securities in connection with offers
and sales of the Securities in market-making transactions in the
over-the-counter market, in private transactions, or otherwise at negotiated
prices related to prevailing market prices at the time of sale. Chase Securities
may act as principal or agent in such market-making transactions. The Company
will not receive any proceeds from the sale of the Securities in such
market-making transactions. The Company has agreed to indemnify Chase Securities
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments which Chase Securities might be required to make in
respect thereof.
Chase Securities is an affiliate of Texas Commerce Bank National
Association which is agent bank and a lender to the Company under the Bank
Credit Agreement. Chase Venture, an affiliate of Chase Securities, owns
approximately 11.4% of the Common Stock of Holdings.
Under the terms of the Voting Agreement, Chase Venture, an affiliate of the
Chase Securities, may cause Holdings to nominate a director to the Board of
Directors of Holdings. See "Related Transactions."
LEGAL MATTERS
Certain legal matters with respect to the original issuance and sale of the
Securities are being passed upon for the Company by Bracewell & Patterson,
L.L.P., Houston, Texas. Certain members of Bracewell & Patterson, L.L.P. own
less than .5% of the outstanding Common Stock of Holdings.
81
<PAGE>
EXPERTS
The combined financial statements of TOC, its subsidiaries and Clarkston as
of May 31, 1995 and as of June 30, 1996, for the years ended May 31, 1994 and
1995, the twelve months ended May 31, 1996 and the one month ended June 30, 1996
included in this Prospectus and Registration Statement have been audited by
Coopers & Lybrand L.L.P. ("C&L"), independent public accountants, as stated in
their report included herein and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of the Company for the year ended June 30, 1997
included in this Prospectus and Registration Statement have been audited by
Deloitte & Touche LLP as stated in their report included herein and are included
in reliance upon their report given upon their authority as experts in
accounting and auditing.
82
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants ................................... F-2
Financial Statements
Consolidated Balance Sheet ...................................... F-4
Consolidated Statement of Operations ............................ F-5
Consolidated Statement of Stockholders' Equity .................. F-6
Consolidated Statement of Cash Flows ............................ F-7
Notes to Consolidated Financial Statements ...................... F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Petrochemicals Corporation:
We have audited the accompanying consolidated balance sheet of Texas
Petrochemicals Corporation as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1997, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 1, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Petrochemicals Corporation:
We have audited the accompanying combined balance sheet of Texas Olefins
Company, its subsidiaries and affiliate (Predecessor to Texas Petrochemicals
Corporation) as of June 30, 1996 and the related combined statements of
operations, stockholders' equity, and cash flows for the one month period ended
June 30, 1996, the twelve month period ended May 31, 1996 and for the year ended
May 31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects the combined financial position of Texas
Olefins Company, subsidiaries and affiliate as of June 30, 1996, and the
combined results of their operations and their cash flows for the one month
period ended June 30, 1996, the twelve month period May 31, 1996 and for the
year ended May 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the combined financial statements, effective June
1, 1994 and June 1, 1995, the Company changed its method of accounting for
investment securities and its method of accounting for impairment of long-lived
assets, respectively.
COOPERS & LYBRAND
L.L.P.
Houston, Texas
August 16, 1996
F-3
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 101 $ 4,780
Investment securities.............. -- 6,794
Accounts receivable -- trade....... 44,662 35,280
Inventories........................ 17,926 11,933
Other current assets............... 19,683 11,753
-------- -----------
Total current assets.......... 82,372 70,540
Property, plant and equipment, net...... 239,959 81,814
Investments in land held for sale....... 3,886 6,181
Investment in and advances to limited
partnership........................... 2,969 2,824
Goodwill, net of accumulated
amortization of $4,887................ 179,598 --
Other assets, net....................... 12,325 6,523
-------- -----------
Total assets.................. $521,109 $ 167,882
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................... $ 10,157 $ --
Accounts payable -- trade.......... 29,942 40,131
Accrued expenses................... 16,917 4,383
Current portion of cash bonus plan
liability......................... 7,811 --
Current portion of long-term
debt.............................. 6,438 --
Dividends payable.................. -- 677
-------- -----------
Total current liabilities..... 71,265 45,191
Revolving line of credit................ 12,000 13,000
Long-term debt.......................... 299,236 --
Cash bonus plan liability............... 17,573 --
Deferred income taxes and other......... 65,959 16,107
Minority interest in net assets of
consolidated subsidiary............... -- 1,107
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $1 par value,
4,162,000 shares authorized and
outstanding....................... 4,162 --
Additional paid in capital......... 71,643 --
Accumulated deficit................ (12,729) --
Note receivable from ESOP.......... (8,000) --
Net equity of Predecessor.......... -- 92,477
-------- -----------
Total stockholders' equity.... 55,076 92,477
-------- -----------
Total liabilities and
stockholders'
equity................ $521,109 $ 167,882
======== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY ---------------------------------
------------ ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................ $ 490,246 $ 41,384 $ 455,585 $ 474,677
Cost of goods sold...................... 433,685 35,992 379,468 396,360
Depreciation and amortization........... 29,876 1,277 14,982 14,298
------------ --------- ---------- ----------
Gross profit....................... 26,685 4,115 61,135 64,019
Selling, general and administrative
expenses.............................. 8,414 1,683 19,070 16,571
------------ --------- ---------- ----------
Income from operations........ 18,271 2,432 42,065 47,448
Interest expense (income)............... 35,157 76 1,630 (720)
Other income (expense)
Gain (loss) on disposal of assets
and investment securities, net... -- (280) (3,099) 1,112
Impairment of investment in land... -- -- (12,592) --
Other, net......................... 2,271 (88) (236) (12)
------------ --------- ---------- ----------
2,271 (368) (15,927) 1,100
------------ --------- ---------- ----------
Income (loss) before income
taxes, extraordinary loss
and minority interest...... (14,615) 1,988 24,508 49,268
Provision (benefit) for income taxes.... (3,342) 761 7,903 16,880
------------ --------- ---------- ----------
Income (loss) before
extraordinary loss and
minority interest.......... (11,273) 1,227 16,605 32,388
Extraordinary loss from early
extinguishment of debt, net of tax
benefit of $784....................... 1,456 -- -- --
Minority interest in net loss of
consolidated subsidiary............... -- 9 143 129
------------ --------- ---------- ----------
Net income (loss)............. $ (12,729) $ 1,236 $ 16,748 $ 32,517
============ ========= ========== ==========
Pro Forma net income to reflect income
taxes for Affiliate (Note 7).......... $ 1,236 $ 15,098 $ 30,448
========= ========== ==========
Loss per common share:
Before extraordinary loss..... $ (2.71)
Extraordinary loss............ (.35)
------------
$ (3.06)
============
Weighted average shares outstanding..... 4,162,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL NOTE CLASS A CLASS B AFFILIATE EARNINGS
COMMON PAID IN RECEIVABLE COMMON COMMON COMMON (ACCUMULATED)
STOCK CAPITAL FROM ESOP STOCK STOCK STOCK (DEFICIT)
------- ----------- ---------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, May 31, 1994................ $ 200 $5,028 $1,000 $135,367
Net Income........................... 32,517
Dividends (6,253)
Sale of treasury stock...............
Cancellation of Class B Common....... (7) (461)
Unrealized loss on investment
investment securities..............
------- ------- ------- --------------
Balance, May 31, 1995................ 200 5,021 1,000 161,170
Net income........................... 16,749
Redemption of Class A & B Common.....
Sale of treasury stock...............
Dividends............................ (16,526)
Net change in unrealized loss on
investment securities..............
Cancellation of Class B Common....... (1,214) (71,626)
Cancellation of Class B Common....... (7) (461)
Redemption and cancellation of
Affiliate common stock............. (1,000)
------- ------- ------- --------------
Balance, May 31, 1996................ 200 3,800 -- 89,306
Net income........................... 1,236
Net change in unrealized loss on
investment securities..............
Liquidating dividend to affiliate
shareholders....................... (677)
------- ------- ------- --------------
Balance, June 30, 1996............... 200 3,800 -- 89,865
POST ACQUISITION:
Adjustments due to Acquisition....... $4,162 $71,643 $(10,000) (200) (3,800) -- (89,865)
Net loss............................. (12,729)
Reduction in ESOP Note............... 2,000
------- ----------- ---------- ------- ------- ------- --------------
Balance, June 30, 1997............... $4,162 $71,643 $ (8,000) $ -- $ -- $ -- $(12,729)
======= =========== ========== ======= ======= ======= ==============
</TABLE>
UNREALIZED
LOSS ON
INVESTMENT TREASURY
SECURITIES STOCK TOTAL
----------- --------- --------
PREDECESSOR COMPANY:
Balance, May 31, 1994................ $ (1,187) $140,408
Net Income........................... 32,517
Dividends (6,253)
Sale of treasury stock............... 251 251
Cancellation of Class B Common....... 468
Unrealized loss on investment
investment securities.............. $(3,651) (3,651)
----------- --------- --------
Balance, May 31, 1995................ (3,651) (468) 163,272
Net income........................... 16,749
Redemption of Class A & B Common..... (95,440) (95,440)
Sale of treasury stock............... 22,600 22,600
Dividends............................ (16,526)
Net change in unrealized loss on
investment securities.............. 3,007 3,007
Cancellation of Class B Common....... 72,840
Cancellation of Class B Common....... 468
Redemption and cancellation of
Affiliate common stock............. (1,000)
----------- --------- --------
Balance, May 31, 1996................ (644) -- 92,662
Net income........................... 1,236
Net change in unrealized loss on
investment securities.............. (744) (744)
Liquidating dividend to affiliate
shareholders....................... (677)
----------- --------- --------
Balance, June 30, 1996............... (1,388) -- 92,477
POST ACQUISITION:
Adjustments due to Acquisition....... 1,388 -- (26,672)
Net loss............................. (12,729)
Reduction in ESOP Note............... 2,000
----------- --------- --------
Balance, June 30, 1997............... $-- $ -- $ 55,076
=========== ========= ========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY ------------------------------
--------- ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $ (12,729) $ 1,236 $ 16,748 $ 32,517
Adjustments to reconcile net income
(loss) to
cash flow from operating
activities:
Extraordinary loss................. 1,456 -- -- --
Impairment of investment in land... -- -- 12,592 --
Depreciation of fixed assets....... 24,810 1,259 14,768 14,072
Amortization of intangibles........ 5,066 18 214 226
Amortization of debt issue costs... 1,435 -- -- --
Deferred income taxes.............. (2,897) (237) (5,829) 818
Earnings from limited
partnership...................... (670) 190 202 (260)
Change in:
Accounts receivable........... (9,382) 7,723 1,593 (18,100)
Inventories................... (5,993) 3,069 2,230 12,954
Other assets.................. (4,906) 1,424 (3,616) (852)
Accounts payable, accrueds and
other...................... 2,051 (768) 5,597 8,927
--------- -------- -------- --------
Net cash provided by
(used in)
operating
activities............ (1,759) 13,914 44,499 50,302
Cash flows from investing activities:
Capital expenditures............... (7,634) (1,997) (5,462) (8,680)
Proceeds from asset sales.......... 4,754 --
Acquisition of the Company, net of
cash acquired.................... (366,277) --
Distribution received from
partnership...................... 525 --
Purchase of investment
securities....................... -- -- (19,138) (33,998)
Proceeds from sale of Predecessor
assets........................... 16,288 702 32,821 16,778
--------- -------- -------- --------
Net cash used in
investing
activities............ (352,344) (1,295) 8,221 (25,900)
Cash flows from financing activities:
Bank overdraft..................... 10,157 (12,382) 12,382 --
Net borrowings revolving line of
credit........................... (1,000) 3,000 10,000 (11,000)
Proceeds from issuance of long-term
debt............................. 368,000 -- -- 1,000
Payments on long-term debt......... (62,219) -- (1,022) (4,697)
Cash bonus plan payments........... (9,406) -- -- --
Debt issuance and organizational
costs............................ (15,839) -- -- --
Investment by Parent............... 62,511 -- -- --
Reduction in note receivable from
ESOP............................. 2,000 -- -- --
Dividends paid..................... -- -- (16,526) (9,085)
Predecessor common stock
transactions..................... -- -- (73,840) 451
--------- -------- -------- --------
Net cash provided by
(used in)
financing
activities............ 354,204 (9,382) (69,006) (23,331)
--------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................... 101 3,237 (16,286) 1,071
Cash and cash equivalents, beginning.... -- 1,543 17,829 16,758
--------- -------- -------- --------
Cash and cash equivalents, ending....... $ 101 $ 4,780 $ 1,543 $ 17,829
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE ACQUISITION
On July 1, 1996, TOC, TPC and a raw material supply contract of Clarkston
Corporation (defined within these financial statements and related notes as the
"Affiliate") were acquired for approximately $371 million in a series of
transactions in connection with the Acquisition. After the transactions, TOC was
merged with and into TPC becoming a 100% owned subsidiary of Texas Petrochemical
Holdings, Inc. (defined within these financial statements and notes as the
"Parent"). In connection with the Acquisition, the Company issued $175 million
aggregate principal amount of Original Notes and borrowed $140 million under the
Bank Credit Agreement. On the closing date of the Acquisition, prior to closing,
TOC sold to the previous majority shareholder of TOC for $7.8 million in cash a
ranch of approximately 1,900 acres and the livestock and personalty thereon (the
"Ranch") and 80% of the outstanding capital stock of Texas Falls Corporation
("The Falls") owned by TOC. In June 1996, the Affiliate was dissolved and a
$677,000 liquidating dividend was declared to its shareholders.
The sources and applications of funds required to consummate the
Acquisition are summarized below.
AMOUNT
(IN
MILLIONS)
------------
Sources of Funds:
Bank Credit Agreement.............. $ 140
Original Notes..................... 175
Investment by Parent............... 63
------------
Total......................... $ 378
============
Uses of Funds:
Acquisition(1)..................... $ 363
Fees and expenses(2)............... 15
------------
Total......................... $ 378
============
- ------------
(1) Acquisition cost is net of cash received from the sale of The Falls and the
Ranch for combined proceeds of $7.8 million.
(2) Represents underwriting fees, legal, accounting and other professional fees
payable in connection with the financing of the Acquisition.
The Acquisition was accounted for using the purchase method of accounting
and, therefore, the consolidated financial statements for the year ended June
30, 1997 reflect the purchase price allocated to the net assets acquired based
on their estimated fair values as of July 1, 1996. The fair value of tangible
assets acquired, net of liabilities assumed, was $179 million. The balance of
the purchase price, $184 million, was recorded as goodwill and is being
amortized over 40 years utilizing the straight-line method.
F-8
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma combined statement of income assumes the
Acquisition occurred on June 1, 1995. The pro forma combined statement of income
reflects several adjusting entries, including but not limited to, increased
depreciation and amortization as a result of the increased basis in fixed assets
and goodwill and increased interest expense from the incurrance of additional
debt. The results are not necessarily indicative of the results which would
actually have occurred if the purchase had taken place at June 1, 1995. Amounts
are in millions, except share amounts.
TWELVE
MONTHS ENDED
MAY 31, 1996
------------
Revenues................................ $454.2
Cost of goods sold...................... 367.3
Depreciation and amortization........... 36.3
------------
Gross profit....................... 50.6
Selling, general and administrative..... 12.7
------------
Income from operations........ 37.9
Interest expense........................ 31.9
Other expense:
Loss on disposal of assets and
investment securities, net....... (3.1)
Impairment of investment in land... (12.6)
Other, net......................... 0.1
------------
(15.6)
------------
Loss before income taxes...... (9.6)
Provision for income taxes.............. --
------------
Net loss...................... $ (9.6)
============
Loss per share................ $(2.30)
============
Weighted average shares
outstanding................ 4,162,000
============
2. NATURE OF OPERATIONS
The Company through its facility in Houston, Texas is the largest producer
of butadiene and butene-1, and the third largest producer of MTBE, in North
America, in terms of production capacity. In addition, the Company is the sole
producer of diisobutylene and isobutylene concentrate in the United States and
is the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. The Company purchases a significant portion of its crude butadiene
requirements at prices, which are adjusted based on the Company's selling price
of butadiene as well as the cost of natural gas used to produce butadiene,
thereby providing the Company with a fixed profit on such sales. Methanol and
isobutane are purchased at prices linked to prevailing market prices.
F-9
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the year ended June 30,
1997 include the accounts of TPC and its wholly owned subsidiary, Texas Butylene
Chemical Company. The financial statements for the periods prior to July 1, 1996
include the combined presentation of the accounts of TOC, TPC, The Falls and the
Affiliate, collectively referred to in these financial statements and related
notes as the "Predecessor." TOC was merged with and into TPC in conjunction
with the Acquisition as described in Note 1. The minority interest reflected in
the accompanying Predecessor financial statements reflects approximately 20% of
the common stock of The Falls not owned by the Company.
CHANGE IN FISCAL YEAR END
In June 1996 the Company's Board of Directors approved a change in the
Company's fiscal year end to June 30 from May 31. Accordingly, the accompanying
combined financial statements include results of operations and cash flows for
the one month transition period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," (SFAS 115). Management has classified all
investments as available-for-sale. Cost is determined by specific
identification. Purchases and sales are reflected on a trade date basis.
Investment securities are carried at fair value with any unrealized gains or
losses reported as a component of stockholders' equity, net of tax.
INVENTORIES
Inventories consist of raw materials, finished goods and chemicals used in
processing and are valued at the lower of average cost or market.
The Company may enter into product exchange agreements with suppliers
whereby certain inventories are exchanged for raw materials. These exchanges are
recorded at the lower of cost or market. Any resulting gains or losses from the
utilization of these exchanges are reflected in cost of chemical products sold.
Balances related to quantities due to or payable by the Company are included in
inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs and
other maintenance and repairs are charged to expense as incurred while
significant improvements are capitalized. Upon retirement or sale of an asset,
the asset and the related accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations.
DEPRECIATION
Depreciation of property, plant and equipment is computed using the
straight-line method over their estimated useful lives ranging from 3 to 31
years, with the plants being depreciated over 10 years.
DEBT ISSUE COSTS AND OTHER
Debt issue costs relating to the Company's long-term debt are amortized to
interest expense over the scheduled maturity of debt utilizing the interest
method. Unamortized debt issue costs relating to long-term debt retired prior to
its scheduled maturity are charged off as an extraordinary item. Other assets
include
F-10
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
patents and catalysts, which are amortized using the straight-line method over
their useful lives ranging from 2 to 7 years.
IMPAIRMENT OF ASSETS
Prior to June 1, 1995, the Company recognized impairment of investments in
land and property, plant and equipment at the time when a decline in value of an
asset was determined to be permanent. Effective June 1, 1995, the Company
adopted SFAS No. 121, "Impairment of Long-Lived Assets and Assets to be
Disposed of." During the twelve months ended May 31, 1996, the Company
evaluated the carrying value of its investment in land in light of the possible
sale of these assets in the foreseeable future and considering the criteria of
SFAS No. 121, determined that an impairment write-down was necessary. As a
result, the Company recorded a provision for estimated impairment of $12.6
million, with an associated tax benefit of $4.7 million, to write-down certain
investments in land to estimated fair market value. Actual sales proceeds from
investments in land may differ from the carrying amounts.
REVENUE RECOGNITION
The Company recognizes revenue from sales of refined products in the period
of delivery.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred taxes be provided
at enacted tax rates on temporary differences between the carrying amounts of
assets and liabilities for financial and tax reporting purposes.
The Affiliate of the Predecessor has elected for federal tax purposes to be
taxed under provisions of Subchapter S of the Internal Revenue Code. This
election requires the stockholders to include the Affiliate's net earnings,
losses and credits in their own income for tax purposes. Accordingly, the
Affiliate generally is not liable for federal income taxes and no provision for
federal income taxes is included in the accompanying financial statements. For
the periods prior to July 1, 1996, pro forma net income reflects the effect on
the combined company as if the Affiliate was a taxable entity for income tax
purposes. The Affiliate's articles of incorporation require its board of
directors to declare a payment of a cash dividend to its shareholders of no less
than 110% of the maximum individual federal income tax rate under the Internal
Revenue Code for each calendar year, payable within 30 days after the Affiliate
files its tax return.
EMPLOYEE STOCK OWNERSHIP PLAN
The balance of the note receivable from the Employee Stock Ownership Plan
(See Note 11), is recorded as a contra account in the stockholder's equity
section of the balance sheet.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," SFAS
No. 129 "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. SFAS No. 129 is effective for periods ending after December
15, 1997. SFAS No. 130 and SFAS 131 are effective for fiscal years
F-11
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning after December 15, 1997. Adoption of these pronouncements is not
expected to have a material effect on the Company's financial position, results
of operations or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation. There is no resulting impact
on stockholders' equity or net income (loss).
4. INVESTMENT SECURITIES
On July 1, 1996 in connection with the Acquisition, all of the
Predecessor's equity securities were sold at their unamortized cost. As of June
30, 1996 the Predecessor held $6.8 million of equity securities with an
unamortized cost of $9.0 million and gross unrealized losses of $2.2 million.
Unrealized losses of $0.6 million and $1.4 million (net of deferred tax) related
to these securities is recorded as a component of stockholders' equity for the
twelve months ended May 31, 1996 and the one month ended June 30, 1996,
respectively. During the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, gross realized gains of approximately $1.9 million and $0,
respectively, and gross realized losses of approximately $5.0 million and $0.3
million, respectively, were recognized on the sale of securities.
The Predecessor held $3.7 million of bankers acceptance notes at May 31,
1995, with scheduled maturities of less than one year. The Predecessor also held
approximately $17.4 million of equity securities at May 31, 1995. Unrealized
losses of $3.6 million (net of deferred tax) related to these securities are
recorded as a component of stockholders' equity for the year ended May 31, 1995.
During the year ended May 31, 1995, gross realized gains of approximately $1.2
million and gross realized losses of approximately $0.05 million were recognized
on the sale of securities.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Finished goods.......................... $ 8,500 $ 5,480
Raw materials........................... 7,504 4,533
Chemicals and supplies.................. 1,922 1,920
-------- -----------
$ 17,926 $ 11,933
======== ===========
PROPERTY, PLANT AND EQUIPMENT:
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Chemical plants......................... $259,293 $ 173,369
Construction in progress................ 3,047 5,378
Other................................... 1,934 13,812
-------- -----------
264,274 192,559
Less accumulated depreciation, depletion
and amortization...................... 24,315 110,745
-------- -----------
$239,959 $ 81,814
======== ===========
F-12
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS:
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Debt issue costs........................ $ 13,026 $ --
Organizational costs.................... 573 --
Intangibles and other................... 2,000 7,934
-------- -----------
15,599 7,934
Less accumulated amortization........... 3,274 1,411
-------- -----------
$ 12,325 $ 6,523
======== ===========
ACCRUED EXPENSES:
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Accrued interest........................ $ 13,203 $ 81
Property and sales taxes................ 2,866 2,370
Federal and state taxes................. 135 959
Other................................... 713 973
-------- -----------
$ 16,917 $ 4,383
======== ===========
6. LONG-TERM DEBT
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Bank Credit Agreement
Term A Loan........................ $ 25,781 $--
Term B Loan........................ 44,000
ESOP Loan.......................... 8,000 --
Revolving Credit Loans............. 12,000 13,000
Securities.............................. 225,000 --
Deferred premium on Securities.......... 2,893 --
-------- -----------
317,674 13,000
Less current maturities................. 6,438 --
-------- -----------
Long-term debt.......................... $311,236 $13,000
======== ===========
The Bank Credit Agreement provided for term loans in the amount of $130
million, an ESOP loan of $10 million, and a revolving credit facility of up to
$40 million. Quarterly principal and interest payments are made under the Bank
Credit Agreement. The final payments under the ESOP Loan, Term A Loan and Term B
Loan are due on June 30, 2001, December 31, 2002 and June 30, 2004,
respectively. The Revolving Credit Loan facility is currently scheduled to
expire on December 31, 2002. The debt under the Bank Credit Agreement bears
interest, at the option of the borrower, based on the LIBOR rate plus a margin
(2.5% and 3% at June 30, 1997) or the greater of the prime rate and the federal
funds rate plus 1/2% plus a margin (1.5% at June 30, 1997). Substantially all
assets of the Company are pledged as collateral under the Bank Credit Agreement.
The Securities are due 2006 and bear interest at 11 1/8% payable semiannually on
January 1 and July 1. The Bank Credit Agreement and the Indentures include
certain restrictive covenants, which include
F-13
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
but are not limited to, limitations on capital expenditures, indebtedness,
investments and sales of assets and subsidiary stock. Additionally, the Bank
Credit Agreement requires the Company to maintain certain financial ratios. As
of June 30, 1997 the Company obtained an amendment to the Bank Credit Agreement
to waive the debt to EBITDA ratio at June 30, 1997 and to update the financial
ratios relating to fixed charge coverage and debt to EBITDA for fiscal 1998.
On March 13, 1997 the Company closed on the sale of $50 million aggregate
principal amount of Notes in a Rule 144A offering. The terms of the Notes were
identical, except as to the offering price, to the terms of the Original Notes
issued by the Company in July 1996. The Company applied the net proceeds
received from the offering to reduce the Term A Loan. The Company subsequently
completed an exchange offer to exchange the unregistered securities for
identical securities, which have been registered under the Securities Act.
The fair value of the Securities, based on quoted market prices, was
approximately $242 million as of June 30, 1997. The long-term debt under the
Bank Credit Agreement carries a floating interest rate, therefore, the Company
estimates that the carrying amount of such debt was not materially different
from its fair value as of June 30, 1997.
The aggregate scheduled maturities outstanding debt for the succeeding five
years are as follows:
FISCAL YEAR
- -----------
1998.................................. $ 6,438
1999.................................. 6,438
2000.................................. 7,125
2001.................................. 8,156
2002.................................. 7,188
7. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax assets and liability
at June 30, 1997 and June 30, 1996 are as follows (in thousands of dollars):
COMPANY PREDECESSOR
-------- -----------
JUNE 30, JUNE 30,
1997 1996
-------- -----------
Deferred tax asset
(liability) -- current:
Net operating loss carryforward.... $ 1,292 $ --
Cash bonus plan.................... 2,756 --
Accrued liabilities................ (446) --
Unrealized loss on investment
securities........................ -- 815
-------- -----------
$ 3,602 $ 815
======== ===========
Deferred tax asset
(liability) -- noncurrent:
Investment in land................. $ 4,660 $ 4,660
Cash bonus plan.................... 6,200 --
Property, plant and equipment...... (76,819) (20,423)
-------- -----------
$(65,959) $ (15,763)
======== ===========
The current deferred tax asset is included in other current assets in the
accompanying balance sheet. As of June 30, 1997 the Company had estimated net
operating loss carryforwards for income tax reporting purposes of approximately
$3.7 million which expire on June 30, 2017.
F-14
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for federal and state income taxes is comprised of the
following (in thousand of dollars):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------- ------------------------------
YEAR ONE TWELVE
ENDED MONTH MONTHS YEAR
JUNE ENDED ENDED ENDED
30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
------- -------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal............................ $ (508) $ 880 $12,150 $14,314
State.............................. 63 118 1,582 1,748
------- -------- ------- -------
(445) 998 13,732 16,062
------- -------- ------- -------
Deferred:
Federal............................ (2,897) (210) (5,461) 895
State.............................. -- (368) (77) 818
------- -------- ------- -------
(2,897) (237) (5,829) 818
------- -------- ------- -------
Total provision (benefit) for
income taxes............... $(3,342) $ 761 $ 7,903 $16,880
======= ======== ======= =======
Pro Forma income tax
provision.................. $ 761 $ 9,553 $18,949
======== ======= =======
</TABLE>
Pro Forma income tax provision assumes that the income of the Affiliate,
which is a Subchapter S Corporation and accordingly pays no federal income tax,
was taxable to the Predecessor based on the Predecessor's effective tax rate.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income from continuing operations. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY ------------------------------
-------- ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Statutory federal income tax rate....... 35 % 35% 35% 35%
Computed "expected" federal income
tax................................... $(5,115) $ 696 $ 8,578 $17,438
Increase (decrease) in tax resulting
from:
Affiliate earnings not subject to
federal income tax............... -- -- (1,651) (2,069)
State income taxes, net of federal
benefit.......................... 41 59 789 1,086
Other, net......................... 22 6 280 518
Amortization of goodwill and
other............................ 1,710 -- (93) (93)
-------- -------- ------- -------
Provision (benefit) for income taxes.... $(3,342) $ 761 $ 7,903 $16,880
======== ======== ======= =======
</TABLE>
8. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP
The Company and Hollywood Marine, Inc. formed a limited partnership,
Hollywood/Texas Olefins, Ltd., to operate four barges capable of transporting
chemicals. The Company is a 50% limited partner in the limited partnership. The
Company accounts for this investment under the equity method and records its
portion of the limited partnership's net income as other income in the
accompanying statement of operations. Summarized financial information of the
partnership has not been presented because the Company's investment in and its
proportionate share of the partnership's operations are not material.
F-15
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
ONE TWELVE
YEAR MONTH MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, MAY 31, MAY 31,
1997 1996 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest................................ $ 20,600 $ 62 $ 2,330 $ 527
Income taxes............................ 967 877 14,756 14,740
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases tank cars under noncancelable operating leases. Under
the terms of the lease agreements, the Company is reimbursed by customers at a
fixed rate per mile, based on the distance the tank cars travel. Reimbursements
were approximately $0.8 million, $0.04 million, $0.8 million and $0.7 million,
for the year ended June 30, 1997, for the one month period ended June 30, 1996,
for the twelve months ended May 31, 1996 and for the year ended May 31, 1995,
respectively. The Company is also obligated under an operating lease to
Hollywood/Texas Olefins, Ltd. for the rental of two barges.
Total rent expense was approximately $3.9 million, $0.4 million, $4.8
million and $4.4 million (net of reimbursements described above and including
$1.8 million, $0.2 million, $2.0 million and $2.0 million for the rental of four
barges) for the year ended June 30, 1997, for the one month period ended June
30, 1996, for the twelve months ended May 31, 1996 and for the year ended May
31, 1995, respectively.
Future minimum lease payments at June 30, 1997 are as follows (in thousands
of dollars):
FISCAL YEAR
- -----------
1998.................................. $ 3,993
1999.................................. 2,994
2000.................................. 2,307
2001.................................. 1,783
2002.................................. 814
PURCHASE COMMITMENTS
The Company has purchase commitments incident to the ordinary conduct of
business. The prices of such purchase commitments are based on formulas, which
are determined from the prevailing market rate for such products. These
commitments generally have cancellation provisions given proper notification.
LITIGATION
The Company is involved in various routine legal proceedings which are
incidental to the business. Management of the Company is vigorously defending
such matters and is of the opinion that their ultimate resolution will not have
a material adverse impact on the Company.
STOCKHOLDER ACTION
Effective July 28, 1995 the Predecessor's Board of Directors approved the
redemption of 25,000 shares of Class A common stock and 1,565,670 shares of
Class B common stock from certain stockholders for total consideration of
approximately $95,000,000. The redemption was paid with cash of approximately
$80,000,000 and with the issuance to a former stockholder of a $15,000,000
promissory note due November 1, 1995 collateralized by 915,000 shares of Class B
common stock and the personal guarantee of an officer of the Predecessor. In
connection with the above redemption the Predecessor's Board of Directors
approved
F-16
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the sale of (1) 351,670 shares of Class B treasury stock to certain officers of
the Predecessor and to a trust at the price of $60 per share, and (2) 25,000
shares to Class A treasury stock to an officer of the Predecessor at a price of
$60 per share. On September 12, 1995, the Predecessor's stockholders did not
ratify the stock redemption and other transactions described above. These items
were not ratified due to the abstention of the trustee representing a majority
of Class B common stock. The abstaining stockholder has the right, for up to two
years from September 12, 1995, to vote in favor of or against the aforementioned
transaction or take other action on behalf of the trust beneficiaries. The
Company cannot predict what action the abstaining stockholder will take.
Accordingly, the Company cannot determine the effect, if any, of this
uncertainty on its financial position, results of operations or cash flows.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency, the U.S.
Coast Guard, the Army Corps of engineers, the Texas Natural Resource
Conservation Commission, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect the cost of compliance
with existing environmental laws will have a material adverse effect on the
Company's financial condition, results of operations or cash flows, there can be
no assurance that future legislation, regulation or judicial or administrative
decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex, has
indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone site
in Texas City, Texas. Petro-Tex and many other companies along the Gulf Coast
allegedly sent wastes to the Malone site for disposal in the 1970s and possibly
the early 1980s. Malone has been subject to several state enforcement actions
regarding its waste disposal practices, and TNRCC has revoked Malone's permits
to operate its facilities. It is not known whether the site will require
remediation or at what cost. The Company believes that it has meritorious
defenses to Petro-Tex's claim and intends to contest the claim vigorously.
Although no on-site contamination has been identified as requiring remediation,
management believes that certain areas of the Houston facility were historically
used for waste disposal. Based on limited, currently available information about
these waste disposal areas and their contents, the Company believes that, if
such remediation becomes necessary, any remediation costs would not have a
material adverse effect on the Company's financial condition or results of
operations. The Petro-Tex indemnity does not extend to these on-site waste
disposal areas or their contents.
PREDECESSOR COMMITMENTS
During 1996, the Predecessor's Board of Directors approved the cancellation
of all of the following stock purchase agreements, stock option agreements and
salary continuation agreements in anticipation of the Acquisition.
F-17
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE AGREEMENTS
The Predecessor's Board of Directors approved a stock purchase agreement
with certain officers who own 185,000 shares of the Predecessor's outstanding
Class A common stock and 1,081,670 shares of the Predecessor's outstanding Class
B common stock. Under the terms of this agreement in the event any of these
officers ceases full time employment with the Predecessor or in the event of the
stockholder's death, the Predecessor must redeem all of the stockholder's shares
at a redemption price of $60 per share. This agreement superseded the previous
stock purchase agreements of the Predecessor which are described in the
following paragraphs.
The Predecessor entered into a stock purchase agreement with a certain
minority stockholder who owns 20,000 shares of the Predecessor's outstanding
Class A common stock and 80,000 shares of the Predecessor's outstanding Class B
common stock. Under the terms of this agreement, in the event of the
stockholder's death, the Predecessor must redeem all shares owned by the
deceased stockholder at a formula price, which is adjusted annually. At May 31,
1995, the formula price per share was approximately $58.
The Predecessor entered into a death benefit agreement with an officer of
the Predecessor who owns 660,000 shares of Class B common stock of the
Predecessor. This agreement provides that in the event of the death of the
officer, the Predecessor is obligated to redeem the shares at a price of $60 per
share with twenty-five percent of the purchase price payable at closing and the
balance payable in five equal annual installments plus interest at the rate of
eight percent per annum. This agreement replaces a previous agreement that
obligated the Predecessor to redeem the shares in the event of the death of the
officer at a price of $80 per share.
The Predecessor entered into a stock purchase agreement with certain of its
minority stockholders who own 171,000 shares of the Predecessor's outstanding
common stock. Under the terms of this agreement, such stockholders may sell
their shares to the Predecessor at a formula price, which is adjusted annually.
Under this agreement, the Predecessor is obligated to redeem the shares in the
event of the death of the stockholder at the formula price. At May 31, 1995, the
formula price per share was approximately $54.
The Predecessor also entered into a Section 303 stock purchase agreement
with an officer of the Predecessor who owns 85,000 shares of the Predecessor's
outstanding common stock. This agreement allows for the officer's estate to
require the Predecessor to redeem the necessary shares so as to pay estate taxes
and funeral and administrative expenses upon the death of the officer. Under the
terms of this agreement, the redemption price per share will be based upon the
value of the shares as reflected on the federal estate tax return.
Additionally, the Predecessor entered into separate stock purchase
agreements with an officer of the Predecessor and his spouse who own 500,000
shares of the Predecessor's outstanding common stock as part of a community
estate. The agreement with the officer requires the Predecessor to redeem
250,000 shares from the community estate upon the officer's death at a price of
$90 per share with twenty five percent of the redemption price payable at
closing and the balance payable in five annual installments plus interest at the
rate of eight percent per annum. The agreement with the officer's spouse allows
her to require the Predecessor to redeem the 250,000 shares from the community
estate not redeemed as part of the officer's agreement for a period of one year
subsequent to the officer's death at the same price and payable in the same
manner as set forth in the officer's agreement. Additionally, the spouse's
agreement requires the Predecessor to redeem 250,000 shares of the stock from
the community estate in the event that she predeceases the officer at a price of
$90 per share with sixty percent of the redemption price payable at closing and
the balance payable in thirty-six equal monthly installments plus interest at
the rate of eight percent per annum.
F-18
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the Affiliate's common stock is subject to a stock purchase
agreement. Under the terms of the stock purchase agreement, the Affiliate is
obligated to redeem all of a stockholder's shares in the event of death and has
an option to redeem all of a stockholder's shares in certain other instances.
The redemption price is equal to the Affiliate's adjusted book value, as defined
in the agreement, divided by the number of outstanding shares. At May 31, 1995,
the redemption price per share was $8.15. Of the total redemption amount, 25% is
to be paid in cash with the remaining balance to be paid in 42 equal monthly
installments as evidenced by an interest bearing promissory note.
STOCK OPTION AGREEMENTS
The Predecessor entered into stock option agreements with two of its
officers, which granted them the option to purchase 100,000 shares of common
stock. The option purchase price for the shares is $40 per share. At May 31,
1995, 30,000 shares were exercisable. During the fiscal year ended May 31, 1994,
one of the officers forfeited his option to purchase 50,000 shares of common
stock. In the event the option is exercised, the Predecessor and the officers
will enter into stock purchase agreements. Under the terms of the agreement,
transfer of the stock is restricted and only the Predecessor, at its option, may
redeem the stock. However, upon death of the officer, the Predecessor is
obligated to redeem the officer's shares. In all instances the redemption price
will be the greater of the formula price in the agreement or $40 per share. At
May 31, 1995 the formula price was approximately $54 per share.
SALARY CONTINUATION AGREEMENTS
The Predecessor entered into salary continuation agreements with three of
its officers. The agreements provide that if the officer is an employee of the
Predecessor upon death, an amount ranging from $10,000 to $25,000 would be
payable monthly to his estate for a period of five years.
11. EMPLOYEE BENEFITS
PROFIT SHARING PLAN
The Company has a noncontributory profit sharing plan that covers all
full-time employees that have completed one year or more of service. Employees
can contribute up to 10% of their base compensation to a tax deferred fund which
is matched by the Company at the rate of $.25 per one dollar contributed by the
employee up to 6% of the employee's base compensation. The Company's expense to
match employee contributions was $169,591, $14,786, $195,627 and $180,000 for
the year ended June 30, 1997, for the one month period ended June 30, 1996, for
the twelve month period ended May 31, 1996 and for the year ended May 31, 1995,
respectively. Additionally, the Company made additional discretionary
contributions to the plan which amounted to approximately $1.1 million, $0.2
million, $2.4 million and $2.6 million for the year ended June 30, 1997, for the
one month period ended June 30, 1996, for the twelve month period ended May 31,
1996 and for the year ended May 31, 1995, respectively. The Company's
contributions vest with the employee at a rate of 20% per year.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, Holdings established an Employee Stock
Ownership Plan (the "ESOP"), covering substantially all full-time employees of
the Company. The ESOP borrowed $10 million under the Bank Credit Agreement to
purchase 100,000 shares of Holding's Common Stock at the closing of the
Acquisition. The shares of Common Stock purchased by the ESOP were pledged as
security for the ESOP Loan, and such shares will be released and allocated to
ESOP participants' accounts as the ESOP Loan is discharged. For employees whose
employment commenced prior to October 1, 1996 and who have attained 21 years,
participation begins as of the Acquisition date or the date of commencement of
the participant's employment. A participant's ESOP account vests at the rate of
20% per year. The Company's contributions to the ESOP, which are used to retire
principal and pay interest on the loan is reported as
F-19
<PAGE>
compensation expense. Principal and interest payments made for the year ended
June 30, 1997 amounted to $2.7 million.
CASH BONUS PLAN LIABILITY
In connection with the Acquisition, the Predecessor established the $35
million Cash Bonus Plan covering substantially all employees of the Predecessor
(or certain affiliates of the Predecessor) and covering the employees of certain
third-party contractors who have contributed to the success of the Predecessor.
All participants of the plan as of July 2, 1996 were distributed 10% of the cash
bonus in August 1996, and the remaining amount is to be paid in sixteen
quarterly installments which began in October 1996.
12. RELATED PARTY TRANSACTIONS
Prior to the Acquisition, the Predecessor made contributions from time to
time to a charitable organization that is an affiliate of the Predecessor.
13. CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the year ended June 30, 1997, the one month
period ended June 30, 1996, the twelve month period ended May 31, 1996 and the
year ended May 31, 1995 approximately 41%, 46%, 50%, and 35%, respectively, of
the Company's sales were to four customers. The Company had two customers, which
represented 11% and 17% of sales during the year ended June 30, 1997, 14% and
16% of sales during the one month period ended June 30, 1996, and 16% and 19% of
sales during the twelve months ended May 31, 1996. The Company had one customer,
which represented 12% of sales during the year ended May 31, 1995. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral for accounts receivable. The Company's credit losses have
been minimal.
The Company maintains its cash deposits and short-term investments with a
major bank and a financial services company which at certain times exceed the
federally insured limits. Management assesses the financial condition of these
institutions and believes that any possible credit loss is minimal.
14. FINANCIAL INSTRUMENTS
At June 30, 1997 the Company estimated that the carrying value and fair
value of its financial instruments, other than long-term debt (See Note 6), were
approximately equal due to the short-term nature of the instruments. Such
instruments include cash and cash equivalents, accounts receivable and accounts
payable.
F-20
<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................... 2
Summary................................. 3
Risk Factors............................ 10
Use of Proceeds......................... 15
Capitalization.......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 26
Management.............................. 42
Related Transactions.................... 48
Beneficial Ownership of Holdings' Common
Stock................................. 49
Description of the Bank Credit
Agreement............................. 50
Description of the Securities........... 53
Plan of Distribution.................... 81
Legal Matters........................... 81
Experts................................. 82
Index to Financial Statements........... F-1
Texas Petrochemicals
Corporation
PROSPECTUS
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not Applicable.
ITEM 14. 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.
As permitted by Section G of Article 2.02-1 of the TBCA or any successor
statute (the "Indemnification Article"), the Company's Bylaws (a) makes
mandatory the indemnification permitted under Section B of the Indemnification
Article as contemplated by Section G thereof; (b) makes mandatory its payment or
reimbursement of the reasonable expenses incurred by a former or present
director who was, is, or is threatened to be made a named defendant or
respondent in a proceeding upon such director's compliance with the requirements
of Section K of the Indemnification Article; and (c) extends the mandatory
indemnification referred to in Section (a) above and the mandatory payment or
reimbursement of expenses referred to in Section (b) above (i) to all former or
present officers of the Company and (ii) to all persons who are or were serving
at the request of the Company as a director, officer, partner or trustee of
another foreign or domestic corporation, partnership, joint venture, trust or
employee benefit plan, to the same extent that the Company is obligated to
indemnify and pay or reimburse expenses to directors. The Company's Bylaws also
provide that the Company shall pay or reimburse expenses incurred by any
director, officer, employee or agent in connection with such person's appearance
as a witness or other participation in a proceeding at a time when such person
is not a named defendant or respondent in such proceeding.
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.
Pursuant to Section 2(b) of the market making agreement by and between the
Company and Chase Securities, Chase Securities will indemnify the Company
against any liability arising pursuant to information in the prospectus
contained herein, this Registration Statement or amendment thereto with respect
to Chase Securities' market making activities.
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 15. SALE OF UNREGISTERED SECURITIES.
In connection with his employment, Mr. Waycaster received a grant of
options to purchase up to 50,000 shares of the Common Stock of the Company at a
purchase price of $40 per share. The options were cancelled in connection with
the Acquisitions. Such grant of options was exempt by virtue of Section 4(2) of
and Rule 701 under the Securities Act.
On July 1, 1996, Finance Co., a predecessor by merger to the Company,
issued and sold $175 million aggregate principal amount of the Original Notes to
qualified institutional buyers, as defined in Rule 144A under the Securities
Act, in transactions meeting the requirements of Rule 144A. Similarly, on March
13,
II-1
<PAGE>
1997, the Company issued and sold $50,000,000 in aggregate principal amount of
the Notes to qualified institutional buyers, as defined in Rule 144A under the
Securities Act, in transactions meeting the requirements of Rule 144A.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
3.1 -- Certificate of Incorporation of the Company, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-4, File No. 333-11569).
3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
4.1 -- Indenture dated as of July 1, 1996 by and between the Company and Fleet National Bank, as
Trustee, with respect to the 11 1/8% Senior Subordinated Notes due 2006, including the
form of the Note (incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4, File No. 333-11569).
4.2 -- Indenture dated as of March 1, 1997 by and between the Company and Fleet National Bank, as
Trustee, with respect to the 11 1/8% Series B Senior Subordinated Notes due 2006,
including the form of Note (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, File No. 333-24589).
5.1 -- Opinion of Bracewell & Patterson, L.L.P. as to the validity of the 11 1/8% Senior
Subordinated Notes due 2006 and the validity of the 11 1/8% Series B Senior Subordinated
Notes due 2006.
10.1 -- Holdings' 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4, File No. 333-11569).
10.2 -- TPC Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4, File No. 333-11569).
10.3 -- TPC Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-4, File No. 333-11569).
10.4 -- TPC Cash Bonus Plan (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
10.5 -- Security Agreement by and between Boatmen's Trust Company of Texas and the Company
(incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form
S-4, File No. 333-11569).
10.6 -- TPC Profit Sharing Plan (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
10.7 -- Lease for Calcasieu Parish, Louisiana (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-4, File No. 333-11569).
10.8 -- Credit Agreement dated as of July 1, 1996 among the Company, Texas Commerce Bank, National
Association, ABN AMRO North America, Inc., and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4, File No.
333-11569).
10.9 -- Security Agreement dated as of July 1, 1996 by and between the Company and Texas Commerce
Bank, National Association (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
10.10 -- Pledge Agreement dated as of July 1, 1996 by and between the Company and Texas Commerce
Bank, National Association (incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
10.11 -- Letter Agreement dated May 6, 1996, by and among The Sterling Group, Inc., Holdings, TPC
Holding, and the Company (incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
II-2
<PAGE>
<C> <S>
10.12 -- Form of Indemnity Agreement between the Company and each of its officers and directors
(incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-4, File No. 333-11569).
10.13 -- Form of Tax Sharing Agreement among Holdings, TPC Holding, the Company and Texas Butylene
Chemical Corporation (incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
10.14 -- Employment Agreement with Bill W. Waycaster (incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-4, File No. 333-11569).
12* -- Statement re Computation of Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company's
Registration Statement on Form S-4, File No. 333-11569).
23.1* -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in their opinion filed as Exhibit 5
hereto).
23.3*-- Consent of Deloitte & Touche LLP
24 -- Powers of Attorney.
25.1 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture dated as of July 1, 1996 (incorporated by reference to Exhibit 25 to
the Company's Registration Statement on Form S-4, File No. 333-11569).
25.2 -- Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee
under the Indenture dated as of March 1, 1997 (incorporated by reference to Exhibit 25 to
the Company's Registration Statement on Form S-4, File No. 333-24589).
</TABLE>
- ------------
* Filed herewith.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration 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
II-3
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer of controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TEXAS
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 SEPTEMBER 25, 1997.
TEXAS PETROCHEMICALS CORPORATION
By:/s/ B. W. WAYCASTER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON SEPTEMBER 25, 1997.
SIGNATURE TITLE
- ------------------------- -----------------------------------------------------
WILLIAM A. McMINN* Chairman
WILLIAM A. MCMINN
/s/B. W. WAYCASTER Director, President and Chief Executive Officer
B. W. WAYCASTER (principal executive officer)
/s/CLAUDE E. MANNING Chief Financial Officer
CLAUDE E. MANNING (principal financial and accounting officer)
GORDON A. CAIN* Director
GORDON A. CAIN
STEVE A. NORDAKER* Director
STEVE A. NORDAKER
WILLIAM R. HUFF* Director
WILLIAM R. HUFF
SUSAN O. RHENEY* Director
SUSAN O. RHENEY
JOHN T. SHELTON* Director
JOHN T. SHELTON
*By: /s/CLAUDE E. MANNING
CLAUDE E. MANNING
(ATTORNEY-IN-FACT FOR PERSONS INDICATED)
II-5
EXHIBIT 12
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY
31, TWELVE ONE MONTH
------------------------------- MONTHS ENDED ENDED YEAR ENDED
1993 1994 1995 MAY 31, 1996 JUNE 30, 1996 JUNE 30, 1997
--------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes and
minority interest.................. $ 41,081 $ 52,303 $ 49,268 $24,508 $ 1,988 $ (14,615)
Interest expense..................... 1,087 663 475 2,343 98 35,157
Interest portion of rental expense... 1,630 1,430 1,470 1,600 140 1,600
--------- --------- --------- ------------- ------------- -------------
Earnings....................... $ 43,798 $ 54,396 $ 51,213 $28,451 $ 2,226 $ 22,142
========= ========= ========= ============= ============= =============
Fixed Charges:
Interest expense................... $ 1,087 $ 663 $ 475 $ 2,343 $ 98 $ 35,157
Interest portion of rental
expense.......................... 1,630 1,430 1,470 1,600 140 1,600
--------- --------- --------- ------------- ------------- -------------
Total fixed charges............ $ 2,717 $ 2,093 $ 1,945 $ 3,943 $ 238 $ 36,757(1)
========= ========= ========= ============= ============= =============
Ratio of earnings to fixed
charges.......................... 16.1x 26.0x 26.3x 7.2x(2) 9.4x --
<CAPTION>
PRO FORMA PRO FORMA
TWELVE ONE MONTH
MONTHS ENDED ENDED
MAY 31, 1996 JUNE 30, 1996
------------ -------------
Loss before income taxes and minority
interest........................... $ (9,600) $(1,600)
Interest expense..................... 31,900 2,500
Interest portion of rental expense... 1,600 140
------------ -------------
Earnings...................... $ 23,900 $ 1,040
============ =============
Fixed Charges:
Interest expense................... $ 31,900 $ 2,500
Interest portion of rental
expense......................... 1,600 140
------------ -------------
Total fixed charges........... $ 33,500 $ 2,640
============ =============
Ratio of earnings to fixed
charges......................... -- (3) -- (3)
============ =============
</TABLE>
- ------------
(1) For the year ended June 30, 1997, earnings were insufficient to cover fixed
charges by the amount of $(14.6) million.
(2) For the pro forma twelve months ended May 31, 1996 and the one month ended
June 30, 1996, earnings were insufficient to cover fixed charges in the
amount of $(9.6) million and $(1.6) million, respectively.
(3) For the twelve months ended May 31, 1996, income before taxes and minority
interest includes a $12.6 million non-cash provision for the impairment of
certain non-strategic properties which TPC intends to sell.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our reports dated August 16, 1996, on our audits of the financial statements of
Texas Olefins Company, subsidiaries and affiliate, which includes an explanatory
paragraph relating to changes in accounting principles. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 25, 1997
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to
Registration Statement No. 333-26821 of Texas Petrochemicals Corporation of our
report dated August 1, 1997 appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
September 25, 1997
