TEXAS PETROCHEMICALS CORPORATION
OFFER TO EXCHANGE ITS
11 1/8% SERIES B EXCHANGE SENIOR SUBORDINATED NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OUTSTANDING
11 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
MAY 12, 1997, UNLESS EXTENDED BY TEXAS PETROCHEMICALS CORPORATION IN
ITS SOLE DISCRETION (THE "EXPIRATION DATE"). ALTHOUGH TEXAS PETROCHEMICALS
CORPORATION HAS NO PRESENT INTENTION TO CONDUCT ITS EXCHANGE OFFER LONGER THAN
30 DAYS, IT RESERVES THE RIGHT TO EXTEND THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
Texas Petrochemicals Corporation, a Texas corporation (the "Company" or
"TPC"), hereby offers, upon the terms and subject to the conditions set forth
in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal" and, together with the Prospectus,
the "Exchange Offer"), to exchange $1,000 principal amount of its 11 1/8%
Series B Exchange Senior Subordinated Notes due 2006 (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for each $1,000 principal amount of its outstanding
11 1/8% Series B Senior Subordinated Notes due 2006 (the "Original Series B
Notes"), of which an aggregate of $50,000,000 principal amount is outstanding.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Series B Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer pursuant to the Securities Act, and (ii) holders of
the Exchange Notes generally will not be entitled to the rights of holders of
the Original Series B Notes under the Registration Rights Agreement (as defined
under "Prospectus Summary -- The Exchange Offer") following the consummation
of the Exchange Offer. See "The Exchange Offer -- Registration Rights,"
"-- Consequences of Failure to Exchange" and "-- Resale of the Exchange
Notes; Plan of Distribution." The Exchange Notes will evidence the same debt as
the Original Series B Notes (which they replace) and will be issued under, and
be entitled to the benefits of, the indenture governing both the Original Series
B Notes and the Exchange Notes.
The Company will accept for exchange any and all Original Series B Notes
validly tendered and not withdrawn prior to the Expiration Date. Tenders of
Original Series B Notes may be withdrawn at any time prior to the Expiration
Date. The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer." The Original Series B Notes may be tendered only in integral
multiples of $1,000 principal amount.
(PROSPECTUS COVER CONTINUED ON FOLLOWING PAGE)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is April 11, 1997.
<PAGE>
The Original Series B Notes and the Exchange Notes are referred to herein
collectively as the "Notes."
Interest on the Notes is payable semiannually on January 1 and July 1 of
each year, commencing January 1, 1997. Except as described below, the Notes are
not redeemable at the option of the Company prior to February 15, 1999.
Thereafter, the Notes will be redeemable, in whole or in part, at the option of
the Company, at the redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption. Up to 35% of the
original principal amount of the Notes will be redeemable at any time and from
time to time prior to July 1, 1999, at the option of the Company, with the
proceeds of any Public Equity Offerings (as defined under "Description of the
Notes -- Certain Definitions") following which there is a Public Market (as
defined under "Description of the Notes -- Certain Definitions") at a
redemption price equal to 110% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of redemption; provided,
however, that at least 65% of the original aggregate principal amount of the
Notes must remain outstanding after each such redemption. Upon a Change in
Control (as defined under "Description of the Notes -- Change of Control"),
each holder of Notes may require the Company to purchase all or a portion of
such holder's Notes at 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase. The Notes are
unsecured senior subordinated obligations of the Company and will rank
subordinate in right of payment to all existing and future Senior Indebtedness
(as defined under "Description of the Notes -- Certain Definitions") of the
Company. As of December 31, 1996, on a pro forma basis after giving effect to
the issuance of the Notes and the application of the proceeds therefrom, the
Company would have had approximately $85.5 million of Senior Indebtedness
outstanding. For a more complete description of the Notes, see "Description of
the Notes."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes, except as otherwise described
herein, the Exchange Notes issued pursuant to the Exchange Offer in exchange for
the Original Series B Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 of the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and that such holder does not intend
to participate and there is no arrangement or understanding with any person to
participate, in the distribution of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Exchange Offer -- Resale of the Exchange Notes; Plan of
Distribution."
Prior to this offering, there has been no public market for the Notes. The
Notes are not, and are not expected to be, listed on any securities exchange or
authorized for trading on NASDAQ. The Company does not expect that an active
market for the Notes will develop. The Original Series B Notes have been
eligible for trading in the Private Offerings, Resale and Trading through
Automated Linkages (PORTAL) Market of The Nasdaq Stock Market, Inc., but the
Exchange Notes will not be so eligible. To the extent that an active market for
Notes does develop, the market value thereof will depend on many factors,
including among other things, prevailing interest rates, general economic
conditions, the Company's financial condition and results of operations, the
volatility of the market for non-investment grade debt and other factors. Such
conditions might cause the Notes, to the extent that they are traded, to trade
at a discount. See "Risk Factors -- Lack of Public Market for the Notes."
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any and all amendments thereto) on Form S-4 (the
"Registration Statement") under the Securities Act, with respect to, among
other things, the Exchange Notes offered hereby. This Prospectus, which is part
of the Registration Statement, does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto, certain items
of which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company and the Notes, reference is hereby made
to the Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the
Registration Statement may be obtained from the Public Reference Section of the
Commission, upon payment of prescribed fees. The Commission maintains a Web site
that contains reports and information regarding registrants that file
electronically with the Commission at Web site (http://www.sec.gov).
Pursuant to the Indenture (as defined under "Description of the
Notes -- General"), so long as any of the Notes are outstanding, whether or not
the Company is subject to the reporting requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company is obligated to send to the Commission the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) if the Company were
subject to such reporting requirements; PROVIDED, HOWEVER, that if Holdings (as
defined) shall have become a Guarantor (as defined under "Description of the
Notes -- Certain Definitions") with respect to all obligations relating to the
Notes, the reports, information and other documents required to be filed and
provided as described hereunder may, at the Company's option, be filed by and be
those of Holdings rather than the Company; PROVIDED FURTHER, HOWEVER, that in
the event Holdings conducts, directly or indirectly, any business or holds,
directly or indirectly, any significant assets other than the capital stock of
TPC Holding (as defined) or the Company at the time of filing and providing any
such report, information or other document containing financial statements of
Holdings, Holdings shall include in such report, information or other document
summarized financial information (as defined in Rule 1-02(bb) of Regulation S-X
promulgated by the Commission) with respect to the Company. The Company is also
obligated to provide to all holders of the Notes, and file with the Trustee (as
defined under "Description of the Notes"), copies of such annual reports,
quarterly reports and other documents and, if filing such documents by the
Company with the Commission is not permitted under the Exchange Act, promptly
upon written request supply copies of such documents to any prospective
purchaser of the Notes and to securities analysts and broker-dealers upon their
request.
3
<PAGE>
PRODUCT OVERVIEW
<TABLE>
<CAPTION>
TWELVE MONTHS
NORTH TWELVE MONTHS ENDED MAY 31,
AMERICAN ENDED 1996
MARKET MAY 31, 1996 SALES
PRODUCT POSITION(1) REVENUES VOLUME(2) COMMENTS
- ------------------------------------- ---------- ------------- ------------- ---------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BUTADIENE 1 $ 112.6 623 Only significant North American
producer whose core business is
the production of butadiene. Only
domestic producer with
"on-purpose" capability.
MTBE 2 $ 187.4 14,335 MTBE, produced by reacting
Bbls./day(3) methanol and isobutylene, is the
preferred oxygenate and a major
component of reformulated
gasoline in the U.S.
N-BUTYLENES $ 48.2
Butene-1 1 229 The Company has the ability to
produce butene-1 from two
different production processes.
Butene-2(4) 1 55 The Company either recycles or
upgrades by-product streams into
butene-2, which is sold at higher
margins.
SPECIALTY ISOBUTYLENES $ 74.5
Isobutylene
Concentrate 1 256 Sole U.S. producer.
High Purity
Isobutylene(5) 1 74 Of three U.S. producers, the
Company is the largest merchant
supplier to the chemical market.
Diisobutylene 1 38 Sole U.S. producer.
</TABLE>
- ------------
(1) The Company's (as defined) North American market share position, in terms of
annual rated production capacity. Rated capacities reflect production levels
achievable if plant operations are dedicated to maximizing output of that
particular product, which exceeds actual capacities available under typical
multi-product configurations.
(2) In millions of pounds per year, unless expressed in barrels per day.
Relevant conversion ratios for the Company's products are as follows:
POUNDS PER GALLON POUNDS PER BARREL
----------------- -----------------
MTBE 6.22 261.11
Butene-1, high purity isobutylene,
isobutylene concentrate 5.01 210.21
Butene-2 5.10 213.99
Diisobutylene 6.00 252.00
(3) Refers to sales of MTBE to third parties and excludes MTBE production
volumes used to produce high purity isobutylene.
(4) High purity butene-2 sold by the Company for use in chemical applications.
(5) High purity isobutylene sold by the Company for use in chemical
applications.
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. 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 TRANSACTIONS (AS DEFINED), AND TO TPC AND ITS SUBSIDIARIES
FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS. ALL REFERENCES TO FISCAL YEARS
IN THIS PROSPECTUS UP TO AND INCLUDING FISCAL 1995 REFER TO THE FISCAL YEARS
ENDED MAY 31 IN THE CALENDAR YEARS INDICATED. THE COMPANY HAS CHANGED ITS FISCAL
YEAR END TO JUNE 30 AND INFORMATION FOR FISCAL YEARS ENDED SUBSEQUENT TO MAY 31,
1995 IS SO PRESENTED. ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY'S
CAPACITY TO PRODUCE CERTAIN PRODUCTS REFLECT PRODUCTION LEVELS ACHIEVABLE IF
PLANT OPERATIONS ARE DEDICATED TO MAXIMIZING OUTPUT OF THAT PARTICULAR PRODUCT,
WHICH EXCEEDS ACTUAL CAPACITY AVAILABLE UNDER TYPICAL MULTI-PRODUCT PRODUCTION
CONFIGURATIONS. UNLESS OTHERWISE INDICATED, INDUSTRY DATA CONTAINED HEREIN,
OTHER THAN WITH RESPECT TO THE COMPANY, IS DERIVED FROM PUBLICLY AVAILABLE
INDUSTRY TRADE JOURNALS AND OTHER PUBLICLY AVAILABLE INDUSTRY SOURCES, WHICH THE
COMPANY HAS NOT INDEPENDENTLY VERIFIED BUT WHICH THE COMPANY BELIEVES TO BE
RELIABLE.
THE COMPANY
The Company is the largest producer of butadiene and butene-1, and the
second largest producer of methyl TERTIARY-butyl ether ("MTBE"), in North
America, in terms of production capacity. In addition, the Company is the sole
producer of diisobutylene and isobutylene concentrate in the United States and
the largest domestic merchant supplier of high purity isobutylene to the
chemical market. The Company's products include: (i) butadiene, primarily used
to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer
in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture
of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty
isobutylenes, primarily used in the production of specialty rubbers, lubricant
additives, detergents and coatings. For the six months ended December 31, 1996
and the twelve months ended May 31, 1996, butadiene represented 25% and 25% of
the Company's total revenues, respectively, MTBE represented 52% and 41%,
respectively, n-butylenes 9% and 11%, respectively, specialty isobutylenes 11%
and 16%, respectively, and other revenues the remaining 3% and 7%, respectively.
On a pro forma basis after giving effect to the Transactions, the Company's
revenues for the six months ended December 31, 1996, the twelve months ended May
31, 1996 and the one month ended June 30, 1996 would have been $246.7 million,
$454.2 million and $41.2 million, respectively, and EBITDA (as defined) for the
six months ended December 31, 1996, the twelve months ended May 31, 1996 and the
one month ended June 30, 1996 would have been $26.0 million, $74.2 million and
$4.3 million, respectively.
The Company seeks to reduce its exposure to the cyclical nature of the
petrochemical industry through long-term, fixed profit contracts and to increase
its profitability by maximizing its production flexibility and increasing sales
of high margin n-butylenes and specialty isobutylenes. For the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, approximately 43% and
45% of the Company's total revenues were derived from products sold on a fixed
profit basis or whose selling prices were linked, directly or indirectly, to raw
material costs. The Company believes that the combination of its fixed profit
contracts, competitive cost position and specialty product sales provides
stability to its cash flows and helps to offset the effects of cyclical
downturns.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in
5
<PAGE>
North America, the Company believes that many of its customers place significant
value on its ability to provide a reliable domestic supply of butadiene and as a
result have entered into long-term sales contracts with the Company, which, in
aggregate, accounted for 92% and 88% of its butadiene sales in the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, respectively.
The Company extracts butadiene from crude butadiene, which is generated
from the production of ethylene and is comprised of a number of valuable
components, including butadiene, isobutylene, n-butylenes, isobutane and
n-butane. Many U.S. ethylene producers rely on third parties such as the Company
to process their crude butadiene streams, as the crude butadiene volumes they
produce are not sufficient to justify the construction of on-site butadiene
recovery facilities. The Company estimates that producers accounting for 65% of
U.S. and Canadian ethylene production capacity do not internally process crude
butadiene by-product streams. The Company is the largest non-integrated crude
butadiene processor in North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations. For the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, fixed profit supply contracts for crude butadiene accounted
for approximately 92% and 72%, respectively, of the Company's butadiene sales
volume.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major component of,
reformulated gasoline ("RFG") and is used in over 25% of the U.S. gasoline
pool. MTBE is produced by reacting methanol and isobutylene, and the Company's
ability to produce isobutylene by three alternative methods enables it to
produce MTBE by the most economical processes available to the Company. In
addition, the Company has the ability to add incremental capacity to capitalize
on expected future growth, at a significantly lower cost than the cost of adding
new capacity. The Company believes that this incremental capacity gives it a
competitive advantage over other producers who would have to incur greater cost
to increase capacity. The Company sells MTBE to oil refiners and gasoline
producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and
CITGO Petroleum Corporation on both a contract and spot basis at prices linked
to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes. In the six months ended
December 31, 1996, the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, sales of n-butylenes and specialty isobutylenes represented 20%,
27% and 21%, respectively, of the Company's revenues as compared to 19% in
fiscal 1993.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally to produce MTBE for sale in the spot
market. In the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 18% and 11%, respectively, of the Company's
6
<PAGE>
isobutylene was used in the production of specialty isobutylenes with the
remainder being used for MTBE production. In addition, the Company maintains the
production flexibility to upgrade n-butylenes contained in crude butadiene
streams to either isobutylene or butene-1 using its patented skeletal
isomerization process ("SKIP"). This flexibility allows the Company to meet its
customers' needs through the most economical process, to produce additional
products and to capitalize on favorable market conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company's principal executive offices are located at Three Riverway,
Suite 1500, Houston, Texas 77056. The Company's telephone number is (713)
627-7474.
THE TRANSACTIONS
Texas Petrochemical Holdings, Inc., a Delaware corporation ("Holdings"),
TPC Holding Corp., a Delaware corporation ("TPC Holding"), and TPC Finance
Corp., a Texas corporation ("Finance Co."), were organized in May 1996 to
effect the acquisition (the "Acquisition") of TOC and its subsidiaries,
including TPC, and to assume a raw materials supply contract from Clarkston. On
July 1, 1996 (the "Closing Date"), Holdings issued and sold $43.8 million of
its common stock ("Common Stock"), issued $6.2 million of its Common Stock for
the shares contributed by the Rollover Investors (as defined), sold a sufficient
amount of 13.5% Senior Discount Notes Due 2007 (the "Discount Notes") and
Common Stock, as an investment unit to raise $30 million, and contributed the
proceeds thereof to TPC Holding. Finance Co. borrowed approximately $140.0
million under the Bank Credit Agreement and received approximately $169 million
in net proceeds from the sale at such time of $175 million aggregate principal
amount of 11 1/8% Senior Subordinated Notes due 2006 (the "Original Notes")
and loaned the combined net proceeds to TPC Holding. TPC Holding used the
capital contributions received from Holdings, cash on hand and the proceeds of
the loan from Finance Co. to effect the Acquisition pursuant to a stock purchase
agreement dated as of May 14, 1996 (the "Stock Purchase Agreement"), to fund
the ESOP (as defined) and pay fees and expenses in connection with the
Transactions. 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. The form and terms
of the Original Series B Notes are the same as the form and terms of the
Original Notes except that (i) the Original Notes have been registered under the
Securities Act and, therefore, do not bear legends restricting their transfer
pursuant to the Securities Act, and (ii) holders of the Original Notes will not
be entitled to the rights of holders of the Original Series B Notes under the
Registration Rights Agreement (as defined under "Description of the
Notes -- Registered Exchange Offer; Registration Rights"). The sale of the
Original Notes, the execution of and initial borrowings under the Bank Credit
Agreement, the placement of the Common Stock and the sale of the Discount Notes
are hereinafter referred to as the "Financings." The Financings, the
Acquisition, the establishment of the ESOP, the payment of certain fees and
expenses, and other related transactions are collectively referred to herein as
"The Transactions." See "The Transactions."
7
<PAGE>
The following charts depict (i) the organizational structure of Holdings
and its subsidiaries (the acquiring companies), and TOC and its subsidiaries
(the companies that were acquired) prior to the Transactions and (ii) the
organizational structure upon consummation of the Transactions.
PRIOR TO THE TRANSACTIONS
Acquiring Companies Companies to be Acquired
Texas Petrochemical Texas Olefins Company Other
Holdings, Inc. ("TOC") Stockholders
("Holdings")
Issuer of Common Stock
and Discount Notes 81% 19%
100% Texas Petrochemicals
Corporation
TPC Holding Corp. ("TPC")
("TPC Holding")
100%
TPC Finance Corp.
("Finance Co.")
Initial borrower under the
Bank Credit Agreement
and issuer of the Notes
Following the Transactions
Texas Petrochemical
Holdings, Inc. Discount Notes
Common Stock ("Holdings") and Common Stock
$50 million Issuer of Common Stock $30 million
and Discount Notes
100%
TPC Holding Corp.
("TPC Holding")
100%
Bank Credit
Agreement Texas Petrochemicals
$140.6 million Corporation
("TPC")
Successor obligor on loans
under the Bank Credit
Agreement
Notes and the Notes
$175 million
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<CAPTION>
<S> <C>
Registration Rights Agreement........... In order to capitalize on advantageous conditions in the bond market and
the market for the Original Notes, the Company sold $50 million in
aggregate principal amount of Original Series B Notes to qualified
institutional buyers as defined in Rule 144A under the Securities Act
through Chase Securities Inc., as initial purchaser (the "Initial Pur-
chaser"). The Company and the Initial Purchaser entered into a
Registration Rights Agreement dated as of March 13, 1997 (the
"Registration Rights Agreement"), which grants the holders of the
Original Series B Notes certain exchange and registration rights. The
Exchange Offer made hereby is intended to satisfy such exchange rights.
The Exchange Offer...................... $1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of Original Series B Notes. As of the date hereof, $50
million aggregate principal amount of the Original Series B Notes are
outstanding. The Company will issue the Exchange Notes to holders on the
earliest practicable date following the Expiration Date.
Resales of the Exchange Notes........... Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that,
except as described below, the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred
by a holder thereof (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and pro-
spectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes pursuant to the Exchange
Offer in exchange for Original Series B Notes that such broker-dealer
acquired for its own account as a result of market-making activities or
other trading activities (other than Original Series B Notes acquired
directly from the Company or its affiliates) must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. If the Company
receives certain notices in the Letter of Transmittal, this Prospectus, as
it may be amended or supplemented from time to time, may be used for the
period described below by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Original Series B Notes where such
Original Series B Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities and not acquired
directly from the Company. The Company has agreed that, if it receives
certain notices in the Letter of Transmittal, for a period of 180 days
after the date on which the Registration Statement becomes effective, it
will make this Prospectus available to any such broker-dealer for use in
connection with any such resale. The Letter of Transmittal requires
broker-dealers tendering Original Series B Notes in the Exchange Offer to
indicate whether such broker-dealer acquired such Original Series B Notes
for its own account as a result of market-making activities or other
trading activities (other than Original Series B Notes acquired directly
from the Company or any of its affiliates), and if no broker-dealer
indicates that such Original Series B Notes were so acquired, the Company
has no obligation under the Registration Rights Agreement to maintain the
effectiveness of the
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Registration Statement past the consummation of the Exchange Offer or
to allow the use of this Prospectus for such resales. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer"; " -- Registration
Rights" and " -- Resale of the Exchange Notes; Plan of Distribution."
Expiration Date......................... The Exchange Offer expires at 5:00 p.m., New York City time, on
May 12, 1997, unless such Exchange Offer is extended by the
Company in its sole discretion, in which case the term "Expiration Date"
means the latest date and time to which such Exchange Offer is extended.
Conditions to the Exchange Offer........ The Exchange Offer is subject to certain conditions, which may be waived by
the Company. See "The Exchange Offer -- Conditions to the Exchange
Offer."
Procedures for Tendering the Original
Series B Notes......................... Each holder of Original Series B Notes wishing to accept the Exchange Offer
must complete, sign and date the accompanying Letter of Transmittal in
accordance with the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal together with the Original
Series B Notes and any other required documentation to the Exchange Agent
(as defined below under "Exchange Agent") at the address set forth
herein. By executing the Letter of Transmittal, a holder will make certain
representations to the Company. See "The Exchange Offer -- Registration
Rights" and " -- Procedures for Tendering Original Series B Notes."
Special Procedures for Beneficial
Owners................................. Any beneficial owner whose Original Series B Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on such beneficial owner's
behalf. See "The Exchange Offer -- Procedures for Tendering Original
Series B Notes."
Guaranteed Delivery Procedures.......... Holders of Original Series B Notes who wish to tender their Original Series
B Notes when those securities are not immediately available or who cannot
deliver their Original Series B Notes, the Letter of Transmittal or any
other documents required by such Letter of Transmittal to the Exchange
Agent prior to the Expiration Date, must tender their Original Series B
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer -- Procedures for Tendering Original Series B
Notes -- GUARANTEED DELIVERY."
Withdrawal Rights....................... Tenders of Original Series B Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
Acceptance of Original Series B Notes
and Delivery of Exchange Notes......... The Company will accept for exchange any and all Original Series B Notes
that are properly tendered in the Exchange Offer, and not withdrawn, prior
to the Expiration Date. The Exchange Notes issued pursuant to the Exchange
Offer will be issued on the earliest practicable date following the
acceptance for exchange of Original Series B Notes by the Company. See
"The Exchange Offer -- Terms of the Exchange Offer."
Exchange Agent.......................... Fleet National Bank is serving as exchange agent (the "Exchange Agent")
in connection with the Exchange Offer.
Federal Income Tax Considerations....... The Company has received an opinion of counsel advising that the exchange
of Original Series B Notes for Exchange Notes pursuant to the Exchange
Offer will not be treated as a taxable exchange for federal income tax
purposes. See "Certain Federal Income Tax Considerations."
</TABLE>
10
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Maturity Date........................ July 1, 2006.
Interest Payment Dates............... January 1 and July 1 of each year, commencing July 1, 1997.
Optional Redemption.................. Except as described below, the Company may not redeem the Notes prior to
July 1, 2001. On or after such date, the Company may redeem the Notes,
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 principal amount
of the Notes with the net proceeds received after the issuance of the
Notes of one or 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 Notes remains outstanding
after each such redemption. See "Description of the Notes -- 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 Notes 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
Notes -- Change of Control."
Ranking.............................. The Notes are unsecured and subordinated to all existing and future
Senior Indebtedness of the Company. The Notes 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 December 31,
1996, after giving effect to the issuance of the Notes and the
application of the proceeds therefrom, the Company would have had
outstanding approximately $85.5 million (exclusive of unused
commitments) in aggregate amount of Senior Indebtedness and $225.0
million of Senior Subordinated Indebtedness. See "Description of
Notes -- Ranking."
Restrictive Covenants................ The indenture under which the Notes will be issued (the "Indenture")
will 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 substantially all of its
assets to, another person. The Indenture will 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 distributions. In
addition, the Company will be obligated, under certain circumstances, to
offer to repurchase Notes at a purchase price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase, with the net cash proceeds of certain sales or
other dispositions of assets. However, all of these limitations and
prohibitions will be subject to a number of important qualifications.
See "Description of the Notes -- Certain Covenants."
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the
information set forth under the caption "Risk Factors" and all other
information set forth in this Prospectus before making any investment in the
Notes.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER INFORMATION
The summary historical 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 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 financial information set
forth below for the year ended May 31, 1992 and for the six months ended
December 31, 1995 and 1996 has been derived from unaudited financial statements,
which, in the opinion of management, have been prepared on a basis consistent
with the audited financial statements of such entities and contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for these periods. The unaudited combined
financial information for the year ended May 31, 1992 has been prepared from
audited financial statements of TOC and its subsidiaries and unaudited financial
statements of Clarkston. The results of the one-month and interim periods are
not necessarily indicative of the results of the entire year or any other
period. The pro forma combined financial information of TOC, its subsidiaries
and Clarkston for the periods prior to July 1, 1996 and the pro forma
consolidated financial information of the Company since July 1, 1996 presented
below have been derived from the unaudited pro forma financial statements
included elsewhere herein. The pro forma combined financial information for the
periods prior to July 1, 1996 give effect to the Transactions (including the
Acquisition, the Financings, the sale of certain assets and the new employee
compensation arrangements) and the offering of the Notes and the application of
the proceeds therefrom as if they had occurred on June 1, 1995. The pro forma
balance sheet as of December 31, 1996 and the pro forma statement of operations
data for the six months ended December 31, 1996 are as adjusted to give effect
to the offering of the Notes and the application of the proceeds therefrom as if
it had occurred as of December 31, 1996 for balance sheet information and July
1, 1996 for statement of operations information.
The summary pro forma financial information does not necessarily represent
what such entities' financial position and results of operations would have been
if the Transactions and the offering of the Notes had actually been completed as
of the dates indicated and are not intended to project such entities' financial
position or results of operations for any future period or as of any date. The
information presented below should be read in conjunction with the 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 Pro Forma Financial Information and the related notes
thereto included elsewhere herein.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
PRO PRO
FORMA FORMA
TWELVE ONE TWELVE ONE SIX
MONTHS MONTH MONTHS MONTH MONTHS
ENDED ENDED ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, MAY 31, JUNE 30, DECEMBER 31,
------------------------------------------ ------- -------- ------------ ----------- ------------
1992 1993 1994 1995 1996 1996 1996 1996 1995
--------- --------- --------- --------- ------- -------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............ $ 416.1 $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4 $454.2 $41.2 $226.5
Cost of goods
sold(1)............. 318.3 340.8 268.8 396.3 379.5 36.0 367.3 35.4 187.6
Depreciation and
amortization...... 12.0 12.6 13.6 14.3 15.0 1.3 36.3 3.1 7.4
--------- --------- --------- --------- ------- -------- ------------ ----------- ------------
Gross profit........ 85.8 57.3 70.0 64.1 61.1 4.1 50.6 2.7 31.5
Selling, general and
administrative
expenses(1)....... 15.4 14.4 16.7 16.6 19.1 1.7 12.7 1.5 5.8
--------- --------- --------- --------- ------- -------- ------------ ----------- ------------
Income from
operations........ 70.4 42.9 53.3 47.5 42.0 2.4 37.9 1.2 25.7
Interest income
(expense), net.... (0.6) (0.6) (0.2) 0.7 (1.6 ) (0.1) (32.7) (2.7) (1.6)
Other income
(expense)(2)...... (6.3) (1.2) (0.8) 1.1 (15.9 ) (0.3) (15.6) (0.2) 0.2
--------- --------- --------- --------- ------- -------- ------------ ----------- ------------
Income (loss) before
income taxes and
minority
interest.......... 63.5 41.1 52.3 49.3 24.5 2.0 (10.4) (1.7) 24.3
Provision (benefit)
for income taxes.. 24.3 13.0 18.4 16.9 7.9 0.8 (1.7) (0.4) 8.1
Minority interest in
net loss of
consolidated
subsidiary........ -- -- 0.0 0.1 0.1 0.0 -- -- 0.1
--------- --------- --------- --------- ------- -------- ------------ ----------- ------------
Net income (loss)... 39.2 28.1 33.9 32.5 16.7 1.2 (8.7) (1.3) 16.3
OPERATING DATA:
Revenues by product:
Butadiene(3).... $ 64.9 $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2 $112.6 $10.2 $ 60.4
MTBE............ 252.0 211.0 175.2 199.1 187.4 21.0 187.4 21.0 91.7
n-Butylenes..... 29.2 21.7 28.1 42.7 48.2 3.2 48.2 3.2 25.3
Specialty
Isobutylenes.... 38.2 54.8 59.9 75.5 74.5 5.5 74.5 5.5 34.0
Other(4)........ 31.8 41.9 20.5 51.2 32.9 1.5 31.5 1.3 15.1
Sales volumes (in
millions of
pounds):
Butadiene....... 559.1 556.2 484.4 580.8 622.6 64.6 622.6 64.6 295.3
MTBE(5)......... 254.4 225.1 194.8 211.1 219.8 26.6 219.8 26.6 111.2
n-Butylenes..... 158.7 114.7 150.8 245.9 284.6 17.1 284.6 17.1 153.2
Specialty
Isobutylenes.... 240.4 309.0 312.2 398.0 368.2 23.0 368.2 23.0 184.6
</TABLE>
SIX PRO FORMA
MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
STATEMENT OF
OPERATIONS DATA:
Revenues............ $246.7 $246.7
Cost of goods
sold(1)............. 216.5 216.5
Depreciation and
amortization...... 15.9 15.9
------------ ------------
Gross profit........ 14.3 14.3
Selling, general and
administrative
expenses(1)....... 4.2 4.2
------------ ------------
Income from
operations........ 10.1 10.1
Interest income
(expense), net.... (17.4) (17.7)
Other income
(expense)(2)...... 1.5 1.5
------------ ------------
Income (loss) before
income taxes and
minority
interest.......... (5.8) (6.1)
Provision (benefit)
for income taxes.. (0.9) (1.0)
Minority interest in
net loss of
consolidated
subsidiary........ -- --
------------ ------------
Net income (loss)... (4.9) (5.1)
OPERATING DATA:
Revenues by product:
Butadiene(3).... $ 62.6 $ 62.6
MTBE............ 128.1 128.1
n-Butylenes..... 21.5 21.5
Specialty
Isobutylenes.... 25.9 25.9
Other(4)........ 8.6 8.6
Sales volumes (in
millions of
pounds):
Butadiene....... 356.4 356.4
MTBE(5)......... 150.3 150.3
n-Butylenes..... 115.5 115.5
Specialty
Isobutylenes.... 100.8 100.8
<TABLE>
<CAPTION>
AS ADJUSTED
MAY 31, JUNE 30, DECEMBER 31, DECEMBER 31,
------------------------------------------ -------- ------------ ------------
1992 1993 1994 1995 1996 1996 1996
--------- --------- --------- --------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 33.9 $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ (6.4) $ (1.7)
Property, plant and equipment, net... 101.8 101.6 95.9 90.1 81.8 251.6 251.6
Total assets......................... 203.2 194.1 214.6 230.7 167.9 572.5 570.9
Long-term debt (including current
portion)........................... 14.4 10.9 11.0 -- 13.0 313.0 313.5
Total stockholders' equity........... 123.7 128.2 140.4 163.3 92.5 61.9 60.6
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
13
<PAGE>
<TABLE>
<CAPTION>
PRO PRO
FORMA FORMA
TWELVE ONE TWELVE ONE
MONTHS MONTH MONTHS MONTH
ENDED ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, MAY 31, JUNE 30,
------------------------------------------ ------- -------- ------- --------
1992 1993 1994 1995 1996 1996 1996 1996
--------- --------- --------- --------- ------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................ $ 82.4 $ 55.5 $ 66.9 $ 61.8 $57.0 $3.7 $74.2 $ 4.3
Employee profit sharing and
bonuses(1)......................... 22.5 18.6 23.6 20.9 23.5 1.0 8.3 .5
Capital expenditures................. 7.1 12.0 12.5 8.7 5.5 2.0 5.5 2.0
Net cash provided by (used in)
operating activities............... 53.9 44.5 30.2 50.3 44.5 13.9 -- --
Net cash provided by (used in)
investing activities............... (24.5) (7.2) (5.3) (25.9) 8.2 (1.3) -- --
Net cash provided by (used in)
financing activities............... (31.3) (29.9) (17.6) (23.3) (69.0) (9.4) -- --
Cash dividends....................... 8.7 23.7 21.4 6.2 16.5 -- -- --
Pro forma ratio of EBITDA to interest
expense, net....................... 2.3x 1.7x
Pro forma ratio of long-term debt to
EBITDA(7).......................... 4.2x 6.1x
Pro forma ratio of earnings to fixed
charges(8)......................... -- --
</TABLE>
PRO
FORMA
SIX SIX SIX
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
1995 1996 1996
------------ ------------ ------------
OTHER DATA:
EBITDA(6)............................ $ 33.1 $ 26.0 $ 26.0
Employee profit sharing and
bonuses(1)......................... 10.2 1.4 1.4
Capital expenditures................. 2.1 5.2 5.2
Net cash provided by (used in)
operating activities............... 29.7 (0.1) --
Net cash provided by (used in)
investing activities............... (8.4) (358.4) --
Net cash provided by (used in)
financing activities............... (42.3) 353.9 --
Cash dividends.......................
Pro forma ratio of EBITDA to interest
expense, net....................... 1.5x
Pro forma ratio of long-term debt to
EBITDA(7).......................... 6.0x
Pro forma ratio of earnings to fixed
charges(8)......................... --
- ------------
(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 from operations before taking into consideration
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. EBITDA should not be construed by an investor as an alternative to
income from operations (as determined in accordance with generally accepted
accounting principles), as an indicator of the operating performance of the
Company or as an alternative to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as a
measure of liquidity.
(7) For the purposes of calculating the pro forma ratio of long-term debt to
EBITDA for the one month ended June 30, 1996 and the six months ended
December 31, 1996, EBITDA has been calculated on an annualized basis.
(8) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the pro forma
twelve months ended May 31, 1996, the one month ended June 30, 1996 and the
six months ended December 31, 1996, earnings were insufficient to cover
fixed charges in the amount of $(10.4) million, $(1.7) million and $(6.1)
million, respectively. For the twelve months ended May 31, 1996, income
before taxes and minority interest includes a $12.6 million non-cash
provision for the impairment of certain non-strategic properties which TPC
intends to sell.
14
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PURCHASERS OF THE
NOTES OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW.
SUBSTANTIAL LEVERAGE
In connection with the Transactions, the Company incurred a significant
amount of indebtedness and has significant debt service requirements. As of
December 31, 1996, on a pro forma basis after giving effect to the issuance of
the Notes and the application of the proceeds therefrom as if they had occurred
on such date, the Company would have had outstanding indebtedness of $310.5
million, including the Notes, and the Company's stockholders' equity would have
been $60.6 million. See "Capitalization" and "Pro Forma Financial
Information." In addition, the Company may incur additional indebtedness in the
future, subject to limitations imposed by its debt instruments including,
without limitation, both the indenture under which the $175 million aggregate
principal amount of Original Notes were issued (the "Original Indenture") and
the Indenture (collectively, the "Indentures") 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 Notes, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, debt service requirements, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes, including its operations and
future business opportunities; (iii) certain of the Company's borrowings,
including certain borrowings under the Bank Credit Agreement, are at variable
rates of interest, which will expose the Company to the risk of increased
interest rates; (iv) the indebtedness outstanding under the Bank Credit
Agreement is secured by substantially all the assets of the Company and will
mature prior to the maturity of the Notes; and (v) the Company's flexibility to
adjust to changing market conditions and ability to withstand competitive
pressures could be limited by its leveraged position and the covenants contained
in its debt instruments, thus putting the Company at a competitive disadvantage,
and the Company may be more vulnerable to a downturn in general economic
conditions or in its business or be unable to carry out capital spending that is
important to its growth and productivity improvement programs. See "Description
of the Bank Credit Agreement" and "Description of the Notes."
The Company 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 Notes, will
depend on its financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond its control, including interest rates,
unscheduled plant shutdowns, increased operating costs, raw material and product
prices, and regulatory developments. There can be no assurance that the Company
will maintain a level of cash flow from operations sufficient to permit it to
pay the principal, premium, if any, and interest on its indebtedness (including
the Notes).
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital
or restructure or refinance its debt (including the Notes). There can be no
assurance that such alternative measures would be successful or would permit the
Company to meet its scheduled debt service obligations. In the absence of such
operating results and resources, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations. The Bank Credit Agreement and the
Indentures will restrict the Company's ability to sell assets and use the
proceeds therefrom. See "Description of the Bank Credit Agreement" and
"Description of the Notes." There can be no assurance as to the ability of the
Company to consummate
15
<PAGE>
such sales or the proceeds which the Company could realize therefrom or that
such proceeds would be adequate to meet the obligations then due.
In the event that the Company is unable to generate sufficient cash flow
and the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its indebtedness, or if
the Company otherwise fails to comply with the various covenants in the
instruments governing such indebtedness (including covenants in the Indentures
and the Bank Credit Agreement), the Company could be in default under the terms
of the agreements governing such indebtedness, including 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 Notes and on the market value of the Notes. See
"Description of the Notes" and "Description of the Bank Credit Agreement."
RESTRICTIVE FINANCING COVENANTS
The Bank Credit Agreement contains a number of significant covenants that,
among other things, restricts the ability of the Company to dispose of assets or
merge, incur additional indebtedness, incur guarantee obligations, repay the
Notes or amend the 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 and an amendment to the Bank Credit Agreement on March 28, 1997 to update
these financial ratios. See "Description of the Bank Credit Agreement." The
Indentures also contain a number of restrictive covenants. See "Description of
the Notes -- Certain Covenants."
The Company's ability to comply with the covenants and restrictions
contained in the Bank Credit Agreement and the 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 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 Notes. See "Description of the Notes -- Ranking." If the
Company were unable to repay its indebtedness to the lenders under the Bank
Credit Agreement, such lenders could proceed against the collateral securing
such indebtedness as described under "Description of the Bank Credit
Agreement." There can be no assurance that in the event of any such default the
Company will have adequate resources to repay in full principal, premium, if
any, and interest on the Notes.
SUBORDINATION OF THE NOTES; UNSECURED STATUS OF THE NOTES
The payment of principal, premium, if any, and interest on, and any other
amounts owing in respect of, the Notes is subordinated in right of payment to
the prior payment in full of all existing and future Senior Indebtedness of the
Company, including all amounts owing under the Bank Credit Agreement. As of
December 31, 1996, on a pro forma basis after giving effect to the issuance of
the Notes and the application of the proceeds therefrom as if they had occurred
on such date, the aggregate principal amount of such Senior Indebtedness of the
Company would have been $85.5 million. Therefore, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, the
16
<PAGE>
assets of the Company will be available to pay obligations on the Notes 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 Notes. In addition, the Company may not pay
principal of, premium, if any, or interest on the Notes, or purchase, redeem or
otherwise retire the Notes, if any principal, premium, if any, or interest on
any Designated Senior Indebtedness (as defined under "Description of the
Notes -- Certain Definitions") is not paid when due (whether at final maturity,
upon scheduled redemption or installment, acceleration or otherwise) unless such
default has been cured or waived or such indebtedness has been repaid in full.
In addition, under certain circumstances, if any nonpayment default exists with
respect to Designated Senior Indebtedness, the Company may not make any payments
on the Notes for a specified period of time, unless such default is cured or
waived or such Designated Senior Indebtedness has been repaid in full. See
"Description of the Notes -- Ranking."
The Indentures permit 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 Notes are unsecured and therefore do not have the benefit of such
collateral. Accordingly, if an event of default occurs under the Bank Credit
Agreement, the lenders under the Bank Credit Agreement will have a prior right
to the assets of the Company, and may foreclose upon such collateral, to the
exclusion of the holders of the Notes. In either such event, such assets would
first be used to repay in full amounts outstanding under the Bank Credit
Agreement, resulting in all or a portion of the Company's assets being
unavailable to satisfy the claims of the holders of Notes and other unsecured
indebtedness.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined under "Description
of the Notes -- Certain Definitions"), the Company is required to offer to
purchase all of the outstanding Notes at a price equal to 101% of the principal
amount thereof at the date of purchase plus accrued and unpaid interest, if any,
to the date of purchase. In addition, a similar repurchase right would be
triggered under the Original Indenture for the Original Notes upon the
occurrence of the same events that constitute a Change of Control. The
occurrence of certain of the events which would constitute a Change of Control
constitute a default under the Bank Credit Agreement. In addition, the Bank
Credit Agreement prohibits the purchase of the Original Notes and the Notes by
the Company in the event of a Change of Control, unless and until such time as
the indebtedness under the Bank Credit Agreement is repaid in full. The
Company's failure to purchase the Notes 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 the Indentures,
which could have materially adverse consequences to the Company and to the
holders of the Notes. In the event of a Change of Control, there can be no
assurance that the Company would have sufficient assets to satisfy all of its
obligations under the Bank Credit Agreement, the Original Notes and the Notes.
See "Description of the Notes -- Change of Control" and "Description of the
Bank Credit Agreement."
CYCLICAL INDUSTRIES
The Company's primary business consists of the production of butadiene,
MTBE, n-butylenes and specialty isobutylenes. The prices of certain of these
products have historically been cyclical and have been sensitive to overall
production capacity relative to demand, the availability and price of feedstocks
and the level of general business activity. In the past, certain of these
products have experienced market shortages, accompanied by relatively high
prices, and periods of oversupply, accompanied by relatively low prices.
While the Company has achieved relatively stable profitability on its sales
of butadiene due to the nature of the supply contracts under which it purchases
crude butadiene, industry profitability for MTBE has fluctuated considerably
over the past several years. In the early 1990s, considerable additional
production capacity was installed in the U.S. in anticipation of demand for MTBE
created by the Federal Clean Air Act Amendments of 1990 ("CAAA"). This demand
did not completely materialize due to states opting-out of the programs
promulgated by the CAAA as well as less than anticipated demand in states not
17
<PAGE>
required to comply with such programs, resulting in an industry overcapacity
condition that has resulted in lower average selling prices and margins.
HIGHLY COMPETITIVE INDUSTRY
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors are larger and have greater
financial resources than the Company. Among the Company's competitors are some
of the world's largest chemical companies and major integrated petroleum
companies that have their own raw material resources. In addition, a significant
portion of the Company's business is based upon widely available technology.
Accordingly, barriers to entry, apart from capital availability, may be low in
the commodity product section of the Company's business, and the entrance of new
competitors into the industry may reduce the Company's ability to capture
improving profit margins in circumstances where overcapacity in the industry is
diminishing. Furthermore, petroleum-rich countries have recently become more
significant participants in the petrochemical industry and may expand such role
significantly in the future. Any of these developments could have a negative
impact on the Company's financial position, results of operations and cash
flows. See "Business -- Competition."
DEPENDENCE ON KEY CUSTOMERS
Certain of the Company's largest customers account for a significant
percentage of the Company's sales of particular products. In the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, over 84% and 71%,
respectively, of the Company's butadiene and MTBE sales were made to its five
largest customers for each product. In addition, in the twelve-month period
ended May 31, 1996 and the one-month period ended June 30, 1996, approximately
16.1% and 14.1%, respectively, of the Company's total revenues were derived from
a single butadiene customer. Although the Company believes its relationships
with its largest customers are good, the loss of a significant customer or a
number of significant customers would have a material adverse effect on the
Company's financial condition, results of operations and cash flows. There can
be no assurance that the historic levels of business from these customers or the
Company's ability to replace a lost customer will be maintained in the future.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive Federal, state and local
laws, regulations and decrees governing, among other things, emissions to air,
discharges to waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. The Company's production facilities
require operating permits that are subject to revocation, modification and
renewal, violations of which may provide for substantial fines and civil or
criminal sanctions. The operation of any chemical manufacturing plant entails
risk of adverse environmental effect, including exposure to chemical products
and by-products from the Company's operations, and there can be no assurance
that material costs or liabilities will not be incurred to rectify any such
damage. In addition, potentially significant expenditures could be required in
order to comply with environmental, health and safety laws and regulations that
may be adopted or imposed in the future. To meet changing licensing and
regulatory standards, the Company may be required to make additional significant
site or operational modifications, potentially involving substantial
expenditures or the reduction or suspension of certain operations. See
"-- Dependence on Single Facility" and "Business -- Environmental
Regulation."
PRICE VOLATILITY OF PETROCHEMICAL FEEDSTOCKS
The Company uses large amounts of petrochemical feedstocks in the
manufacturing of its chemical products. While the Company tries to match cost
increases with corresponding price increases, there may be periods of time
during which increases in feedstock prices are not recovered by the Company due
to an inability to increase the selling prices of its products because of
weakness in demand for, or oversupply of, such products.
The principal raw material feedstocks purchased by the Company are crude
butadiene, isobutane and methanol. A number of the Company's raw material
suppliers provide the Company with a significant
18
<PAGE>
amount of its raw materials, and if one significant supplier or a number of
significant suppliers were unable to meet their obligations under present supply
arrangements, or if such arrangements could not be renewed upon expiration, the
Company could be required to incur increased costs for its raw materials. The
ability to pass on increases in raw material prices to the Company's customers
is, to a large extent, dependent on market conditions. There may be periods of
time in which increases in feedstock prices are not recovered by the Company due
to an inability to increase the selling prices of its products because of
weakness in demand for, or oversupply of, such products, and therefore, certain
increases in raw materials prices may have a material adverse effect on the
operations of the Company.
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 will be able to comply with the new regulatory limit without incurring
significant costs, there can be no assurance that future scientific studies
regarding the health effects of butadiene or any other product handled by the
Company will not result in more stringent regulations or in restrictions on the
use of, or exposure to, such products. See "Business -- Environmental
Regulation."
FRAUDULENT TRANSFER CONSIDERATIONS
In connection with the Transactions, TPC incurred substantial indebtedness,
including through its incurrence of indebtedness under the Bank Credit Agreement
and the Original Notes and the refinancing of a portion of such indebtedness
with the Original Series B 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,
19
<PAGE>
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, including the incurrence of any such indebtedness to
fund the Transactions, (B) was engaged, or about to engage, in a business or
transaction for which its assets constituted unreasonably small capital to carry
on its business, or (C) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay as such debts
matured or became due (as all of the foregoing terms are defined in or
interpreted under the relevant fraudulent transfer or conveyance statutes), such
court could avoid the obligations under the Notes or subordinate the Notes to
presently existing and future indebtedness of TPC or take other action
detrimental to the holders of the Notes, including, under certain circumstances,
invalidating the Notes. In that event, there can be no assurance that any
repayment on the Notes would ever be recovered by holders of the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, TPC would be considered insolvent if, at
the time it incurred the indebtedness constituting the Notes or such
indebtedness refinanced thereby, either (i) the sum of its debts (including
contingent liabilities) was greater than its assets, at a fair valuation, or
(ii) the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether TPC was solvent at the relevant time, or whether, whatever
standard was used, the Notes would not be avoided on another of the grounds set
forth above.
LACK OF PUBLIC MARKET FOR THE NOTES
The Original Series B Notes have not been registered under the Securities
Act, and may not be resold by purchasers thereof unless the Original Series B
Notes are subsequently registered or an exemption from the registration
requirements of the Securities Act is available. While the Original Series B
Notes are at present eligible for trading in the PORTAL market of the Nasdaq
Stock Market, Inc., the Exchange Notes will not be so eligible, and there can be
no assurance, even following registration or exchange of the Original Series B
Notes for Exchange Notes, that an active trading market for the Original Series
B Notes or the Exchange Notes will exist. At the time of the private placement
of the Original Series B Notes, the Initial Purchaser advised the Company that
it intended to make a market in the Original Series B Notes and, if issued, the
Exchange Notes. However, the Initial Purchaser is not obligated to make a market
in the Original Series B Notes or the Exchange Notes, and any such market-making
may be discontinued at any time at the sole discretion of the Initial Purchaser.
No assurance can be given as to the liquidity of or trading market for the
Original Series B Notes or the Exchange Notes.
CONSEQUENCES TO NON-TENDERED HOLDERS OF ORIGINAL SERIES B NOTES
CONSEQUENCES OF FAILURE TO EXCHANGE. To the extent that Original Series B
Notes are tendered and accepted for exchange pursuant to the Exchange Offer, the
trading market for Original Series B Notes that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Original Series B Notes not tendered for exchange. The extent of the market
therefor and the availability of price quotations would depend upon a number of
factors, including the number of holders of Original Series B Notes remaining at
such time and the interest in maintaining a market in such Original Series B
Notes on the part of securities firms. An issue of securities with a smaller
outstanding market value available for trading (the "float") may command a
lower price than would a comparable issue of securities with a greater float.
Therefore, the market price for Original Series B Notes that are not exchanged
in the Exchange Offer may be affected adversely to the extent that the amount of
Original Series B Notes exchanged pursuant to the Exchange Offer reduces the
float. The reduced float also may tend to make the trading price of the Original
Series B Notes that are not exchanged more volatile.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER. Issuance of the Exchange Notes
in exchange for the Original Series B Notes pursuant to the Exchange Offer will
be made following the prior satisfaction, or waiver, of the conditions set forth
in "The Exchange Offer -- Conditions to the Exchange Offer" and only
20
<PAGE>
after timely receipt by the Exchange Agent of such Original Series B Notes, a
properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of Original Series B Notes desiring to
tender such Original Series B Notes in exchange for Exchange Notes should allow
sufficient time to ensure timely delivery of all required documentation. Neither
the Exchange Agent, the Company or any other person is under any duty to give
notification of defects or irregularities with respect to the tenders of
Original Series B Notes for exchange. Original Series B Notes that may be
tendered in the Exchange Offer but which are not validly tendered will,
following the consummnation of the Exchange Offer, remain outstanding and will
continue to be subject to the same transfer restrictions currently applicable to
such Original Series B Notes.
21
<PAGE>
THE TRANSACTIONS
Holdings, its wholly-owned subsidiary, TPC Holding, and TPC Holding's
wholly-owned subsidiary, Finance Co., were organized to effect the Acquisition.
Prior to the Acquisition, TOC was owned by various individuals, foundations and
trusts, including approximately 5% by certain members of management of TPC. TOC
owned approximately 81% of the outstanding capital stock of TPC, which was its
principal operating subsidiary. Approximately 19% of the outstanding capital
stock of TPC was owned by certain individuals and trusts, including
approximately 3% by certain members of management of TPC.
TPC Holding, Holdings, the shareholders of TOC, the shareholders of TPC
(other than TOC) and Mr. Dave C. Swalm, as representative of certain of such
shareholders, entered into the Stock Purchase Agreement pursuant to which TPC
Holding acquired 3,830,000 shares (95.75%) of the outstanding capital stock of
TOC and 734,962 shares (18.55%) of the outstanding capital stock of TPC for a
total consideration of $361.8 million in cash. This total consideration was
based on a per share purchase price for TOC and TPC shares of $77.076 and
$90.626, respectively. Fifty thousand shares (1.25%) of capital stock of TOC and
the remaining 26,038 shares (0.66%) of capital stock of TPC (not held by TOC)
were contributed by certain shareholders of TOC and TPC (the "Rollover
Investors") to Holdings in exchange for $6.2 million of Holdings' Common Stock
at the closing (the "Closing") of the Acquisition.
CASH BONUS PLAN. Prior to the Closing, TPC established the Cash Bonus Plan
providing generally for $35 million for certain present employees of the Company
and certain present employees of its independent contractors. Within 45 days
after Closing, 10% of this amount was paid to eligible participants and the
remaining payments will be made in sixteen quarterly installments of
approximately 5.63% each, plus an interest factor, payable within 15 days of
each of the sixteen quarterly installment dates. See "Management -- Cash Bonus
Plan."
ASSET SALES. On the Closing Date of the Acquisition, prior to the Closing,
TOC sold to Mr. Swalm for $7.8 million in cash a ranch of approximately 1,900
acres and the livestock and personalty thereon (collectively, the "Ranch") and
the 80% of the outstanding capital stock of The Texas Falls Corporation owned by
TOC.
On the Closing Date, prior to the Closing, Holdings (i) issued
approximately $50 million in common equity comprised of (a) approximately $43.8
million of Common Stock to an investor group (the "Investor Group") led by
Gordon A. Cain and The Sterling Group, Inc. ("Sterling"), the ESOP, certain
directors and officers of Holdings and the Company, and certain employees of the
Company, and (b) approximately $6.2 million of Common Stock to the Rollover
Investors in exchange for their contribution to Holdings of 1.25% of the
outstanding capital stock of TOC and 0.66% of the outstanding capital stock of
TPC, representing the aggregate fair value of such shares; and (ii) raised $30
million in cash by the issue of the Discount Notes and Common Stock of Holdings,
as an investment unit. After Holdings had been so capitalized, Holdings
contributed to TPC Holding, its wholly-owned subsidiary, the cash received from
the issuance of its Common Stock, the Discount Notes and the capital stock of
TOC and TPC contributed to Holdings by the Rollover Investors.
In connection with the Acquisition, Finance Co. borrowed approximately
$140.0 million under the Bank Credit Agreement and received approximately $169
million in net proceeds from the consummation of the sale of the Original Notes.
TPC Holding then borrowed all of such funds from Finance Co. pursuant to an
intercompany promissory note.
THE CLOSING. Pursuant to the Stock Purchase Agreement, TPC Holding
purchased 3,830,000 shares of TOC common stock (95.75% of the total outstanding
capital stock of TOC) for $295.2 million in cash of which $13.3 million ($3.473
per share of TOC common stock) was deposited in a post-closing indemnity escrow
(the "Indemnity Escrow"). An additional $0.173 million was deposited in the
Indemnity Escrow by a Rollover Investor who has contributed 50,000 shares of TOC
common stock to Holdings.
Pursuant to the Stock Purchase Agreement, TPC Holding also purchased
734,962 shares of TPC common stock (18.55% of the total outstanding capital
stock of TPC) for $66.6 million in cash of which $3 million ($4.084 per share of
TPC common stock) was deposited in the Indemnity Escrow. An additional
22
<PAGE>
$0.11 million was deposited in the Indemnity Escrow by the Rollover Investors
who contributed 26,038 shares of TPC common stock to Holdings.
On the Closing Date, 120,000 shares of TOC common stock (3% of the
outstanding capital stock of TOC) was deposited in a subsequent closing escrow
(the "Subsequent Escrow") and TPC Holding deposited into the Subsequent Escrow
$9.2 million ($76.94 per share), representing the estimated purchase price for
such shares. On or about September 16, 1996, $0.4 million of the cash deposited
into the Subsequent Escrow was funded into the Indemnity Escrow, the escrowed
shares were distributed to TPC Holding, and $8.8 million was distributed to
former holders of the escrowed shares. An additional $16,320 ($0.136 per share)
was paid to such former holders by TPC Holding, representing the difference
between the final purchase price and the estimated purchase price initially
deposited in the Subsequent Escrow.
As a result of these transactions, on the Closing Date immediately after
the Closing, TOC was a 97.0% owned subsidiary of TPC Holding, and TPC was owned
80.79% by TOC and 19.21% by TPC Holding (including shares contributed by the
Rollover Investors). Following the Mergers (as defined) and the delivery to TPC
Holding on or about September 16, 1996 of the shares held in the Subsequent
Escrow, TPC is a wholly-owned subsidiary of TPC Holding.
MERGERS. On the Closing Date immediately after the Closing, TOC merged
with and into TPC, with TPC as the surviving corporation (the "Initial
Merger"). In the Initial Merger, each outstanding share of TOC was converted
into .85 of a share of TPC and, except for the shares of TPC held by TOC which
were canceled, the outstanding shares of TPC remained unchanged. On the Closing
Date, immediately after the Initial Merger, Finance Co. merged with and into
TPC, with TPC as the surviving corporation (the "Second Merger" and, together
with the Initial Merger, the "Mergers"). In the Second Merger, each
outstanding share of Finance Co. was converted into one share of common stock of
TPC. As a result of the Mergers, TPC holds the promissory note payable by TPC
Holding to Finance Co., and TPC is a 97.5% owned subsidiary of TPC Holding,
which in turn is a wholly-owned subsidiary of Holdings. In addition, TPC is the
primary obligor with respect to borrowings under the Bank Credit Agreement and
the primary obligor on the Notes. On or about September 16, 1996, the shares of
capital stock formerly representing shares of TOC, and at that time representing
shares of common stock of TPC, held in the Subsequent Escrow were delivered to
TPC Holding, and TPC became a wholly-owned subsidiary of TPC Holding.
INDEMNITY ESCROW. Pursuant to the Stock Purchase Agreement, the Company
has indemnified the present and former officers and directors of TOC and TPC for
certain matters arising prior to the Closing. In addition, the Company has the
right to recover from the Indemnity Escrow losses and liabilities arising from
or in connection with certain matters, including but not limited to, the
following: (i) breach of any covenant, representation or warranty in the Stock
Purchase Agreement by any TOC or TPC shareholder; (ii) failure by TOC, TPC or
any subsidiary to perform any obligation in the Stock Purchase Agreement, and
the inaccuracy of certain statements of fact regarding TOC, TPC and their
subsidiary in the Stock Purchase Agreement; (iii) losses arising from claims in
connection with the sale, purchase or issuance of common stock of TOC or TPC;
(iv) any taxes payable by TOC, TPC or any subsidiary attributable to periods
prior to March 31, 1996 to the extent not accrued on the consolidated balance
sheet of TOC as of March 31, 1996; (v) losses or claims paid to any present or
former director, officer, employee or agent of the Company pursuant to the
contractual right described in the preceding sentence arising prior to the
Closing; and (vi) losses arising from certain acts, omissions, events,
circumstances or conditions, including environmental matters, occurring or
existing prior to the Closing Date and not disclosed to TPC Holding. All claims
to recover such losses and liabilities from the Indemnity Escrow must be brought
within one year from the Closing Date, with the exception of losses and
liabilities arising from environmental matters and taxes, which must be brought
within eighteen months from the Closing Date. The Company has the right to
indemnification from the selling shareholders for the breach of any covenant,
representation or warranty made severally by them in the Stock Purchase
Agreement (generally relating to title to the shares being sold and authority to
perform their obligations under the Stock Purchase Agreement). Beyond that, in
the absence of fraud, the Company's rights to recovery for breach of the Stock
Purchase Agreement or for losses arising from pre-closing matters are limited to
recovery against the Indemnity Escrow.
23
<PAGE>
COMMON STOCK PLACEMENT. Substantially concurrently with the consummation
of the Acquisition, Holdings completed the sale of approximately 438,000 shares
of its Common Stock to the ESOP, certain directors and officers of Holdings and
the Company, certain employees of the Company, and the Investor Group. See
"Related Transactions" and "Beneficial Ownership of Holdings' Common Stock."
DISCOUNT NOTES. The Discount Notes are senior unsecured obligations of
Holdings ranking PARI PASSU with other senior unsecured indebtedness of
Holdings. The purchaser of the Discount Notes purchased the Discount Notes and
shares of Common Stock as an investment unit. The Discount Notes are limited to
approximately $57.7 million aggregate principal amount at final maturity
(providing $30.0 million of proceeds) and will mature on July 1, 2007. No
interest will accrue on the Discount Notes prior to July 1, 2001. From and after
July 1, 2001, interest on the Discount Notes will be payable semiannually at the
rate of 13.5% per annum.
THE BANK CREDIT AGREEMENT. The Bank Credit Agreement provides for, (i) the
Revolving Credit Facility, and (ii) the Tranche A Term Loan, the Tranche B Term
Loan and the ESOP Term Loan. See "Description of the Bank Credit Agreement."
RAW MATERIAL SUPPLY. Clarkston was an affiliate of the Company that
primarily sold isobutane to, and also purchased n-butane from, the Company and
certain third parties. Clarkston purchased substantially all of its isobutane
requirements at market prices under a supply contract with EPC Venture, Inc.
("Enterprise"). In connection with the Transactions, this supply contract with
Enterprise was assigned to the Company.
24
<PAGE>
THE EXCHANGE OFFER
REGISTRATION RIGHTS
In connection with the sale of the Original Series B Notes, the Company
entered into the Registration Rights Agreement with the Initial Purchaser
pursuant to which the Company agreed, for the benefit of the holders of the
Original Series B Notes, at its cost, (i) within 75 days after the date of the
original issue of the Original Series B Notes, to file an Exchange Offer
Registration Statement with the Commission with respect to the Exchange Offer
for the Exchange Notes, and (ii) to use all reasonable efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the date of original issuance of the
Original Series B Notes. Upon the Exchange Offer Registration Statement being
declared effective, the Company agreed to offer the Exchange Notes in exchange
for surrender of the Original Series B Notes. The Company agreed to keep the
Exchange Offer open for not less than 30 calendar days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
holders of the Original Series B Notes. For each Original Series B Note
surrendered to the Company pursuant to its Exchange Offer, the holder of such
Original Series B Note will receive an Exchange Note having a principal amount
equal to that of the surrendered Note. Interest on each Exchange Note will
accrue from the last interest payment date on which interest was paid on the
Original Series B Note surrendered in exchange therefor or, if no interest has
been paid on such Original Series B Note, from the date of its original issue.
The Registration Rights Agreement also provides an agreement to include in the
prospectus for the Exchange Offer certain information necessary to allow a
broker-dealer who holds Original Series B Notes that were acquired for its own
account as a result of market-making activities or other ordinary course trading
activities (other than Original Series B Notes acquired directly from the
Company or one of its affiliates) to exchange such Original Series B Notes
pursuant to the Exchange Offer and to satisfy the prospectus delivery
requirements in connection with resales of Exchange Notes received by such
broker-dealer in the Exchange Offer, and to maintain the effectiveness of the
Registration Statement for such purposes for 180 days.
The foregoing agreement is needed because any broker-dealer who acquires
Original Series B Notes for its own account as a result of market-making
activities or other trading activities is required to deliver a prospectus
meeting the requirements of the Securities Act. This Prospectus covers the offer
and sale of the Exchange Notes pursuant to the Exchange Offer made hereby and
the resale of Exchange Notes received in the Exchange Offer by any broker-dealer
who held Original Series B Notes acquired for its own account as a result of
market-making activities or other trading activities (other than Original Series
B Notes acquired directly from the Company or one of its affiliates).
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in general
be freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Original Series B Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes (i) will not be able to rely
on the interpretation of the staff of the Commission, (ii) will not be able to
tender its Original Series B Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Original Series B Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
Each holder of the Original Series B Notes (other than certain specified
holders) who wishes to exchange Original Series B Notes for Exchange Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is not an affiliate of the Company, (ii) any Exchange Notes to be
received by it were acquired in the ordinary course of its business and (iii) at
the time of commencement of the Exchange Offer, it has no arrangement with any
person to participate in the distribution (within the meaning of the Securities
Act) of the Exchange Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any other reason the Exchange Offer is not consummated within
150 days of the date of issuance and sale of the Original Series B Notes, or
upon
25
<PAGE>
request of the Initial Purchaser (under certain circumstances), the Company
will, at its cost, (i) as promptly as practicable, file a Shelf Registration
Statement (which may be an amendment of the Registration Statement of which this
Prospectus is a part) covering resales of the Original Series B Notes, (ii) use
all reasonable efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (iii) use all reasonable efforts to keep
effective the Shelf Registration Statement until two years after its effective
date (or until one year after such effective date if such Shelf Registration
Statement is filed at the request of the Initial Purchaser under certain
circumstances). The Company will, in the event of the filing of a Shelf
Registration Statement, provide to each holder of the Original Series B Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement for the Original
Series B Notes has become effective and take certain other actions as are
required to permit unrestricted resales of the Original Series B Notes. A holder
of Original Series B Notes that sells such Original Series B Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations). In addition, each holder
of the Original Series B Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have such holder's Original Series B
Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding liquidated damages set forth in the following paragraph.
In the event that either (i) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 75th calendar day following the
date of original issue of the Original Series B Notes, (ii) the Exchange Offer
Registration Statement or, if required in lieu thereof, the Shelf Registration
Statement, is not declared effective on or prior to the 120th calendar day
following the date of original issue of the Original Series B Notes or (iii)
once effective, the Exchange Offer Registration Statement or the Shelf
Registration Statement ceases to be effective or the prospectus ceases to be
usable (under certain circumstances), the interest rate borne by the Original
Series B Notes shall be increased by one-half of one percent per annum following
such 75-day period in the case of (i) above, such 120-day period in the case of
clause (ii) above or any such period in the case of (iii) above, in each case
payable in cash semiannually, in arrears, on January 1 and July 1 of each year.
Upon (x) the filing of the Exchange Offer Registration Statement in the case of
clause (i) above, (y) the effectiveness of the Exchange Offer Registration
Statement or Shelf Registration Statement in the case of clause (ii) above or
(z) the reeffectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement in the case of clause (iii) above, and provided that none
of the conditions set forth in clauses (i), (ii) and (iii) above continues to
exist, the interest rate borne by the Original Series B Notes from the date of
such filing, effectiveness or reeffectiveness, as the case may be, will be
reduced to the original interest rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement.
Except as set forth above, after consummation of the Exchange Offer,
holders of Original Series B Notes have no registration or exchange rights under
the Registration Rights Agreement. See "-- Consequences of Failure to
Exchange," and "-- Resales of Exchange Notes; Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Series B Notes which are not exchanged for Exchange Notes
pursuant to the Exchange Offer and are not included in a resale prospectus
which, if required, will be filed as part of an amendment to the Registration
Statement, will remain restricted securities and subject to restrictions on
transfer. Accordingly, such Original Series B Notes may be resold (i) to the
Company (upon redemption thereof or otherwise), (ii) so long as the Original
Series B Notes are eligible for resale pursuant to Rule 144A, to a person whom
the seller reasonably believes is a qualified institutional buyer within the
meaning of Rule
26
<PAGE>
144A under the Securities Act, purchasing for its own account or for the account
of a qualified institutional buyer to whom notice is given that the resale,
pledge or other transfer is being made in reliance on Rule 144A, (iii) in an
offshore transaction in accordance with Regulation S under the Securities Act,
(iv) pursuant to an exemption from registration in accordance with Rule 144 (if
available) under the Securities Act, (v) in reliance on another exemption from
the registration requirements of the Securities Act, or (vi) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United States
and subject to certain requirements of the registrar or co-registrar being met,
including receipt by the registrar or co-registrar of a certification and (in
the case of (iii), (iv) and (v)) an opinion of counsel reasonably acceptable to
the Company and the registrar.
To the extent Original Series B Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Original Series B Notes will
decrease with a resulting decrease in the liquidity in the market therefor.
Accordingly, the liquidity of the market for the Original Series B Notes could
be adversely affected. See "Risk Factors -- Consequences to Non-Tendering
Holders of Original Series B Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Prospectus
and in the Letter of Transmittal, a copy of which is attached to this Prospectus
as Annex A, the Company will accept any and all Original Series B Notes validly
tendered and not withdrawn prior to the Expiration Date. The Company will issue
$1,000 principal amount of Exchange Notes in exchange for each $1,000 principal
amount of Original Series B Notes accepted in the Exchange Offer. Holders may
tender some or all of their Original Series B Notes pursuant to the Exchange
Offer. However, Original Series B Notes may be tendered only in integral
multiples of $1,000 principal amount.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Series B Notes, except that (i) the Exchange Notes will have
been registered under the Securities Act and hence will not bear legends
restricting their transfer pursuant to the Securities Act, and (ii) except as
otherwise described above, holders of the Exchange Notes will not be entitled to
the rights of holders of Original Series B Notes under the Registration Rights
Agreement. The Exchange Notes will evidence the same debt as the Original Series
B Notes (which they replace), and will be issued under, and be entitled to the
benefits of, the Indenture which governs all of the Notes.
Solely for reasons of administration (and for no other purpose) the Company
has fixed the close of business on April 10, 1997 as the record date for the
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. Only a registered holder
of Original Series B Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the trustee under the Indenture
may participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Original Series B Notes entitled to
participate in the Exchange Offer.
Holders of the Original Series B Notes do not have any appraisal or
dissenters' rights under the Texas Business Corporation Act or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original
Series B Notes when, as and if they have given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of the Original Series B Notes for the purposes of receiving the
Exchange Notes. The Exchange Notes delivered pursuant to the Exchange Offer will
be issued on the earliest practicable date following the acceptance for exchange
of Original Series B Notes by the Company.
If any tendered Original Series B Notes are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Series B
Notes will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date.
27
<PAGE>
Holders who tender Original Series B Notes in the Exchange Offer will not
be required to pay brokerage commissions of fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of the
Original Series B Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on May
12, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Series B Notes, (ii) to extend the Exchange Offer, (iii)
if any of the conditions set forth below under " -- Conditions to the Exchange
Offer" shall not have been satisfied, to terminate the Exchange Offer, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent, or (iv) to amend the terms of the Exchange Offer in any manner.
Except as specified in the immediately preceding paragraph, any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by it to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Original Series B Notes, and the
Exchange Offer will be extended for a period of five to 10 business days, as
required by law, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of its
Exchange Offer, the Company shall not have an obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING ORIGINAL SERIES B NOTES
TENDERS OF ORIGINAL SERIES B NOTES. The tender by a holder of Original
Series B Notes pursuant to any of the procedures set forth below will constitute
the tendering holder's acceptance of the terms and conditions of the Exchange
Offer. The Company's acceptance for exchange of Original Series B Notes tendered
pursuant to any of the procedures described below will constitute a binding
agreement between such tendering holder and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer. Only holders are
authorized to tender their Original Series B Notes. The procedures by which
Original Series B Notes may be tendered by beneficial owners that are not
holders will depend upon the manner in which the Original Series B Notes are
held.
DTC has authorized DTC participants that are beneficial owners of Original
Series B Notes through DTC to tender their Original Series B Notes as if they
were holders. To effect a tender, DTC participants should either (i) complete
and sign the Letter of Transmittal (or a facsimile thereof), have the signature
thereon guaranteed if required by Instruction 1 of the Letter of Transmittal,
and mail or deliver the Letter of Transmittal or such facsimile pursuant to the
procedures for book-entry transfer set forth below under " -- BOOK-ENTRY
DELIVERY PROCEDURES," or (ii) transmit their acceptance to DTC through the DTC
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, and follow the procedures for book-entry transfer set forth below
under " -- BOOK-ENTRY DELIVERY PROCEDURES."
TENDER OF ORIGINAL SERIES B NOTES HELD IN PHYSICAL FORM. To tender
effectively Original Series B Notes held in physical form pursuant to the
Exchange Offer, a properly completed Letter of Transmittal (or a facsimile
thereof) duly executed by the holder thereof, and any other documents required
by the Letter of
28
<PAGE>
Transmittal, must be received by the Exchange Agent at one of its addresses set
forth below, and tendered Original Series B Notes must be received by the
Exchange Agent at such address (or delivery effected through the deposit of
Original Series B Notes into the Exchange Agent's account with DTC and making
book-entry delivery as set forth below) on or prior to the Expiration Date, or
the tendering holder must comply with the guaranteed delivery procedure set
forth below. LETTERS OF TRANSMITTAL OR ORIGINAL SERIES B NOTES SHOULD BE SENT
ONLY TO THE EXCHANGE AGENT AND SHOULD NOT BE SENT TO THE COMPANY.
TENDER OF ORIGINAL SERIES B NOTES HELD THROUGH A CUSTODIAN. To tender
effectively Original Series B Notes that are held of record by a custodian bank,
depository, broker, trust company or other nominee, the beneficial owner thereof
must instruct such holder to tender the Original Series B Notes on the
beneficial owner's behalf. A Letter of Instructions from the record owner to the
beneficial owner may be included in the materials provided along with this
Prospectus which may be used by the beneficial owner in this process to instruct
the registered holder of such owner's Original Series B Notes to effect the
tender.
TENDER OF ORIGINAL SERIES B NOTES HELD THROUGH DTC. To tender effectively
Original Series B Notes that are held through DTC, DTC participants should
either (i) properly complete and duly execute the Letter of Transmittal (or a
facsimile thereof), and any other documents required by the Letter of
Transmittal, and mail or deliver the Letter of Transmittal or such facsimile
pursuant to the procedures for book-entry transfer set forth below or (ii)
transmit their acceptance through ATOP, for which the transaction will be
eligible, and DTC will then edit and verify the acceptance and send an Agent's
Message to the Exchange Agent for its acceptance. Delivery of tendered Original
Series B Notes held through DTC must be made to the Exchange Agent pursuant to
the book-entry delivery procedures set forth below or the tendering DTC
participant must comply with the guaranteed delivery procedures set forth below.
THE METHOD OF DELIVERY OF ORIGINAL SERIES B NOTES AND LETTERS OF
TRANSMITTAL, ANY REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS,
INCLUDING DELIVERY THROUGH DTC AND ANY ACCEPTANCE OR AGENT'S MESSAGE TRANSMITTED
THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE PERSON TENDERING ORIGINAL
SERIES B NOTES AND DELIVERING LETTERS OF TRANSMITTAL AND, EXCEPT AS OTHERWISE
PROVIDED IN THE LETTER OF TRANSMITTAL, DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, IT IS SUGGESTED
THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
Except as provided below, unless the Original Series B Notes being tendered
are deposited with the Exchange Agent on or prior to the Expiration Date
(accompanied by a properly completed and duly executed Letter of Transmittal or
a properly transmitted Agent's Message), the Company may, at its option, reject
such tender. Exchange of Exchange Notes for the Original Series B Notes will be
made only against deposit of the tendered Original Series B Notes and delivery
of all other required documents.
BOOK-ENTRY DELIVERY PROCEDURES. The Exchange Agent will establish accounts
with respect to the Original Series B Notes at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus, and any
financial institution that is a participant in DTC may make book-entry delivery
of the Original Series B Notes by causing DTC to transfer such Original Series B
Notes into the Exchange Agent's account in accordance with DTC's procedures for
such transfer. However, although delivery of Original Series B Notes may be
effected through book-entry at DTC, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees or an Agent's Message in
connection with a book-entry transfer, and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at one or more
of its addresses set forth in this Prospectus on or prior to the Expiration
Date, or compliance must be made with the guaranteed delivery procedures
described below. Delivery of documents to DTC does not constitute delivery to
the Exchange Agent. The confirmation of a book-entry transfer into the Exchange
Agent's account at DTC as described above is referred to herein as a "Book-
Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each participant in DTC tendering the Original Series B Notes and that such
29
<PAGE>
participant has received the Letter of Transmittal and agrees to be bound by the
terms of the Letter of Transmittal and the Company may enforce such agreement
against such participant.
SIGNATURE GUARANTEES. Signatures on all Letters of Transmittal must be
guaranteed by a recognized member of the Medallion Signature Guarantee Program
or by any other "eligible guarantor institution," as such term is defined in
Rule 17Ad-15 promulgated under the Exchange Act (each of the foregoing, an
"Eligible Institution"), unless the Original Series B Notes tendered thereby
are tendered (i) by a registered holder of Original Series B Notes (or by a
participant in DTC whose name appears on a DTC security position listing as the
owner of such Original Series B Notes) who has not completed either the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions"
on the Letter of Transmittal, or (ii) for the account of an Eligible
Institution. See Instruction 1 of the Letter of Transmittal. If the Original
Series B Notes are registered in the name of a person other than the signer of
the Letter of Transmittal or if Original Series B Notes not accepted for
exchange or not tendered are to be returned to a person other than the
registered holder, then the signatures on the Letter of Transmittal accompanying
the tendered Original Series B Notes must be guaranteed by an Eligible
Institution as described above. See Instructions 1 and 5 of the Letter of
Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Original Series B Notes
pursuant to the Exchange Offer and time will not permit the Letter of
Transmittal, certificates representing such Original Series B Notes and all
other required documents to reach the Exchange Agent, or the procedures for
book-entry transfer cannot be completed, on or prior to the Expiration Date,
such Original Series B Notes may nevertheless be tendered if all the following
conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company
herewith, or an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, is received by the
Exchange Agent on or prior to the Expiration Date, as provided
below; and
(iii) the certificates for the tendered Original Series B Notes, in
proper form for transfer (or a Book-Entry Confirmation of the
transfer of such Original Series B Notes into the Exchange
Agent's account at DTC as described above), together with a
Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature
guarantees and any other documents required by the Letter of
Transmittal or a properly transmitted Agent's Message, are
received by the Exchange Agent within two business days after
the date of execution of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be sent by hand delivery, telegram,
facsimile transmission or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery.
Notwithstanding any other provision hereof, delivery of Exchange Notes by
the Exchange Agent for Original Series B Notes tendered and accepted for
exchange pursuant to the Exchange Offer will, in all cases, be made only after
timely receipt by the Exchange Agent of such Original Series B Notes (or Book-
Entry Confirmation of the transfer of such Original Series B Notes into the
Exchange Agent's account at DTC as described above), and a Letter of Transmittal
(or facsimile thereof) with respect to such Original Series B Notes, properly
completed and duly executed, with any required signature guarantees and any
other documents required by the Letter of Transmittal, or a properly transmitted
Agent's Message.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt), acceptance and withdrawal of tendered
Original Series B Notes will be determined by the Company in its sole
discretion, which determination will be final and binding. The Company reserves
the absolute right to reject any and all Original Series B Notes not properly
tendered or any Original Series B Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Original Series B Notes. The interpretation of the terms and
conditions of its Exchange Offer
30
<PAGE>
(including the instructions in the Letter of Transmittal) by the Company will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Original Series B Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
holders of defects or irregularities with respect to tenders of Original Series
B Notes, neither the Company, the Exchange Agent nor any other person is under
any duty to give such notice, nor shall they incur any liability for failure to
give such notification. Tenders of Original Series B Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Original Series B Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Original Series B Notes are submitted in a principal amount
greater than the principal amount of Original Series B Notes being tendered by
such tendering holder, such unaccepted or non-exchanged Original Series B Notes
will be returned by the Exchange Agent to the tendering holders (or, in the case
of Original Series B Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described below, such unaccepted or non-exchanged Original
Series B Notes will be credited to an account maintained with such Book-Entry
Transfer Facility), unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
By tendering, each registered holder will represent to the Company that,
among other things, (i) the Exchange Notes to be acquired by the holder and any
beneficial owner(s) of the Original Series B Notes ("Beneficial Owner(s)") in
connection with the Exchange Offer are being acquired by the holder and any
Beneficial Owner(s) in the ordinary course of business of the holder and any
Beneficial Owner(s), (ii) the holder and each Beneficial Owner are not
participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in a distribution of the Exchange
Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that (x)
any person participating in the Exchange Offer for the purpose of distributing
the Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction with respect to the Exchange Notes acquired by such person and
cannot rely on the position of the Staff of the Commission set forth in
no-action letters that are discussed herein under " -- Resale of the Exchange
Notes; Plan of Distribution," and (y) any broker-dealer that receives Exchange
Notes for its own account in exchange for Original Series B Notes pursuant to
the Exchange Offer must deliver a prospectus in connection with any resale of
such Exchange Notes, but by so acknowledging, the holder shall not be deemed to
admit that, by delivering a prospectus, it is an "underwriter" within the
meaning of the Securities Act, (iv) neither the holder nor any Beneficial Owner
is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company except as otherwise disclosed to the Company in writing, and (v) the
holder and each Beneficial Owner understands that a secondary resale transaction
described in clause (iii) above should be covered by an effective registration
statement containing the selling securityholder information required by Item 507
of Regulation S-K of the Commission.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Series B Notes, where such Original Series B Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "-- Resale of the
Exchange Notes; Plan of Distribution."
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Series B Notes
pursuant to the Exchange Offer may be withdrawn, unless theretofore accepted for
exchange as provided in the Exchange Offer, at any time prior to the Expiration
Date.
To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Series B Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Series B Notes to be withdrawn,
including the certificate number or numbers of the particular certificates
evidencing the Original Series B Notes (unless such Original Series B
31
<PAGE>
Notes were tendered by book-entry transfer), and aggregate principal amount of
such Original Series B Notes, and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of the
Original Series B Notes into the name of the person withdrawing such Original
Series B Notes. If Original Series B Notes have been delivered pursuant to the
procedures for book-entry transfer set forth in "-- Procedures for Tendering
Original Series B Notes -- BOOK-ENTRY DELIVERY PROCEDURES," any notice of
withdrawal must specify the name and number of the account at the appropriate
book-entry transfer facility to be credited with such withdrawn Original Series
B Notes and must otherwise comply with such book-entry transfer facility's
procedures. If the Original Series B Notes to be withdrawn have been delivered
or otherwise identified to the Exchange Agent, a signed notice of withdrawal
meeting the requirements above is effective immediately upon written or
facsimile notice of withdrawal even if physical release is not yet effected. A
withdrawal of Original Series B Notes can only be accomplished in accordance
with the foregoing procedures.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. No
withdrawal of Original Series B Notes will be deemed to have been properly made
until all defects or irregularities have been cured or expressly waived. Neither
the Company nor the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in any notice of withdrawal
or revocation, nor shall they incur any liability for failure to give any such
notification. Any Original Series B Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Original Series B Notes so
withdrawn are retendered. Properly withdrawn Original Series B Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering Original Series B Notes" at any time prior to the
Expiration Date.
Any Original Series B Notes which have been tendered but which are not
accepted for exchange due to the rejection of the tender due to uncured defects
or the prior termination of the Exchange Offer, or which have been validly
withdrawn, will be returned to the holder thereof (unless otherwise provided in
the Letter of Transmittal), as soon as practicable following the Expiration Date
or, if so requested in the notice of withdrawal, promptly after receipt by the
Company of notice of withdrawal without cost to such holder.
CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer shall not be subject to any conditions, other than that
(i) the Commission has issued an order or orders declaring the Indenture
governing the Notes qualified under the Trust Indenture Act of 1939, (ii) the
Exchange Offer, or the making of any exchange by a holder, does not violate
applicable law or any applicable interpretation of the staff of the Commission,
(iii) no action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency with respect to the Exchange
Offer, which, in the judgment of the Company, might impair the ability of the
Company to proceed with the Exchange Offer, (iv) there shall not have been
adopted or enacted any law, statute, rule or regulation which, in the Company's
judgment, would materially impair its ability to proceed with the Exchange Offer
or (v) there shall not have occurred any material change in the financial
markets in the United States or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which on the financial markets
of the United States, in the Company's judgment, would materially impair its
ability to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the conditions
to the Exchange Offer are not satisfied, it may (i) refuse to accept any
Original Series B Notes and return all tendered Original Series B Notes to the
tendering holders, (ii) extend its Exchange Offer and retain all Original Series
B Notes tendered prior to the Expiration Date, subject, however, to the rights
of holders to withdraw such Original Series B Notes (see "-- Withdrawal of
Tenders") or (iii) waiver such unsatisfied conditions with respect to the
Exchange Offer and accept all validly tendered Original Series B Notes which
have not been withdrawn. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered holders, and
will
32
<PAGE>
extend the Exchange Offer for a period of five to 10 business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to 10 business day period.
EXCHANGE AGENT
Fleet National Bank, the Trustee under the Indenture governing the Notes,
has been appointed as Exchange Agent for the Exchange Offer. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery and
other documents should be directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
By Registered or Certified Mail: By Hand: By Overnight Courier
FLEET NATIONAL BANK FLEET NATIONAL BANK FLEET NATIONAL BANK
Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations
CT OP TO6D Customer Service Window CT OP TO6D
P.O. Box 1440 5th Floor 1 Talcott Plaza
Hartford, Connecticut 06143 1 Talcott Plaza Hartford, Connecticut 06103
Attention: Patricia Williams Hartford, Connecticut 06106 Attention: Patricia Williams
Attention: Patricia Williams
By Facsimile Transmission:
(860) 986-7908
Attention: Patricia Williams
Confirm by Telephone:
(860) 986-1271
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting acceptance
of the Exchange Offer. However, reasonable and customary fees will be paid to
the Exchange Agent for its service and it will be reimbursed for its reasonable
out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include fees and expenses of the Exchange Agent and the
trustee under the Indenture, accounting and legal fees and printing costs, among
others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of its Original Series B Notes pursuant to the Exchange Offer. If, however, a
transfer tax is imposed for any reason other than the exchange of its Original
Series B Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
The carrying values of the Original Series B Notes are not expected to be
materially different from the fair value of the Exchange Notes at the time of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
RESALE OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Series B Notes where such Original Series B Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In
33
<PAGE>
addition, until ........... ...., 1997, all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commission or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses approved in writing of
one counsel for the holders of the Notes) other than commissions or concessions
of any brokers or dealers and will indemnify the holders of the Notes (including
any broker-dealers) required to use this Prospectus in connection with their
resale of Exchange Notes as described above against certain liabilities,
including liabilities under the Securities Act.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Original Series B Notes in like
principal amount, the form and terms of which are the same as the form and terms
of the Exchange Notes, except as otherwise described herein under "The Exchange
Offer -- Terms of the Exchange Offer." The Original Series B Notes surrendered
in exchange for the Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase in the indebtedness of the Company.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted for the issuance of the Original Series B
Notes and the application of the proceeds therefrom. The information set forth
below should be read in conjunction with the "Pro Forma Financial Information"
and the Company's Consolidated Financial Statements and related notes thereto
included elsewhere herein.
AS OF
DECEMBER 31, 1996
---------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
Cash and investment securities....... $ 0.2 $ 0.2
====== ===========
Long-term debt, including current
maturities:
Existing revolving line of
credit........................ 4.5 4.5
Tranche A Term Loan............. 80.0 27.5
Tranche B Term Loan............. 44.5 44.5
ESOP Term Loan.................. 9.0 9.0
Original Notes.................. 175.0 175.0
Original Series B Notes(1)...... -- 53.0
------ -----------
Total long-term debt,
including current
maturities.............. 313.0 313.5
Common stock held by ESOP............ 9.0 9.0
Less -- Note receivable
from ESOP............... (9.0) (9.0)
Total stockholders'
equity.................. 61.9 60.6
------ -----------
Total
capitalization..... $374.9 $ 374.1
====== ===========
- ------------
(1) Includes the premium related to the issuance of the Notes.
35
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Combined Statements of Operations for the
twelve months ended May 31, 1996, and the one month ended June 30, 1996 give
effect to the Transactions and the offering of the Notes as if they had occurred
on June 1, 1995. The following unaudited Pro Forma Consolidated Statement of
Operations for the six months ended December 31, 1996 gives effect to the
offering of the Original Series B Notes as if it had occurred on July 1, 1995.
The following unaudited Pro Forma Consolidated Balance Sheet as of December 31,
1996 gives effect to the issuance of the Original Series B Notes and the
application of the proceeds therefrom as if they had occurred on December 31,
1996. The Acquisition was accounted for as a purchase under generally accepted
accounting principles.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma financial
information does not purport to represent what the results of operations or
financial condition would actually have been had the Transactions and the
Offering in fact occurred on the dates set forth above or to project the
Company's results of operations or financial condition for any future period or
as of any date, respectively. The pro forma financial information set forth
below should be read in conjunction with the historical Consolidated Financial
Statements and Notes thereto of the Company included elsewhere in this Offering
Memorandum and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
36
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
ADJUSTMENTS PRO FORMA
FOR THE FOR THE
ISSUANCE ISSUANCE
OF THE OF THE
ORIGINAL ORIGINAL
TPC SERIES B SERIES B
HISTORICAL NOTES NOTES
---------- ----------- ---------
Revenues............................. $246.7 $ 246.7
Cost of goods sold................... 216.5 216.5
Depreciation and amortization........ 15.9 15.9
---------- ---------
Gross profit.................... 14.3 14.3
Selling, general and administrative
expenses........................... 4.2 4.2
---------- ---------
Income from operations..... 10.1 10.1
Interest expense, net................ 17.4 0.5(p) 17.7
(0.2)(l)
Other income, net.................... 1.5 1.5
---------- ----------- ---------
Loss before income taxes........ (5.8) 0.3 (6.1)
Benefit for income taxes............. (0.9) (0.1)(q) (1.0)
---------- ----------- ---------
Net loss................... $ (4.9) $(0.2) $ (5.1)
========== =========== =========
See accompanying Notes to Pro Forma Financial Statements.
37
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR ONE MONTH ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
ISSUANCE
OF THE
TOC, ITS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA ORIGINAL
SUBSIDIARIES FOR THE FOR THE FOR THE FOR THE SERIES B
AND CLARKSTON ACQUISITION ACQUISITION FINANCINGS TRANSACTIONS NOTES
------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $41.4 $(0.2)(a) $ 41.2 $ 41.2
Cost of goods sold................... 36.0 (0.6)(c) 35.4 35.4
Depreciation and amortization........ 1.3 1.8(d) 3.1 3.1
------------- ----------- ------------ ----------- ------------ -----------
Gross profit.................... 4.1 (1.4) 2.7 -- 2.7 --
Selling, general and administrative
expenses........................... 1.7 (0.2)(a) 1.5 1.5
0.1(c)
(0.1)(e)
------------- ----------- ------------ ----------- ------------ -----------
Income from operations..... 2.4 (1.2) 1.2 -- 1.2 --
Interest expense, net................ .1 (0.1)(a) 0.1 2.5(j) 2.6 0.1(p)
0.1(g)
Other income (expense):
Dividend income................. -- -- --
Charitable contribution......... (0.1) 0.1(h) -- --
Loss on disposal of assets and
investment securities, net.... (0.3) (0.3) (0.3)
Impairment of investment in
land.......................... -- -- --
Other, net...................... 0.1 0.1 0.1
------------- ----------- ------------ ----------- ------------ -----------
Income (loss) before income taxes and
minority interest.................. 2.0 (1.1) 0.9 (2.5) (1.6) (0.1)
Provision for income taxes........... 0.8 (0.3)(i) 0.5 (0.9)(i) (0.4)
Minority interest in net loss of
consolidated subsidiary............ 0.0 0.0(a) -- -- --
------------- ----------- ------------ ----------- ------------ -----------
Net income (loss).......... $ 1.2 $(0.8) $ 0.4 $(1.6) $ (1.2) $(0.1)
============= =========== ============ =========== ============ ===========
</TABLE>
PRO FORMA
FOR THE
ISSUANCE
OF THE
ORIGINAL
SERIES B
NOTES
---------
Revenues............................. $41.2
Cost of goods sold................... 35.4
Depreciation and amortization........ 3.1
---------
Gross profit.................... 2.7
Selling, general and administrative
expenses........................... 1.5
---------
Income from operations..... 1.2
Interest expense, net................ 2.7
Other income (expense):
Dividend income................. --
Charitable contribution......... --
Loss on disposal of assets and
investment securities, net.... (0.3)
Impairment of investment in
land.......................... --
Other, net...................... 0.1
---------
Income (loss) before income taxes and
minority interest.................. (1.7)
Provision for income taxes........... (0.4)
Minority interest in net loss of
consolidated subsidiary............ --
---------
Net income (loss).......... $(1.3)
=========
See accompanying Notes to Pro Forma Financial Statements
38
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MAY 31, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
ISSUANCE
OF THE
TOC, ITS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA ORIGINAL
SUBSIDIARIES FOR THE FOR THE FOR THE FOR THE SERIES B
AND CLARKSTON ACQUISITION ACQUISITION FINANCINGS TRANSACTIONS NOTES
------------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 455.6 $ (1.4)(a) $ 454.2 $454.2
Cost of goods sold................... 379.5 (0.2)(a) 367.3 367.3
(12.0)(c)
Depreciation and amortization........ 15.0 (0.3)(a) 36.3 36.3
(0.1)(b)
21.7(d)
------------- ----------- ----------- ----------- ------------ ------------
Gross profit.................... 61.1 (10.5) 50.6 -- 50.6
Selling, general and administrative
expenses........................... 19.1 (1.7)(a) 12.7 12.7
(0.3)(b)
(3.2)(c)
(1.2)(e)
------------- ----------- ----------- ----------- ------------ ------------
Income from operations..... 42.0 (4.1) 37.9 37.9
Interest expense, net................ 1.6 0.1(a) 1.3 30.6(j) 31.9 1.1(p)
(1.7)(f) (0.4)(l)
1.3(g) 0.1(n)
Other income (expense):
Dividend income................. 0.3 (0.3)(f) -- --
Charitable contribution......... (0.6) 0.6(h) -- --
(Loss) on disposal of assets and
investment securities, net.... (3.1) (3.1) (3.1)
Impairment of investment in
land.......................... (12.6) (12.6) (12.6)
Other, net...................... 0.1 0.1 0.1
------------- ----------- ----------- ----------- ------------ ------------
Income (loss) before income taxes and
minority interest.................. 24.5 (3.5) 21.0 (30.6) (9.6) (0.8)
Provision (benefit) for income
taxes.............................. 7.9 2.1(i) 10.0 (11.4)(i) (1.4) (0.3)(q)
Minority interest in net loss of
consolidated subsidiary............ 0.1 (0.1)(a) -- --
------------- ----------- ----------- ----------- ------------ ------------
Net (loss) income.......... $ 16.7 $ (5.7) $ 11.0 $ (19.2) $ (8.2) $ (0.5)
============= =========== =========== =========== ============ ============
</TABLE>
PRO FORMA
FOR THE
ISSUANCE
OF THE
ORIGINAL
SERIES B
NOTES
----------
Revenues............................. $454.2
Cost of goods sold................... 367.3
Depreciation and amortization........ 36.3
----------
Gross profit.................... 50.6
Selling, general and administrative
expenses........................... 12.7
----------
Income from operations..... 37.9
Interest expense, net................ 32.7
Other income (expense):
Dividend income................. --
Charitable contribution......... --
(Loss) on disposal of assets and
investment securities, net.... (3.1)
Impairment of investment in
land.......................... (12.6)
Other, net...................... 0.1
----------
Income (loss) before income taxes and
minority interest.................. (10.4)
Provision (benefit) for income
taxes.............................. (1.7)
Minority interest in net loss of
consolidated subsidiary............
----------
Net (loss) income.......... $ (8.7)
==========
See accompanying Notes to Pro Forma Financial Statements
39
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
ADJUSTMENTS PRO FORMA
FOR THE FOR THE
ISSUANCE ISSUANCE
OF THE OF THE
ORIGINAL ORIGINAL
TPC SERIES B SERIES B
HISTORICAL NOTES NOTES
---------- ------------ ----------
ASSETS
Current assets:
Cash and cash equivalents....... $ 0.2 $ 0.2
Accounts receivable -- trade.... 41.1 41.1
Inventories..................... 21.9 21.9
Other current assets............ 13.1 13.1
---------- ----------
Total current assets....... 76.3 76.3
Property, plant and equipment, net... 251.6 251.6
Investments in land held for sale.... 3.9 3.9
Investment in and advances to limited
partnership........................ 2.8 2.8
Goodwill, net........................ 223.7 223.7
Other assets, net of accumulated
amortization....................... 14.2 0.5(n) 12.6
(2.1)(o)
---------- ------------ ----------
Total assets............... $572.5 $ (1.6) $570.9
========== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................. $ 10.5 $ 10.5
Accounts payable -- trade....... 31.3 31.3
Accrued expenses................ 20.0 20.0
Current portion of cash bonus
plan.......................... 7.9 7.9
Current portion of Senior Term
Loans & ESOP Loan............. 13.0 (4.7)(m) 8.3
---------- ------------ ----------
Total current
liabilities............. 82.7 (4.7) 78.0
Revolving line of credit............. 4.5 4.5
Senior Term Loans.................... 113.5 (52.5)(k) 65.7
4.7(m)
Senior Subordinated Notes............ 175.0 50.0(k) 228.0
3.0(l)
ESOP Term Loan....................... 7.0 7.0
Cash bonus plan...................... 21.7 21.7
Deferred income taxes and other...... 106.2 (0.8)(o) 105.4
Common Stock held by ESOP............ 9.0 9.0
Less: Note receivable from ESOP...... (9.0) (9.0)
Stockholders' equity................. 61.9 (1.3)(o) 60.6
---------- ------------ ----------
$572.5 $ (1.6) $570.9
========== ============ ==========
See accompanying Notes to Pro Forma Financial Statements
40
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996, THE ONE MONTH
ENDED JUNE 30, 1996, AND THE TWELVE MONTHS ENDED MAY 31, 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
(a) Represents the elimination of operations, assets and liabilities
associated with The Texas Falls Corporation, which was not acquired as
part of the Acquisition. Pursuant to the Stock Purchase Agreement, 80% of
the outstanding capital stock of The Texas Falls Corporation was sold at
Closing to Mr. Swalm for $5.6 million. The proceeds were used to reduce
the Company's outstanding indebtedness.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Revenues............................. $0.2 $1.4
Cost of goods sold................... 0.0 0.2
Depreciation and amortization........ 0.0 0.3
Selling, general and administrative
expenses........................... 0.2 1.7
Interest income (expense), net....... (0.1 ) 0.1
Minority interest in net loss of
consolidated subsidiary............ 0.0 0.1
------------- -------------
Net loss................... $ (0.1 ) $ (0.6 )
============= =============
Cash................................. 0.5
Investments in land.................. 2.3
Other assets, net of accumulated
amortization....................... 2.8
Accrued expenses..................... (0.2 )
-------------
Net adjustment............. $ 5.4
=============
(b) Represents the elimination of operations and assets associated with the
Ranch, which was sold pursuant to the Stock Purchase Agreement at Closing
to a former shareholder for $2.2 million. The proceeds were used to reduce
the Company's outstanding indebtedness.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Depreciation......................... -- $0.1
Selling, general and administrative
expenses........................... -- $0.3
Fixed assets associated with the
Ranch.............................. $2.2 --
(c) Pursuant to the Stock Purchase Agreement, the existing profit sharing plan
was replaced with a new profit sharing plan. The Pro Forma Combined
Statements of Operations reflect (i) a reduction in the cost of goods sold
and selling, general and administrative expenses resulting from the
elimination of bonuses attributable to the existing profit sharing plan,
and (ii) an increase associated with bonuses attributable to the new
profit sharing plan.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Cost of goods sold:
Bonuses under the previous
profit sharing plan........... $(0.6) $ (12.0)
============= =============
Selling, general and administrative
expenses:
Bonuses under the previous
profit sharing plan........... $(0.4) $ (11.5)
Bonuses under the new profit
sharing plan.................. 0.5 8.3
------------- -------------
Net increase (decrease).... $ 0.1 $ (3.2)
============= =============
(d) Represents an increase in depreciation and amortization resulting from the
preliminary purchase price allocation in accordance with the purchase
method of accounting. Goodwill is amortized over 40 years.
41
<PAGE>
(e) As a result of the Transactions, certain shareholders are no longer
employed by the Company. The Pro Forma Combined Statements of Operations
reflect a decrease in selling, general and administrative expenses for the
elimination of related shareholder salaries and expenses.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Shareholder salaries................. $ 0.1 $ 0.8
Expenses............................. 0.0 0.4
------------- -------------
$ 0.1 $ 1.2
============= =============
(f) Represents the reduction of interest expense, interest income and dividend
income for the sales of marketable equity securities, the Ranch and 80% of
the outstanding capital stock of The Texas Falls Corporation at June 1,
1995.
(g) Represents interest expense associated with the Cash Bonus Plan.
(h) Represents the elimination of charitable contributions paid to an
affiliate organization. Such contributions were not related to the
businesses acquired and will not be made after the Acquisition.
(i) Represents the tax effect of all adjustments and the net income of
Clarkston using a combined state and federal statutory income tax rate of
approximately 37%.
(j) Represents interest incurred on borrowings under the Bank Credit Agreement
and the Original Notes. Debt issuance costs are amortized over the terms
of the related debt and included as a component of interest expense.
Assumes a 7.8% average borrowing rate and average outstanding borrowings
under the Bank Credit Agreement of $120.4 million and $110.4 million for
the twelve-month period ended May 31, 1996 and the one-month period ended
June 30, 1996, respectively. The stated and effective interest rate on the
Original Notes is 11.125% and 11.58%, respectively.
ONE MONTH TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 MAY 31, 1996
------------- -------------
Bank Credit Agreement................ $ 0.8 $ 9.6
ESOP Note, net of interest income.... -- --
Original Notes....................... 1.6 19.4
Amortization of debt issuance
costs.............................. .1 1.6
------------- -------------
$ 2.5 $30.6
============= =============
A 1% change in the interest rate payable on the outstanding balance under
the Bank Credit Agreement would change annual interest expense by $1.2
million on an annual basis before the effect of income taxes.
(k) Represents the sale of the Original Series B Notes and the application of
the net proceeds as a reduction of Tranch A of the Senior Term Loans.
(l) Represents the amount of premium received on sale of the Notes over par
value. Premium will be carried as a liability and amortized over the
remaining term of the Notes, approximately 9.25 years.
(m) Represents the reclassification of a portion of the current Tranche A
Senior Term Loan to long-term as a result of the revision of the principal
payment amortization schedule.
(n) Represents the capitalization of debt issue costs associated with the
Notes offered hereby. These costs will be amortized over the remaining
term of the Notes, approximately 9.25 years.
(o) Represents the write off of a portion of the debt issue costs associated
with the Tranch A Senior Term Loan being reduced with net proceeds from
the sale of the Notes, net of the tax effect using a combined state and
federal statutory rate of approximately 37%. As the write off will be
included in historical income as an extraordinary item, such charge was
not considered in the pro forma income statement.
(p) Represents the net increase in interest expense as a result of issuing the
Notes and the reduction of a portion of the Tranche A Senior Term Loan.
The stated and effective interest rate on the Notes is 11.125% and 11.36%,
respectively.
(q) Represents the tax effect of the adjustments to taxable income using a
combined state and federal statutory rate of approximately 37%.
42
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below has been derived
from the combined financial statements of TOC, its subsidiaries and Clarkston
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 Offering Memorandum 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 financial information set forth
below for the year ended May 31, 1992 and the six months ended December 31, 1995
and 1996 has been derived from unaudited financial statements, which, in the
opinion of management, have been prepared on a basis consistent with the audited
financial statements of such entities and contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results for these periods. The unaudited combined financial information for the
year ended May 31, 1992 has been prepared from audited financial statements of
TOC and its subsidiaries and unaudited financial statements of Clarkston. The
results of the one month 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>
TWELVE ONE SIX
MONTHS MONTH MONTHS
ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, DECEMBER 31,
------------------------------------------ -------- --------- ------------
1992 1993 1994 1995 1996 1996 1995
--------- --------- --------- --------- -------- --------- ------------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 416.1 $ 410.7 $ 352.4 $ 474.7 $455.6 $ 41.4 $226.5
Cost of goods sold(1)................ 318.3 340.8 268.8 396.3 379.5 36.0 187.6
Depreciation and amortization........ 12.0 12.6 13.6 14.3 15.0 1.3 7.4
--------- --------- --------- --------- -------- --------- ------------
Gross profit......................... 85.8 57.3 70.0 64.1 61.1 4.1 31.5
Selling, general and administrative
expenses(1)........................ 15.4 14.4 16.7 16.6 19.1 1.7 5.8
--------- --------- --------- --------- -------- --------- ------------
Income from operations............... 70.4 42.9 53.3 47.5 42.0 2.4 25.7
Interest income (expense), net....... (0.6) (0.6) (0.2) 0.7 (1.6) (0.1) (1.6)
Other income (expense)(2)............ (6.3) (1.2) (0.8) 1.1 (15.9) (0.3) 0.2
--------- --------- --------- --------- -------- --------- ------------
Income (loss) before income taxes and
minority interest.................. 63.5 41.1 52.3 49.3 24.5 2.0 24.3
Provision (benefit) for income
taxes.............................. 24.3 13.0 18.4 16.9 7.9 0.8 8.1
Minority interest in net loss of
consolidated subsidiary............ -- -- 0.0 0.1 0.1 0.0 0.1
--------- --------- --------- --------- -------- --------- ------------
Net income (loss).................... 39.2 28.1 33.9 32.5 16.7 1.2 16.3
OPERATING DATA:
Revenues by product:
Butadiene(3)..................... $ 64.9 $ 81.3 $ 68.7 $ 106.2 $112.6 $ 10.2 $ 60.4
MTBE............................. 252.0 211.0 175.2 199.1 187.4 21.0 91.7
n-Butylenes...................... 29.2 21.7 28.1 42.7 48.2 3.2 25.3
Specialty Isobutylenes........... 38.2 54.8 59.9 75.5 74.5 5.5 34.0
Other(4)......................... 31.8 41.9 20.5 51.2 32.9 1.5 15.1
Sales volumes (in millions of
pounds):
Butadiene........................ 559.1 556.2 484.4 580.8 622.6 64.6 295.3
MTBE(5).......................... 254.4 225.1 194.8 211.1 219.8 26.6 111.2
n-Butylenes...................... 158.7 114.7 150.8 245.9 284.6 17.1 153.2
Specialty Isobutylenes........... 240.4 309.0 312.2 398.0 368.2 23.0 184.6
</TABLE>
SIX
MONTHS
ENDED
DECEMBER 31,
------------
1996
------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $246.7
Cost of goods sold(1)................ 216.5
Depreciation and amortization........ 15.9
------------
Gross profit......................... 14.3
Selling, general and administrative
expenses(1)........................ 4.2
------------
Income from operations............... 10.1
Interest income (expense), net....... (17.4)
Other income (expense)(2)............ 1.5
------------
Income (loss) before income taxes and
minority interest.................. (5.8)
Provision (benefit) for income
taxes.............................. (0.9)
Minority interest in net loss of
consolidated subsidiary............ --
------------
Net income (loss).................... (4.9)
OPERATING DATA:
Revenues by product:
Butadiene(3)..................... $ 62.6
MTBE............................. 128.1
n-Butylenes...................... 21.5
Specialty Isobutylenes........... 25.9
Other(4)......................... 8.6
Sales volumes (in millions of
pounds):
Butadiene........................ 356.4
MTBE(5).......................... 150.3
n-Butylenes...................... 115.5
Specialty Isobutylenes........... 100.8
(FOOTNOTES ON FOLLOWING PAGE)
43
<PAGE>
<TABLE>
<CAPTION>
MAY 31,
------------------------------------------ JUNE 30, DECEMBER 31,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- -------- ------------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 33.9 $ 38.6 $ 50.6 $ 67.3 $ 25.0 $ (6.4)
Property, plant and equipment, net... 101.8 101.6 95.9 90.1 81.8 251.6
Total assets......................... 203.2 194.1 214.6 230.7 167.9 572.5
Long-term debt (including current
portion)........................... 14.4 10.9 11.0 -- 13.0 313.0
Total stockholders' equity........... 123.7 128.2 140.4 163.3 92.5 61.9
</TABLE>
<TABLE>
<CAPTION>
TWELVE ONE SIX
MONTHS MONTH MONTHS
ENDED ENDED ENDED
YEAR ENDED MAY 31, MAY 31, JUNE 30, DECEMBER 31,
------------------------------------------ -------- --------- ------------
1992 1993 1994 1995 1996 1996 1995
--------- --------- --------- --------- -------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................ $ 82.4 $ 55.5 $ 66.9 $ 61.8 $ 57.0 $ 3.7 $ 33.1
Employee profit sharing and
bonuses(1)......................... 22.5 18.6 23.6 20.9 23.5 1.0 10.2
Capital expenditures................. 7.1 12.0 12.5 8.7 5.5 2.0 2.1
Net cash provided by operating
activities......................... 53.9 44.5 30.2 50.3 44.5 13.9 29.7
Net cash provided by (used in)
investing activities............... (24.5) (7.2) (5.3) (25.9) 8.2 (1.3) (8.4)
Net cash used in financing
activities......................... (31.3) (29.9) (17.6) (23.3) (69.0) (9.4) (42.3)
Cash dividends....................... 8.7 23.7 21.4 6.2 16.5 -- 4.0
Ratio of earnings to fixed
charges(7)......................... 23.6x 16.1x 26.0x 26.3x 7.2x 9.4x 11.3x
</TABLE>
SIX
MONTHS
ENDED
DECEMBER 31,
------------
1996
------------
OTHER DATA:
EBITDA(6)............................ $ 26.0
Employee profit sharing and
bonuses(1)......................... 1.4
Capital expenditures................. 5.2
Net cash provided by operating
activities......................... (0.1)
Net cash provided by (used in)
investing activities............... (358.4)
Net cash used in financing
activities......................... 353.9
Cash dividends....................... --
Ratio of earnings to fixed
charges(7)......................... --
- ------------
(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 from operations before taking into consideration
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. EBITDA should not be construed by an investor as an alternative to
income from operations (as determined in accordance with generally accepted
accounting principles), as an indicator of the operating performance of the
Company or as an alternative to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as a
measure of liquidity.
(7) For purposes of this ratio, earnings consist of income before income taxes
and minority interest. Fixed charges consist of interest expense and the
portion of rents representative of an interest factor. For the twelve months
ended May 31, 1996, income before taxes and minority interest includes a
$12.6 million non-cash provision for the impairment of certain non-strategic
properties which TPC intends to sell. For the six months ended December 31,
1996, earnings were insufficient to cover fixed charges in the amount of
$(5.8) million.
44
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of the results of operations,
financial condition and liquidity of the Company should be read in conjunction
with the combined financial statements of TOC, its subsidiaries and Clarkston
included in this Prospectus and the notes thereto. The discussion and analysis
relating to the periods prior to July 1, 1996 pertains to TOC, its subsidiaries
and Clarkson, and the financial statements and other information set forth
herein for such periods combine the historical results of TOC, its subsidiaries
and Clarkston. As a result, the transactions between Clarkston and the Company
have been eliminated in the combined financial statements.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of
butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes
(isobutylene concentrate, high purity isobutylene, and diisobutylene). The
Company's results of operations are affected by a number of factors, including
variations in market demand, production volumes, and the pricing of its products
and primary raw materials. The Company believes that the pricing for its
principal products is primarily dependent on the balance between the global
supply and North American demand for each product, the cost structure of the
various global producers (including their cost of raw materials), and, from time
to time, other external factors, such as the implementation of the CAAA, which
has significantly increased the demand for MTBE. Historically, the Company has
successfully mitigated the cyclicality of the markets for certain of its end
products by entering into contracts with pricing which allows for a fixed profit
by linking prices directly or indirectly to raw material costs. In addition, the
Company has attempted to optimize the use of isobutylene, an intermediate
feedstock produced by the Company, to produce MTBE or higher margin, specialty
products depending on prevailing market conditions.
The markets for the Company's principal products, butadiene and MTBE, are
cyclical, and market conditions may have a significant impact on the Company's
operating results. During the past five years, industry-wide pricing and
operating rates for butadiene and MTBE have fluctuated significantly and have
affected the Company's revenues and profit margins. The Company has, however,
achieved relatively stable profitability on its sales of butadiene due to the
nature of the supply contracts under which the Company purchases crude
butadiene, the raw material from which most of the Company's butadiene is
produced. The Company purchases approximately 95% of its crude butadiene
requirements at prices which are adjusted based on the Company's selling price
of butadiene as well as the energy cost of natural gas used to produce
butadiene, thereby providing the Company with a fixed profit on such sales.
Moreover, the Company sells butadiene under contracts which typically require
its customers to purchase a certain minimum volume from the Company.
Historically, MTBE was sold in the U.S. under sales contracts which allowed
suppliers to recover raw material costs and earn a fixed profit. Sales prices
under these contracts were higher than the then prevailing spot prices. Since
December 1994, the Company, as well as most other U.S. MTBE producers, has sold
all of its MTBE production at prices related to spot market prices. The Company
believes that the reduction of industry-wide volumes sold under these types of
fixed profit contracts and the large U.S. capacity additions built in the early
1990s in anticipation of demand created by the implementation of the CAAA's
oxygenated gasoline program in 1992 has acted as a deterrent to possible
capacity additions. Despite the transition in the industry away from fixed
profit contracts, the Company has consistently achieved profitability on its
sales of MTBE. One of the Company's principal raw materials used in the
production of MTBE, methanol, which the Company purchases at market prices, has
experienced considerable price fluctuations over the past several years. The
addition of significant new methanol production capacity in 1995 and early 1996
has resulted in a decline in the price of methanol from the historically high
levels reached in the winter of 1994. The Company believes that this current
imbalance between supply and demand will continue over the next
45
<PAGE>
several years, and that the price of methanol will remain relatively stable at
historically low levels, which is expected to have a positive impact on the
profitability of the Company's MTBE operations.
The markets and pricing for the Company's n-butylene and specialty
isobutylene products historically have been less cyclical than those for
butadiene and MTBE. These products are generally more specialized in nature,
typically account for a smaller proportion of the end-use product's overall cost
than commodity products, and are produced by a fewer number of producers. The
Company sells certain n-butylenes and specialty isobutylenes under contracts
which link their selling prices to the prices of products (principally gasoline
and butanes) for which prices fluctuate in a manner that correlates closely with
those of the raw materials used to manufacture n-butylenes and specialty
isobutylenes. In addition, the Company sells certain of these products under
contracts which link selling prices directly to raw material costs. The Company
has increased its focus on maximizing sales of these products. In the six months
ended December 31, 1996, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, sales of n-butylenes and specialty isobutylenes represented
20%, 27% and 21%, respectively, of the Company's revenues as compared to 19% in
fiscal 1993.
For the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 43% and 45% of the Company's revenues were derived from
products which were sold on a fixed profit basis or for which selling prices
were linked directly or indirectly to raw material costs. Historically, the
percentage of the Company's revenues represented by such contracts has been
relatively stable. However, there can be no assurance that such contracts will
remain in effect beyond their current terms or, if extended, that the same
provisions would continue to apply. See "Business -- Contracts." The pricing
of the Company's other products, including MTBE, is typically based on
prevailing market prices.
Other revenues include Clarkston's trading revenues from third parties (for
periods prior to July 1, 1996), utility revenues, revenues realized from the
Company's terminalling facilities and sales of chemical by-products. The
Company's utility revenues have been primarily a function of natural gas costs
since demand has been relatively stable. The Company's terminalling revenues are
primarily a function of the volume of services provided. Sales of chemical
by-products are primarily a function of plant production levels. Clarkston,
which was owned by certain of the same shareholders as TOC, historically engaged
in the purchase of isobutane, one of the Company's principal raw materials,
primarily on behalf of the Company, and also on behalf of certain third parties.
As part of the Transactions, the Company (for periods prior to July 1, 1996)
assumed from Clarkston a contract between Clarkston and a certain supplier for
the purchase of isobutane. Clarkston's historical revenues derived from third
parties have been included in other revenues, and the raw material costs
relating to such revenues have been included in cost of goods sold.
Historically, trading costs have substantially offset Clarkston's third party
trading revenues. Historical transactions between the Company and Clarkston have
been eliminated.
The Company believes its relationships with its largest customers are good.
Certain of its largest customers account for a significant percentage of the
Company's sales of particular products. As a result, the loss of significant
volumes or a significant customer could affect revenues from year to year.
Historically the Company has successfully replaced lost volumes or customers
with new customers or open market sales.
46
<PAGE>
REVENUES
The Company's revenues are primarily a function of the volume of products
sold by the Company and the prices for such products. The following tables set
forth the Company's: (i) historical revenues and the percentages of historical
revenues by product; (ii) volume of products sold; and (iii) average selling
prices for such products, exclusive of tolling fees, in each case for the years
ended May 31, 1994 and 1995, the twelve-month period ended May 31, 1996, the
one-month period ended June 30, 1996 and the six months ended December 31, 1995
and 1996.
REVENUES
<TABLE>
<CAPTION>
SIX
TWELVE MONTHS MONTHS
ONE MONTH ENDED
ENDED ENDED DECEMBER
YEAR ENDED MAY 31, MAY 31, JUNE 30, 31,
------------------------------------------ -------------------- -------------------- ---------
1994 1995 1996 1996 1995
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Butadiene............... $ 68.7 19% $ 106.2 22% $ 112.6 25% $ 10.2 25% $ 60.4
MTBE.................... 175.2 50 199.1 42 187.4 41 21.0 50 91.7
n-Butylenes............. 28.1 8 42.7 9 48.2 11 3.2 8 25.3
Specialty
Isobutylenes.......... 59.9 17 75.5 16 74.5 16 5.5 13 34.0
Other(1)................ 20.5 6 51.2 11 32.9 7 1.5 4 15.1
--------- --- --------- --- --------- --- --------- --- ---------
Total............... $ 352.4 100% $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 226.5
========= === ========= === ========= === ========= === =========
</TABLE>
SIX MONTHS
ENDED
DECEMBER 31,
--------------------
1996
--------------------
Butadiene............... 27% $ 62.6 25%
MTBE.................... 40 128.1 52
n-Butylenes............. 11 21.5 9
Specialty
Isobutylenes.......... 15 25.9 11
Other(1)................ 7 8.6 3
--- --------- ---
Total............... 100% $ 246.7 100%
=== ========= ===
- ------------
(1) Includes Clarkston's trading revenues from third parties, utility revenues,
revenues realized from the Company's terminalling facilities and sales of
chemical by-products to third parties.
SALES VOLUMES
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------- ------------- ---------- ------------ ------------
1994 1995 1996 1996 1995 1996
--------- --------- ------------- ---------- ------------ ------------
(MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C> <C> <C>
Butadiene............... 484.4 580.8 622.6 64.6 295.3 356.4
MTBE(1)................. 194.8 211.1 219.8 26.6 111.2 150.3
n-Butylenes............. 150.8 245.9 284.6 17.1 153.2 115.5
Specialty
Isobutylenes.......... 312.2 398.0 368.2 23.0 184.6 100.8
</TABLE>
- ------------
(1) Volumes in millions of gallons.
AVERAGE SELLING PRICES
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------- ------------- ---------- ------------ ------------
1994 1995 1996 1996 1995 1996
--------- --------- ------------- ---------- ------------ ------------
(DOLLARS PER POUND, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C> <C> <C>
Butadiene............................ $ 0.16 $ 0.21 $0.20 $ 0.18 $ 0.23 $ 0.20
MTBE(1).............................. 0.90 0.94 0.85 0.80 0.83 0.85
n-Butylenes(2)....................... 0.19 0.17 0.17 0.19 0.17 0.19
Specialty Isobutylenes(2)............ 0.19 0.19 0.20 0.24 0.24 0.26
</TABLE>
- ------------
(1) Prices in dollars per gallon.
(2) Weighted average of the products under these categories.
RAW MATERIALS
The Company's principal purchased raw materials are crude butadiene,
methanol and isobutane. The Company purchases approximately 95% of its crude
butadiene requirements at prices which are adjusted based on the Company's
selling price of butadiene as well as the cost of natural gas used to produce
butadiene, thereby providing the Company with a fixed profit on such sales.
Methanol and isobutane are purchased at prices linked to prevailing market
prices. The following table sets forth the Company's
47
<PAGE>
average raw material prices for crude butadiene, methanol and isobutane for the
years ended May 31, 1994 and 1995, the twelve-month period ended May 31, 1996,
the one-month period ended June 30, 1996 and the six month period ended December
31, 1995 and 1996.
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------- -------------- --------------- ------------ ------------
1994 1995 1996 1996 1995 1996
--------- --------- -------------- --------------- ------------ ------------
(DOLLARS PER GALLON, EXCEPT WHERE NOTED)
<S> <C> <C> <C> <C> <C> <C>
Crude Butadiene(1)................... $ 0.09 $ 0.15 $ 0.14 $0.12 $ 0.12 $ 0.11
Methanol............................. 0.44 0.80 0.40 0.41 0.41 0.45
Isobutane............................ 0.39 0.41 0.43 0.46 0.42 0.55
</TABLE>
- ------------
(1) Prices in dollars per pound.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of
operations .
<TABLE>
<CAPTION>
SIX
MONTHS
TWELVE MONTHS ONE MONTH ENDED
ENDED ENDED DECEMBER
YEAR ENDED MAY 31, MAY 31, JUNE 30, 31,
------------------------------------------ -------------------- -------------------- ---------
1994 1995 1996 1996 1995
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Revenues................ $ 352.4 100% $ 474.7 100% $ 455.6 100% $ 41.4 100% $ 226.5
Cost of goods sold(1)... 268.8 76 396.3 84 379.5 84 36.0 87 187.6
Depreciation and
amortization.......... 13.6 4 14.3 3 15.0 3 1.3 3 7.4
--------- --- --------- --- --------- --- --------- --- ---------
Gross profit............ 70.0 20 64.1 13 61.1 13 4.1 10 31.5
Selling, general and
administrative
expenses(1)........... 16.7 5 16.6 3 19.1 4 1.7 4 5.8
--------- --- --------- --- --------- --- --------- --- ---------
Income from operations.. $ 53.3 15% $ 47.5 10% $ 42.0 9% 2.4 6% $ 25.7
========= === ========= === ========= === ========= === =========
</TABLE>
SIX MONTHS
ENDED
DECEMBER 31,
--------------------
1996
--------------------
Revenues................ 100% $ 246.7 100%
Cost of goods sold(1)... 83 216.5 88
Depreciation and
amortization.......... 3 15.9 6
--- --------- ---
Gross profit............ 14 14.3 6
Selling, general and
administrative
expenses(1)........... 3 4.2 2
--- --------- ---
Income from operations.. 11% $ 10.1 4%
=== ========= ===
- ------------
(1) Employee profit sharing and bonuses were historically included in cost of
goods sold and selling, general and administrative expenses in the following
amounts:
<TABLE>
<CAPTION>
TWELVE MONTHS ONE MONTH SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
MAY 31, MAY 31, JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------- -------------- --------------- ------------ ------------
1994 1995 1996 1996 1995 1996
--------- --------- -------------- --------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cost of goods sold................... $ 13.4 $ 12.5 $ 12.0 -$- $ 6.0 $--
Selling, general and administrative
expenses........................... 10.2 8.4 11.5 1.0 4.2 1.4
--------- --------- -------------- --------------- ------------ ------------
Total............................ $ 23.6 $ 20.9 $ 23.5 $ 1.0 $ 10.2 $ 1.4
========= ========= ============== =============== ============ ============
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1995
REVENUES
The Company's revenues increased by approximately 9%, or $20.2 million, to
$246.7 million for the six months ended December 31, 1996 from $226.5 million
for the six months ended December 31, 1995. The increase was primarily
attributable to increased selling prices and volumes for MTBE and increased
volumes of butadiene sold, partially offset by decreases in sales volumes of
n-butylenes and specialty isobutylenes. The Company's revenues by product for
the six months ended December 31, 1995 and December 31, 1996 were as follows:
48
<PAGE>
<TABLE>
<CAPTION>
INCREASE (DECREASE)
SIX MONTHS ENDED IN REVENUES SIX MONTHS ENDED
DECEMBER 31, DUE TO CHANGES IN DECEMBER 31,
---------------- ------------------- ----------------
1995 PRICE VOLUME 1996
---------------- --------- ------ ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Butadiene............................ $ 60.4 $ (10.7) $ 12.9 $ 62.6
MTBE................................. 91.7 4.2 32.2 128.1
n-Butylenes.......................... 25.3 2.5 (6.3) 21.5
Specialty Isobutylenes............... 34.0 2.0 (10.1) 25.9
Other(1)............................. 15.1 8.6
-------- --------
$226.5 $246.7
======== ========
</TABLE>
- ------------
(1) The component mix of other revenues does not make it meaningful to show
increases or decreases due to price or volume.
Butadiene revenues increased by approximately 4%, or $2.2 million, to $62.6
million for the six months ended December 31, 1996 from $60.4 million for the
six months ended December 31, 1995. The increase was attributable to an increase
in sales volumes of approximately 21%, or 61.1 million pounds, as a result of
increased production levels due to the availability of crude butadiene feedstock
and strong customer demand. The volume increase was offset by a decline in
butadiene prices. Butadiene prices in the prior period remained high due to the
build up of U.S. tire inventory to record levels by the end of the calendar
year. A sharp drop in butadiene prices began in 1996 and resulted in a lower
average selling price in the current period.
MTBE revenues increased by approximately 40%, or $36.4 million, to $128.1
million for the six months ended December 31, 1996 from $91.7 million for the
six months ended December 31, 1995. With the decrease in demand for isobutylene
concentrate the Company shifted its isobutylene production, an intermediate
feedstock, to the production of MTBE. Demand for MTBE in the market remained
strong, thus the Company was able to supply increased volumes at higher sales
prices to its customers.
n-Butylenes revenues decreased by approximately 15%, or $3.8 million, to
$21.5 million for the six months ended December 31, 1996 from $25.3 million for
the six months ended December 31, 1995. This decrease was attributable to lower
sales volumes of butene-2 during the current period. Current market conditions
allowed the Company's major butene-2 customer to find alternative feedstocks.
Butene-1 sales revenues were unchanged.
Specialty isobutylene revenues decreased by approximately 24%, or $8.1
million, to $25.9 million for the six months ended December 31, 1996 from $34.0
million for the six months ended December 31, 1995. The decrease in revenues was
primarily attributable to lower sales volumes of isobutylene concentrate. The
Company supplies all of its isobutylene concentrate to two customers, both of
which were adversely affected by high isobutane prices during the current
period. High purity isobutylene revenues decreased slightly during the period as
a result of lower sales volumes caused by the timing of product shipments.
Other revenues decreased by approximately 43%, or $6.5 million, to $8.6
million for the six months ended December 31, 1996 from $15.1 million for the
six months ended December 31, 1995. The decrease in revenues is due to the
elimination of Clarkston's trading revenues from third parties. Clarkston was
dissolved in June 1996 as part of the Acquisition.
GROSS PROFIT
Gross profit decreased by approximately 55%, or $17.2 million, to $14.3
million for the six months ended December 31, 1996 from $31.5 million for the
six months ended December 31, 1995. Gross margin during the period decreased to
5.8% from 13.9%. The decrease was primarily attributable to higher isobutane
costs which resulted in lower margins on MTBE and specialty isobutylene sales.
In December 1996, as a result of the decline in MTBE margins, the Company shut
down its Dehydro-1 unit for 27 days 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
49
<PAGE>
gross profit during the current period. Increased gross profits from the sale of
higher volumes of butadiene were sufficient to offset the decrease in gross
profit from lower sales volumes of isobutylene concentrate and high purity
isobutylene. Gross profit was also negatively impacted by increased depreciation
and amortization expense during the current period as a result of the increased
basis in fixed assets and goodwill from the Acquisition.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 61%, or $15.6 million, to
$10.1 million for the six months ended December 31, 1996 from $25.7 million for
the six months ended December 31, 1995. Operating margin during the period
decreased to 4.1% from 11.3%. 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.
ONE MONTH ENDED JUNE 30, 1996 COMPARED TO ONE MONTH ENDED JUNE 30, 1995
REVENUES
The Company's revenues increased by approximately 14%, or $5.2 million, to
$41.4 million for the one month ended June 30, 1996 from $36.2 million for the
one month ended June 30, 1995. This increase was attributable to increased
volumes for butadiene and MTBE. Volumes for n-butylenes and specialty
isobutylenes were down compared to the prior period. Prices for butadiene were
up slightly and MTBE prices were down. Other product prices remained constant
with the prior period.
GROSS PROFIT
Gross profit decreased by approximately 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.
50
<PAGE>
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
REVENUES
The Company's revenues decreased by approximately 4%, or $19.1 million, to
$455.6 million for the twelve months ended May 31, 1996 from $474.7 million for
the year ended May 31, 1995. This decrease was primarily attributable to
decreased selling prices for butadiene, MTBE and n-butylenes, as well as
decreased sales volumes for specialty isobutylenes and a decrease in other
revenues, partially offset by increased selling prices of specialty isobutylenes
as well as increased sales volumes of butadiene, MTBE and n-butylenes. The
Company's revenues by product for the year ended May 31, 1995 and the twelve-
month period ended May 31, 1996 were as follows:
<TABLE>
<CAPTION>
TWELEVE
INCREASE (DECREASE) MONTHS
YEAR ENDED IN REVENUES ENDED
MAY 31, DUE TO CHANGES IN MAY 31,
----------- --------------------- -----------
1995 PRICE VOLUME 1996
----------- ------ ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Butadiene............................ $ 106.2 $ (1.2) $ 7.6 $ 112.6
MTBE................................. 199.1 (19.9) 8.2 187.4
n-Butylenes.......................... 42.7 (1.2) 6.7 48.2
Specialty Isobutylenes............... 75.5 4.7 (5.7 ) 74.5
Other(1)............................. 51.2 32.9
----------- -----------
Total............................ $ 474.7 $ 455.6
=========== ===========
</TABLE>
- ------------
(1) The component mix of other revenues does not make it meaningful to show
increases or decreases due to price or volume.
Butadiene revenues increased by approximately 6%, or $6.4 million, to
$112.6 million for the twelve months ended May 31, 1996 from $106.2 million for
the year ended May 31, 1995. This increase was primarily attributable to an
increase in sales volumes of approximately 7%, or 41.8 million pounds, as a
result of increased contractual volumes sold at then current prices to a major
customer as the Company gained a larger share of this customer's business and as
this customer increased its requirements. In addition, sales prices decreased
slightly due to customers drawing down inventory thereby decreasing overall
product demand.
MTBE revenues decreased by approximately 6%, or $11.7 million, to $187.4
million for the twelve months ended May 31, 1996 from $199.1 million for the
year ended May 31, 1995. This decrease was primarily attributable to a decrease
in selling prices due to the expiration of significant sales contracts in which
pricing was based on a fixed profit above cost, in accordance with industry
trends. In addition, sales volumes increased by approximately 4%, or 8.7 million
gallons, due to the full year implementation of mandated oxygenate requirements.
n-Butylenes revenues increased by approximately 13%, or $5.5 million, to
$48.2 million for the twelve months ended May 31, 1996 from $42.7 million for
the year ended May 31, 1995. This increase was attributable to increased sales
volumes of approximately 16%, or 38.7 million pounds, as the Company 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
51
<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 $1.3 million increase in
selling, general and administrative expenses primarily attributable to legal and
other expenses related to the repurchase of the Company's stock. See
"-- Liquidity and Capital Resources."
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
REVENUES
The Company's revenues increased by 35%, or $122.3 million, to $474.7
million for the year ended May 31, 1995 from $352.4 million for the year ended
May 31, 1994. This increase was primarily attributable to increased sales prices
and volumes for butadiene and MTBE, to increased sales volumes for n-butylenes
and specialty isobutylenes, and to an increase in other revenues. The Company's
revenues by product for the fiscal years 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
YEAR ENDED IN REVENUES YEAR ENDED
MAY 31, DUE TO CHANGES IN MAY 31,
---------- ---------------------- ----------
1994 PRICE VOLUME 1995
---------- ------ ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Butadiene............................ $ 68.7 $23.8 $13.7 $106.2
MTBE................................. 175.2 9.6 14.3 199.1
n-Butylenes.......................... 28.1 (3.2 ) 17.8 42.7
Specialty Isobutylenes............... 59.9 (0.9 ) 16.5 75.5
Other(1)............................. 20.5 51.2
---------- ----------
Total............................ $352.4 $474.7
========== ==========
</TABLE>
- ------------
(1) The component mix of other revenues does not make it meaningful to show
increases or decreases due to price or volume.
Butadiene revenues increased by 55%, or $37.5 million, to $106.2 million
for the year ended May 31, 1995 from $68.7 million for the year ended May 31,
1994. This increase was primarily attributable to an increase in selling prices
due to higher U.S. demand relative to supply. U.S. demand for butadiene
increased primarily as a result of rubber end-users substituting synthetic
rubber for higher priced natural rubber. Supply of butadiene decreased in fiscal
1995 as imports of butadiene and crude butadiene declined due to reduced foreign
ethylene production and higher ocean freight costs. Butadiene sales volumes also
increased by approximately 20%, or 96.4 million pounds, as a result of an
increase in sales under contract to two major customers, one of which expanded
its production capacity.
MTBE revenues increased by 14%, or $23.9 million, to $199.1 million for the
year ended May 31, 1995 from $175.2 million for the year ended May 31, 1994.
This increase was primarily attributable to an increase in sales volumes of 8%,
or 16.3 million gallons. This volume increase was the result of MTBE
52
<PAGE>
users building inventories in anticipation of greater demand for MTBE due to
further implementation of the CAAA in early 1995. In addition, MTBE selling
prices increased as a result of higher methanol raw material prices. Methanol
prices on the U.S. Gulf Coast increased from $0.40 per gallon in June 1994 to
$1.45 per gallon in December 1994, before falling to $0.75 per gallon in May
1995.
n-Butylenes revenues increased by 52%, or $14.6 million, to $42.7 million
for the year ended May 31, 1995 from $28.1 million for the year ended May 31,
1994. This increase was primarily the result of increased sales volumes of
butene-1 to new customers and increased sales volumes of butene-2 in response to
periodic customer demand. Overall n-butylenes sales volumes increased by 63%, or
95.1 million pounds, during this period. This increase was partially offset by a
decline in n-butylenes average selling prices as a result of butene-1 price
reductions by the Company in response to market competition.
Specialty isobutylenes revenues increased by 26%, or $15.6 million, to
$75.5 million for the year ended May 31, 1995 from $59.9 million for the year
ended May 31, 1994. This increase was due to an increase in specialty
isobutylenes sales volumes of 27%, or 85.8 million pounds. This volume increase
was the result of the Company actively seeking alternate uses for its
isobutylene as a result of the lower margin realized for MTBE in this period due
to higher methanol prices. This led to higher sales volumes for diisobutylene
and high purity isobutylene attributable to increased sales to a major customer,
as well as increased sales volumes of isobutylene concentrate during the first
half of the fiscal year as the Company gained a greater share of a major
customer's business.
Other revenues increased by 149%, or $30.7 million, to $51.2 million for
the year ended May 31, 1995 from $20.5 million for the year ended May 31, 1994.
This increase was primarily due to an increase of $28.9 million in revenues from
Clarkston's third party trading activities, partially offset by a decrease in
utility revenues.
GROSS PROFIT
Gross profit decreased by 8%, or $5.9 million, to $64.1 million for the
year ended May 31, 1995 from $70.0 million for the year ended May 31, 1994.
Gross margin during this period declined to 13.5% from 19.9%. The decline in
gross profit and gross margin was primarily attributable to a significant
increase in the price of methanol, a primary raw material used to produce MTBE,
partially offset by increased sales volumes of specialty isobutylenes produced
from isobutylene, which would otherwise have been used to produce lower margin
MTBE. The average price of methanol increased to $0.80 per gallon for the year
ended May 31, 1995 from $0.44 per gallon for the prior period. In addition,
crude butadiene prices increased to $0.15 per pound from $0.09 per pound in the
prior period directly attributable to the increase in the Company's selling
price of butadiene. Costs associated with Clarkston's third party trading
activities increased, offsetting increases in revenues.
INCOME FROM OPERATIONS
Income from operations decreased by approximately 11%, or $5.8 million, to
$47.5 million for the year ended May 31, 1995 from $53.3 million for the year
ended May 31, 1994. Operating margin during this period declined to 10.0% from
15.1%. The decrease in income from operations and operating margin was
attributable to the same factors contributing to the decline in gross profit and
gross margin. Selling, general and administrative expenses were generally
unchanged from the prior period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1995
Net cash provided by (used in) operating activities was $(0.1) million for
the six months ended December 31, 1996 compared to $29.7 million for the six
months ended December 31, 1995. The decrease of $29.8 million was primarily
attributable to the decrease in overall profitability and to a lesser extent,
changes in working capital as a result of timing differences in receipts and
disbursements of cash. Net cash used in investing activities was $358.4 million
for the six months ended December 31, 1996 compared to $8.4 million for the six
months ended December 31, 1995. The increase of $350.0 million was primarily
attributable to the Acquisition of the Company on July 1, 1996, partially offset
by proceeds from the sale of non-plant assets, investment securities, the Ranch
and common stock in The Texas Falls Corporation. Net
53
<PAGE>
cash provided by (used in) financing activities was $353.9 million for the six
months ended December 31, 1996 compared to $(42.3) million for the six months
ended December 31, 1995. The change of $396.2 million was primarily attributable
to the issuance of long-term debt and an investment from the Parent, in order to
finance the Acquisition of the Predecessor.
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.
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.
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
Net cash provided by operating activities was $50.3 million for the year
ended May 31, 1995 compared to $30.2 million for the year ended May 31, 1994.
This increase of $20.1 million was primarily attributable to increases in
changes in working capital and an increase in losses realized on the disposal of
assets and investment securities, partially offset by a decrease in net income.
Net cash used in investing activities was $25.9 million for the year ended May
31, 1995 compared to $5.3 million for the year ended May 31, 1994. This increase
of $20.6 million was primarily attributable to a reduction in proceeds from the
sale of investment securities and a decrease in purchases of investment
securities, partially offset by a decrease in capital expenditures. Net cash
used in financing activities was $23.3 million for the year ended May 31, 1995
compared to $17.6 million for the year ended May 31, 1994. This increase of $5.7
million was primarily due to decreased borrowings under revolving credit lines
and also to increased repayments of notes payable, partially offset by decreased
repayments under revolving credit lines and decreased dividends paid.
LIQUIDITY
The Company's liquidity needs 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 will be
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 $4.5 million
was in use at December 31, 1996, to provide adequate funds for ongoing
operations, planned
54
<PAGE>
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 pursuant to which the Original Notes and the Notes were issued. 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. For the six months ended December 31, 1996
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 and an amendment to the Bank Credit Agreement on March 28, 1997 to
update these financial ratios. See "Risk Factors -- "Restrictive Financing
Covenants," "Description of the Bank Credit Agreement" and "Description of
the Notes."
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 historical capital expenditures since 1993 have in
substantial part resulted from implementing its strategic plan of improving
operating efficiency, and complying with environmental and safety standards. The
Company's capital expenditures were $12.5 million, $8.7 million and $5.5 million
for the years ended May 31, 1994 and 1995 and the twelve-month period ended May
31, 1996, respectively, of which $1.0 million, $2.2 million and $2.1 million,
respectively, related to environmental compliance. See
"Business -- Environmental Regulation."
Capital expenditures for fiscal 1997 will relate principally to improving
operating efficiencies and environmental expenditures.
The Company expenses approximately $20 million annually for plant
maintenance and expects to incur cash expenditures of a similar amount in fiscal
1997 for such purposes. These maintenance costs are not treated as capital
expenditures.
The Company's operations are subject to federal, state, and local laws and
regulations administered by the EPA, the U.S. Coast Guard, the Army Corps of
Engineers, the Texas Natural Resource Conservation Commission ("TNRCC"), the
Texas General Land Office, the Texas Department of Health and various local
regulatory agencies. The Company holds all required permits and registrations
necessary to comply substantially with all applicable environmental laws and
regulations, including permits and registrations for wastewater discharges,
solid and hazardous waste disposal and air emissions, and management believes
that the Company is in substantial compliance with all such laws and
regulations. While management does not expect that compliance with existing
environmental laws will have a material adverse effect on the Company's
financial condition or results of operations, there can be no assurance that
future legislation, regulation or judicial or administrative decisions will not
have such an effect.
The Company routinely incurs expenses associated with managing hazardous
substances and pollution in its ongoing operations. The amounts of these
operating expenses were approximately $3.1 million, $3.1 million and $2.8
million for the years ended May 31, 1994 and 1995 and the twelve-month period
ended May 31, 1996, respectively.
OTHER
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (the "Standard"). The Standard requires, among
other things, that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. During 1996, the Company evaluated the carrying value of its
investments in land in light of the possible sale of these assets in the
foreseeable
55
<PAGE>
future and considering the criteria in the Standard, determined that an
impairment write-down was necessary. Prior to 1996, the Company did not consider
the decline in the fair value of those assets, which was below the Company's
cost, to be a permanent decline. During the twelve months ended May 31, 1996 the
Company adopted the Standard and as a result recorded a provision of
$12,592,112, with an associated tax benefit of $4,660,000, to write down certain
properties to estimated fair market value.
RECENTLY ISSUED PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123, which is effective for fiscal years beginning
after December 31, 1995, encourages but does not require companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. The Company
has not yet determined if it will adopt this new fair value-based method of
accounting for its stock-based incentive plans or elect the disclosure
provisions of SFAS No. 123.
56
<PAGE>
BUSINESS
GENERAL
The Company is the largest producer of butadiene and butene-1, and the
second largest producer of MTBE, in North America, in terms of production
capacity. In addition, the Company is the sole producer of diisobutylene and
isobutylene concentrate in the United States and the largest domestic merchant
supplier of high purity isobutylene to the chemical market. The Company's
products include: (i) butadiene, primarily used to produce synthetic rubber;
(ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-
butylenes (butene-1 and butene-2), used in the manufacture of plastic resins,
fuel additives and synthetic alcohols; and (iv) specialty isobutylenes,
primarily used in the production of specialty rubbers, lubricant additives,
detergents and coatings. For the six months ended December 31, 1996, and the
twelve months ended May 31, 1996, butadiene represented 25% and 25% of the
Company's total revenues, respectively, MTBE represented 52% and 41%,
n-butylenes 9% and 11%, respectively, specialty isobutylenes 11% and 16%,
respectively and other revenues the remaining 3% and 7%, respectively. On a pro
forma basis after giving effect to the Transactions, the Company's revenues for
the six months ended December 31, 1996, the twelve months ended May 31, 1996 and
the one month ended June 30, 1996 would have been $246.7 million, $454.2 million
and $41.2 million, respectively, and EBITDA (as defined) for the six months
ended December 31, 1996, the twelve months ended May 31, 1996 and the one month
ended June 30, 1996 would have been $26.0 million, $74.2 million and $4.3
million, respectively.
The Company seeks to reduce its exposure to the cyclical nature of the
petrochemical industry through long-term, fixed profit contracts and to increase
its profitability by maximizing its production flexibility and increasing sales
of high margin n-butylenes and specialty isobutylenes. For the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, approximately 43% and
45% of the Company's total revenues were derived from products sold on a fixed
profit basis or whose selling prices were linked, directly or indirectly, to raw
material costs. The Company believes that the combination of its fixed profit
contracts, competitive cost position and specialty product sales provides
stability to its cash flows and helps to offset the effects of cyclical
downturns.
Butadiene is the most widely used feedstock for synthetic rubber products
and is also used in the manufacture of engineered plastics, nylon fibers and
other products. The Company sells butadiene to a stable customer base ,
including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American
Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of
butadiene in North America, the Company believes that many of its customers
place significant value on its ability to provide a reliable domestic supply of
butadiene and as a result have entered into long-term sales contracts with the
Company, which, in aggregate, accounted for 92% and 88% of its butadiene sales
in the twelve months ended May 31, 1996, and the one month ended June 30, 1996,
respectively.
The Company extracts butadiene from crude butadiene, which is generated
from the production of ethylene and is comprised of a number of valuable
components, including butadiene, isobutylene, n-butylenes, isobutane and
n-butane. Many U.S. ethylene producers rely on third parties such as the Company
to process their crude butadiene streams, as the crude butadiene volumes they
produce are not sufficient to justify the construction of on-site butadiene
recovery facilities. The Company estimates that producers accounting for 65% of
U.S. and Canadian ethylene production capacity do not internally process crude
butadiene by-product streams. The Company is the largest non-integrated crude
butadiene processor in North America and as a result of its strategic importance
to ethylene producers, the Company has been able to secure long-term supply
contracts covering the majority of its crude butadiene requirements. Such
contracts provide for a fixed profit based on the Company's selling prices for
butadiene, and account for the relatively stable profitability of the Company's
butadiene operations. For the twelve months ended May 31, 1996 and the one month
ended June 30, 1996, fixed profit supply contracts for crude butadiene accounted
for approximately 92% and 72%, respectively, of the Company's butadiene sales
volume.
MTBE is a blending stock which reduces carbon monoxide and volatile organic
compound emissions and enhances the octane content of gasoline, and has been one
of the fastest growing petrochemicals, in terms of volume, over the past fifteen
years. Today, MTBE is the preferred oxygenate for, and a major
57
<PAGE>
component of, RFG and is used in over 25% of the U.S. gasoline pool. MTBE is
produced by reacting methanol and isobutylene, and the Company's ability to
produce isobutylene by three alternative methods enables it to produce MTBE by
the most economical processes available to the Company. In addition, the Company
has the ability to add incremental capacity to capitalize on expected future
growth, at a significantly lower cost than the cost of adding new capacity. The
Company believes that this incremental capacity gives it a competitive advantage
over other producers who would have to incur greater cost to increase capacity.
The Company sells MTBE to oil refiners and gasoline producers, including Mobil
Oil Corporation, Lyondell Petrochemical Company and CITGO Petroleum Corporation
on both a contract and spot basis at prices linked to prevailing market prices.
The Company is the leading producer of high margin n-butylenes and
specialty isobutylenes in North America. In recent years, the Company has
increased its sales of these products by increasing its market share in
polyolefin applications and the development of new end-use applications. The
Company's principal customers for n-butylenes include Union Carbide Corporation,
The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and
Lyondell Petrochemical Company. The Company's principal customers for specialty
isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc
Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically,
the profitability of the Company's n-butylenes sales has been relatively stable
as the majority of the sales of these products are made under contracts which
link their selling prices to the prices of products (principally gasoline and
butanes) whose prices fluctuate closely with those of the raw materials used to
manufacture n-butylenes and specialty isobutylenes. In the six months ended
December 31, 1996, the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, sales of n-butylenes and specialty isobutylenes represented 20%,
27% and 21%, respectively, of the Company's revenues as compared to 19% in
fiscal 1993.
The Company's principal feedstocks are crude butadiene, isobutane and
methanol. One of the Company's intermediate feedstocks, isobutylene, is used in
the manufacture of MTBE and specialty isobutylenes. As part of its production
strategy, the Company uses its manufactured isobutylene first to maximize the
production of high margin specialty isobutylenes, second, to satisfy its
contractual MTBE requirements, and finally, to produce MTBE for sale in the spot
market. In the twelve months ended May 31, 1996 and the one month ended June 30,
1996, approximately 18% and 11%, respectively, of the Company's isobutylene was
used in the production of specialty isobutylenes with the remainder being used
for MTBE production. In addition, the Company maintains the production
flexibility to upgrade n-butylenes contained in crude butadiene streams to
either isobutylene or butene-1 using its patented SKIP process. This flexibility
allows the Company to meet its customers' needs through the most economical
process, to produce additional products and to capitalize on favorable market
conditions.
The Company's manufacturing facility, located approximately one mile from
the Houston Ship Channel, provides convenient access to other Gulf Coast
petrochemical producers and is connected to several of its customers and raw
materials suppliers through an extensive pipeline network. In addition, the
Company's facility is serviced by rail, tank truck and barge.
The Company was founded in 1968, at which time the Company was principally
engaged in the installation of crude butadiene processing facilities. In 1984,
the Company acquired from Tenneco, Inc. the assets (principally comprised of the
Houston facility) of Petro-TexChemical Corporation ("Petro-Tex"), the prior
owner of the Company's manufacturing facility.
COMPANY STRATEGY
The Company believes that it has become the industry leader in the
production of the majority of its products by capitalizing on its production
flexibility, its ability to add significant incremental capacity across its
product lines, the marketing experience of its management team, its competitive
cost position and its customer focus. The Company's strategy is to strengthen
its established presence in its selected markets by focusing on the following
factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS -- The markets in which the Company
competes are cyclical. The Company intends to mitigate the effects of this
cyclicality while benefiting from potential
58
<PAGE>
upturns in industry profitability by optimizing the proportion of its sales made
under contracts allowing for a fixed profit or at prices linked directly or
indirectly to raw material prices. In the twelve months ended May 31, 1996 and
the one month ended June 30, 1996, approximately 43% and 45%, respectively, of
the Company's total revenues were derived from products sold on a fixed profit
basis or whose selling prices were linked, directly or indirectly, to raw
material costs. In addition, the Company intends to increase its sales of less
cyclical n-butylene and specialty isobutylene products. In the six months ended
December 31, 1996, the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, sales of n-butylenes and specialty isobutylenes represented 20%,
27% and 21%, respectively, of the Company's revenues as compared to 19% in
fiscal 1993.
CAPITALIZE ON PRODUCTION FLEXIBILITY -- The Company has the ability to
produce a number of its intermediate and finished products (I.E. crude
butadiene, isobutylene and butene-1) by a variety of processes. The Company
intends to capitalize on this ability by shifting production to the most
economical process and production level based upon market conditions, thus
ensuring a reliable source of supply for its customers.
UTILIZE INCREMENTAL CAPACITY -- The Company can increase its capacity to
produce butadiene, isobutylene and MTBE at significantly lower cost than that of
new construction. While the Company currently has no plans to increase its
production capacity, it continuously evaluates these strategic options in light
of prevailing market conditions. In addition, the Company believes that its
ability to add low-cost incremental capacity acts as a deterrent to other
producers and new entrants considering capacity expansions.
The Company's ability to add incremental butadiene capacity and its
relationships with several North American ethylene producers are expected to
enable it to capture the benefit of increased U.S. crude butadiene supply. In
addition, announced butadiene capacity expansions by other U.S. producers are
minimal. The Company believes that growth in global demand for butadiene will be
consistent with gross domestic product growth based on increased tire production
and potential substitution of synthetic rubber for natural rubber.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS -- The Company's production
flexibility and its ability to add low-cost capacity are crucial to its
capitalizing on the attractive demand/supply outlook for a number of its
products.
o BUTADIENE. The U.S. supply of crude butadiene is increasing in line
with domestic ethylene production, although it is currently
insufficient to meet U.S. demand. Industry operating rates are
expected to remain at current high levels as the increase in domestic
crude butadiene production is expected to replace imports since U.S.
producers have limited alternative uses for their crude butadiene
by-product streams.
o MTBE. While the Company expects U.S. demand for MTBE to grow less
quickly than it has over the past fifteen years, it believes that
future growth in foreign demand may be considerable. In addition,
recently announced U.S. MTBE capacity additions are minimal.
o BUTENE-1. Demand for butene-1 is closely linked to polyethylene
production growth. The Company expects global production of
polyethylene to increase at higher than historical rates in the next
four years. In addition, the Company expects demand for butene-1 used
in other applications (I.E. use in butylene oxide, a gasoline
additive) to be strong.
SUSTAIN CUSTOMER FOCUS -- The Company believes that producing quality
products and providing quality service with dependable supply are key factors in
its ability to compete in the market place for its products. Management believes
that its focus on customer service has resulted in strong customer relationships
and a high degree of customer loyalty. This is evidenced by the fact that
approximately 60% of the Company's current customers have purchased products
from the Company for more than ten years.
59
<PAGE>
The following table summarizes the Company's products.
<TABLE>
<CAPTION>
REVENUES REVENUES
FOR TWELVE FOR ONE
MONTHS ENDED MONTH ENDED INTERMEDIATE
COMPANY PRODUCT MAY 31, 1996 JUNE 30, 1996 CHEMICAL PRODUCTS PRINCIPAL APPLICATIONS
- ------------------------------------ -------------- ---------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BUTADIENE $ 112.6 10.2 Styrene-Butadiene Rubber Tires, gaskets, pipes and hoses
Styrene-Butadiene Latex Paints, adhesives and paper coatings
Acrylonitrile Butadiene High-performance plastics
Styrene
Polybutadiene Rubber Tires
Hexamethylenediamine Nylon
MTBE $ 187.4 21.0 Reduces automotive emissions and
improves engine performance
N-BUTYLENES $ 48.2 3.2
Butene-1 High Density and Linear Trash bags, film wrap, pipe and
Low Density Polyethylene plastic containers
Butylene Oxide Detergent packages used in new
gasoline formulations to improve
engine performance
Butene-2 SEC-Butyl and other Used in the production of coatings,
Alcohols adhesives and plasticizers
SPECIALTY
ISOBUTYLENES $ 74.5 5.5
Isobutylene
Concentrate Butyl Rubber High-performance synthetic rubbers
used in tires
Polybutenes Lubricant additives
High Purity
Isobutylene Butyl Rubber High-performance synthetic rubbers
used in tires
Alkylphenols Resins and antioxidants
Agricultural Intermediates Herbicides and insecticides
Hydrocarbon Resins Sealants, paints, coatings and rubber
chemicals
Sulfurized Isobutylene Synthetic lubricant oils
Diisobutylene Alkylphenols Phenolic resins, tackifier and ink
resins, surfactants
Rubber Chemicals Specialty additives
Dispersants Lubricant oil additives
Polycarboxylate Polymers Water treatment, detergent and
mineral processing chemicals
</TABLE>
60
<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.
1995 NORTH AMERICAN BUTADIENE DEMAND
[Pie chart depicting data below]
SB Latex 11.8%
ABS 4.5%
Nylon Intermediates 12.2%
Polychloroprene 3.4%
Nitrile Rubber 2.9%
Polybutadiene 25.1%
SBR 30.5%
Other 9.6%
TOTAL DEMAND = 4.78 BILLION POUNDS
The most important butadiene derivative is SBR, which is primarily used in
the manufacture of tires, gaskets and hoses. Since 1990, the demand for SBR has
increased at a compound annual growth rate of approximately 3%. Although SBR
markets are mature, the Company expects that demand for higher performance tires
and truck tires may contribute to growth in demand for SBR at higher than
historical levels.
Polybutadiene rubber provides higher abrasion resistance than other rubbers
which makes it preferential for high performance tires, plastics applications
and other heavy duty uses. Other types of synthetic rubber produced from
butadiene include polychloroprene rubber, used in wire and cable applications,
and nitrile rubber, which, due to its high tensile strength and abrasion
resistance, is used in specialty applications, such as hoses, tubes and belts.
Butadiene derivatives which are not used to produce synthetic rubber
primarily consist of HMDA, SB latex and ABS. Historically, demand for these
products has generally reflected global gross domestic product growth. HMDA is
an intermediate in the production of nylon fiber. SB latex demand is driven by
its use in paints, adhesives and paper coatings. ABS resins are used in the
production of high-performance plastics with a wide range of applications in the
automotive, appliance and electronics industries.
61
<PAGE>
Butadiene producers are currently operating at historically high rates and
the Company believes that no new capacity is expected to come on-line in the
U.S. in the next five years. Management believes that the Company's existing
capacity and low-cost expansion alternatives act as an effective deterrent to
the construction of new facilities by others in the United States.
The major source of supply for butadiene is extraction from crude
butadiene, a by-product of ethylene production. In the U.S., volumes of crude
butadiene from ethylene facilities are inadequate to meet domestic demand. The
U.S. imports a large portion of its requirements of butadiene and crude
butadiene, especially from Western Europe, where most ethylene facilities use
feedstocks which result in the production of proportionately more crude
butadiene than in the U.S. Historically, the price of butadiene has been
determined by supply, which is influenced by the amount of ethylene produced and
the availability of crude butadiene, and butadiene demand, which is determined
by demand for end-use products, such as tires, engineered plastics and nylon
fibers.
U.S. BUTADIENE PRICES(1) AND OPERATING RATES, 1985-1995
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Butadiene
Contract Price, Operating
U.S. Gulf Coast Rate
--------------- ----------
1985 29.4 62.7%
1986 15.8 68.2%
1987 23.3 79.2%
1988 22.3 86.2%
1989 20.5 84.9%
1990 26.7 82.1%
1991 15.5 73.6%
1992 16.6 80.2%
1993 16.7 78.9%
1994 18.4 84.2%
1995 24.0 89.4%
- ------------
(1) Refers to butadiene spot market prices. Butadiene is typically sold at a
discount to such prices.
MTBE. MTBE has been one of the fastest growing petrochemicals, in terms of
volume, during the past fifteen years, with global production rising from
approximately 15,000 barrels per day in 1980 to approximately 382,000 barrels
per day in 1995. MTBE's dramatic growth has been a result of two significant
factors. First, MTBE has a high octane rating, which makes it a valuable
gasoline blendstock for adding octane to gasoline. Second, MTBE contains a high
percentage weight (approximately 18%) of oxygen. Its high oxygen level, which
results in improved combustion and reduces the level of carbon monoxide and
ozone-depleting emissions from automobile engines, contributes to MTBE's use as
a blending agent in oxygenated and reformulated gasolines. These properties and
its large scale global production capacity have made it the preferred oxygenate
and a major component of RFG in the U.S.
The use of lead additives in gasoline declined dramatically during the
1980s as a result of environmental legislation. Following such legislation,
octane needs increased, which increased world MTBE use considerably. The passage
of the CAAA in 1990 in the U.S. has caused another round of MTBE production
capacity additions and blending use increases during the past four years.
The two programs mandated by the CAAA which have the most significant
effect on the MTBE market are the oxygenated gasoline and the RFG programs. The
oxygenated gasoline program was initiated in 1992, with the goal of reducing
winter carbon monoxide emissions. With the implementation of the RFG program in
1995, the use of RFG was required in the nine major urban areas with the most
severe ozone pollution. High RFG prices and public health concerns, particularly
in cold weather climates, kept MTBE use below the levels that had been
anticipated in the industry at the time of the passage of the CAAA. Despite the
problems with the implementation of the CAAA, the Company expects continued
growth in the use of MTBE, although at slower rates than in the 1980s as the
regulations requiring "cleaner" gasoline
62
<PAGE>
have, in large measure, gone into effect in the U.S. The Company anticipates
that higher rates of growth in MTBE use will continue to prevail in certain
regions of the U.S. and internationally, due to consumer preference or where RFG
use is now optional but may be required by state or local governments. For
example, California has mandated greater usage of oxygenates in a gasoline
reformulated for use in that state, and the use of lead in gasoline continues to
decline in certain European, South American and Far Eastern countries. The
Company also expects new capacity expansions to be minimal over the next several
years due to current industry overcapacity as a result of large increases in
U.S. production capacity in the early 1990s in anticipation of the
implementation of the CAAA programs.
MTBE pricing is primarily determined by the price of RFG due to its value
as an octane enhancer and as an oxygenate. The price difference between regular
unleaded and higher octane, premium unleaded gasoline provides a valuation for
octane from which the value of MTBE as an octane enhancer can be derived. At
various times, depending on the supply and demand for MTBE, MTBE pricing enjoys
a premium over this octane value, reflecting its value as an oxygenate. As
indicated by the following table, MTBE pricing is relatively volatile. The MTBE
market has experienced alternating periods of tight supply and rising prices and
profit margins, followed by periods of capacity additions resulting in
oversupply and declining prices and margins. Historically, MTBE was sold in the
U.S. under sales contracts which allowed suppliers to recover raw material costs
and earn a fixed profit. Sales prices under these contracts were higher than the
then prevailing spot prices. Prices decreased substantially from 1985 to 1986
based on low gasoline prices. As gasoline prices recovered in 1988 and 1989,
MTBE prices followed. Prices increased substantially prior to and during the
Persian Gulf war beginning in late 1990, although prices fell back sharply from
1991 to 1993 as supply outpaced demand. MTBE prices increased in 1994 due to
high methanol prices (that were passed on to users) until methanol prices
decreased significantly in the first quarter of 1995. More recently, MTBE prices
have rebounded from their 1995 lows as a result of much higher demands from the
RFG program.
U.S. MTBE PRICES AND OPERATING RATES RELATIVE TO UNLEADED GASOLINE PRICES,
1985-1995
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MTBE
Unleaded Global
MTBE Spot Regular Operating
Price, USGC Gasoline Rate
----------- -------- ---------
1985 101 80.0 77.0%
1986 65 43.7 82.0%
1987 69 51.3 78.0%
1988 82 49.5 79.0%
1989 86 58.1 78.0%
1990 113 73.6 75.0%
1991 92 66.1 73.0%
1992 89 59.0 75.0%
1993 71 51.5 72.0%
1994 81 50.0 67.0%
1995 83 55.1 71.0%
There are a number of competing oxygenate products to MTBE, including
ethanol, ethyl TERTIARY-butyl ether (ETBE) and TERTIARY-amyl methyl ether
(TAME). However, management believes that MTBE will continue to be the U.S.
gasoline industry's oxygenate of choice due to a number of factors, including
price, available capacity, chemical properties and the EPA's CAAA rules
regarding minimum oxygen content in fuels.
BUTENE-1. Butene-1 is used as a comonomer in the production of high
density polyethylene ("HDPE") and linear low density polyethylene ("LLDPE").
Both HDPE and LLDPE are raw materials for the production of trash bags, film
wrap, pipe and plastic containers. Comonomers are added to polyethylene to
improve characteristics such as tear and crack resistance. The Company expects
global HDPE and LLDPE demand to increase at an annual compound growth rate of 6%
and 14%, between 1994 and 1999, respectively. In the U.S., butene-1 is facing
increased competition from other comonomers such as hexene-1
63
<PAGE>
which, although more expensive than butene-1, improves certain properties of
polyethylene resins. The Company believes that butene-1 demand for use in
polyethylene will continue to grow in line with demand for polyethylene.
Historically, pricing of butene-1 has been determined by demand based on its use
as a polyethylene comonomer, and its competitive position with other comonomers
such as hexene-1.
Butene-1 is also used to produce butylene oxide, a key component of
detergent additive packages used in many gasoline formulations. The Company
believes that this use represents one of the fastest growing end-uses for
butene-1.
BUTENE-2. Butene-2 is recovered as part of the crude butadiene stream that
remains after extraction of butadiene, isobutylene and butene-1. The Company
sells purified butene-2 primarily for use in the production of coatings and
plasticizers. Due to the high quality of the butene-2 produced by the Company,
it has historically received a higher than market price.
ISOBUTYLENE CONCENTRATE. Isobutylene concentrate is similar to high purity
isobutylene in composition, although its purity is 88% isobutylene compared to
99.9% in high purity isobutylene. The Company markets isobutylene concentrate
for use in the growing lubricant additives business as well as for use in the
production of butyl rubber. The Company is the sole U.S. producer of isobutylene
concentrate.
HIGH PURITY ISOBUTYLENE. High purity isobutylene is used in the production
of butyl rubber, which is used to produce tires and in specialty chemical
applications such as in the production of resins, antioxidants, paints and
coatings, synthetic lubricant oils and rubber chemicals. The Company is
currently the largest domestic merchant supplier of high purity isobutylene to
the chemical market and competes with ARCO Chemical Company and Exxon Chemical
Company.
DIISOBUTYLENE. Diisobutylene is used primarily as an intermediate in the
manufacturing of alkylphenols for the surfactant and phenolic resins markets.
Other uses include the production of tackifier and ink resins, dispersants for
lubricant oil additives, and rubber and processing chemicals. The Company is the
sole U.S. producer of diisobutylene.
PRODUCTION PROCESS
The Company's production operations are based on a number of key factors:
(i) UPGRADING BY-PRODUCT STREAMS: The Company has contracted to purchase
certain volumes of crude butadiene from its suppliers. This volume
determines the Company's ability to produce butadiene and n-butylenes
and also provides some isobutylene (typically 10% of total
isobutylene production) for the production of MTBE and specialty
isobutylenes.
(ii) MAXIMIZING USE OF ISOBUTYLENE: Under normal operating conditions,
the Company maximizes isobutylene production from its
dehydrogenation units. The isobutylene processed is first processed
into specialty isobutylenes to satisfy customer demand, secondly
used to produce MTBE to satisfy contractual demand and thirdly, used
to produce MTBE for sale in the spot market.
(iii) INCREMENTAL PRODUCTION CAPABILITY: The Company has the ability to
augment its isobutylene and butene-1 production by the processing of
butene-2 in its SKIP unit, depending on the relative profitability
from additional isobutylene production (for use in either MTBE or
specialty isobutylenes) or butene-1 sales. In addition, "on
purpose" crude butadiene can be produced from butene-2 using the
OXO-D process, as well as from n-butane using dehydrogenation.
BUTADIENE PRODUCTION PROCESS
The Company has the largest butadiene production and finishing facilities
in North America and has an annual production capacity of 840 million pounds of
butadiene, representing approximately 18% of U.S. and Canadian production
capacity. In the twelve months ended May 31, 1996 and the one month ended June
30, 1996, the Company sold and toll-processed 623 million pounds and 65 million
pounds, respectively, of butadiene.
64
<PAGE>
[CHART DESCRIBING BUTADIENE PRODUCTION PROCESS, CARRYING N-BUTYLENES AND
N-BUTANE THROUGH THE OXODEHYDROGENATION PROCESS AND THROUGH THE DEHYDROGENATION
PROCESS, RESPECTIVELY, TO PRODUCE CRUDE BUTADIENE WHICH IS THEN CARRIED THROUGH
THE EXTRACTION PROCESS TO PRODUCE BUTADIENE.]
The Company obtains crude butadiene from three different sources: (i)
purchasing crude butadiene from suppliers; (ii) Oxo-dehydrogenation of
n-butylenes using the Company's patented OXO-D process; and (iii)
dehydrogenation of n-butane.
The Company primarily produces butadiene from purchased crude butadiene,
which is generally the lowest cost method of production. Such crude butadiene is
a by-product of ethylene production.
"On-purpose" crude butadiene production involves the synthesis of crude
butadiene from n-butane and n-butylenes using the Company's OXO-D process and
the Houdry dehydrogenation process. The OXO-D process was developed by the
Company using a proprietary catalyst. The OXO-D unit has an annual capacity to
produce up to 400 million pounds of crude butadiene, which can be processed to
extract butadiene. The Company's dehydrogenation units can produce n-butylenes
(instead of isobutylenes under normal configuration) using the Houdry process,
by switching feedstock from isobutane to n-butane. Such n-butylenes can be used
to produce crude butadiene using the OXO-D process. As this method of production
is relatively expensive and reduces the volume of isobutylene available for MTBE
production, it is used only when butadiene pricing makes it economically
attractive.
The OXO-D unit and its dehydrogenation capabilities give the Company the
only on-purpose butadiene production capability in the U.S. and reinforce the
Company's image with its customers as a reliable source of butadiene under a
wide variety of market conditions.
The Company's manufacturing flexibility is advantageous for two reasons.
First, the Company is not dependent on any particular feedstock to produce
butadiene and it can therefore provide a reliable source of supply under a
variety of market conditions for its customers. Secondly, it permits the Company
to increase butadiene production in favorable market conditions, subject to the
capacity limitations of the Company's finishing facilities.
The Company believes that it is currently the only butadiene producer in
North America with the ability to add significant incremental capacity with
minimal capital expenditures. The Company believes that this acts as a deterrent
to new entrants and other producers considering capacity expansions and will
enable the Company to process increased volumes of crude butadiene from new
ethylene facilities which are currently being built in North America.
The Company also toll processes crude butadiene under contract on behalf of
third parties for a fee which allows the Company to recover its energy
production costs plus a fixed dollar amount. Typically, the Company delivers
finished butadiene to the customer and purchases the other butylenes contained
in the stream, which can be upgraded to higher value uses, such as specialty
isobutylenes, butadiene and n-butylenes.
65
<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 14,335 barrels per day and 21,115
barrels per day, respectively, in the twelve months ended May 31, 1996 and the
one month ended June 30, 1996.
[CHART DESCRIBING MTBE PRODUCTION PROCESS, SHOWING RAFFINATE-1, ISOBUTANE AND
N-BUTYLENES RUNNING THROUGH THE EXTRACTION, DEHYDROGENATION AND SKIP PROCESS,
RESPECTIVELY, LEADING TO ISOBUTYLENE LEADING TO MTBE, WHILE METHANOL LEADS
SEPARATELY TO MTBE.]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
MTBE is produced by reacting isobutylene and methanol. The Company produces
isobutylene, the principal raw material for MTBE, using any one of three
processes: (i) extraction from raffinate-1, which is produced after butadiene
has been extracted from crude butadiene; (ii) dehydrogenation of purchased
isobutane; and (iii) production from n-butylenes (predominantly butene-2) using
the Company's patented SKIP process. The other primary raw material, methanol,
is purchased from third parties in the spot market and under contract and is
transported to the Company's facility by barge.
Isobutylene is removed from the raffinate-1 stream by processing
raffinate-1 through the Company's MTBE unit. The MTBE reaction is highly
selective and efficiently removes isobutylene from the stream. The stream
remaining is called raffinate-2.
The Company has three dehydrogenation units, two of which have been
completely refurbished and are fully operational. Using these two units, the
Company has the ability to produce a total of 18,000 barrels per day of
isobutylene. The Company estimates that the third dehydrogenation unit, with an
additional capacity of 8,000 barrels per day, could be refurbished at a cost of
approximately $100 million, substantially less than the cost of a new
dehydrogenation unit. This refurbishment would increase the Company's capacity
to produce isobutylene for use either in MTBE or specialty isobutylenes by
approximately one third. The Company currently does not have any plans to
undertake this refurbishment, although this could change depending on market
conditions. The Company has fully paid-up rights to the technology used in its
dehydrogenation units and no royalty or other licensing payments are required.
Isobutane is purchased under long-term contract and supplemented with spot
purchases.
66
<PAGE>
The Company currently has sufficient additional MTBE capacity to enable it
to take advantage of future expected growth. The Company believes that this
additional capacity gives it a competitive advantage over other producers which
would have to incur greater cost to increase capacity.
The Company's SKIP unit upgrades butene-2 to either butene-1 or isobutylene
depending on requirements. Isobutylene production is normally operated so that a
portion of the isobutylene produced by dehydrogenation is used in the production
of isobutylene concentrate and diisobutylene and the remainder is used to
produce MTBE. In addition, a small amount of MTBE production is used in the
production of high purity isobutylene. The configuration of the plant provides
the flexibility to vary the relative quantities of MTBE and isobutylene products
produced.
N-BUTYLENE PRODUCTION PROCESS
The Company has the largest butene-1 processing capacity in North America
and has an annual production capacity of 275 million pounds of butene-1,
representing approximately 40% of North American production capacity. In the
twelve months ended May 31, 1996 and the one month ended June 30, 1996, the
Company sold 229 million pounds and 17 million pounds, respectively, of
butene-1, and in the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, the Company sold 55 million pounds and .2 million pounds,
respectively, of butene-2.
[CHART DESCRIBING N-BUTYLENE PRODUCTION PROCESS, SHOWING RAFFINATE-1 LEADING TO
THE PRODUCTION OF RAFFINATE-2, FOLLOWED BY FRACTIONATION PROCESSES PRODUCING
BUTANES, BUTENE-2 AND BUTENE-1 AS WELL AS N-BUTYLENES RUNNING THROUGH THE SKIP
PROCESS DIRECTLY TO PRODUCE BUTENE-1. SEPARATELY N-BUTYLENES EMPLOY THE SKIP
PROCESS TO PRODUCE ISOBUTYLENE.]
- ------------
(1) Raffinate-1 is produced after butadiene has been extracted from purchased
crude butadiene.
The Company has the ability to produce butene-1 using two different
processes: (i) fractionation from raffinate-2, which is produced after
isobutylene has been extracted from raffinate-1; and (ii) production from
n-butylenes (predominantly butene-2) using the Company's patented SKIP process.
After the removal of butene-1, the remaining n-butylenes stream (containing
principally butene-2 and n-butane) is either: (i) further purified to butene-2
which the Company sells intermittently based on customer demand; (ii) used as a
feedstock in the Company's SKIP process to produce butene-1 or isobutylene; or
(iii) used as a feedstock in the OXO-D process to produce crude butadiene. The
remaining product stream, containing principally n-butane, is sold to third
parties as a chemical by-product.
67
<PAGE>
SPECIALTY ISOBUTYLENE PRODUCTION PROCESSES
[CHART DESCRIBING SPECIAL ISOBUTYLENE PRODUCTION PROCESSES, SHOWING METHANOL
BEING PROCESSED INTO MTBE WHICH IS BACK-CRACKED TO PRODUCE HIGH-PURITY
ISOBUTYLENE. SEPARATELY, ISOBUTYLENE IS FRACTIONATIONED AND DIMERIZATIONED TO
PRODUCE ISOBUTYLENE CONCENTRATE AND DIISOBUTYLENE, RESPECTIVELY.]
The Company takes advantage of its isobutylene production and extraction
capabilities to produce high purity isobutylene, isobutylene concentrate and
diisobutylene. The Company is currently the only U.S. producer of isobutylene
concentrate and diisobutylene and it is the largest of three U.S. producers of
high purity isobutylene.
High purity isobutylene is manufactured by "back-cracking" a small
portion of the MTBE product stream into its components, isobutylene and
methanol. The isobutylene produced by this method is of extremely high purity
and the methanol is recycled and used in subsequent MTBE production. The Company
has an annual capacity to convert MTBE into 100 million pounds of high purity
isobutylene, and in the twelve months ended May 31, 1996, it sold 74 million
pounds.
The Company uses its patented dimerization process to produce diisobutylene
and has an annual production capacity of 50 million pounds. In the twelve months
ended May 31, 1996 and the one month ended June 30, 1996, the Company sold 38
million pounds and 3.0 million pounds, respectively, of diisobutylene
principally on a contractual basis.
Some of the isobutylene produced by the Company is sold as concentrate. The
Company has an annual production capacity of 380 million pounds of isobutylene
concentrate and, in the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, it sold 256 million pounds and 15 million pounds, respectively,
of isobutylene concentrate. The Company has been successful in working with
customers to demonstrate the viability of concentrate as an alternative to high
purity isobutylene or lower purity raffinate-1 feedstock. The Company sells
isobutylene concentrate under contracts at prices linked to the cost of
isobutane feedstock and including energy costs and other components of
isobutylene concentrate, plus a fixed profit, as well as on the spot market.
While produced in smaller volumes than the Company's more commodity-type
products, specialty isobutylenes have historically had high margins due to the
niche sales markets for their end-use products.
OTHER OPERATIONS
The Company operates a large scale cogeneration power plant that supplies
electricity and process steam to the facility's chemical processing operations.
Excess capacity of this power plant, as well as steam and boiler feed water are
currently sold to neighboring facilities under contracts at a price equal to the
cost of fuel plus a fixed profit. In addition, the Company generates revenues
from its terminals in Baytown, Texas and Lake Charles, Louisiana and from
chemical by-product sales to third parties.
CONTRACTS
The Company enters into three general types of contracts in connection with
its production processes: feedstock supply contracts, product sales contracts
and, to a lesser extent, toll manufacturing agreements.
68
<PAGE>
The majority of these contracts have terms of two to three years and provide for
successive one-year renewals unless either party objects to such renewal in a
timely manner. There can be no assurance that these agreements will remain in
effect beyond their current terms or, if extended, that the same provisions
would continue to apply.
FEEDSTOCK SUPPLY. The Company typically purchases its principal feedstock,
crude butadiene, under contracts which require suppliers to deliver a percentage
(varying from 50% to 100%) of their total crude butadiene production. The price
of crude butadiene to the Company is typically based on the price of its
principal components: butadiene, n-butylenes, isobutylene and n-butane. The
price for the butadiene component of crude butadiene is generally set at the
Company's average selling price for butadiene less a fixed dollar amount, which
includes a variable component for energy costs. The prices for the n-butylene
and isobutylene components of crude butadiene are linked to spot gasoline prices
and the n-butane and isobutane components are linked to spot n-butane prices.
The Company typically purchases methanol under contracts which require the
supplier to deliver minimum volumes of methanol. Methanol is generally purchased
at a discount to the prevailing market price, subject to specified minimum and
maximum price ranges.
The majority of the Company's isobutane is purchased under contract from
EPC Venture, Inc. which provides 450,000 barrels per month. This supplier also
provides storage and pipeline transportation. Isobutane is purchased at the
prevailing average market price for each month.
PRODUCT SALES. The Company's sales contracts typically require customers
to purchase minimum volumes expressed either in absolute terms or as a
percentage of the customer's product needs. Pricing for butadiene is generally
set at a small discount to the recognized U.S. Gulf Coast contract market price,
while MTBE pricing is typically based on the average U.S. Gulf Coast spot market
price. Butene-1 is sold under contracts at prices based on formulae which links
the butene-1 selling price to the price of gasoline. Butene-1 is also sold on
the spot market at prevailing prices. Butene-2 is sold at negotiated market
prices. Pricing for isobutylene concentrate is generally linked to the cost of
its principal raw material, isobutane, and fuel plus a transportation fee and
other components, which are linked to relevant average spot market prices.
Pricing for high purity isobutylene and diisobutylene is typically based on
market prices.
TOLL MANUFACTURING AGREEMENTS. The Company toll processes crude butadiene
under contracts on behalf of third parties, including The Dow Chemical Company,
The Goodyear Tire & Rubber Company and Phillips 66 Company. Typically, the
Company returns butadiene to the customer and purchases the other butylenes and
butanes contained in the crude butadiene stream. The toll process fees allow the
Company to recover its energy production costs plus a fixed dollar amount. In
addition, the Company returns purified butene-1 to certain of its crude
butadiene suppliers under similar arrangements.
OTHER. The Company also provides storage and terminalling services under
contract to certain of its customers at its Baytown and Lake Charles facilities.
COMPETITION
The petrochemical businesses in which the Company operates are highly
competitive. Many of the Company's competitors, particularly in the
petrochemical industry, are larger and have greater financial resources than the
Company. Among the Company's competitors are some of the world's largest
chemical companies and major integrated petroleum companies that have their own
raw material resources. In addition, a significant portion of the Company's
business is based upon widely available technology. Accordingly, barriers to
entry, apart from capital availability, may be low in the commodity product
section of the Company's business, and the entrance of new competitors into the
industry may reduce the Company's ability to capture improving profit margins in
circumstances where overcapacity in the industry is diminishing. Further,
petroleum-rich countries have recently become more significant participants in
the petrochemical industry and may expand such role significantly in the future.
Any of these developments would have a negative impact on the Company's
financial position, results of operations and cash flows.
69
<PAGE>
Given the nature of the markets in which it competes, the Company believes
it has two primary competitive advantages over its competitors. First, the
Company's position as the most significant merchant crude butadiene processor in
the U.S. has allowed it to secure supply arrangements for crude butadiene, which
provide for a fixed profit based on the Company's selling prices for the
finished product. The Company believes that this partially limits its exposure
to fluctuations in raw materials prices. Secondly, the Company's flexible
production processes enable it to take advantage of increases in demand for its
products at a lower cost than its competitors, thereby enabling the Company to
produce additional products on an economically opportunistic basis, and to meet
its customers' needs through the most economic processes.
The Company's primary competitors in the sales of butadiene in the U.S. are
Exxon Chemical Company, Shell Chemical Company, Lyondell Petrochemical Company
and the Huntsman Group. With respect to MTBE, the Company competes primarily
with ARCO Chemical Company, Exxon Chemical Company, Valero Energy Corporation,
Texaco Inc. and Enron Corp. For sales of butene-1 the Company competes primarily
with Exxon Chemical Company, Chevron Chemical Company, Amoco Chemical Company,
Shell Chemical Company and Huls AG. For high purity isobutylene, the Company
competes in the U.S. with ARCO Chemical Company and Exxon Chemical Company.
Although the Company is the only North American producer of isobutylene
concentrate and diisobutylene, diisobutylene is also imported from Japan and
Europe.
SALES AND MARKETING
The majority of the Company's sales are made pursuant to long-term sales
contracts with initial terms ranging from one to five years. The Company enjoys
long-standing relationships with its customers and approximately 85% of its
total sales over each of the last three years were made to the same customers.
The Company believes that its ability to maintain long-term customer contracts
has been facilitated by the extensive market knowledge and experience in the
petrochemical industry of its sales executives as well as the Company's emphasis
on customer relationships. The Company's strategy is to continue to increase
sales to existing customers and to attract new customers by providing
reliability of supply, competitive prices and superior customer service.
CUSTOMERS
The Company's products are generally sold to major refining, chemical and
end-user corporations primarily located in the United States and Canada. The
Company believes that its butadiene customers place significant value on its
ability to provide a reliable domestic supply of butadiene due to its raw
material purchase contracts and its ability to produce butadiene through two
alternative methods. As a result, some of the largest and most established users
of butadiene in the industry have contracted to purchase butadiene from the
Company. Typically, the Company's butadiene sales contracts require these
customers to purchase a percentage of their total requirements from the Company
subject to a minimum volume. Pricing is based on prevailing market prices.
The Company's principal butadiene customers include American Synthetic
Rubber Inc., The Dow Chemical Company, The Goodyear Tire & Rubber Company,
Enichem Elastomers Inc., E.I. du Pont de Nemours and Company and
Bridgestone/Firestone, Inc. In the twelve months ended May 31, 1996 and the one
month ended June 30, 1996, The Goodyear Tire & Rubber Company accounted for
approximately 16.1% and 14.1%, respectively, of the Company's total revenues.
The Company's principal MTBE customers include Lyondell Petrochemical
Company, CITGO Petroleum Corporation and Mobil Oil Corporation.
The Company's principal butene-1 customers include Union Carbide
Corporation, Shell Chemical Company, Lyondell Petrochemical Company, NOVA
Chemicals Ltd. and The Dow Chemical Company. The Company's principal butene-2
customers include Shell Chemical Company.
The Company's principal specialty isobutylene customers include Bayer Inc.,
The Lubrizol Corporation, Schenectady International, Inc., Rhone-Poulenc Inc.
and Mobil Chemical Company Inc.
70
<PAGE>
PATENTS AND LICENSES
The Company presently owns, controls or holds rights to approximately 21
patents. The Company believes that its patents, particularly its patents
relating to the SKIP, OXO-D and diisobutylene production processes, are
important to its business and provide the Company with certain competitive
advantages. Accordingly, the Company actively protects existing production
process technologies.
The Company has available for license certain of its patented technologies,
including the SKIP and OXO-D processes, to third parties. In addition, the
Company licenses certain technologies, including the process by which it
extracts butadiene from crude butadiene, from third parties.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state, and local laws and
regulations administered by the EPA, the U.S. Coast Guard, the Army Corps of
Engineers, the TNRCC, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliance with all such
laws and regulations. While management does not expect that compliance with
existing environmental laws will have a material adverse effect on the Company's
financial condition or results of operations, there can be no assurance that
future legislation, regulation or judicial or administrative decisions will not
have such an effect.
Under federal and state environmental laws, companies may be liable for
remediation of contamination at on-site and off-site waste management and
disposal areas. Management believes that the Company is not likely to be
required to incur remediation costs related to its management, transportation
and disposal of solid and hazardous materials and wastes, or to its pipeline
operations. If the Company were to be required to incur such costs, however,
management believes that such costs would not have a material adverse effect on
the Company's results of operations. In addition, under the terms of the 1984
purchase agreement, the prior owner of the Houston facility, Petro-Tex, has
indemnified the Company for liability arising from off-site disposal of any
materials prior to June 1984. Notwithstanding the terms of the indemnity, in
July 1994 Petro-Tex filed a claim for indemnity against the Company for any
costs that may be attributable to Petro-Tex for the cleanup of the Malone
Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other
companies along the Gulf Coast allegedly sent wastes to the Malone site for
disposal in the 1970s and possibly the early 1980s. Malone has been subject to
several state enforcement actions regarding its waste disposal practices. It is
not known whether the site will require remediation or at what cost. The Company
believes that it has meritorious defenses to Petro-Tex's claim and intends to
contest the claim vigorously. Although no on-site contamination has been
identified as requiring remediation, management believes that certain areas of
the Houston facility were historically used for waste disposal. Based on
limited, currently available information about these waste disposal areas and
their contents, the Company believes that, if such remediation becomes
necessary, any remediation costs would not have a material adverse effect on the
Company's financial condition or results of operations. The Petro-Tex indemnity
does not extend to these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive
regulation under the Resource Conservation and Recovery Act, the Federal Clean
Water Act, the CAAA and similar requirements of state law. In particular, under
the CAAA, the EPA and TNRCC have promulgated, or are required to promulgate,
numerous regulations which affect or will affect the operations of the Company.
The most significant of these are the so-called Hazardous Organics National
Emission Standard for Hazardous Air Pollutants or HON Rule, the requirements of
Title V of the CAAA and rules relating to the controls of oxides of nitrogen,
which are known as the Nitrogen Oxides Reasonably Available Control Technology
rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed
hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethyl formamide and
MTBE, which are manufactured, used and/or
71
<PAGE>
processed by the Company, have been identified as HAPs for purposes of
regulation under the CAAA. Areas of concern in the Company's operations for HAPs
emissions include equipment leaks, process vents, product storage, transfer
operations and emissions from wastewater streams. The Company has examined each
of these areas and believes that it will be able to achieve substantial
compliance with the HON Rule after incorporating additional monitoring and
record-keeping systems into its operations at a cost that management believes
will not be material.
The NOx RACT Rules require compliance by May 1999. The Company has examined
the rules and believes that the main expenditure required to achieve compliance
will involve purchase and installation of monitoring equipment for NOx
emissions, which can be either continuous emission monitors, predictive emission
monitors or other approved monitoring methods. Based on its preliminary study,
management estimates that the cost to comply with the NOx RACT Rules will be $2
million over the next three years.
The Company's Houston facility is located in Harris County, Texas, which
has been designated as a non-attainment area for ozone under the CAAA.
Accordingly, the State of Texas has developed a State Implementation Plan
("SIP") which requires reductions in emissions of ozone precursors, including
volatile organic compounds and carbon monoxide in Harris County. 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.
Title III of the CAAA requires prevention of accidental releases of certain
listed extremely hazardous substances. The EPA's rules implementing portions of
Title III, which were signed by the EPA Administrator on May 24, 1996, will
require the Company to conduct a hazards assessment and develop a risk
management plan by 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 costs of this program are included in the Company's
operating budget at approximately $500,000 per year for the next five years.
The wastewater treatment system for the Houston facility is 75% owned by
the Company and 25% owned by Bayer Corporation ("Bayer"), the owner of an
adjacent facility. Bayer operates the treatment system, but the federal and
state discharge permits are held jointly by the Company and Bayer. The Company
believes that the system has sufficient capacity for the Company's projected
needs. The Company has budgeted to expend approximately $750,000 by 1998 to
upgrade the sludge-handling equipment of the wastewater treatment system. Under
the joint wastewater treatment agreement, Bayer will pay the remaining cost of
the upgrade, which is expected to be approximately $250,000. The Company has
budgeted approximately $120,000 for fiscal 1997 for maintenance work on the
wastewater treatment facility.
72
<PAGE>
In February 1996, the EPA issued an order to the Company and Bayer
requiring the companies to resolve the exceedances of their discharge permit
limits for copper and total suspended solids that had occurred since 1992. The
Company believes that these issues have been resolved by raising the limits in
the new discharge permit and by other corrective actions. No penalties were
assessed.
To meet rules expected to be promulgated concerning stormwater runoff, the
Company has budgeted to spend approximately $500,000 by 2000 for additional
stormwater control and collection. The Company has also budgeted $600,000
through fiscal 1999 to purchase noise barriers for certain equipment.
The terminals in Baytown and Lake Charles are in substantial compliance
with applicable environmental laws and regulations, and management believes that
no significant expenditures will be required at these facilities to allow them
to continue to comply with such laws and regulations.
MTBE and butadiene are the subject of continuing health effects studies.
Some recent studies have suggested that MTBE may cause cancer or other adverse
health effects, and the EPA considers MTBE to be a possible human carcinogen.
However, in February 1996, a study by the Health Effects Institute, commissioned
by the EPA and the Centers for Disease Control and Prevention, reported that
adding oxygenates, including MTBE, to gasoline reduces emissions of carbon
monoxide and benzene and is unlikely to increase substantially the health risks
associated with fuel used in motor vehicles. Nevertheless, EPA, California and
other states reportedly are expected to adopt limits for MTBE levels in drinking
water. 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 has budgeted
$600,000 for fiscal 1997 to control butadiene emissions in its laboratory. The
Company does not expect that the current health concerns regarding MTBE or
butadiene will have a material adverse effect on the Company's financial
condition or results of operations, although no assurances can be given that
future studies will not result in more stringent regulation of MTBE and
butadiene.
EMPLOYEES
As of June 30, 1996, the Company had approximately 350 full-time employees,
all of whom were salaried employees. In addition, the Company contracts with a
third party to provide approximately 155 contract employees to perform routine
maintenance on and around its Houston facility. The Company believes its
relationship with its employees is satisfactory.
SAFETY RECORD
The Company maintains one of the best workman's compensation records in
Texas, equivalent to most clerical operations. Over the last six years, the
Company has experienced only three lost time injuries. The Company believes this
record is accomplished through extensive classroom and on-the-job training as
well as the efforts of its highly trained, 67-member volunteer emergency
response team.
PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile
from the Houston Ship Channel and near one of the chemical industry's largest
domestic processing facilities. Approximately 230 acres is owned by the Company,
and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the
Port of Houston two ship docks which accommodate barge and ocean-going vessels,
and has the facilities to be served by rail and by truck. In addition, the
facility is connected by pipeline to customers and suppliers of raw materials,
directly and through other major pipelines in the immediate area as well as in
Texas City, and with salt dome storage facilities of other companies located at
both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a
laboratory for sampling and testing. The Company owns and operates a storage and
terminal facility at Baytown, Texas, leases a storage and terminal facility in
Lake Charles, Louisiana and leases tank storage capacity in Bayonne, New Jersey.
In
73
<PAGE>
addition, the Company owns its headquarters building and an adjacent building on
the Katy Freeway in Houston, Texas. The Company believes that is has adequate
facilities for the conduct of its current and planned operations.
LEGAL PROCEEDINGS
In addition to the matters disclosed under "-- Environmental Regulation,"
the Company is a party to various claims and litigation arising in the ordinary
course of its business. Management recognizes the uncertainties of litigation
and the possibility that one or more adverse rulings could materially impact
operating results. However, although no assurances can be given, management
believes that other than as disclosed, based on the nature of and its
understanding of the facts and circumstances which give rise to such claims and
litigation, and after considering appropriate reserves that have been
established, that the ultimate resolution of such issues, individually and in
the aggregate, will not have a material adverse effect on the Company's
financial position or results of operation.
74
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company, TPC Holding and Holdings. Each director
is elected for a one year term or until such person's successor is duly elected
and qualified.
<TABLE>
<CAPTION>
YEARS OF
SERVICE WITH THE
COMPANY
NAME AGE POSITION OR ITS PREDECESSORS
- ------------------------------------- --- ------------------------------------------ -------------------
<S> <C> <C> <C>
Gordon A. Cain....................... 84 Director 13
James J. Collis...................... 34 Director --
William R. Huff...................... 47 Director --
William A. McMinn.................... 66 Director and Chairman 9
Susan O. Rheney...................... 37 Director --
John T. Shelton...................... 66 Director 13
B. W. Waycaster...................... 58 Director, President and Chief 4
Executive Officer
Claude E. Manning.................... 50 Chief Financial Officer 24
Ronald W. Woliver.................... 56 Vice President, Marketing 28
Stephen R. Wright.................... 49 Vice President and General Counsel --
Bill R. McNeese...................... 62 Vice President, Operations 9
</TABLE>
Mr. Cain is President of Beta Consulting, Inc. ("Beta Consulting"), a
consulting and investment company. From August 1982 until his retirement in
December 31, 1992, he was Chairman of the Board of Sterling. Mr. Cain 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. He has been on the Board of Directors of
Atlantic Coast Airlines, Inc. since November 1991. Mr. Cain also serves as a
director of Agennix, Incorporated, a biotechnology company, and Martinaire,
Inc., an air freight company. Prior to organizing 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. Collis has been a partner with CEA Capital Partners since March 1,
1997. From April 1996 until March of 1997, he served as a Vice President of
Chase Capital Partners. From May 1995 to April 1996, he was a Vice President,
and from mid 1991 to May 1995 he was an associate, in the Merchant Banking Group
of The Chase Manhattan Bank. Chase Capital Partners and The Chase Manhattan Bank
are affiliates of Chase Securities Inc., the Initial Purchaser of the Notes in
this offering. Mr. Collis serves on the Board of Directors as the designee of
Chase Venture Capital Associates, L.P. ("Chase Venture"), an affiliate of
Chase Securities Inc. See "Related Transactions."
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 is
also a director of Arcadian Corporation, a fertilizer manufacturer. Mr. Huff
serves on the Board of Directors as the designee of the Huff Fund. See "Related
Transactions."
Mr. McMinn was Corporate Vice President and Manager of the Industrial
Chemical Group of FMC Corporation, a manufacturer of machinery and chemical
products, from 1973 through 1985. He became President and Chief Executive
Officer of Cain Chemical Inc., a producer of petrochemicals, in 1987 and served
in that capacity until its acquisition by Occidental Petroleum in May 1988. He
became Chairman of the Board of Directors of Arcadian Corporation in August 1990
and served in that capacity until it was sold
75
<PAGE>
in April 1997. He has been a director of PM Holdings Corporation and its
principal operating subsidiary, Purina Mills, Inc., a leading manufacturer of
animal nutrition products, since October 1993.
Ms. Rheney has been a principal of Sterling since February 1992. She worked
as an independent financial consultant from December 1990 to January 1992. Prior
to that time, from June 1987 to November 1990, she was an associate at Sterling.
Ms. Rheney is also a director of Mail-Well, Inc.
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.
THE BOARD AND CERTAIN BOARD COMMITTEES
Prior to the consummation of the Transactions, the Board of Directors held
five regularly scheduled meetings during the fiscal year ended June 30, 1996.
Each director attended all such meetings.
Following the consummation of the Acquisition, the Company's Board
established the following committees:
o The Executive Committee, which possesses all the powers and authority
of the Company's Board with respect to the management and direction of
the business and affairs of the Company, except as limited by law. The
Executive Committee is composed of Messrs. McMinn (Chair), Shelton and
Waycaster.
o The Audit Committee, which recommends independent public accountants
to the Company's Board, reviews the annual audit reports of the
Company and reviews the fees paid to the Company's independent public
accountants. The Audit Committee reports its findings and
recommendations to the Board for ratification. The Audit Committee is
composed of Mr. Collis (Chair) and Ms. Rheney.
o The Compensation Committee, which is charged with the responsibility
for supervising the Company's executive compensation policies,
administering the employee incentive plans, reviewing officers'
salaries, approving significant changes in executive employee benefits
and recommending to the Board such other forms of remuneration as it
deems appropriate. The Compensation Committee is composed of Messrs.
Cain (Chair), McMinn and Shelton.
76
<PAGE>
o The Finance Committee, which researches, evaluates, and recommends
corporate growth opportunities and review and makes recommendations
regarding debt and equity financing. The Finance Committee is composed
of Ms. Rheney (Chair) and Messrs. Huff, Cain and Waycaster.
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.
EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the five most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of May 31, 1996 (the "Named Executive Officers")
for services rendered in all capacities to the Company for the twelve months
ended May 31, 1996 and the fiscal years ended May 31, 1995 and 1994.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2)
- ------------------------------------- -------- ---------- ------------
David C. Swalm, Chief Corporate
Officer and Chairman............... 1996 $ 480,000 $ 5,210,440
1995 480,000 5,652,400
1994 480,000 6,355,700
B. W. Waycaster, President and Chief
Executive Officer.................. 1996 $ 300,000 $ 2,899,100
1995 300,000 565,300
1994 300,000 636,500
John T. Shelton, Executive Vice
President.......................... 1996 $ 180,000 $ 1,012,300
1995 180,000 1,084,900
1994 180,000 1,216,700
Ronald W. Woliver, Vice President,
Marketing.......................... 1996 $ 180,000 $ 1,012,300
1995 180,000 1,084,900
1994 180,000 1,216,700
Claude E. Manning, Chief Financial
Officer............................ 1996 $ 132,000 $ 72,966
1995 121,000 100,811
1994 116,000 103,683
Bill R. McNeese, Vice President,
Operations......................... 1996 $ 132,000 $ 72,293
1995 121,000 100,133
1994 116,000 103,346
- ------------
(1) None of the executive officers has received perquisites, the value of which
exceeded the lesser of $50,000 or 10% of the salary and bonus of such
executive officer except Mr. Swalm, who received approximately $54,000 in
1995.
(2) Includes 401(k) contributions in 1996, 1995 and 1994 of $21,035, $24,618 and
$20,309, respectively, for Mr. Manning and $21,149, $24,440 and $19,972,
respectively, for Mr. McNeese.
EMPLOYMENT AND OTHER AGREEMENTS
In 1992, Mr. Waycaster entered into an employment agreement with TOC and
TPC which provides for an annual base salary of $300,000 and a minimum annual
cash bonus of $300,000. The agreement expires on April 1, 1997. In the event of
Mr. Waycaster's retirement, death or disability, salary payments will continue
for the term of the agreement. In the event of the involuntary termination of
his employment, Mr. Waycaster would receive amounts prescribed in the agreement.
In addition, Mr. Waycaster has entered
77
<PAGE>
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
Transactions.
In 1994, TPC entered into agreements with each of Messrs. Swalm, Shelton
and Woliver which provide a benefit in the event of death while an employee of
TPC. Provided the individual is survived by his wife, the death benefit
continues monthly for the shorter of the life of the wife (or in the case of Mr.
Woliver, so long as he also has minor children) or 60 months, and is $25,000 per
month with respect to Mr. Swalm, $10,000 per month with respect to Mr. Shelton
and $10,000 per month with respect to Mr. Woliver. Each agreement terminates on
termination of employment for any reason other than death or disability of the
individual.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Transactions, Finance Co.established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full-time
employees, including executive officers, of the Company who satisfy the
requirements described below. The ESOP, which invests primarily in shares of
Common Stock, borrowed $10.0 million from Finance Co. pursuant to a loan (the
"Company ESOP Loan") to purchase 100,000 shares of Common Stock at the
Closing. Finance Co. funded the Company ESOP Loan from the ESOP Term Loan. The
Company ESOP Loan matures on June 30, 2001, and bears interest at interest rates
based on the Alternative Base Rate (as defined) or the LIBOR Rate (as defined).
The outstanding principal of the Company ESOP Loan is payable in twenty equal
quarterly installments of $500,000 during the period beginning September 30,
1996 and ending June 30, 2001. The shares of Common Stock purchased by the ESOP
were pledged (the "ESOP Pledge") as security for the Company ESOP Loan, and
such shares will be released and allocated to ESOP participants' accounts as the
Company ESOP Loan is discharged. The Company may make contributions to the ESOP
as determined by the Board of Directors in an amount anticipated to be equal to
a certain percentage of the total annual earnings of all ESOP participants (the
"Discretionary Contributions"). The Company intends to make Discretionary
Contributions in amounts sufficient to enable the ESOP to discharge its
indebtedness under the Company ESOP Loan; however, the Company has no legal
obligation to make Discretionary Contributions. Shares released under the ESOP
Pledge are allocated to each participant based on such participant's base
compensation relative to total base compensation for all ESOP participants.
Until the Company ESOP Loan is paid in full, Discretionary Contributions will be
used to pay the outstanding principal and interest on the Company ESOP Loan. For
employees whose employment commenced prior to October 1, 1996 and who have
attained the age of 21 years, participation begins as of the later to occur of
the Closing Date or the date of commencement of the participant's employment. A
participant's ESOP account vests at the rate of 20% per year. Distributions from
the ESOP are made in cash or Common Stock upon a participant's retirement,
death, disability or termination of employment. In the event of retirement,
death or disability, the entire balance of a participant's ESOP account will
become distributable without regard to the ordinary vesting schedule. In the
event of termination of employment for any other reason, the vested portion of a
participant's ESOP account will become distributable and the remaining portion,
if any, will be forfeited. If Common Stock is distributed to a participant, the
participant may, within two 60-day periods, require the Company to purchase all
or a portion of such Common Stock at the fair market value of the Common Stock
as determined under the ESOP (the "Put Options"). The first 60-day period
commences on the date the participant receives a distribution of Common Stock
and the second 60-day period commences a year from such date. If a participant
fails to exercise either of the two Put Options, the participant may transfer
the shares of Common Stock only upon receipt of a bona fide third party offer
and only after first offering the shares to the ESOP and then to the Company.
Employees of the Company own approximately 20% of the outstanding Common Stock
through the ESOP after the Acquisition.
78
<PAGE>
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).
CASH BONUS PLAN
Prior to the date of the Acquisition, TPC established the Cash Bonus Plan
covering substantially all employees of TPC (or certain affiliates of TPC) and
covering the employees of certain third-party contractors who have contributed
to the success of TPC (or certain affiliates thereof). Upon the occurrence of a
Change of Control (as defined below), an employee participant as of July 2, 1996
will be distributed a portion of $3,200,000 within forty-five days of the date
of the Change of Control and will be distributed a portion of $1,800,000 plus
interest in each of sixteen quarterly installments following the date of the
Change of Control so long as the employee is an employee of TPC (or certain
successors or affiliates of TPC) on the corresponding quarterly installment
date. Upon the occurrence of a Change of Control, an eligible employee of a
third-party contractor who is providing services to TPC (or certain successors
or affiliates thereof) on July 2, 1996 will be distributed a portion of $300,000
within forty-five days of the date of the Change of Control, and will be
distributed a portion of $168,750 plus interest in each of sixteen quarterly
installments following the date of the Change of Control so long as the employee
of the third-party contractor is providing services to TPC on the corresponding
quarterly installment date. Each participant's allocable share of the bonus
payments to be made under the Cash Bonus Plan is based on a formula which
considers a participant's compensation and length of service with TPC. If a
participant retires, dies, becomes disabled, or whose employment is terminated
without cause after July 2, 1996, such participant's beneficiary or
representative will continue to receive a portion of the bonus payments through
the sixteenth installment payment even though such participant is no longer
employed by TPC or the third-party contractor which is providing services to
TPC. Under the Cash Bonus Plan, a "Change of Control" is deemed to occur when
the outstanding stock of TOC is acquired, or more than 50% of the shares of
TPC's common stock is sold, in a cash tender offer, exchange offer, merger,
third-party private purchase or other means of acquisition, or when
substantially all of the assets of TPC are sold to an unrelated third party. The
Transactions effected a Change of Control and distributions from the Cash Bonus
Plan have commenced.
STOCK OPTION PLAN
Holdings established a stock option plan (the "Option Plan") immediately
prior to the consummation of the Transactions. The Option Plan 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
79
<PAGE>
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 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.
80
<PAGE>
RELATED TRANSACTIONS
TPC historically engaged in certain raw material purchase transactions with
Clarkston, which prior to the consummation of the Transactions was owned by
several of the same individuals (including Mr. Swalm) who were stockholders of
TOC and/or TPC. In the twelve months ended May 31, 1996, the Company made
purchases of raw materials from Clarkston of approximately $113.4 million. As
part of the Transactions, the Company assumed from Clarkston a contract between
Clarkston and a certain supplier for the purchase of isobutane. In connection
with the Transactions, Clarkston was dissolved. 80% of the outstanding capital
stock owned by TOC of The Texas Falls Corporation was sold to Mr. Swalm. Messrs.
Swalm, Shelton, Woliver and Waycaster collectively own the remaining 20% of the
outstanding capital stock of The Texas Falls Corporation.
Sterling entered into an agreement with Holdings and TPC Holding pursuant
to which Sterling provided consulting and advisory services with respect to the
organization of Holdings, TPC Holding and Finance Co., the structuring of the
Transactions, employee benefit and compensation arrangements and other matters.
The agreement also provides that Holdings and TPC Holding, jointly and
severally, indemnify Sterling against liabilities relating to its services. At
the Closing, the Company paid Sterling a one-time transaction fee of
approximately $4.0 million for these services, and reimbursed Sterling for its
expenses. In addition, each of Holdings, TPC Holding and the Company has agreed
that if it or any of its subsidiaries determines within two years of the date of
the agreement to dispose of or acquire any assets or business, to offer its
securities for sale or to raise any debt or equity, either Holdings, TPC
Holding, the Company or the relevant subsidiary will retain Sterling as a
consultant with respect to the transaction, provided that Sterling's fees are on
terms no less favorable to Holdings, TPC Holding, the Company or the relevant
subsidiary than would be available from unaffiliated third parties.
Holdings, TPC Holding and Finance Co. were organized by Sterling for the
purpose of effecting the Acquisition. Ms. Susan Rheney, a principal of Sterling,
and Mr. Gordon A. Cain, are directors of Holdings, TPC Holding and the Company.
See "Management." Mr. Cain and Ms. Rheney purchased 76,150 and 5,000 shares of
Common Stock, respectively, in connection with the Transactions at a price of
$100 per share, the same price at which all shares were sold in connection with
the Transactions.
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.
See "-- Employment and Other Agreements" for a description of Mr.
Waycaster's employment agreement.
81
<PAGE>
BENEFICIAL OWNERSHIP OF HOLDINGS' COMMON STOCK
The following table sets forth as of March 3, 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
James J. Collis...................... -- --
380 Madison Avenue
New York, New York 10017
William R. Huff(1)................... -- --
67 Park Place
Morristown, New Jersey 07960
Claude E. Manning.................... 4,000 0.8%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
William A. McMinn.................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Bill R. McNeese...................... 2,000 0.4%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Susan O. Rheney...................... 5,000 0.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
John T. Shelton...................... 10,000 1.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
B. W. Waycaster...................... 40,000 7.6%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Ronald W. Woliver.................... 10,000 1.9%
8707 Katy Freeway, Suite 300
Houston, Texas 77024
Stephen R. Wright.................... 1,150 0.2%
15723 Windy Glen
Houston, TX 77095
All directors and Named Executive
Officers as a group (11 persons)... 151,150 28.6%
Texas Petrochemicals Corporation
Employee Stock Ownership Plan(2)... 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.(3)(4)......................... 60,000 11.4%
380 Madison Avenue
New York, New York 10017
The Huff Alternative Income Fund,
L.P.(4)............................ 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) The trustee of the ESOP (the "ESOP Trustee") will vote all shares of
Common Stock held by the ESOP pursuant to the direction of the Board of
Directors or by a committee to be designated by the Board of Directors,
except that participants are entitled to direct the ESOP Trustee to vote the
shares of Common Stock allocated to their accounts with respect to the
approval or disapproval of any corporate merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transaction
as may be prescribed in regulations under the Internal Revenue Code. No
shares of Common Stock held by the ESOP have yet been allocated to
participant's accounts.
(3) Chase Venture is an affiliate of the Initial Purchaser of the Original
Series B Notes.
(4) 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.
82
<PAGE>
DESCRIPTION OF THE BANK CREDIT AGREEMENT
GENERAL
Finance Co. and TPC entered into the Bank Credit Agreement with a syndicate
of lenders (the "Lenders"), and Texas Commerce Bank National Association, as
Agent for such Lenders (the "Agent") and effected the initial borrowings
described below on the Closing Date. The following description summarizes
certain provisions 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
Offering Memorandum have the meanings assigned thereto in the Bank Credit
Agreement.
The Bank Credit Agreement provides for secured facilities consisting of (i)
a six and one-half year revolving credit facility providing for up to $40.0
million in revolving loans, a specified portion of which was used for letters of
credit (the "Revolving Credit Facility") and (ii) a term loan facility
providing for $140.0 million in term loans consisting of (x) a six and one-half
year term loan of $85.0 million (the "Tranche A Term Loan"), (y) an eight-year
term loan of $45.0 million (the "Tranche B Term Loan," and, together with the
Tranche A Term Loan, the "Senior Term Loans") and (z) a five-year term loan of
$10.0 million (the "ESOP Term Loan," and, together with the Senior Term Loans,
the "Term Loans").
The Revolving Credit Facility permits, at the option of the Company, the
issuance of letters of credit in principal amounts to be determined thereunder.
Loans and letters of credit under the Revolving Credit Facility are subject to a
borrowing base consisting of 85% of Eligible Accounts and 65% of Eligible
Inventory (collectively, the "Borrowing Base"), provided that at no time shall
more than 50% of the Borrowing Base be comprised of 65% of Eligible Inventory.
At the closing of the Transactions, Finance Co. borrowed the entire amount of
the Senior Term Loans and $0.5 million under the Revolving Credit Facility and
lent the proceeds of such borrowings to TPC Holding to finance a portion of the
purchase price of the Acquisition and pay a portion of the fees and expenses
related to the Transactions. At the closing of the Transactions, Finance Co.
also borrowed the full amount of the ESOP Term Loan and lent such amount to the
ESOP. The ESOP used those funds to purchase Common Stock at the closing of the
Transactions.
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.
83
<PAGE>
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.
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 the Closing Date in
connection with the origination and syndication of the Term Loans and the
Revolving Credit Facility.
The Company also is required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation,
syndication and administration of the Bank Credit Agreement and to reimburse the
Lenders for all reasonable costs and expenses incurred in connection with the
enforcement of their rights in connection with a default or the enforcement of
the Bank Credit Agreement. The Company agreed to indemnify the Agent and the
Lenders and their respective officers, directors, shareholders, employees,
agents and attorneys against certain costs, expenses (including fees and
disbursements of counsel) and liabilities arising out of or relating to the Bank
Credit Agreement, the Stock Purchase Agreement and the transactions contemplated
thereby. Furthermore, the Lenders are entitled to be reimbursed for increases in
reserve requirements, changes in law and circumstances, possible future
illegality of interest options, taxes (other than on gross receipts or income),
possible inability to determine market rate, capital adequacy, and consequential
costs.
84
<PAGE>
COVENANTS
The Bank Credit Agreement contains substantial restrictive covenants
limiting the ability of the Company to, among other things: (i) incur
contractual contingent obligations; (ii) pay subordinated debt or amend
subordinated debt documents without the prior consent of the Lenders; (iii)
create or allow to exist liens or other encumbrances; (iv) transfer assets
outside the Company except for sales and other transfers of inventory or
surplus, immaterial or obsolete assets in the ordinary course of business of the
Company; (v) enter into mergers, consolidations and asset dispositions of all or
substantially all of its properties; (vi) make investments; (vii) extend credit
to any entity; (viii) sell, transfer or otherwise dispose of any class of stock
or the voting rights of any subsidiary of TPC; (ix) enter into transactions with
related parties other than in the ordinary course of business on an arm's-length
basis on terms no less favorable to the Company than those available from third
parties; (x) amend certain agreements, without the prior consent of the Majority
Lenders; (xi) make any material change in the nature of the business conducted
by the Company; (xii) pay cash dividends or redeem shares of capital stock;
(xiii) make capital expenditures; and (xiv) pay dividends or repurchase stock.
In addition, the Bank Credit Agreement contains covenants that, among other
things and with certain exceptions, require the Company to: (i) maintain the
existence, qualification and good standing of the Company; (ii) comply in all
material respects with all material applicable laws; (iii) maintain material
rights, franchise agreements, business contracts, patents, trademarks, licenses
and Material Contracts; (iv) deliver certain financial and other information;
(v) maintain specified insurance; and (vi) notify the Lenders of any default
under the Loan Documents and of certain other material events.
Under the Bank Credit Agreement, as amended on March 28, 1997, 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 September 30, 1997; (ii) 1.05 to 1.00 from October 1, 1997
through June 30, 1999, and (iii) 1.15 to 1.00 thereafter; (2) a ratio of (a)
Total Debt to (b) EBITDA for the prior four quarter period of no greater than
(a) 5.80 to 1.00 through September 29, 1997, (b) 5.60 to 1.00 from September 30,
1997 through December 30, 1997, (c) 5.0 to 1.00 from December 31, 1997 through
March 30, 1998, (d) 4.75 to 1.00 from March 31, 1998 through June 30, 1998, (e)
3.75 to 1.00 from July 1, 1998 through June 30, 2000; and (f) 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 they existed as of December 31, 1996 and an amendment
to the Bank Credit Agreement on March 28, 1997 which updated these financial
ratios to those set forth above.
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,
85
<PAGE>
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.
86
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, dated as of March 1, 1997
(the "Indenture"), between the Company and Fleet National Bank, as Trustee
(the "Trustee").
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of the form of which Indenture and the form of Notes is filed as
an exhibit to the Registration Statement. Upon the effectiveness of the
Registration Statement, the Indenture became subject to the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The following summary of
certain provisions of the Indenture and the Notes (i) is a description of such
provisions after giving effect to the consummation of the Transactions, and (ii)
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture and the Notes,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York or the State of
Connecticut (which initially shall be the offices of the Trustee, at Shawmut
Trust Company of New York, c/o First Chicago Trust Co. of N.Y., 14 Wall Street,
8th Floor / Window #2, New York, New York 10005 or at 777 Main Street, Hartford,
Connecticut 06115, respectively), except that, at the option of the Company,
payment of interest may be made by check mailed to the address of the Holders as
such address appears in the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. See
"-- Book-Entry, Delivery and Form." No service charge shall be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
The form and terms of the Notes offered hereby are the same as the form and
terms of the Original Notes except that (i) the Original Notes have been
registered under the Securities Act and, therefore, do not bear legends
restricting their transfer pursuant to the Securities Act and (ii) holders of
the Original Notes will not be entitled to the rights of holders of the Notes
offered hereby under the Registration Rights Agreement.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $50 million aggregate principal amount, and will mature on July 1,
2006. The Notes will bear interest at the rate per annum shown on the cover page
hereof from March 13, 1997, or from the most recent date to which interest has
been paid or provided for, payable semiannually to Holders of record at the
close of business on the December 15 or June 15 immediately preceding the
interest payment date on January 1 and July 1 of each year, commencing 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 Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to July 1, 2001. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
July 1 of the years set forth below:
87
<PAGE>
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 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 Notes must
remain outstanding after each such redemption.
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 Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes represents senior subordinated,
unsecured obligations of the Company. The payment of the principal of, premium
(if any) and interest on the Notes is subordinate in right of payment, as set
forth in the Indenture, to the prior payment in full of all Senior Indebtedness
of the Company, whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company under the Bank Credit Agreement. The
Notes are also effectively subordinated to all Secured Indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
As of December 31, 1996, after giving pro forma effect to the Offering as
if it had occurred on such date, the Company's Senior Indebtedness would have
been approximately $85.5 million, all of which is Secured Indebtedness. Although
the Indenture contains limitations on the amount of additional Indebtedness that
the Company may incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness"
and "-- Limitation on Indebtedness and Preferred Stock of Subsidiaries."
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank PARI PASSU with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is subordinate or
junior in ranking in right of payment to its Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is
not deemed to be subordinated or junior to secured indebtedness merely because
it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Notes (collectively, "pay the Notes") if (i) any Designated Senior
Indebtedness is not
88
<PAGE>
paid when due or (ii) any other default on Designated Senior Indebtedness occurs
and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Designated Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative
of the holders of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the Trustee
and the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this
paragraph), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Notes after the end
of such Payment Blockage Period. The Notes shall not be subject to more than one
Payment Blockage Period in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness of
the Company will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment, and
until the Senior Indebtedness of the Company is paid in full, any payment or
distribution to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of such Senior Indebtedness
as their interests may appear. If a distribution is made to Noteholders that,
due to the subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the Noteholders, and
creditors of the Company who are not holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
The Original Series B Notes were initially issued in the form of two
registered Notes in global form without coupons (each a "Global Note"). Each
Global Note was deposited on the date of the closing of the sale of the Notes
(the "Closing Date") with, or on behalf of, DTC and registered in the name of
Cede & Co., as nominee of DTC, or will remain in the custody of the Trustee
pursuant to the FAST Balance Certificate Agreement between DTC and the Trustee.
89
<PAGE>
DTC 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. DTC 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. DTC's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC'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 DTC (i)
upon deposit of the Global Notes, DTC credited the accounts of Participants
designated by the Initial Purchaser with an interest in the Global Note and (ii)
ownership of the Notes will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC (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 Notes or to
pledge the Notes as collateral will be impaired.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes 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 Indenture for any
purpose, including with respect to giving of any directions, instruction, or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Notes represented by a Global Note to pledge or
transfer such interest to persons or entities that do not participate in DTC'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 under the Notes, DTC
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 DTC 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 Notes under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders of
Notes or a holder that is an owner of a beneficial interest in a Global Note
desires to take any action that DTC, as the holder of such Global Note, is
entitled to take, DTC 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 Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
Notes, or to assure that any notices are forwarded by DTC 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 Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note representing such Notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the
90
<PAGE>
owners thereof for the purpose of receiving such payment and for any and all
other purposes whatsoever. Consequently, neither the Company nor the Trustee has
or will have any responsibility or liability for the payment of such amounts to
beneficial owners of interest in the 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 the Global Note as shown
on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of interests in the Global Note will be
governed by standing instructions and customary practice and will be the
responsibility of the Participants or the Indirect Participants and DTC.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository or DTC 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 Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Notes. Upon any such issuance, the
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 Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes 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 Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 35% of the total voting power of the then outstanding Voting
Stock of the Company; PROVIDED, HOWEVER, that the Permitted Holders
beneficially own (for purposes of this clause (i), the Permitted Holders
shall be deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent corporation), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the then outstanding Voting Stock of the Company than such other person
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of Directors
(for the purposes of this clause (i), such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person is the beneficial owner (as
defined in this clause (i)), directly or indirectly, of more than 35% of
the voting power of the Voting Stock of such parent corporation and the
Permitted Holders beneficially own (as defined above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
91
<PAGE>
(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 Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The use of the terms "all or substantially all" and "substantially as an
entirety" in Indenture provisions such as clause (iii) of the definition of
"Change in Control" and under "-- Merger and Consolidation" has no clearly
established meaning under New York law (which governs the Indenture) and has
been the subject of limited judicial interpretation in few jurisdictions.
Accordingly, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially
all" of the assets of a person, or a disposition of such assets "substantially
as an entirety," which uncertainty should be considered by prospective
investors in the Notes.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company, TPC Holding or Holdings would decide to do so in the future.
Subject to the limitations discussed below, the Company, TPC Holding or Holdings
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect the Company's, TPC Holding's or
Holdings' capital structure or credit ratings. Restrictions on the ability of
the Company to incur additional Indebtedness are contained
92
<PAGE>
in the covenants described under "-- Certain Covenants -- Limitation on
Indebtedness" and "-- Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries." Such restrictions can only be waived with the consent
of the holders of a majority in principal amount of the Notes then outstanding.
Except for the limitations contained in such covenants, however, the Indenture
will not contain any covenants or provisions that may afford holders of the
Notes protection in the event of a highly leveraged transaction. The Indenture
will not contain any covenants that restrict the ability of Holdings or TPC
Holding to incur Indebtedness.
If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be delivered by holders of the Notes seeking to accept
the Change of Control offer. The failure of the Company to make or consummate
the Change of Control offer or pay the purchase price when due will give the
Trustee and the holders of the Notes the rights described under "-- Events of
Default."
The existence of a holder's right to require the Company to offer to
repurchase such holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Bank Credit Agreement, under certain circumstances, prohibits the
Company from purchasing any Notes prior to June 30, 2004, and also provides that
the occurrence of certain change of control events with respect to the Company,
TPC Holding and Holdings constitutes a default thereunder. In the event a Change
of Control occurs at a time when the Company is prohibited from purchasing
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Bank Credit Agreement. In such circumstances, the subordination provisions
in the Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repaid or repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders of Notes following the occurrence of a Change of Control may be limited
by the Company's then existing financial resources. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Indenture relating to the Company's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence, the
Consolidated Coverage Ratio exceeds 2.0 to 1.0 if such Indebtedness is Incurred
from the 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
93
<PAGE>
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 or any
Indebtedness, the proceeds of which are used to Refinance the Original Notes or
the Notes 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 Indebtedness Incurred under Section 4.03(a) of 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. For purposes of this clause (b), Indebtedness Incurred
pursuant to Section 4.03(b)(i) and (b)(ii) of the Original Indenture prior to
the Issue Date shall be deemed to have been Incurred pursuant to clause (1) and
(2) of this paragraph (b), respectively.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall constitute Refinancing Indebtedness and shall be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the covenant entitled
"-- Limitation on Indebtedness," (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described
above, the Company, in its sole discretion, will classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be
divided and classified in more than one of the types of Indebtedness described
above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not
Incur (i) any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness or (ii) any Secured Indebtedness
that is not Senior Indebtedness unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES. The Company shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the Company
or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness or Preferred Stock (other than to the Company
or a Wholly
94
<PAGE>
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 Indenture;
(e) Preferred Stock which is not Disqualified Stock; PROVIDED,
HOWEVER, that such Restricted Subsidiary shall not pay cash dividends on
such Preferred Stock; and
(f) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clause (b) or (c) of this paragraph or this
clause (f); PROVIDED, HOWEVER, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Subsidiary described in clause (b), such Refinancing
Indebtedness shall be Incurred only by such Subsidiary.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes, and after giving effect to, the proposed Restricted Payment: (i) a
Default shall have occurred and be continuing (or would result therefrom); (ii)
the Company is not able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "-- Limitation on Indebtedness;"
or (iii) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the 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 Notes achieve an Investment Grade Rating during any fiscal quarter, the
percentage for such fiscal quarter (and for any other fiscal quarter where, on
the first day of such fiscal quarter, the Notes shall have an Investment Grade
Rating) will be 100% of Consolidated Net Income during such fiscal quarter;
PROVIDED FURTHER, HOWEVER, that if such Restricted Payment is to be made in
reliance upon an additional amount permitted pursuant to the immediately
preceding proviso, the Notes must have an Investment Grade Rating at the time
such Restricted Payment is declared or, if not declared, made; (B) the aggregate
Net Cash Proceeds received by the Company from the issuance or sale of its
Capital Stock (other than Disqualified Stock) subsequent to the 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
95
<PAGE>
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 calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above; (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "-- Limitation on Indebtedness;" PROVIDED, HOWEVER,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; (iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; PROVIDED, HOWEVER, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (iv) a payment
by the Company to TPC Holding, Holdings or the ESOP, or directly by the Company,
to be used to repurchase, redeem, acquire or retire for value any Capital Stock
of Holdings pursuant to any stockholders' agreement, management equity
subscription plan or agreement, stock option plan or agreement, or other
employee plan or agreement or employee benefit plan in effect as of the 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,
96
<PAGE>
including, without limitation, directors' fees, legal and audit expenses,
SECcompliance 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 Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases to the extent such provisions restrict the
transfer of the lease or the property leased thereunder or in purchase money
financings; (v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; (vi) encumbrances or
restrictions imposed by operation of applicable law; and (vii) any restriction
with respect to a Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of such sale or
disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition, and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) FIRST, to the extent the
Company elects (or is required by the terms of any Senior Indebtedness), to
prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other
than any Disqualified Stock) of a Wholly Owned Subsidiary or such Restricted
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company) within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to the
extent of the balance of such Net Available Cash after application in accordance
with clause (A), to the extent the Company elects, to acquire Additional Assets;
PROVIDED, HOWEVER, that the Company shall be required to commit such Net
Available Cash to the acquisition of Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net Available
Cash (the "Receipt Date") and shall be required to consummate the acquisition
of such Additional Assets within 18 months from the Receipt Date; (C) THIRD, to
the extent of the balance of such Net Available Cash after application in
accordance with clauses (A) and (B), to make an offer pursuant to paragraph (b)
below to the holders of the Notes (and to holders of other Senior
97
<PAGE>
Subordinated Indebtedness designated by the Company) to purchase Notes (and such
other Senior Subordinated Indebtedness) pursuant to and subject to the
conditions contained in the Indenture; and (D) FOURTH, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A), (B) and (C) to (x) the acquisition by the Company or any Wholly Owned
Subsidiary or such Restricted Subsidiary of Additional Assets or (y) the
prepayment, repayment or purchase of Indebtedness (other than any Disqualified
Stock) of the Company (other than Indebtedness owed to an Affiliate of the
Company) or Indebtedness of any Subsidiary (other than Indebtedness owed to the
Company or an Affiliate of the Company), in each case within one year from the
later of the receipt of such Net Available Cash and the date the offer described
in clause (b) below is consummated; PROVIDED, HOWEVER, that in connection with
any prepayment, repayment or purchase of Indebtedness pursuant to clause (A),
(C) or (D) above, the Company or such Restricted Subsidiary shall retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this paragraph,
the Company and the Restricted Subsidiaries shall not be required to apply any
Net Available Cash in accordance with this paragraph except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this paragraph exceeds $2.5 million. Pending
application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Permitted Investments. Notwithstanding anything
contained in this "-- Certain Covenants" section to the contrary, the Company
shall not sell, convey, pledge, hypothecate or otherwise transfer the Houston
Facility substantially as an entirety in one transaction or a series of related
transactions to any Person, including, but not limited to, any Subsidiary,
except for (i) pledges or security interests granted in connection with securing
Indebtedness borrowed under the Bank Credit Agreement, and (ii) transactions
that comply with the "-- Merger and Consolidation" covenant described below.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the express assumption of Indebtedness of the Company or
any Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are converted by the Company or such
Restricted Subsidiary into cash within 90 days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(ii)(C)
above, the Company will be required to purchase Notes tendered pursuant to an
offer by the Company for the Notes (and other Senior Subordinated Indebtedness)
at a purchase price of 100% of their principal amount (without premium) plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of Notes (and any other Senior
Subordinated Indebtedness) tendered pursuant to such offer is less than the Net
Available Cash allotted to the purchase thereof, the Company will be required to
apply the remaining Net Available Cash in accordance with clause (a)(ii)(D)
above. The Company shall not be required to make such an offer to purchase Notes
(and other Senior Subordinated Indebtedness) pursuant to this covenant if the
Net Available Cash available therefor is less than $10 million (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any transaction
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company (an "Affiliate
Transaction")
98
<PAGE>
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 any of its Restricted Subsidiaries for goods or
materials purchased, or services received, in the ordinary course of business,
(viii) the purchase of or the payment of Indebtedness of or monies owed by the
Company or any of its Restricted Subsidiaries or fees to be paid to Sterling or
any Affiliate of Sterling, in each case pursuant to a written agreement in
existence on the date of the Indenture and (ix) any Tax Sharing Agreement;
PROVIDED, HOWEVER, that the aggregate amount payable by the Company pursuant
thereto shall not exceed the sum of (A) the amount of taxes which the Company
would have been liable for on a stand-alone basis plus (B) the amount of any
state net worth tax applicable to Holdings and TPC Holding.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary or (ii) if, immediately after giving effect to such issuance, sale or
other disposition, such Restricted Subsidiary remains a Restricted Subsidiary;
PROVIDED, HOWEVER, that in connection with any such sale or disposition of
Capital Stock the Company or any such Restricted Subsidiary complies with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock."
MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, its assets substantially as an entirety to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by an indenture supplemental
thereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Certain Covenants -- Limitation on Indebtedness;" (iv)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company prior to such transaction minus any costs incurred in
connection with such transaction; and (v) the Company shall have delivered to
the Trustee an officer's certificate and an opinion
99
<PAGE>
of counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor company, only in the case
of a conveyance, transfer or lease, shall not be released from the obligation to
pay the principal of and interest on the Notes.
SEC REPORTS. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide within 15 days to
the Trustee and Noteholders with such annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections; PROVIDED, HOWEVER, that if Holdings shall have become a Guarantor
with respect to all obligations relating to the Notes (or the Exchange Notes),
the reports, information and other documents required to be filed and provided
as described hereunder may, at the Company's option, be filed by and be those of
Holdings rather than the Company; PROVIDED FURTHER, HOWEVER, that in the event
Holdings conducts, directly or indirectly, any business or holds, directly or
indirectly, any significant assets other than the capital stock of TPC Holding
or the Company at the time of filing and providing any such report, information
or other document containing financial statements of Holdings, Holdings shall
include in such report, information or other document summarized financial
information (as defined in Rule 1-02(bb) of Regulation S-X promulgated by the
SEC) with respect to the Company.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations in
the covenants described above under "Change of Control" (other than a failure
to purchase Notes) or under "-- Certain Covenants" under "-- Limitation on
Indebtedness," "-- Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries," "-- Limitation on Restricted Payments,"
"-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries," -- "Limitation on Sales of Assets and Subsidiary Stock,"
" -- Limitation on Affiliate Transactions," "Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries," or "-- SEC Reports,"
(v) the failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of the Company or any
Significant Subsidiary is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because of a default and
the total amount of such Indebtedness unpaid or accelerated exceeds $5 million
(the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of Holdings, TPC Holding, the Company or any
Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment or
decree for the payment of money in excess of $5 million is entered against the
Company or any Significant Subsidiary, remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed within 10
days after notice (the "judgment default provision"). However, a default under
clause (iv) or (v) will not constitute an Event of Default until the Trustee or
the holders of 25% in principal amount of the outstanding Notes notify the
Company of the default and the Company does not cure such default within the
time specified after receipt of such notice.
If an Event of Default (other than the bankruptcy provisions relating to
the Company) occurs and is continuing, the Trustee or the holders of at least
25% in principal amount of the outstanding Notes may declare the principal of
and accrued but unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and payable
immediately. If an Event of Default relating to the bankruptcy provisions
relating to the Company occurs and is continuing, the principal of and interest
100
<PAGE>
on all the Notes will IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as the board of directors, the executive committee or a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding.
Without the consent of each holder of an outstanding Note affected thereby,
no amendment may (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above, (v) make any Note payable in money other than that stated in
the Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders.
Without the consent of any holder of the Notes, the Company and the Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
101
<PAGE>
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder of the Notes or to comply with any requirement of the
SEC in connection with the qualification of the Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
their Representative) consent to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at its option at any time may terminate all its obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. In addition, the Company at its option at any time may terminate its
obligations under "Change of Control" and under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger
and Consolidation") (and any omission to comply with such obligations shall not
constitute a Default or Event of Default with respect to the Notes), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under "-- Defaults" above and the limitations contained in clauses (iii) and
(iv) of the first paragraph under, "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
102
<PAGE>
CONCERNING THE TRUSTEE
Fleet National Bank is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
Such bank may also act as a depository of funds for or makes loans to, and
performs other services for, the Company or its affiliates in the ordinary
course of business in the future. The corporate trust office of the Trustee is
located at 777 Main Street, Hartford, Connecticut 06115.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture. The Trustee may resign at any
time or may be removed by the Company. If the Trustee resigns, is removed or
becomes incapable of acting as Trustee or if a vacancy occurs in the office of
the Trustee for any cause, a successor Trustee shall be appointed in accordance
with the provisions of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and the Indenture. The Indenture also
contains certain limitations on the right of the Trustee, as a creditor of the
Company, to obtain payment of claims in certain cases, or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger or
consolidation (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (ii) all
or substantially all the assets of any division or line of business of the
Company or any Restricted Subsidiary or (iii) any other assets of the Company or
any Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and
(iii) above, (x) a disposition of the Excluded Assets, (y) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes
103
<PAGE>
of the covenant described under "-- Certain Covenants -- Limitation on Sales of
Assets and Subsidiary Stock" only, a disposition that constitutes a Restricted
Payment permitted by the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments" or a disposition specifically
excepted from the definition of Restricted Payment).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
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 Indenture), substituted, refinanced, restructured, replaced
(including, without limitation, any successive renewals, extensions, increases,
substitutions, refinancings, restructurings, replacements, supplements or other
modifications of the foregoing). Subsequent to the date of the Indenture, there
may be multiple Bank Credit Agreements and the term "Bank Credit Agreement"
shall mean all such Bank Credit Agreements.
"Bank Indebtedness" means any and all amounts payable by the Company
under or in respect of the Bank Credit Agreement, as amended, refinanced or
replaced from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceeding), fees, charges,
expenses, reimbursement obligations, Guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or
(except for the purposes of the covenant described under " -- Certain
Covenants -- Change of Control") any committee thereof duly authorized to act
on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the
104
<PAGE>
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, (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition, any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (2) or (3) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period, and (5) in calculating EBITDA and
Consolidated Interest Expense for any period prior to the Original Issue Date
for the purposes of calculating the Consolidated Coverage Ratio, without
duplicating adjustments made pursuant to clauses (1) through (4) above, EBITDA
and Consolidated Interest Expense for such period shall be calculated giving
effect to the pro forma adjustments set forth under "Pro Forma Financial
Information" above and to a one-time employee compensation expense incurred in
connection with the Transactions. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to capital leases and one-third of the rental expense attributable
to operating leases, (ii) amortization of debt discount and debt issuance cost,
(iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary, and (x) the cash contributions to any employee stock
ownership plan or similar trust
105
<PAGE>
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.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $15 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
106
<PAGE>
"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.
"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,
107
<PAGE>
HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean
any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Houston Facility" means the Company's plant located at 8600 Park Place
Boulevard, Houston, Texas 77017, together with all land owned or leased by the
Company adjacent or in proximity thereto, all improvements or additions to such
plant or land, including docks, pipelines and facilities for traincar and truck
service, all equipment, catalysts and other items used in the production,
processing, purification, finishing, extraction, hydrogenation, dehydrogenation,
dimerization, oxo-dehydrogenation, back-cracking, skeletal isomerization or
fractionation of chemical products, feedstocks or intermediaries.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for Indebtedness; PROVIDED, HOWEVER, that any Indebtedness of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit); (v) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured; and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
solely to protect the Company or any Restricted Subsidiary against fluctuations
in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others
108
<PAGE>
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.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, brokerage commissions, underwriting discounts or commissions or sales
commissions and other reasonable fees and expenses (including, without
limitation, fees and expenses of counsel, accountants and investment bankers)
related to such Asset Disposition or converting to cash any other proceeds
received, and any relocation and severance expenses as a result thereof, and all
Federal, state, provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition or made in order to obtain a necessary consent to such Asset
Disposition or to comply with applicable law, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition and (iv) appropriate
amounts provided by the seller as a reserve, in accordance with GAAP, against
any liabilities associated with the property or other assets disposed in such
Asset Disposition and retained by the Company or any Restricted Subsidiary after
such Asset Disposition, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Disposition. Further, with respect to an Asset Disposition by a Subsidiary which
is not a wholly-owned Subsidiary, Net Available Cash shall be reduced pro rata
for the portion of the equity of such Subsidiary which is not owned by the
Company.
109
<PAGE>
"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 Indenture" means the Indenture, dated as of July 1, 1996, as
amended, between the Company and Fleet National Bank, as trustee, as in effect
on the date of the Indenture.
"Original Issue Date" means the closing date for the sale and original
issuance of the Original Notes, which was July 1, 1996.
"Original Notes" means the notes issued from time to time under the
Original Indenture.
"Permitted Holders" means (i) each Person who owns Capital Stock of
Holdings on the date of issuance of (a) the Notes or (b) the Common Stock in
connection with the Employee Offering, (ii) any Person who on the date of
issuance of the Notes is or was before such date an officer, director,
stockholder, employee or consultant of Sterling, (iii) the ESOP, (iv) any
savings or investment plan sponsored by the Company or Holdings, (v) with
respect to any Person covered by the preceding clauses (i) through (iv) (A) in
the case of an entity, any Affiliate of such Person, and (B) in the case of an
individual, any spouse, parent, sibling, child or grandchild (in each case,
whether such relationship arises from birth, adoption or through marriage), or
(vi) any trust, limited liability company, corporation, limited or general
partnership or other entity, a majority of interest of the beneficiaries,
stockholders, partners or owners (direct or beneficial) of which are Persons of
the type referred to in the preceding clauses (i) through (v).
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; and (viii) any Person to the extent
such Investment represents the non-cash portion of the consideration received
for an Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings, TPC Holding or the Company pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offeringhas been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Holdings, TPC Holding or the Company, as
110
<PAGE>
applicable, has been distributed by means of an effective registration statement
under the Securities Act or sales pursuant to Rule 144 under the Securities Act.
"Rating Agency" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by the
Company (as certified by a resolution of the Board of Directors) which shall be
substituted for S&P or Moody's or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the
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 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.
111
<PAGE>
"Senior Indebtedness" means (i) Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred and (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent
post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes;
PROVIDED, HOWEVER, that Senior Indebtedness shall not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for Federal, state, local or
other taxes owed or owing by the Company, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of the Company (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of the Company or (5) that portion of any Indebtedness which
at the time of Incurrence is Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the Notes, the Original Notes
and any other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank PARI PASSU with the Notes in right of payment 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 Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, limited liability company, limited or general partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means any tax sharing agreement between the
Company, TPC Holding and Holdings or any other person with which the Company is
required to, or is permitted to, file a consolidated tax return or with which
the Company is or could be part of a consolidated group for tax purposes.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above
112
<PAGE>
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P, and
(v) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's.
"Term Loan Provisions" means the provisions in the Bank Credit Agreement
pursuant to which the lenders have committed to make available to the Company
$140 million of credit facilities in the form of amortizing term loans.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED, HOWEVER, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately
after giving effect to such designation (x) if such Unrestricted Subsidiary at
such time has Indebtedness, the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be by
the Company to the Trustee by promptly filing with the Trustee a copy of the
board resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
113
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the principal federal
income tax matters of general application relating to the Exchange Offer and the
holding and disposing of the Original Series B Notes and the Exchange Notes and
reflects the opinion provided by Bracewell & Patterson, L.L.P. ("Counsel"),
counsel to the Company, as to these matters. There can be no assurance that the
Internal Revenue Service will take a similar view as to any of the tax
consequences described below. The discussion is based on current provisions of
the Internal Revenue Code, existing Treasury regulations promulgated thereunder
and administrative and judicial interpretations thereof, all of which are
subject to change. The discussion does not purport to describe all aspects of
federal income taxation that may be relevant to a holder in light of its
particular tax status and its other income, deductions and credits and does not
discuss any state, local or foreign tax matters. Moreover, certain holders
(including insurance companies, tax-exempt organizations and foreign persons)
may be subject to special rules not discussed below. The discussion is limited
to investors who hold the Original Series B Notes, and will hold any Exchange
Notes acquired pursuant to the Exchange Offer, as capital assets (generally,
property held for investment).
DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH HOLDER OF ORIGINAL
SERIES B NOTES IS URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF THE EXCHANGE OF ITS ORIGINAL SERIES B NOTES FOR EXCHANGE
NOTES, AND THE OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE EFFECT OF
POSSIBLE CHANGES IN THE TAX LAWS.
EXCHANGE OF ORIGINAL SERIES B NOTES FOR EXCHANGE NOTES
Under Treasury Regulations, a "significant modification" of a debt
instrument is deemed to constitute a sale or exchange therefor for federal
income tax purposes, resulting (in appropriate circumstances) in gain or loss to
the holder of the modified debt instrument, cancellation of indebtedness to the
issuer of the modified debt instrument, and various changes under the original
issue discount rules.
Although there is no precedent directly on point or closely analogous,
because the economic rights of the holder of Original Series B Notes VIS-A-VIS
the Company will not be modified as a result of an exchange of such notes for
Exchange Notes, such exchange should not be a significant modification for these
purposes and the Exchange Notes should be treated as a continuation of the
corresponding Original Series B Notes. The Company will take this position and
intends to report the transaction in this manner for federal income tax
purposes. Even if the exchange of Exchange Notes for Original Series B Notes is
not treated as a continuation of the Original Series B Notes, the exchange
should constitute a recapitalization of the Company within the meaning of
section 368(a)(1)(E) of the Internal Revenue Code, which would be a tax-free
transaction for the holders of Original Series B Notes, except to the extent the
principal amount of securities received exceeds the principal amount of
securities surrendered therefor. Thus, the holder of Original Series B Notes
should not recognize gain or loss upon the exchange of such securities for
Exchange Notes; the holder's basis in the Exchange Notes should be the same as
its basis in the Original Series B Notes, and the holder's holding period for
the Exchange Notes for federal income tax purposes should include any holding
period for the Original Series B Notes.
If the exchange of Exchange Notes for Original Series B Notes were not
viewed as a continuation of the Original Series B Notes, then notwithstanding
that the Original Series B Notes were issued without original issue discount, if
the issue price of the Exchange Notes is less than that of the Original Series B
Notes, the Exchange Notes would be viewed as possessing original issue discount.
However, the holder would also have amortizable bond premium (see
" -- AMORTIZABLE BOND PREMIUM"below) with respect to the Exchange Notes to the
extent the holder's tax basis in the Exchange Notes exceeds the issue price for
such notes. It is likely that any original issue discount income attributable to
the Exchange Notes and any amortizable bond premium on such notes would offset
one another, leaving the holder with substantially the same taxable interest
income for each period under the Exchange Notes as it would have had under the
Original Series B Notes.
The remaining summary of federal income tax consequences of owning and
disposing of the Exchange Notes also applies to holders of Original Series B
Notes who do not accept the Exchange Offer.
114
<PAGE>
THE NOTES
STATED INTEREST. A holder of a Note is required to report as ordinary
income the stated interest earned on the Note in accordance with such holder's
method of tax accounting.
AMORTIZABLE BOND PREMIUM. If a holder purchases a Note and its tax basis
in the Note as of the date of purchase exceeds the greater of the principal
amount or the amount payable on a call date prior to maturity, the holder may be
entitled to elect to treat such excess as bond premium which is amortizable over
the term of the Note in accordance with a constant yield to maturity method that
takes into account the compounding of interest. An election to amortize bond
premium applies to all debt obligations acquired by the taxpayer in the taxable
year of the election and all subsequent years, unless revoked with the consent
of the Internal Revenue Service. If amortizable bond premium for a holder is
determined by reference to a call price, and if the Note is not subsequently
redeemed on the call date, then, for purposes of determining future amounts of
amortizable bond premium, the Note will be considered to be reissued on such
date for an amount equal to the nonexercised call price. The amount of
amortizable bond premium with respect to a Note generally will be treated as a
reduction in the holder's interest income on the Note. The holder's tax basis in
the Note will be reduced by any bond premium it is allowed to amortize.
Purchasers of Notes should consult their tax advisors concerning the existence
of amortizable bond premium and the effect of the associated election.
DISPOSITION. In general, upon the sale, redemption or other disposition of
a Note, the holder will recognize (i) ordinary interest income to the extent of
any interest that has accrued while the holder held the Note but has not yet
been taken into income by the holder and (ii) gain or loss equal to the
difference between the amount realized from such disposition (exclusive of any
amounts treated as ordinary interest income under clause (i)) and the holder's
tax basis in the Note. Except as provided under " -- MARKET DISCOUNT" below,
the gain or loss described in clause (ii) of the preceding sentence will be
capital gain or loss and will be long-term if the Note was held for more than
one year.
MARKET DISCOUNT. If a holder purchases a Note after issuance, there will
be market discount equal to the excess, if any, of the principal amount of the
Note over the holder's tax basis in the Note at the time of acquisition, unless
such excess qualified for a de minimis exception. Under the market discount
rules, any gain recognized by a holder upon the sale or other disposition of a
Note with market discount will be taxable as ordinary interest income to the
extent of the portion of the market discount that accrued on a straight-line
basis (or, at the election of the holder, on a constant yield to maturity basis)
while the holder held the Note. Market discount income may be recognized on a
gift of a Note as if the Note had been sold for its fair market value. A holder
of a Note with market discount may be required to defer deductions for a portion
of such holder's interest expense on any indebtedness incurred or maintained to
purchase or carry the Note.
As an alternative to the foregoing, a holder of a Note with market discount
may elect under certain circumstances to accrue such market discount income
currently (in which case its tax basis in the Note will be increased by such
accrued market discount income and the deduction-deferral rule described in the
preceding paragraph will not apply to the Note). Any such election applies to
all obligations acquired by the holder in the taxable year of the election and
all subsequent years, unless revoked with the consent of the IRS.
BACKUP WITHHOLDING. Under certain circumstances, the failure of a holder
of Notes to provide sufficient information to establish that such holder is
exempt from the backup withholding provisions of the Internal Revenue Code will
subject such holder to backup withholding at a rate of 31% of interest paid with
respect to the Notes and on the proceeds of a sale or redemption of the Notes.
In general, backup withholding applies if a holder fails to furnish a correct
taxpayer identification number, fails to report dividends and interest income in
full, or fails to certify that such holder has provided a correct taxpayer
identification number and that the holder is not subject to withholding. An
individual taxpayer's identification number is such person's Social Security
number.
115
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the issuance and sale of the Notes
offered hereby will be passed upon for the Company by Bracewell & Patterson,
L.L.P., Houston, Texas. Certain members of Bracewell & Patterson, L.L.P. own
less than .5% of the outstanding Common Stock of Holdings.
EXPERTS
The combined financial statements of TOC, its subsidiaries and Clarkston as
of May 31, 1995 and as of June 30, 1996, for the years ended May 31, 1994 and
1995, the twelve months ended May 31, 1996 and the one month ended June 30, 1996
and the financial statements of Finance Co. as of June 30, 1996 included in this
Prospectus and Registration Statement have been audited by Coopers & Lybrand
L.L.P. ("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.
On January 15, 1997, the Audit Committee of the Board of Directors of the
Company recommended, and the Company's Board of Directors approved, the
engagement of the independent certified public accounting firm of Deloitte &
Touche LLP ("D&T") to audit the consolidated financial statements of the
Company for the year ending June 30, 1997. Accordingly, the engagement of C&L as
the Company's independent auditors was discontinued. The reports of C&L on the
Company's combined financial statements for the year ended May 31, 1995, the
twelve months ended May 31, 1996 and the one month ended June 30, 1996 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with the audits of the Company's combined financial statements for the year
ended May 31, 1995, the twelve months ended May 31, 1996 and the one month ended
June 30, 1996, and during the subsequent interim period prior to January 15,
1997, there were no disagreements between the Company and C&L on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures which, if not resolved to the satisfaction of C&L, would
have caused C&L to make reference to the matter in their reports. There were no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)) during the
year ended May 31, 1995, the 12 months ended May 31, 1996, the one month ended
June 30, 1996 and the subsequent interim period prior to January 15, 1997. The
Company has not consulted with D&T during the year ended May 31, 1995, the 12
months ended May 31, 1996, the one month ended June 30, 1996 or any subsequent
interim period prior to January 15, 1997 on either the application of accounting
principles or the type of opinion D&T might issue on the Company's financial
statements.
116
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
TPC Finance Corp. .........................................................
Report of Independent
Accountants ......................................................... F-2
Balance Sheet as of June 30,
1996 ................................................................ F-3
Texas Petrochemicals Corporation (and
Predecessor)
Report of Independent
Accountants ......................................................... F-4
Consolidated Balance Sheets as
of December 31, 1996, June 30,
1996 and
as of May 31, 1995 ................................................. F-5
Consolidated Statements of
Operations for the six months
ended December 31, 1996
and 1995, the one month ended
June 30, 1996 and 1995, for the
twelve months
ended May 31, 1996, and for
the years ended May 31, 1995
and 1994 ............................................................ F-6
Combined Statements of
Stockholders' Equity for the
one month ended June 30, 1996,
for the twelve months ended
May 31, 1996, and for the years
ended May 31, 1995
and 1994 ........................................................... F-7
Consolidated Statements of Cash
Flows for the six months ended
December 31, 1996
and 1995, the one month ended
June 30, 1996 and 1995, for the
twelve months
ended May 31, 1996, and for
the years ended May 31, 1995
and 1994 ............................................................ F-8
Notes to Consolidated Financial
Statements .......................................................... F-9
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
TPC Finance Corp.:
We have audited the accompanying balance sheet of TPC Finance Corp.
("Finance Co.") as of June 30, 1996. This balance sheet is the responsibility
of Finance Co.'s management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Finance Co. as of June 30, 1996 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 16, 1996
F-2
<PAGE>
TPC FINANCE CORP.
BALANCE SHEET
JUNE 30, 1996
ASSETS
Cash................................. $ 1,000
---------
Total...................... $ 1,000
=========
STOCKHOLDER'S EQUITY
Common stock $0.01 par value; 1,000
shares authorized; 1,000 shares
issued and outstanding............. $ 10
Additional paid-in capital........... 990
---------
Total...................... $ 1,000
=========
NOTE: TPC Finance Corp. ("Finance Co.") was incorporated in Texas on May 2,
1996. On May 14, 1996, Finance Co.'s parent, TPC Holding Corp. ("TPC
Holding") entered into an agreement to purchase the outstanding capital
stock of Texas Olefins Company ("TOC") and the outstanding capital stock
(not already owned by TOC) of Texas Petrochemicals Corporation and its
subsidiaries. Effective July 1, 1996, the acquisition closed for total
consideration of approximately $377 million. In connection with the
acquisition, Finance Co. incurred indebtedness of approximately $315
million and loaned the combined net proceeds to TPC Holding. Finance Co.
was then merged with and into Texas Petrochemicals Corporation.
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Texas Olefins Company:
We have audited the accompanying combined balance sheet of Texas Olefins
Company, subsidiaries and affiliate as of June 30, 1996 and May 31, 1995, and
the related combined statements of operations, stockholders' equity, and cash
flows for the one month period ended June 30, 1996, the twelve month period
ended May 31, 1996 and for the years ended May 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects the combined financial position of Texas
Olefins Company, subsidiaries and affiliate as of June 30, 1996 and May 31,
1995, and the combined results of their operations and their cash flows for the
one month period ended June 30, 1996, the twelve month period May 31, 1996 and
for the years ended May 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
As further described in Note 3 to the combined financial statements,
effective July 1, 1996 the Company was acquired for approximately $377 million
in a series of transactions.
As discussed in Note 2 to the combined financial statements, effective June
1, 1993 and June 1, 1994, the Company changed its method of accounting for
income taxes and its method of accounting for investment securities,
respectively.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 16, 1996
F-4
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ ---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 141 $ 4,780 $ 17,829
Investment securities........... -- 6,794 21,126
Accounts receivable:
Trade...................... 41,112 35,279 40,098
Due from broker............ -- -- 4,498
Inventories (Note 5)............ 21,944 11,934 17,232
Prepaid expenses................ 11,014 9,665 8,245
Other current assets............ 2,078 2,088 2,225
------------ ---------- ----------
Total current
assets............. 76,289 70,540 111,253
Property, plant and equipment, net
(Note 6)........................... 251,601 81,814 90,071
Investments in land held for sale in
1996 (Note 8)...................... 3,886 6,181 18,773
Investment in and advances to limited
partnership (Note 9)............... 2,844 2,824 3,217
Goodwill............................. 223,726 -- --
Other assets, net (Note 7)........... 14,181 6,523 7,423
------------ ---------- ----------
Total assets.......... $572,527 $ 167,882 $ 230,737
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................. $ 10,477 $ -- $ --
Accounts payable -- trade....... 31,253 40,131 35,958
Notes payable to stockholders
and former stockholder........ -- -- 697
Accrued expenses (Note 10)...... 20,049 4,727 7,298
Dividends payable............... -- 677 --
Current portion of cash bonus
plan.......................... 7,875 -- --
Current portion of long-term
debt.......................... 13,000 -- --
------------ ---------- ----------
Total current
liabilities........ 82,654 45,535 43,953
------------ ---------- ----------
Revolving line of credit (Note 11)... 4,500 13,000 --
Long-term debt....................... 295,500 -- --
Cash bonus plan...................... 21,656 -- --
Notes payable to stockholders and
former stockholder................. -- -- 325
Deferred income taxes (Note 12)...... 106,262 15,763 22,125
Minority interest in net assets of
consolidated subsidiary............ -- 1,107 1,062
Commitments and contingencies (Note
13)................................
Stockholders' equity:
Common stock, $1 par value,
4,162,000 shares authorized
and outstanding............... 4,162 -- --
Additional paid in capital...... 71,643 -- --
Accumulated deficit............. (4,850) -- --
Note receivable from ESOP....... (9,000) -- --
Net equity of Predecessor....... -- 92,477 163,272
------------ ---------- ----------
Total stockholders'
equity............. 61,955 92,477 163,272
------------ ---------- ----------
Total
liabilities
and
stockholders'
equity........ $572,527 $ 167,882 $ 230,737
============ ========== ==========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS ENDED ONE MONTH ONE MONTH MONTHS
DECEMBER 31, ENDED ENDED ENDED YEAR ENDED MAY 31,
-------------------------- JUNE 30, JUNE 30, MAY 31, ----------------------
1996 1995 1996 1995 1996 1995 1994
----------- ----------- --------- --------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 246,736 $ 226,507 $ 41,384 $ 36,187 $ 455,585 $ 474,677 $ 352,447
Cost of goods sold...... 216,507 187,557 35,992 29,408 379,468 396,360 268,813
Depreciation and
amortization.......... 15,894 7,403 1,277 1,210 14,982 14,298 13,572
----------- ----------- --------- --------- ---------- ---------- ----------
Gross profit....... 14,335 31,547 4,115 5,569 61,135 64,019 70,062
Selling, general and
administrative
expenses.............. 4,228 5,850 1,683 2,246 19,070 16,571 16,730
----------- ----------- --------- --------- ---------- ---------- ----------
Income from
operations... 10,107 25,697 2,432 3,323 42,065 47,448 53,332
----------- ----------- --------- --------- ---------- ---------- ----------
Interest income
(expense), net........ (17,367) (1,565) (76) 149 (1,630) 720 (238)
Other income (expense):
Dividend income.... -- 29 252 362 487
Charitable
contributions.... (51) -- (655) (657) (5,116)
Gain (loss) on
disposal of
assets and
investment
securities,
net.............. (280) 298 (3,099) 1,112 3,385
Impairment of
investment in
land............. -- -- (12,592) -- --
Other, net......... 1,488 210 (37) (261) 167 283 453
----------- ----------- --------- --------- ---------- ---------- ----------
1,488 210 (368) 66 (15,927) 1,100 (791)
----------- ----------- --------- --------- ---------- ---------- ----------
Income (loss)
before
income
taxes and
minority
interest... (5,772) 24,342 1,988 3,538 24,508 49,268 52,303
Provision (benefit) for
income taxes (Note
12)................... (922) 8,141 761 1,264 7,903 16,880 18,396
Minority interest in net
loss of consolidated
subsidiary............ -- 89 9 8 143 129 5
----------- ----------- --------- --------- ---------- ---------- ----------
Net income
(loss)..... $ (4,850) $ 16,290 $ 1,236 $ 2,282 $ 16,748 $ 32,517 $ 33,912
=========== =========== ========= ========= ========== ========== ==========
Pro Forma net income to
reflect income taxes
for Affiliate (Note
12)................... $ 15,458 $ 1,236 $ 2,182 $ 15,098 $ 30,448 $ 32,755
=========== ========= ========= ========== ========== ==========
Loss per share.......... $ (1.17)
===========
Weighted average shares
outstanding........... 4,162,000
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
TEXAS OLEFINS COMPANY, SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
CLASS A CLASS B AFFILIATE LOSS ON
COMMON COMMON COMMON RETAINED INVESTMENT TREASURY
STOCK STOCK STOCK EARNINGS SECURITIES STOCK TOTAL
-------- --------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1993................ $200,000 $5,042,800 $1,000,000 $123,780,734 $(1,872,000) $128,151,534
Net income........................... 33,912,111 33,912,111
Dividends............................ (21,404,500) (21,404,500)
Purchase of 60,000 shares of treasury
stock.............................. (250,743) (250,743)
Cancellation of 14,400 shares of
Class B common stock............... (14,400) (921,600) 936,000
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1994................ 200,000 5,028,400 1,000,000 135,366,745 (1,186,743) 140,408,402
Net income........................... 32,516,837 32,516,837
Dividends............................ (6,253,200) (6,253,200)
Sale of 60,000 shares of treasury
stock.............................. 250,743 250,743
Cancellation of 7,200 shares of Class
B common stock..................... (7,200) (460,800) 468,000
Unrealized loss on investment
securities, net of taxes........... $(3,650,584) (3,650,584)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1995................ 200,000 5,021,200 1,000,000 161,169,582 (3,650,584) (468,000) 163,272,198
Net income........................... 16,748,619 16,748,619
Redemption of 25,000 shares of Class
A common stock and 1,565,670 shares
of Class B common stock............ (95,440,200) (95,440,200)
Sale of 376,670 shares of treasury
stock.............................. 22,600,200 22,600,200
Dividends............................ (16,526,000) (16,526,000)
Change in unrealized loss on
investment securities, net of
taxes.............................. 3,007,034 3,007,034
Cancellation of 1,214,000 shares of
Class B Common Stock............... (1,214,000) (71,626,000) 72,840,000
Cancellation of 7,200 shares of Class
B common stock..................... (7,200) (460,800) 468,000
Redemption and cancellation of
1,000,000 shares of Affiliate
common stock....................... (1,000,000) (1,000,000)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance, May 31, 1996................ 200,000 3,800,000 -- 89,305,401 (643,550) -- 92,661,851
Net income........................... 1,235,927 1,235,927
Net change in unrealized loss on
investment securities, net of
taxes.............................. (743,709) (743,709)
Liquidating dividend to affiliate
shareholders....................... (677,000) (677,000)
-------- --------- --------- ----------- ---------- ---------- -----------
Balance June 30, 1996................ $200,000 $3,800,000 $ -- $89,864,328 $(1,387,259) $ -- $92,477,069
======== ========= ========= =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ONE TWELVE
SIX MONTHS ENDED MONTH ONE MONTH MONTHS YEAR ENDED MAY 31,
DECEMBER 31, ENDED ENDED ENDED
-------------------------- JUNE 30, JUNE 30, MAY 31, --------------------
1996 1995 1996 1995 1996 1995 1994
----------- ----------- -------- ----------- -------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................ $ (4,850) $ 16,290 $ 1,236 $ 2,282 $16,748 $ 32,517 $ 33,912
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization
of fixed assets.............. 12,921 7,403 1,259 1,192 14,768 14,072 13,308
Amortization of goodwill and
other assets................. 3,784 -- 18 18 214 226 264
(Gain) loss on disposal of
assets and investment
securities, net.............. -- -- 280 (298) 3,099 (1,112) (3,385)
Impairment of investment in
land......................... -- -- -- -- 12,592 -- --
Earnings from limited
partnership.................. (270) -- 190 (35) 202 (260) (577)
Minority interest in net loss
of consolidated subsidiary... -- (89) (9 ) (8) (143 ) (129) (5)
Deferred income taxes.......... (584) (1,510) (237 ) (142) (5,829 ) 818 272
Change in:
Accounts receivable.......... (5,834) (7,361) 7,723 8,189 1,593 (18,100) 5,630
Inventories.................. (10,011) 8,584 3,069 (6,120) 2,230 12,954 (20,902)
Other current and noncurrent
assets..................... (1,735) (5,442) 1,424 (137) (3,616 ) (852) (742)
Accounts payable............. (8,878) 10,133 (107 ) (6,198) 4,280 9,787 1,027
Accrued expenses............. 15,322 1,727 (932 ) 3,123 (1,638 ) 381 1,440
----------- ----------- -------- ----------- -------- --------- ---------
Net cash provided by (used
in) operating
activities............... (135) 29,735 13,914 1,866 44,500 50,302 30,242
Cash flows from investing activities:
Capital expenditures............. (5,171) (2,108) (1,997 ) (471) (5,462 ) (8,680) (12,550)
Purchase of investment securities
available for sale............. -- (6,331) -- -- (19,138 ) (33,998) (35,018)
Proceeds from sale of investment
securities available for sale
and non-plant assets........... 9,799 -- 702 6,395 32,821 16,778 42,241
Acquisition of the Company....... (371,057) -- -- -- -- -- --
Distribution received from
investment in limited
partnership.................... 250 -- -- -- -- -- --
Proceeds from the sale of
subsidiary and ranch........... 7,800 -- -- -- -- -- --
----------- ----------- -------- ----------- -------- --------- ---------
Net cash provided by (used
in) investing activities... (358,379) (8,439) (1,295 ) 5,924 8,221 (25,900) (5,327)
Cash flows from financing activities:
Bank overdraft................... 10,478 4,797 (12,383 ) -- 12,382 -- --
Proceeds from revolving line of
credit......................... 11,500 30,000 17,100 -- 100,050 25,000 88,100
Payments of revolving line of
credit......................... (20,000) -- (14,100 ) -- (90,050 ) (36,000) (87,100)
Proceeds from notes payable...... -- -- -- -- -- 1,000 1,000
Payments of notes payable........ -- (305) -- (716) (1,022 ) (4,697) (1,487)
Redemption of common stock....... -- (95,440) -- -- (96,440 ) -- (519)
Dividends paid................... -- (4,000) -- (3,763) (16,526 ) (9,085) (18,575)
Proceeds from sale of common
stock.......................... -- 22,600 -- -- 22,600 451 1,000
Proceeds from issuance of
long-term debt................. 315,000 15,000 -- -- -- -- --
Payments on long-term debt....... (6,500) (15,000) -- -- -- -- --
Payment of cash bonus plan....... (5,469) -- -- -- -- -- --
Debt issuance costs.............. (14,522) -- -- -- -- -- --
Investment by Parent............. 62,909 -- -- -- -- -- --
Reduction in note receivable
fromm ESOP..................... 1,000 -- -- -- -- -- --
Organizational costs............. (521) -- -- -- -- -- --
----------- ----------- -------- ----------- -------- --------- ---------
Net cash used in financing
activities................. 353,875 (42,348) (9,383 ) (4,479) (69,006 ) (23,331) (17,581)
----------- ----------- -------- ----------- -------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... (4,639) (21,052) 3,236 3,311 (16,285 ) 1,071 7,334
Cash and cash equivalents, at
beginning of year.................. 4,780 22,849 1,544 17,829 17,829 16,758 9,424
----------- ----------- -------- ----------- -------- --------- ---------
Cash and cash equivalents, at end of
year............................... $ 141 $ 1,797 $ 4,780 $21,140 $ 1,544 $ 17,829 $ 16,758
=========== =========== ======== =========== ======== ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest..................... $ 6,822 $ 1,477 $ 62 $-- $ 2,330 $ 527 $ 663
Income taxes................. -- 7,400 877 -- 14,756 14,740 16,992
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
1. NATURE OF OPERATIONS:
The consolidated financial statements include the accounts of Texas
Petrochemicals Corporation and its wholly owned subsidiary, Texas Butylene
Chemical Company, collectively referred to as (the "Company" since July 1,
1996). The Company through its facility in Houston, Texas in the largest
producer of butadiene and butene-1, and the second largest producer of methyl
tertiary-butyl ether ("MTBE"), in North America, in terms of production
capacity. In addition, the Company is the sole producer of diisobutylene and
isobutylene concentrate in the United States and 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.
For the twelve months ended May 31, 1996 and for the one month ended June
30, 1996, approximately 43% and 45%, respectively, of the Company's total
revenues were derived from products sold on a fixed profit basis or whose
selling prices were linked, directly or indirectly, to raw material costs. The
Company believes that the combination of its fixed profit contracts, competitive
cost position and specialty product sales provides stability to its cash flows
and helps to offset the effects of cyclical downturns.
2. SIGNIFICANT ACCOUNTING POLICIES:
CHANGE IN FISCAL YEAR END
In June 1996 the Company's board of directors approved a change in the
Company's fiscal year end to June 30 from May 31. Accordingly, the accompanying
combined financial statements include results of operations and cash flows for
the one month transition period.
PRINCIPLES OF COMBINATION
The consolidated balance sheet and the consolidated statements of income
and cash flows for the periods prior to July 1, 1996 include the combined
presentation of the accounts of Texas Olefins Company, Texas Petrochemicals
Corporation, The Texas Falls Corporation and Clarkston Corporation (the
"Affiliate"), collectively referred to as (the "Predecessor"). Texas Olefins
Company was merged with and into Texas Petrochemicals Corporation in conjunction
with the Acquisition described in Note 3. The minority interest reflected in the
accompanying financial statements reflects approximately 20% of the common stock
of The Texas Falls Corporation not owned by the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENT SECURITIES
Effective June 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (SFAS 115). Management has classified all investments as
available-for-sale. Cost is determined by specific identification. Purchases and
F-9
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
sales are reflected on a trade date basis. Investment securities are carried at
fair value with any unrealized gains or losses reported as a component of
stockholders' equity, net of tax.
INVENTORIES
Inventories consist of raw materials, finished goods and chemicals used in
processing and are valued at the lower of average cost or market.
The Company may enter into product exchange agreements with suppliers
whereby certain inventories are exchanged for raw materials. These exchanges are
recorded at the lower of cost or market. Any resulting gains or losses from the
utilization of these exchanges are reflected in cost of chemical products sold.
Balances related to quantities due to or payable by the Company are included in
inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs and
other maintenance and repairs are charged to expense as incurred while
significant improvements are capitalized. Upon retirement or sale of an asset,
the asset and the related accumulated depreciation is removed from the accounts
and any resulting gain or loss is reflected in operations.
DEPRECIATION
Depreciation of property, plant and equipment is computed using the
straight-line method over their estimated useful lives ranging from 3 to 31 1/2
years, with the plants being depreciated over 10 years.
OTHER ASSETS
Other assets include certain intangible assets and catalysts which are
amortized using the straight-line method over their useful lives ranging from 2
to 40 years.
IMPAIRMENT OF ASSETS
Prior to June 1, 1995, the Company recognized impairment of investments in
land and property, plant and equipment at the time when a decline in value of an
asset was determined to be permanent. Effective June 1, 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Impairment of Long-Lived Assets and Assets to be Disposed of."
REVENUE RECOGNITION
The Company recognizes revenue from sales of refined products in the period
of delivery.
INCOME TAXES
Effective June 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The adoption had no effect on financial position or net income.
Under SFAS No. 109, deferred taxes are provided at the enacted tax rate on
temporary differences between assets and liabilities for financial and tax
reporting purposes.
Deferred taxes are recorded to reflect the effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The Affiliate of the Company has elected for federal tax purposes to be
taxed under provisions of Subchapter S of the Internal Revenue Code. This
election requires the stockholders to include the Affiliate's net earnings,
losses and credits in their own income for tax purposes. Accordingly, the
Affiliate generally is not liable for federal income taxes and no provision for
federal income taxes is included in the accompanying financial statements. Pro
Forma net income to reflect the effect on the combined company of income
F-10
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
taxes for the Affiliate as if it were a taxable entity has been included on the
face of the income statement. 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.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123, which is effective for fiscal years beginning
after December 31, 1995, encourages but does not require companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. The Company
has not yet determined if it will adopt this new fair value-based method of
accounting for its stock-based incentive plans or elect the disclosure
provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation. There is no resulting impact
on stockholders' equity or net income.
3. THE ACQUISITION (UNAUDITED):
On July 1, 1996, Texas Olefins Company ("TOC"), Texas Petrochemicals
Corporation and a raw material supply contract of the Affiliate were acquired
for approximately $377 million in a series of transactions (the
"Acquisition"). After the transactions, TOC was merged with and into Texas
Petrochemicals Corporation with Texas Petrochemicals Corporation becoming a 100%
owned subsidiary of Texas Petrochemicals Holdings, Inc. (the "Parent"). In
connection with the Acquisition, Texas Petrochemicals Corporation issued $175
million of Senior Subordinated Notes due 2006 (the "Subordinated Notes") and
borrowed $140 million under the Bank Credit Agreement. 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 personality thereon and 80% of the outstanding capital stock of
The Texas Falls Corporation ("The Falls") owned by TOC. In June 1996, the
Affiliate was dissolved and a $677,000 liquidating dividend was declared to its
shareholders.
F-11
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
The following unaudited pro forma statements of operations assumes the
acquisition occurred on June 1, 1995 for the twelve months ended May 31, 1996
and on June 1, 1996 for the one month ended June 30, 1996 and on July 1, 1995
for the six months ended December 31, 1995.
PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996 MAY 31, 1996
----------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................. $ 225.9 $41.2 $ 454.2
Cost of goods sold................... 181.5 35.4 367.3
Depreciation and amortization........ 18.0 3.1 36.3
-------- ------------- -------------
Gross profit.................... 26.4 2.7 50.6
Selling, general and administrative
expenses........................... 4.1 1.5 12.7
-------- ------------- -------------
Income from operations..... 22.3 1.2 37.9
Interest expense, net................ 15.9 2.6 31.9
Other income (expense):
Dividend income................. -- --
Charitable contribution......... -- --
Loss on disposal of assets and
investment securities, net.... (0.3) (3.1)
Impairment of investment in
land.......................... -- (12.6)
Other, net...................... 0.1 0.1 0.1
-------- ------------- -------------
Loss before income taxes and minority
interest........................... 6.5 (1.6) (9.6)
Provision for income taxes........... 2.4 -- --
Minority interest in net loss of
consolidated subsidiary............ -- -- --
-------- ------------- -------------
Net loss................... $ 4.1 $(1.6) $ (9.6)
======== ============= =============
</TABLE>
4. INVESTMENT SECURITIES:
As of June 30, 1996 the Company 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 Company held $3.7 million of bankers acceptance notes at May 31, 1995,
with scheduled maturities of less than one year. The Company 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 is
recorded as a component of stockholders' equity for the year ended May 31, 1995.
During the year ended May 31, 1995, gross realized gains of approximately $1.2
million and gross realized losses of approximately $0.05 million were recognized
on the sale of securities.
F-12
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
The amortized cost and estimated market values of investment securities at
May 31, 1995 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COSTS GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C>
Bankers acceptance notes............. $ 3,680 $ 3,680
Equity securities.................... 23,062 $ 350 $5,966 17,446
--------- ---------- ---------- ---------
Total........................... $26,742 $ 350 $5,966 $ 21,126
========= ========== ========== =========
</TABLE>
Included in cash and cash equivalents at May 31, 1995 and June 30, 1996 was
$22.9 million and $5.5 million of commercial paper with scheduled maturities of
less than three months. Aggregate cost approximated market value at May 31, 1995
and June 30, 1996.
5. INVENTORIES:
Inventories at December 31, 1996, June 30, 1996 and May 31, 1995 are
summarized as follows (in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ --------- ---------
Finished goods....................... $ 12,148 $ 5,481 $ 6,757
Raw materials........................ 7,745 4,533 8,787
Chemicals and supplies............... 2,051 1,920 1,688
------------ --------- ---------
$ 21,944 $ 11,934 $ 17,232
============ ========= =========
6. PROPERTY, PLANT AND EQUIPMENT:
Following is a summary of the Company's property, plant and equipment at
December 31, 1996, June 30, 1996 and May 31, 1995 (in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ ------------ ----------
Chemical plants...................... $252,586 $ 173,370 $ 161,130
Construction in progress............. 10,242 5,378 10,294
Other................................ 3,066 13,812 13,701
------------ ------------ ----------
265,894 192,560 185,125
Less allowance for depreciation,
depletion and amortization......... (14,293) (110,746) (95,054)
------------ ------------ ----------
Total........................... $251,601 $ 81,814 $ 90,071
============ ============ ==========
F-13
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
7. OTHER ASSETS:
Following is a summary of the Company's other assets at December 31, 1996,
June 30, 1996 and May 31, 1995 (in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ --------- ---------
Debt issue costs..................... $ 14,522 $ -- $ --
Organizational costs................. 521 -- --
Investment in The Falls and other.... -- 7,934 8,602
------------ --------- ---------
15,043 7,934 8,602
Less accumulated amortization........ 862 1,411 1,179
------------ --------- ---------
$ 14,181 $ 6,523 $ 7,423
============ ========= =========
8. INVESTMENT IN LAND HELD FOR SALE:
Land which is held for sale at December 31, 1996, June 30, 1996 and May 31,
1995 consists principally of unimproved real estate and is summarized as follows
(in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
LOCATION 1996 1996 1995
- ------------------------------------- ------------ --------- ---------
Highway 6
Houston, Texas....................... $ 1,307 $ 1,307 $ 6,799
Macgregor-Highway 288
Houston, Texas....................... 521 521 5,619
Richmond West Hollow
Houston, Texas....................... 975 975 2,977
The Falls,
New Ulm, Texas....................... -- 2,295 2,295
Baytown, Texas....................... 1,068 1,068 1,068
Other miscellaneous.................. 15 15 15
------------ --------- ---------
$ 3,886 $ 6,181 $ 18,773
============ ========= =========
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 writedown certain investments in land
to estimated fair market value. Actual sales proceeds from investments in land
may differ from the carrying amounts at June 30, 1996.
9. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP:
The Company and Hollywood Marine, Inc. formed a limited partnership,
Hollywood/Texas Olefins, Ltd., to operate four barges capable of transporting
chemicals. Texas Olefins Company is a 50% limited partner in the limited
partnership.
The Company accounts for this investment under the equity method and
records its portion of the limited partnership's net income as other income in
the accompanying combined statement of operations. Summarized financial
information of the partnership has not been presented because the Company's
investment in and its proportionate share of the partnership's operations are
not material.
F-14
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
10. ACCRUED EXPENSES:
At December 31, 1996, June 30, 1996 and May 31, 1995, accrued expenses
consisted of the following (in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ --------- ----------
Federal and state taxes.............. $ -- $ 959 $ 3,013
Accrued interest..................... 12,901 81 24
Property and sales taxes............. 4,609 2,370 2,144
Charitable contributions............. -- -- 1,265
Other expenses....................... 2,539 1,317 852
------------ --------- ----------
$ 20,049 $ 4,727 $ 7,298
============ ========= ==========
11. LONG-TERM DEBT:
Following is a summary of the Company's long-term debt at December 31,
1996, June 30, 1996 and May 31, 1995 (in thousands of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ --------- ---------
Bank Borrowings:
Term Loans...................... $124,500 $ -- $ --
ESOP Loan....................... 9,000 -- --
Revolving Credit Loans.......... 4,500 13,000 --
Subordinated Notes................... 175,000 -- --
------------ --------- ---------
313,000 13,000 --
Less current maturities.............. 13,000 -- --
------------ --------- ---------
Long-term debt....................... $300,000 $ 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. The debt initially bears interest at a greater of the prime rate
and the federal funds rate plus 1/2% plus a margin of 1%, due and payable
quarterly beginning September 30, 1996. The Subordinated Notes are due 2006 and
bear interest at 11 1/8% payable semiannually on January 1 and July 1. The Bank
Credit Agreement and the Subordinated Notes include certain restrictive
covenants which include, but are not limited to, limitations on capital
expenditures, indebtedness, investments and sales of assets and subsidiary
stock. Additionally, the Bank Credit Agreement requires the Company to maintain
certain financial ratios. For the six months ended December 31, 1996 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 and an amendment to the Bank Credit Agreement on March 28, 1997 to update
these financial ratios.
The Company had a revolving line of credit agreement with a bank which
permitted borrowings up to $30,000,000 of which $13,000,000 was outstanding at
June 30, 1996. The agreement was cancelled by the Company in connection with the
Acquisition and the new Bank Credit Agreement. The line of credit was
collateralized by the Company's accounts receivable and inventory and charged
interest at the Company's option of the prime rate or the Eurodollar rate plus
1% and required a commitment fee of 0.375% of the unused portion of the line of
credit. The agreement also contained various restrictive covenants which, among
other things, required the Company to maintain certain financial ratios and
restricted the Company's ability to incur additional indebtedness. The above
requirement to maintain certain financial ratios
F-15
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
effectively restricted the amount of dividends that could have been declared in
any given year. The Company's weighted average borrowing rate under this
agreement was 7.49%, 6.70% and 6.06% for the one month dated June 30, 1996, the
twelve months ended May 31, 1996 and the year ended May 31, 1995, respectively.
The Company's weighted average borrowing rate under various agreements which
expired in 1996 was approximately 8%.
12. FEDERAL AND STATE INCOME TAXES:
Significant components of the Company's deferred tax asset and liability at
December 31, 1996, June 30, 1996 and May 31, 1995 are as follows (in thousands
of dollars):
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1995
------------ ----------- -----------
Deferred tax asset -- current:
Net operating loss
carryforward.................. $ 414 $ -- $ --
Unrealized loss on investment
securities.................... -- 815 1,966
Costs capitalized to
inventory..................... -- -- 259
------------ ----------- -----------
$ 414 $ 815 $ 2,225
============ =========== ===========
Deferred tax asset (liability) -- noncurrent:
Investment in land.............. $ 4,660 $ 4,660 $ --
Property, plant and equipment... (110,922) $ (20,423) $ (22,125)
------------ ----------- -----------
Net deferred tax
(liability) -- noncurrent..... $ (106,262) $ (15,763) $ (22,125)
============ =========== ===========
The current deferred tax asset is included in other current assets in the
accompanying balance sheet.
The provision for federal and state income taxes is comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS ONE MONTH ONE MONTH MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1996 1995 1994
------------ --------- ------------ -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal............................. $ (414) $ 880 $1,281 $ 12,150 $14,314 $16,173
State............................... 75 118 125 1,582 1,748 1,951
------------ --------- ------------ -------- ------- -------
(339) 998 1,406 13,732 16,062 18,124
------------ --------- ------------ -------- ------- -------
Deferred:
Federal............................. (583) (210) (122) (5,461) 895 250
State............................... -- (27) (20) (368) (77) 22
------------ --------- ------------ -------- ------- -------
(583) (237) (142) (5,829) 818 272
------------ --------- ------------ -------- ------- -------
Total provision (benefit) for
income taxes................ $ (922) $ 761 $1,264 $ 7,903 $16,880 $18,396
============ ========= ============ ======== ======= =======
Pro Forma income tax
provision................... $ 761 $1,364 $ 9,553 $18,949 $19,553
========= ============ ======== ======= =======
</TABLE>
F-16
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
The Affiliate is a Subchapter S corporation and accordingly pays no federal
income tax. The Pro Forma income tax provision assumes that the income of the
Affiliate was taxable to the Company based on the Company's effective tax rate.
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>
SIX ONE ONE TWELVE
MONTHS MONTH MONTH MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30, MAY 31, MAY 31, MAY 31,
1996 1996 1995 1996 1995 1994
------------ -------- ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax rate...................................... 35% 35% 35% 35% 35% 35%
Computed "expected" federal income tax........ $ (2,020) $ 696 $ 1,247 $ 8,578 $17,438 $18,306
Increase (decrease) in tax resulting from:
Affiliate earnings not subject to federal
income tax............................... -- -- (100) (1,651) (2,069) (1,157)
State income taxes, net of federal
benefit.................................. 49 59 68 789 1,086 1,283
Other, net................................. -- 6 49 280 518 (151)
Amortization............................... 1,049 -- -- (93) (93) (93)
Effect of 1% increase in statutory federal
income tax rate.......................... 208
------------ -------- ----------- ------- ------- -------
Provision (benefit) for income taxes............ $ (922) $ 761 $ 1,264 $ 7,903 $16,880 $18,396
============ ======== =========== ======= ======= =======
</TABLE>
13. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Corporation leases tank cars under noncancelable operating leases.
Under the terms of the lease agreements, the Corporation is reimbursed by
customers at a fixed rate per mile, based on the distance the tank cars travel.
Reimbursements were approximately $0.04 million, $0.8 million, $0.7 million and
$0.8 million for the one month period ended June 30, 1996, for the twelve months
ended May 31, 1996 and for the years ended May 31, 1995 and 1994, respectively.
The Corporation is also obligated under two operating leases to Hollywood/Texas
Olefins, Ltd. for the rental of four barges.
Total rent expense was approximately $0.4 million, $4.8 million, $4.4
million and $4.3 million (net of reimbursements described above and including
$0.2 million, $2.0 million, $2.0 million and $2.0 million for the rental of four
barges) for the one month period ended June 30, 1996, for the twelve months
ended May 31, 1996 and for the years ended May 31, 1995 and 1994, respectively.
Future minimum lease payments at June 30, 1996 are as follows (in thousands
of dollars):
FISCAL YEAR
- -------------------------------------
1997............................... $ 2,935
1998............................... 1,579
1999............................... 1,209
2000............................... 826
2001............................... 282
F-17
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
STOCK PURCHASE AGREEMENT
The Company entered into a stock purchase agreement with a certain minority
stockholder who owns 20,000 shares of the Company's outstanding Class A common
stock and 80,000 shares of the Company's outstanding Class B common stock. Under
the terms of this agreement, in the event of the stockholder's death, the
Company must redeem all shares owned by the deceased stockholder at a formula
price, which is adjusted annually. At May 31, 1995, the formula price per share
was approximately $58.
The Company has entered into a death benefit agreement with an officer of
the Company who owns 660,000 shares of Class B common stock of the Company. This
agreement provides that in the event of the death of the officer, the Company is
obligated to redeem the shares at a price of $60 per share with twenty-five
percent of the purchase price payable at closing and the balance payable in five
equal annual installments plus interest at the rate of eight percent per annum.
This agreement replaces a previous agreement that obligated the Company to
redeem the shares in the event of the death of the officer at a price of $80 per
share.
The Corporation has entered into a stock purchase agreement with certain of
its minority stockholders who own 171,000 shares of the Corporation's
outstanding common stock. Under the terms of this agreement, such stockholders
may sell their shares to the Corporation at a formula price, which is adjusted
annually. Under this agreement, the Corporation is obligated to redeem the
shares in the event of the death of the stockholder at the formula price. At May
31, 1995, the formula price per share was approximately $54.
The Corporation has also entered into a Section 303 stock purchase
agreement with an officer of the Corporation who owns 85,000 shares of the
Corporation's outstanding common stock. This agreement allows for the officer's
estate to require the Corporation to redeem the necessary shares so as to pay
estate taxes and funeral and administrative expenses upon the death of the
officer. Under the terms of this agreement, the redemption price per share will
be based upon the value of the shares as reflected on the federal estate tax
return.
Additionally, the Corporation entered into separate stock purchase
agreements with an officer of the Corporation and his spouse who own 500,000
shares of the Corporation's outstanding common stock as part of a community
estate. The agreement with the officer requires the Corporation to redeem
250,000 shares from the community estate upon the officer's death at a price of
$90 per share with twenty five percent of the redemption price payable at
closing and the balance payable in five annual installments plus interest at the
rate of eight percent per annum. The agreement with the officer's spouse allows
her to require the Corporation to redeem the 250,000 shares from the community
estate not redeemed as part of the officer's agreement for a period of one year
subsequent to the officer's death at the same price and payable in the same
manner as set forth in the officer's agreement. Additionally, the spouse's
agreement requires the Corporation to redeem 250,000 shares of the stock from
the community estate in the event that she predeceases the officer at a price of
$90 per share with sixty percent of the redemption price payable at closing and
the balance payable in thirty-six equal monthly installments plus interest at
the rate of eight percent per annum.
All of the Affiliate's common stock is subject to a stock purchase
agreement. Under the terms of the stock purchase agreement, the Affiliate is
obligated to redeem all of a stockholder's shares in the event of death and has
an option to redeem all of a stockholder's shares in certain other instances.
The redemption price is equal to the Affiliate's adjusted book value, as defined
in the agreement, divided by the number of outstanding shares. At May 31, 1995,
the redemption price per share was $8.15. Of the total redemption amount, 25% is
to be paid in cash with the remaining balance to be paid in 42 equal monthly
installments as evidenced by an interest bearing promissory note.
F-18
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
STOCK OPTION AGREEMENTS
The Corporation has entered into stock option agreements with two of its
officers which granted them the option to purchase 100,000 shares of common
stock. The option purchase price for the shares is $40 per share. At May 31,
1995, 30,000 shares were exercisable. During the fiscal year ended May 31, 1994,
one of the officers forfeited his option to purchase 50,000 shares of common
stock.
In the event the option is exercised, the Corporation and the officers will
enter into stock purchase agreements. Under the terms of the agreement, transfer
of the stock is restricted and only the Corporation, at its option, may redeem
the stock. However, upon death of the officer, the Corporation is obligated to
redeem the officer's shares. In all instances the redemption price will be the
greater of the formula price in the agreement or $40 per share. At May 31, 1995
the formula price was approximately $54 per share.
SALARY CONTINUATION AGREEMENTS
The Corporation has entered into salary continuation agreements with three
of its officers. The agreements provide that if the officer is an employee of
the Corporation upon death, an amount ranging from $10,000 to $25,000 would be
payable monthly to his estate for a period of five years.
PURCHASE COMMITMENTS
The Company and the Affiliate have purchase commitments incident to the
ordinary conduct of business. The prices of such purchase commitments are based
on formulas which are determined from the prevailing market rates for such
products. These commitments generally have cancellation provisions given proper
notification.
LITIGATION
The Company is involved in various legal proceedings which arose during the
normal course of business. Management of the Company is vigorously defending
such matters and is of the opinion that their ultimate resolution will not have
a material adverse effect on the Company. See Note 18.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and
regulations administered by the U.S. Environmental Protection Agency, the U.S.
Coast Guard, the Army Corps of Engineers, the Texas Natural Resource
Conservation Commission, the Texas General Land Office, the Texas Department of
Health and various local regulatory agencies. The Company holds all required
permits and registrations necessary to comply substantially with all applicable
environmental laws and regulations, including permits and registrations for
wastewater discharges, solid and hazardous waste disposal and air emissions, and
management believes that the Company is in substantial compliances with all such
laws and regulations. While management does not expect that compliance with
existing environmental laws will have a material adverse effect on the Company's
financial condition, results of operations or cash flows, there can be no
assurance that future legislation, regulation or judicial or administrative
decisions will not have such an effect.
14. PROFIT SHARING PLANS:
The Corporation has a noncontributory profit sharing plan that covers all
full-time employees that have completed one year or more of service. Employees
can contribute up to 10% of their base compensation to a tax deferred fund which
is matched by the Corporation at the rate of $.25 per one dollar contributed by
the employee up to 6% of the employee's base compensation. The Corporation's
expense to match employee contributions was approximately $14,786, $195,627,
$180,000 and $150,000 for the one month period ended June 30, 1996, for the
twelve month period ended May 31, 1996 and for the years ended May 31, 1995 and
1994, respectively. Additionally, the Corporation made additional discretionary
contributions to the plan which amounted to approximately $0.2 million, $2.4
million, $2.6 million and $2.2 million for the
F-19
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
one month period ended June 30, 1996, for the twelve month period ended May 31,
1996 and for the years ended May 31, 1995 and 1994, respectively. The
Corporation's contributions vest with the employee at a rate of 20% per year.
15. RELATED PARTY TRANSACTIONS:
Prior to the Acquisition, the Company made contributions from time to time
to a charitable organization that is an affiliate of the Company. As of May 31,
1995 the Company had outstanding a $468,000 note payable to a stockholder of the
Company with an interest rate of 7% and a $554,490 note payable to a former
stockholder of the Company with an interest rate of 5.23%. Both notes were
repaid by the Company prior to June 30, 1996. Additionally, during the year
ended May 31, 1995, the Company repaid $4,000,000 on an 8% note payable to an
officer of the Company. Of such amount, $1,000,000 was borrowed during such year
and the remaining $3,000,000 was borrowed prior thereto.
16. CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to chemical and petroleum based
companies in North America. For the one month period ended June 30, 1996, for
the twelve month period ended May 31, 1996 and for the years ended May 31, 1995
and 1994 approximately 46%, 50%, 35% and 53% of the Company's sales were to four
customers. The Company had two customers which represented 14% and 16% of sales
during the one month period ended June 30, 1996 and 16% and 19% of sales during
the twelve month period ended May 31, 1996. The Company had one customer which
represented 12% of sales during the year ended May 31, 1995. The Company had
three customers which represented 12%, 20% and 13% of sales during the year
ended May 31, 1994. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for accounts receivable. The
Company's credit losses have been minimal.
The Company maintains its cash deposits and short-term investments with a
major bank and a financial services company which at certain times exceed the
federally insured limits. Management assesses the financial condition of these
institutions and believes that any possible credit loss is minimal.
17. FINANCIAL INSTRUMENTS:
At June 30, 1996 the Company estimated that the carrying value and fair
value of its financial instruments other than investment securities were
approximately the same. The methods and assumptions used to estimate the fair
value of each class of financial instruments were as follows:
CASH AND CASH EQUIVALENTS -- Fair value was considered to be the same as
the carrying value.
ACCOUNTS RECEIVABLE -- The Company estimated that the net carrying amount
of its accounts receivable was not materially different from the fair value of
such receivables.
ACCOUNTS PAYABLE -- Fair value was considered to be the same as the
carrying value.
DEBT -- In the absence of an active trading market, and considering such
debt has floating interest rates the Company estimated that the carrying amount
of its debt, both current and non-current, was not materially different from the
fair value of such debt.
18. STOCK REDEMPTION:
Effective July 28, 1995 the Company's Board of Directors approved the
redemption of 25,000 shares of Class A common stock and 1,565,670 shares of
Class B common stock from certain stockholders for total consideration of
approximately $95 million. The redemption was paid with cash of approximately
$80 million and with the issuance to a former stockholder of a $15 million
promissory note due November 1, 1995 collateralized by 915,000 shares of Class B
common stock and the personal guarantee of an officer of the Company.
F-20
<PAGE>
TEXAS PETROCHEMICALS CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED)
In connection with the above redemption the Company's Board of Directors
approved the sale of (1) 351,670 shares of Class B treasury stock to certain
officers of the Company and to a trust at the price of $60 per share, and (2)
25,000 shares of Class A treasury stock to an officer of the company at a price
of $60 per share.
STOCKHOLDER ACTION
On September 12, 1995, the stock redemption and other transactions
described above, the management bonus and other transactions previously approved
by the Board of Directors were not ratified by the Company's stockholders. Those
items were not ratified due to the abstention of the trustee representing a
majority of Class B common stock. The abstaining stockholder has the right, for
up to two years from September 12, 1995, to vote in favor of or against the
aforementioned transaction or take other action on behalf of the trust
beneficiaries. The Company cannot predict what action the abstaining stockholder
will take. Accordingly, the Company cannot determine the effect, if any, of this
uncertainty on the combined financial position, results of operations or cash
flows of the Company.
STOCK PURCHASE AGREEMENTS
The Company's Board of Directors has also approved a stock purchase
agreement with certain officers who own 185,000 shares of the Company's
outstanding Class A common stock and 1,081,670 shares of the Company's
outstanding Class B common stock. Under the terms of this agreement in the event
any of these officers ceases full time employment with the Company or in the
event of the stockholder's death, the Company must redeem all of the
stockholder's shares at a redemption price of $60 per share. This agreement
supersedes the previous stock purchase agreements of the Company which are
described in Note 13. During 1996, the Company's board of directors approved the
cancellation of such stock purchase agreement in anticipation of the acquisition
of the Company.
F-21
<PAGE>
ANNEX A
TEXAS PETROCHEMICALS CORPORATION
LETTER OF TRANSMITTAL
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
11 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
OF
TEXAS PETROCHEMICALS CORPORATION
PURSUANT TO THE PROSPECTUS
DATED APRIL 11, 1997
THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MAY 12, 1997, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE
DISCRETION (THE "EXPIRATION DATE"). TENDERS OF NOTES MAY BE WITHDRAWN AT ANY
TIME PRIOR TO THE EXPIRATION DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FLEET NATIONAL BANK
<TABLE>
<CAPTION>
<S> <C> <C>
By Registered or Certified Mail: By Hand: By Overnight Courier
FLEET NATIONAL BANK FLEET NATIONAL BANK FLEET NATIONAL BANK
Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations
CT OP TO6D Customer Service Window CT OP TO6D
P.O. Box 1440 5th Floor 1 Talcott Plaza
Hartford, Connecticut 06143 1 Talcott Plaza Hartford, Connecticut 06103
Attention: Patricia Williams Hartford, Connecticut 06106 Attention: Patricia Williams
Attention: Patricia Williams
By Facsimile Transmission:
(860) 986-7908
Attention: Patricia Williams
Confirm by Telephone:
(860) 986-1271
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
A-1
<PAGE>
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES PURSUANT TO THE
EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR ORIGINAL SERIES B
NOTES TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
This Letter of Transmittal is to be used by holders ("Holders") of 11 1/8%
Series B Senior Subordinated Notes due 2006 (the "Original Series B Notes") of
Texas Petrochemicals Corporation (the "Company") if: (i) certificates
representing Original Series B Notes are to be physically delivered to the
Exchange Agent herewith by such Holders; (ii) tender of Original Series B Notes
is to be made by book-entry transfer to the Exchange Agent's account at The
Depository Trust Company ("DTC") pursuant to the procedures set forth under the
caption "The Exchange Offer -- Procedures for Tendering Original Series B Notes
- -- BOOK-ENTRY DELIVERY PROCEDURES" in the Prospectus dated April 11, 1997 (the
"Prospectus"); or (iii) tender of Original Series B Notes is to be made
according to the guaranteed delivery procedures set forth under the caption "The
Exchange Offer -- Procedures for Tendering Original Series B Notes -- GUARANTEED
DELIVERY" in the Prospectus, and, in each case, instructions are not being
transmitted through the DTC Automated Tender Offer Program ("ATOP"). The
undersigned hereby acknowledges receipt of the Prospectus. All capitalized terms
used herein and not defined shall have the meanings ascribed to them in the
Prospectus.
Holders of Original Series B Notes that are tendering by book-entry
transfer to the Exchange Agent's account at DTC can execute the tender through
ATOP, for which the transaction will be eligible. DTC participants that are
accepting the exchange offer as set forth in the Prospectus and this Letter of
Transmittal (together, the "Exchange Offer") must transmit their acceptance to
DTC which will edit and verify the acceptance and execute a book-entry delivery
to the Exchange Agent's account at DTC. DTC will then send an Agent's Message to
the Exchange Agent for its acceptance. Delivery of the Agent's Message by DTC
will satisfy the terms of the Exchange Offer as to execution and delivery of a
Letter of Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a notice of
guaranteed delivery through ATOP.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If a Holder desires to tender Original Series B Notes pursuant to the
Exchange Offer and time will not permit this Letter of Transmittal, certificates
representing such Original Series B Notes and all other required documents to
reach the Exchange Agent, or the procedures for book-entry transfer cannot be
completed, on or prior to the Expiration Date, then such Holder must tender such
Original Series B Notes according to the guaranteed delivery procedures set
forth under the caption "The Exchange Offer -- Procedures for Tendering
Original Series B Notes -- GUARANTEED DELIVERY" in the Prospectus. See
Instruction 2.
The undersigned should complete, execute and deliver this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
A-2
<PAGE>
TENDER OF ORIGINAL SERIES B NOTES
- -------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED ORIGINAL SERIES B NOTES ARE ENCLOSED HEREWITH.
[_] CHECK HERE IF TENDERED ORIGINAL SERIES B NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_________________________________________________
Account Number:________________________________________________________________
Transaction Code Number:_______________________________________________________
[_] CHECK HERE IF TENDERED ORIGINAL SERIES B NOTES ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):_______________________________________________
Window Ticket Number (if any):_________________________________________________
Date of Execution of Notice of Guaranteed Delivery:____________________________
Name of Eligible Institution that Guaranteed Delivery:_________________________
- -------------------------------------------------------------------------------
A-3
<PAGE>
List below the Original Series B Notes to which this Letter of Transmittal
relates. The name(s) and address(es) of the registered Holder(s) should be
printed, if not already printed below, exactly as they appear on the Original
Series B Notes tendered hereby. The Original Series B Notes and the principal
amount of Original Series B Notes that the undersigned wishes to tender should
be indicated in the appropriate boxes. If the space provided is inadequate, list
the certificate number(s) and principal amount(s) on a separately executed
schedule and affix the schedule to this Letter of Transmittal.
- --------------------------------------------------------------------------------
DESCRIPTION OF ORIGINAL SERIES B NOTES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES)
OF REGISTERED HOLDER(S) AGGREGATE PRINCIPAL
(PLEASE FILL IN IF BLANK) CERTIFICATE PRINCIPAL AMOUNT AMOUNT
SEE INSTRUCTION 3. NUMBER(S)* REPRESENTED** TENDERED**
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL
AMOUNT OF
ORIGINAL SERIES B
NOTES
</TABLE>
- --------------------------------------------------------------------------------
* NEED NOT BE COMPLETED BY HOLDERS TENDERING BY BOOK-ENTRY TRANSFER.
** UNLESS OTHERWISE SPECIFIED, THE ENTIRE AGGREGATE PRINCIPAL AMOUNT REPRESENTED
BY THE ORIGINAL SERIES B NOTES DESCRIBED ABOVE WILL BE DEEMED TO BE TENDERED.
SEE INSTRUCTION 4.
- --------------------------------------------------------------------------------
A-4
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
The undersigned hereby tenders to Texas Petrochemicals Corporation ("the
Company"), upon the terms and subject to the conditions set forth in its
Prospectus dated April 11, 1997 (the "Prospectus"), receipt of which is hereby
acknowledged, and in accordance with this Letter of Transmittal (which together
constitute the "Exchange Offer"), the principal amount of Original Series B
Notes indicated in the foregoing table entitled "Description of Original Series
B Notes" under the column heading "Principal Amount Tendered." The undersigned
represents that it is duly authorized to tender all of the Original Series B
Notes tendered hereby which it holds for the account of beneficial owners of
such Original Series B Notes ("Beneficial Owner(s)") and to make the
representations and statements set forth herein on behalf of such Beneficial
Owner(s).
Subject to, and effective upon, the acceptance for purchase of the
principal amount of Original Series B Notes tendered herewith in accordance with
the terms and subject to the conditions of the Exchange Offer, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company, all
right, title and interest in and to all of the Original Series B Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent the true and lawful agent and attorney-in-fact of the undersigned (with
full knowledge that the Exchange Agent also acts as the agent of the Company)
with respect to such Original Series B Notes, with full powers of substitution
and revocation (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to (i) present such Original Series B Notes and all
evidences of transfer and authenticity to, or transfer ownership of, such
Original Series B Notes on the account books maintained by DTC to, or upon the
order of, the Company, (ii) present such Original Series B Notes for transfer of
ownership on the books of the Company, and (iii) receive all benefits and
otherwise exercise all rights of beneficial ownership of such Original Series B
Notes, all in accordance with the terms and conditions of the Exchange Offer as
described in the Prospectus.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) except as indicated below, neither the
undersigned nor any Beneficial Owner is an "affiliate," as defined in Rule 405
under the Securities Act of 1933, as amended (together with the rules and
regulations promulgated thereunder, the "Securities Act"), of the Company and
(iv) the undersigned and each Beneficial Owner acknowledge and agree that (x)
any person participating in the Exchange Offer with the intention or for the
purpose of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale of the Exchange Notes acquired by such person with a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities and Exchange Commission
(the "Commission") and cannot rely on the interpretation of the Staff of the
Commission set forth in the no-action letters that are alluded to in the section
of the Prospectus entitled "The Exchange Offer -- Registration Rights" and (y)
any broker-dealer that pursuant to the Exchange Offer receives Exchange Notes
for its own account in exchange for Original Series B Notes which it acquired
for its own account as a result of market-making activities or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Exchange Notes. If the undersigned is
a broker-dealer that will receive Exchange Notes for its own account, it
represents and warrants that the Original Series B Notes to be exchanged for the
Exchange Notes were acquired as the result of market-making activities or other
trading activities, and it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer shall not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The undersigned understands that tenders of Original Series B Notes may be
withdrawn by written notice of withdrawal received by the Exchange Agent at any
time prior to the Expiration Date in accordance with the
A-5
<PAGE>
Prospectus. In the event of a termination of the Exchange Offer, the Original
Series B Notes tendered pursuant to the Exchange Offer will be returned to the
tendering Holders promptly (or, in the case of Original Series B Notes tendered
by book-entry transfer, such Original Series B Notes will be credited to the
account maintained at DTC from which such Original Series B Notes were
delivered). If the Company makes a material change in the terms of the Exchange
Offer or the information concerning the Exchange Offer or waives a material
condition of such Exchange Offer, the Company will disseminate additional
Exchange Offer materials and extend such Exchange Offer, if and to the extent
required by law.
The undersigned understands that the tender of Original Series B Notes
pursuant to any of the procedures set forth in the Prospectus and in the
instructions hereto will constitute the undersigned's acceptance of the terms
and conditions of the Exchange Offer. The Company's acceptance for exchange of
Original Series B Notes tendered pursuant to any of the procedures described in
the Prospectus will constitute a binding agreement between the undersigned and
the Company in accordance with the terms and subject to the conditions of the
Exchange Offer. For purposes of the Exchange Offer, the undersigned understands
that validly tendered Original Series B Notes (or defectively tendered Original
Series B Notes with respect to which the Company has, or has caused to be,
waived such defect) will be deemed to have been accepted by the Company if, as
and when the Company gives oral or written notice thereof to the Exchange Agent.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Original
Series B Notes tendered hereby, and that when such tendered Original Series B
Notes are accepted for purchase by the Company, the Company will acquire good
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim or right. The undersigned and
each Beneficial Owner will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or by the Company to be necessary or
desirable to complete the sale, assignment and transfer of the Original Series B
Notes tendered hereby.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall not be affected by, and shall survive the death or incapacity
of the undersigned and any Beneficial Owner(s), and any obligation of the
undersigned or any Beneficial Owner(s) hereunder shall be binding upon the
heirs, executors, administrators, trustees in bankruptcy, personal and legal
representatives, successors and assigns of the undersigned and such Beneficial
Owner(s).
The undersigned understands that the delivery and surrender of any Original
Series B Notes is not effective, and the risk of loss of the Original Series B
Notes does not pass to the Exchange Agent, until receipt by the Exchange Agent
of this Letter of Transmittal, or a manually signed facsimile hereof, properly
completed and duly executed, together with all accompanying evidences of
authority and any other required documents in form satisfactory to the Company.
All questions as to form of all documents and the validity (including time of
receipt) and acceptance of tenders and withdrawals of Original Series B Notes
will be determined by the Company, in its sole discretion, which determination
shall be full and binding.
Unless otherwise indicated herein under "Special Issuance Instructions,"
the undersigned hereby requests that any Original Series B Notes representing
principal amounts not tendered or not accepted for exchange be issued in the
name(s) of the undersigned (and in the case of Original Series B Notes tendered
by book-entry transfer, by credit to the account of DTC), and Exchange Notes
issued in exchange for Original Series B Notes pursuant to the Exchange Offer be
issued to the undersigned. Similarly, unless otherwise indicated herein under
"Special Delivery Instructions," the undersigned hereby requests that any
Original Series B Notes representing principal amounts not tendered or not
accepted for exchange and Exchange Notes issued in exchange for Original Series
B Notes pursuant to the Exchange Offer be delivered to the undersigned at the
address shown below the undersigned's signature(s). In the event that the
"Special Issuance Instructions" box or the "Special Delivery Instructions" box
is, or both are, completed, the undersigned hereby requests that any Original
Series B Notes representing principal amounts not tendered or not accepted for
purchase be issued in the name(s) of, certificates for such Original Series B
Notes be delivered to, and Exchange Notes issued in exchange for Original Series
B Notes pursuant to the Exchange Offer be issued in the name(s) of, and be
delivered to, the person(s) at the address(es) so indicated, as applicable. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" box or "Special Delivery Instructions" box to
transfer any Original Series B Notes from the name of the
A-6
<PAGE>
registered Holder(s) thereof if the Company does not accept for exchange any of
the principal amount of such Original Series B Notes so tendered.
[ ]CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL SERIES B
NOTES IS AN AFFILIATE OF THE COMPANY.
[ ]CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL SERIES B
NOTES TENDERED HEREBY IS A BROKER-DEALER WHO ACQUIRED SUCH NOTES DIRECTLY
FROM THE COMPANY OR AN AFFILIATE OF THE COMPANY.
[ ]CHECK HERE AND COMPLETE THE LINES BELOW IF YOU OR ANY BENEFICIAL OWNER FOR
WHOM YOU HOLD ORIGINAL SERIES B NOTES TENDERED HEREBY IS A BROKER-DEALER WHO
ACQUIRED SUCH NOTES IN MARKET-MAKING OR OTHER TRADING ACTIVITIES. IF THIS BOX
IS CHECKED, THE COMPANY WILL SEND 10 ADDITIONAL COPIES OF THE PROSPECTUS AND
10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO TO YOU OR SUCH BENEFICIAL
OWNER AT THE ADDRESS SPECIFIED IN THE FOLLOWING LINES.
Name:___________________________________
Address:________________________________
________________________________
________________________________
A-7
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Original Series B Notes in a principal amount not
tendered or not accepted for exchange are to be issued in the name of, or
Exchange Notes are to be issued in the name of, someone other than the person(s)
whose signature(s) appear(s) within this Letter of Transmittal or issued to an
address different from that shown in the box entitled "Description of Original
Series B Notes" within this Letter of Transmittal.
Issue: [ ] Original Series B Notes
[ ] Exchange Notes
(check as applicable)
Name..............................................
(PLEASE PRINT)
Address...........................................
(PLEASE PRINT)
..................................................
(ZIP CODE)
..................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 HEREIN)
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Original Series B Notes in a principal amount not
tendered or not accepted for exchange or Exchange Series B Notes are to be sent
to someone other than the person(s) whose signature(s) appear(s) within this
Letter of Transmittal or to an address different from that shown in the box
entitled "Description of Original Series B Notes" within this Letter of
Transmittal.
Delivery: [ ] Original Series B Notes
[ ] Exchange Notes
(check as applicable)
Name..............................................
(PLEASE PRINT)
Address...........................................
(PLEASE PRINT)
..................................................
(ZIP CODE)
..................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 HEREIN)
- --------------------------------------------------------------------------------
A-8
<PAGE>
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(To be completed by all tendering
Holders of Original Series B Notes regardless of whether Original Series B
Notes are being physically delivered herewith)
This Letter of Transmittal must be signed by the registered Holder(s) exactly
as name(s) appear(s) on certificate(s) for Original Series B Notes or, if
tendered by a participant in DTC exactly as such participant's name appears on
a security position listing as owner of Original Series B Notes, or by the
person(s) authorized to become registered Holder(s) by endorsements and
documents transmitted herewith. If signature is by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, please set forth full
title and see Instruction 5.
................................................................................
................................................................................
Signature(s) of Registered Holder(s) or Authorized Signatory
(SEE GUARANTEE REQUIREMENT BELOW)
Dated: ................................................................ 1997
Name(s): .....................................................................
.....................................................................
(Please Print)
Capacity (Full Title):........................................................
Address: .....................................................................
.....................................................................
(Including Zip Code)
Area Code and
Telephone Number:.............................................................
Tax Identification or
Social Security Number:.......................................................
(Complete Accompanying Substitute Form W-9)
SIGNATURE GUARANTEE
(IF REQUIRED-SEE INSTRUCTIONS 1 AND 5)
Authorized Signature:.........................................................
Name of Firm:.................................................................
[PLACE SEAL HERE]
- --------------------------------------------------------------------------------
A-9
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. SIGNATURE GUARANTEES. Signatures of this Letter of Transmittal must be
guaranteed by a recognized member of the Medallion Signature Guarantee Program
or by any other "eligible guarantor institution," as such term is defined in
Rule 17Ad-15 promulgated under the Exchange Act (each of the foregoing, an
"Eligible Institution"), unless the Original Series B Notes tendered hereby
are tendered (i) by a registered Holder of Original Series B Notes (or by a
participant in DTC whose name appears on a security position listing as the
owner of such Original Series B Notes) that has not completed either the box
entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" on this Letter of Transmittal, or (ii) for the account
of an Eligible Institution. If the Original Series B Notes are registered in the
name of a person other than the signer of this Letter of Transmittal, if
Original Series B Notes not accepted for exchange or not tendered are to be
returned to a person other than the registered Holder or if Exchange Notes are
to be issued in the name of or sent to a person other than the registered
Holder, then the signatures on this Letter of Transmittal accompanying the
tendered Original Series B Notes must be guaranteed by an Eligible Institution
as described above. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND ORIGINAL SERIES B NOTES. This
Letter of Transmittal is to be completed by Holders if (i) certificates
representing Original Series B Notes are to be physically delivered to the
Exchange Agent herewith by such Holders; (ii) tender of Original Series B Notes
is to be made by book-entry transfer to the Exchange Agent's account at DTC
pursuant to the procedures set forth under the caption "The Exchange
Offer -- Procedures for Tendering Original Series B Notes -- BOOK-ENTRY DELIVERY
PROCEDURES" in the Prospectus; or (iii) tender of Original Series B Notes is to
be made according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer -- Procedures for Tendering Original Series B
Notes -- GUARANTEED DELIVERY" in the Prospectus. All physically delivered
Original Series B Notes, or a confirmation of a book-entry transfer into the
Exchange Agent's account at DTC of all Original Series B Notes delivered
electronically, as well as a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof), any required signature
guarantees and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at one of its addresses set forth on the cover
page hereto on or prior to the Expiration Date, or the tendering Holder must
comply with the guaranteed delivery procedures set forth below. DELIVERY OF
DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
If a Holder desires to tender Original Series B Notes pursuant to the
Exchange Offer and time will not permit this Letter of Transmittal, certificates
representing such Original Series B Notes and all other required documents to
reach the Exchange Agent, or the procedures for book-entry transfer cannot be
completed, on or prior to the Expiration Date, such Holder must tender such
Original Series B Notes pursuant to the guaranteed delivery procedures set forth
under the caption "The Exchange Offer -- Procedures for Tendering Original
Series B Notes -- GUARANTEED DELIVERY" in the Prospectus. Pursuant to such
procedures, (i) such tender must be made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form provided by the Company, or an Agent's Message with
respect to guaranteed delivery that is accepted by the Company, must be received
by the Exchange Agent, either by hand delivery, mail, telegram, or facsimile
transmission, on or prior to the Expiration Date; and (iii) the certificates for
all tendered Original Series B Notes, in proper form for transfer (or
confirmation of a book-entry transfer or all Original Series B Notes delivered
electronically into the Exchange Agent's account at DTC pursuant to the
procedures for such transfer set forth in the Prospectus), together with a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) and any other documents required by this Letter of
Transmittal, or in the case of a book-entry transfer, a properly transmitted
Agent's Message, must be received by the Exchange Agent within two business days
after the date of the execution of the Notice of Guaranteed Delivery.
A-10
<PAGE>
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE ORIGINAL SERIES B
NOTES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC AND ANY
ACCEPTANCE OR AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE ELECTION AND
RISK OF THE TENDERING HOLDER AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
INSTRUCTION 2, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE
PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their
Original Series B Notes for exchange.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and/or the principal amount represented by Original Series B
Notes should be listed on a separate signed schedule attached hereto.
4. PARTIAL TENDERS. (Not applicable to Holders who tender by book-entry
transfer). If Holders wish to tender less than the entire principal amount
evidenced by any Original Series B Note submitted, such Holders must fill in the
principal amount that is to be tendered in the column entitled "Principal
Amount Tendered." The minimum permitted tender is $1,000 in principal amount of
Original Series B Notes. All other tenders must be in integral multiples of
$1,000 in principal amount. In the case of a partial tender of Original Series B
Notes, as soon as practicable after the Expiration Date, new certificates for
the remainder of the Original Series B Notes that were evidenced by such
Holder's old certificates will be sent to such Holder, unless otherwise provided
in the appropriate box on this Letter of Transmittal. The entire principal
amount that is represented by Original Series B Notes delivered to the Exchange
Agent will be deemed to have been tendered, unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, INSTRUMENTS OF TRANSFER AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
Holder(s) of the Original Series B Notes tendered hereby, the signatures must
correspond with the name(s) as written on the face of the certificate(s) without
alteration, enlargement or any change whatsoever. If this Letter of Transmittal
is signed by a participant in DTC whose name is shown as the owner of the
Original Series B Notes tendered hereby, the signature must correspond with the
name shown on the security position listing as the owner of the Original Series
B Notes.
If any of the Original Series B Notes tendered hereby are registered in the
name of two or more Holders, all such Holders must sign this Letter of
Transmittal. If any of the Original Series B Notes tendered hereby are
registered in different names on several certificates, it will be necessary to
complete, sign and submit as many separate Letters of Transmittal as there are
different registrations of certificates.
If this Letter of Transmittal or any Original Series B Note or instrument
of transfer is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and proper evidence satisfactory to the Company of such person's
authority to so act must be submitted.
When this Letter of Transmittal is signed by the registered Holder(s) of
the Original Series B Notes listed herein and transmitted hereby, no
endorsements of Original Series B Notes or separate instruments of transfer are
required unless Exchange Notes are to be issued, or Original Series B Notes not
tendered or exchanged are to be issued, to a person other than the registered
Holder(s), in which case signatures on such Original Series B Notes or
instruments of transfer must be guaranteed by an Eligible Institution.
IF THIS LETTER OF TRANSMITTAL IS SIGNED OTHER THAN BY THE REGISTERED
HOLDER(S) OF THE ORIGINAL SERIES B NOTES LISTED HEREIN, THE ORIGINAL SERIES B
NOTES MUST BE ENDORSED OR ACCOMPANIED BY APPROPRIATE
A-11
<PAGE>
INSTRUMENTS OF TRANSFER, IN EITHER CASE SIGNED EXACTLY AS THE NAME(S) OF THE
REGISTERED HOLDER(S) APPEAR ON THE ORIGINAL SERIES B NOTES AND SIGNATURES ON
SUCH ORIGINAL SERIES B NOTES OR INSTRUMENTS OF TRANSFER ARE REQUIRED AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION, UNLESS THE SIGNATURE IS THAT OF AN
ELIGIBLE INSTITUTION.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If certificates for
Exchange Notes or unexchanged or untendered Original Series B Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Notes or such Original Series B Notes are to be sent
to someone other than the signer of this Letter of Transmittal or to an address
other than that shown herein, the appropriate boxes on this Letter of
Transmittal should be completed. All Original Series B Notes tendered by
book-entry transfer and not accepted for payment will be returned by crediting
the account at DTC designated herein as the account for which such Original
Series B Notes were delivered.
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company
will pay or cause to be paid any transfer taxes with respect to the transfer and
sale of Original Series B Notes to it, or to its order, pursuant to the Exchange
Offer. If Exchange Notes, or Original Series B Notes not tendered or exchanged
are to be registered in the name of any persons other than the registered
owners, of if tendered Original Series B Notes are registered in the name of any
persons other than the persons signing this Letter of Transmittal, the amount of
any transfer taxes (whether imposed on the registered Holder or such other
person) payable on account of the transfer to such other person must be paid to
the Company or the Exchange Agent (unless satisfactory evidence of the payment
of such taxes or exemption therefrom is submitted) before the Exchange Notes
will be issued.
8. WAIVER OF CONDITIONS. The conditions of the Exchange Offer may be
amended or waived by the Company, in whole or in part, at any time and from time
to time in the Company's sole discretion, in the case of any Original Series B
Notes tendered.
9. SUBSTITUTE FORM W-9. Each tendering owner of a Note (or other payee)
is required to provide the Exchange Agent with a correct taxpayer identification
number ("TIN"), generally the owner's social security or federal employer
identification number, and with certain other information, on Substitute Form
W-9, which is provided hereafter under "Important Tax Information," and to
certify that the owner (or other payee) is not subject to backup withholding.
Failure to provide the information on the Substitute Form W-9 may subject the
tendering owner (or other payee) to a $50 penalty imposed by the Internal
Revenue Service and 31% federal income tax withholding on the payment of
interest on the Notes. The box in Part 3 of the Substitute Form W-9 may be
checked if the tendering owner (or other payee) has not been issued a TIN and
has applied for a TIN or intends to apply for a TIN in the near future. If the
box in Part 3 is checked and the Exchange Agent is not provided with a TIN by
the time of payment, the Exchange Agent will withhold 31% on all such payments
of interest on the Notes until a TIN is provided to the Exchange Agent.
10. BROKER-DEALERS PARTICIPATING IN THE EXCHANGE OFFER. If no
broker-dealer checks the last box on page 7 of this Letter of Transmittal, the
Company has no obligation under the Registration Rights Agreement to allow the
use of the Prospectus for resales of the Exchange Notes by broker-dealers or to
maintain the effectiveness of the Registration Statement of which the Prospectus
is a part after the consummation of the Exchange Offer.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or
requests for assistance or additional copies of the Prospectus, this Letter of
Transmittal or the Notice of Guaranteed Delivery may be directed to the Exchange
Agent at the telephone numbers and location listed above. A Holder or owner may
also contact such Holder's or owner's broker, dealer, commercial bank or trust
company or nominee for assistance concerning the Exchange Offer.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER
WITH CERTIFICATES REPRESENTING THE ORIGINAL SERIES B NOTES AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
A-12
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax law, an owner of Original Series B Notes whose
tendered Original Series B Notes are accepted for exchange is required to
provide the Exchange Agent with such owner's current TIN on Substitute Form W-9
below. If such owner is an individual, the TIN is his or her social security
number. If the Exchange Agent is not provided with the correct TIN, the owner or
other recipient of Exchange Notes may be subject to a $50 penalty imposed by the
Internal Revenue Service. In addition, any interest on Exchange Notes paid to
such owner or other recipient may be subject to 31% backup withholding tax.
Certain owners of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that owner must submit to the Exchange Agent a properly
completed Internal Revenue Service Form W-8 (a "Form W-8"), signed under
penalties of perjury, attesting to that individual's exempt status. A Form W-8
can be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
Backup withholding is not an additional tax. Rather, the federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding, the owner is required to notify the Exchange
Agent of the owner's current TIN (or the TIN of any other payee) by completing
the following form, certifying that the TIN provided on Substitute Form W-9 is
correct (or that such owner is awaiting a TIN), and that (i) the owner has not
been notified by the Internal Revenue Service that the owner is subject to
backup withholding as a result of failure to report all interest or dividends or
(ii) the Internal Revenue Service has notified the owner that the owner is no
longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the owner of the Original
Series B Notes. If the Original Series B Notes are registered in more than one
name or are not registered in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9," for additional guidance on which number to report.
A-13
<PAGE>
- --------------------------------------------------------------------------------
PAYER'S NAME: FLEET NATIONAL BANK
- --------------------------------------------------------------------------------
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW.
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR TAXPAYER PART 2--Certification--Under the penalties of
IDENTIFICATION NUMBER ("TIN") perjury, I certify that:
(1) The number shown on this form is my correct
taxpayer identification number (or I am
waiting for a number to be issued to me),
and
(2) I am not subject to backup withholding
because: (a) I am exempt from backup
Social security number(s) or withholding, or (b) I have not been notified
Employer Identification Number(s) by the Internal Revenue Service (IRS) that
I am subject to backup withholding as a
_________________________________ result of a failure to report all interest
or dividends, or (c) the IRS has notified
me that I am no longer subject to backup
withholding.
SIGNATURE________________________
CERTIFICATION INSTRUCTIONS--You must cross
out item (2) above if you have been notified
DATE_____________________________ by the IRS that you are currently subject to
backup withholding because of under reporting
interest or dividends on your tax return.
PART 3--
Awaiting TIN [ ]
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHOLDING OF 31%.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me will be withheld until I provide a taxpayer
identification number.
Signature ___________________ Date ___________________________________________
A-14
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR HOLDINGS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY OR HOLDINGS SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information................... 3
Prospectus Summary...................... 5
Risk Factors............................ 15
The Transactions........................ 22
The Exchange Offer...................... 25
Use of Proceeds......................... 34
Capitalization.......................... 35
Pro Forma Financial Information......... 36
Selected Historical Financial Data...... 43
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 45
Business................................ 57
Management.............................. 75
Related Transactions.................... 81
Beneficial Ownership of Holdings' Common
Stock................................. 82
Description of the Bank Credit
Agreement............................. 83
Description of the Notes................ 87
Certain Federal Income Tax
Considerations........................ 114
Legal Matters........................... 116
Experts................................. 116
Index to Financial Statements........... F-1
Annex A-Texas Petrochemicals Corporation
Letter of Transmittal................. A-1
Until July 10, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This requirement is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
