ITEM 1. BUSINESS
Texas Petrochemical Holdings, Inc. and its wholly owned subsidiary Texas Petrochemicals Corporation (collectively referred to as the "Company") is the third largest producer of butadiene, the largest producer of butene-1, and the third largest producer of MTBE in North America. In addition, the Company is the sole producer of diisobutylene and isobutylene concentrate in the United States and the largest domestic merchant supplier of high purity isobutylene to the chemical market. The Company's products include: (i) butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty isobutylenes, primarily used in the production of specialty rubbers, lubricant additives, detergents and coatings.
The Company's manufacturing facility, located approximately one mile from the Houston Ship Channel provides convenient access to other Gulf Coast petrochemical producers and is connected to several of its customers and raw material suppliers through an extensive pipeline network. In addition, the Company's facility is serviced by rail, tank truck and barge. During fiscal 1997 the Company successfully gained access to the MTBE market on the East Coast of the United States through the negotiation of a terminalling and storage agreement with the Northville terminal in Linden, New Jersey.
The Company was founded in 1968, at which time the Company was principally engaged in the installation of crude butadiene processing facilities. In 1984, Mr. Dave C. Swalm acquired from Tenneco, Inc. the assets (principally comprised of the Houston facility) of Petro-Tex Chemical Corporation ("Petro-Tex") the prior owner of the Company's manufacturing facility.
On July 1, 1996 Texas Olefins Company, Texas Petrochemicals Corporation and a raw material supply contract of Clarkston Corporation (collectively referred to as the "Predecessor") were acquired for approximately $371 million in a series of transactions (the "Acquisition"). After the transactions, TOC was merged with and into Texas Petrochemicals Corporation with Texas Petrochemicals Corporation becoming a 100% owned subsidiary of Texas Petrochemical Holdings, Inc. Texas Petrochemical Holdings, Inc. was formed by a group of closely held investors.
The Company's principal executive offices are located at Three Riverway, Suite 1500, Houston, Texas 77056. The Company's telephone number is (713) 627-7474.
PRODUCTS
Butadiene is the most widely used feedstock for synthetic rubber products and is also used in the manufacture of engineered plastics, nylon fibers and other products. The Company sells butadiene to a stable customer base. As the second largest producer of butadiene in North America, the Company believes that many of its customers place significant value on its ability to provide a reliable domestic supply of butadiene and as a result have entered into long-term sales contracts with the Company.
The Company extracts butadiene from crude butadiene, which is generated from the production of ethylene and is comprised of a number of valuable components, including butadiene, isobutylene, n-butylenes, isobutane and n-butane. Many U.S. ethylene producers rely on third parties such as the Company to process their crude butadiene streams, as the crude butadiene volumes they produce are not sufficient to justify the construction of on-site butadiene recovery facilities. The Company is the largest non-integrated crude butadiene processor in North America and as a result of its strategic
importance to ethylene producers, the Company has been able to secure long-term supply contracts covering the majority of its crude butadiene requirements. Such contracts provide for a fixed profit based on the Company's selling prices for butadiene, and account for the relatively stable profitability of the Company's butadiene operations.
MTBE is a motor gasoline blending stock which reduces carbon monoxide and volatile organic compound emissions and enhances the octane content of gasoline, and has been one of the fastest growing petrochemicals, in terms of volume, over the past fifteen years. MTBE is produced by reacting methanol and isobutylene. The Company's ability to produce isobutylene by three alternative methods enables it to produce MTBE by the most economical process available to the Company. The U.S. Clean Air Act of 1990 requires the use of an "oxygenate" in gasoline sold in certain regions that are not in compliance with air quality standards. MTBE is the predominate oxygenate used in gasoline. However, as a result of incidents in which MTBE from gasoline has contaminated drinking water, the federal government and certain state governments are considering actions that could reduce or even eventually eliminate the use of MTBE in gasoline. There can be no assurance that these activities will not impact the Company's market for MTBE. A significant reduction in the demand for MTBE could have a material adverse effect on the Company's financial condition or results of operations. See "Environmental Regulation" section for a further discussion of MTBE.
The Company is the leading producer of chemical grade n-butylenes and specialty isobutylenes in North America. In recent years, the Company has increased its sales of these products by increasing its market share in polyolefin applications and the development of new end-use applications. Butene-1 is used as a comonomer in the production of high-density polyethylene ("HDPE") and linear low-density polyethylene ("LLDPE"). Both HDPE and LLDPE are raw materials for the production of trash bags, film wrap, pipe and plastic containers. Butene-1 is also used to produce butylene oxide, a key component of detergent additive packages used in many gasoline formulations. Butene-2 is recovered as part of the crude butadiene stream that remains after extraction of butadiene, isobutylene and butene-1. The Company sells purified butene-2 primarily for use in the production of coatings and plasticizers. Lower purity butene-2 is sold as a gasoline feedstock.
High purity isobutylene is used in the production of butyl rubber, which is used to produce tires and in specialty chemical applications such as in the production of resins, antioxidants, paints and coatings, synthetic lubricant oils and rubber chemicals. The Company is currently the largest domestic merchant supplier of high purity isobutylene to the chemical market. Isobutylene concentrate is similar to high purity isobutylene in composition, although its purity is 88% isobutylene compared to 99.9% in high purity isobutylene. The Company markets isobutylene concentrate for use in the lubricant additives business as well as for use in the production of butyl rubber. The Company is the sole U.S. producer of isobutylene concentrate. Diisobutylene is used primarily as an intermediate in the manufacturing of alkylphenols for the surfactant and phenolic resins markets. Other uses include the production of tackifier and ink resins, dispersants and lubricant oil additives, and rubber and processing chemicals. The Company is the sole U.S. producer of diisobutylene.
The Company's principal feedstocks are crude butadiene, isobutane and methanol. One of the Company's intermediate products, isobutylene, is used in the manufacture of MTBE and specialty isobutylenes.
COMPANY STRATEGY
The Company believes that it has become an industry leader in the production of the majority of its products by capitalizing on its production flexibility, its ability to add significant cost effective,
incremental capacity across its product lines, the marketing experience of its management team, its competitive cost position and its customer focus. The Company's strategy is to strengthen its established presence in its selected markets by focusing on the following factors:
REDUCE EXPOSURE TO CYCLICAL END-MARKETS The markets in which the Company competes are cyclical. The Company intends to mitigate the effects of this cyclicality while benefiting from potential upturns in industry profitability by optimizing the production of its sales under contracts allowing for a fixed profit or at prices linked directly or indirectly to raw material prices.
CAPITALIZE ON PRODUCTION FLEXIBILITY The Company has the ability to produce a number of its intermediate and finished products (i.e. crude butadiene, isobutylene and butene-1) by a variety of processes. The Company intends to capitalize on this ability by shifting production to the most economical process and production level based upon market conditions, thus ensuring a reliable source of supply for its customers.
UTILIZE INCREMENTAL CAPACITY The Company can increase its capacity to produce butadiene, isobutylene and its derivatives at significantly lower cost than that of new construction. The Company's ability to add incremental butadiene capacity and its relationships with several North American ethylene producers are expected to enable it to capture the benefit of increased U.S. crude butadiene supply.
RESPOND TO FAVORABLE INDUSTRY DYNAMICS The Company's production flexibility and its ability to add low-cost capacity are crucial to its capitalizing on market opportunities. The U.S. supply of crude butadiene is increasing in line with domestic ethylene production, although it is currently insufficient to meet U.S. demand. Industry operating rates are expected to remain at current high levels as the increase in domestic crude butadiene production is expected to replace imports with butadiene demand remaining strong in support of derivative businesses.
SUSTAIN CUSTOMER FOCUS The Company believes that producing quality products and providing quality service with dependable supply are key factors in its ability to compete in the market place for its products. Management believes that its focus on customer service has resulted in strong customer relationships and a high degree of customer loyalty. This is evidenced by the fact that approximately 60% of the Company's current customers have purchased products from the Company for more than ten years.
OTHER OPERATIONS
The Company operates a cogeneration power plant that supplies electricity and process steam to the facility's chemical processing operations. Excess capacity of this power plant, as well as steam and boiler feed water are currently sold to neighboring facilities under contracts at a price equal to the cost of fuel plus a fixed profit. In addition, the Company generates revenues from its terminals in Baytown, Texas and Lake Charles, Louisiana and from chemical by-product sales to third parties.
CONTRACTS
The Company enters into three general types of contracts in connection with its production processes: feedstock supply contracts, product sales contracts and, to a lesser extent, toll manufacturing agreements. The majority of these contracts have terms of two to three years and provide for successive one-year renewals unless either party objects to such renewal in a timely manner.
Certain of the Company's largest customers account for a significant percentage of the Company's sales of particular products. The Company had two customers, which represented 11%
and 14% of sales during the year ended June 30, 1999, 13% and 15% of sales during the year ended June 30, 1998, and 11% and 17% of sales during the year ended June 30, 1997. Although the Company believes its relationships with its largest customers are good, the loss of a significant customer or a number of significant customers would have a material adverse effect on the Company's financial condition, results of operations and cash flows.
COMPETITION
The petrochemicals businesses in which the Company operates are highly competitive. Many of the Company's competitors, particularly in the petrochemicals industry, are larger and have greater financial resources than the Company. Among the Company's competitors are some of the world's largest chemical companies and major integrated petroleum companies that have their own raw material resources. In addition, a significant portion of the Company's business is based upon widely available technology. Accordingly, barriers to entry, apart from capital availability, may be low in the commodity product section of the Company's business, and the entrance of new competitors into the industry may reduce the Company's ability to capture improving profit margins in circumstances where overcapacity in the industry is diminishing. Further, petroleum-rich countries have recently become more significant participants in the petrochemical industry and may continue to expand their role in this industry in the future. Any of these developments would have a negative impact on the Company's financial position, results of operations and cash flows.
Given the nature of the markets in which it competes, the Company believes it has two primary competitive advantages over its competitors. First, the Company's position as the most significant merchant crude butadiene processor in the U.S. has allowed it to secure supply arrangements for crude butadiene that provide for a fixed profit based on the Company's selling prices for the finished product. The Company believes that this partially limits its exposure to fluctuations in raw materials prices. Secondly, the Company's flexible production processes enable it to take advantage of increases in demand for its products at a lower cost than its competitors, thus allowing the Company to meet its customers' needs through the most economic processes.
PATENTS AND LICENSES
The Company presently owns, controls or holds right to approximately 21 patents and seeks patent protection for its proprietary processes where feasible to do so..
ENVIRONMENTAL REGULATION
The Company's policy is to be in compliance with all applicable environmental laws. The Company is also committed to Responsible Care(R), a chemical industry initiative tO enhance the industry's responsible management of chemicals. The Company's operations are subject to federal, state, and local laws and regulations administered by the U.S. EPA, the U.S. Coast Guard, the Army Corps of Engineers, the Texas Natural Resource Conservation Commission (TNRCC), the Texas General Land Office, the Texas Department of Health and various local regulatory agencies. The Company holds all required permits and registrations necessary to comply substantially with all applicable environmental laws and regulations, including permits and registrations for wastewater discharges, solid and hazardous waste disposal and air emissions, and management believes that the Company is in substantial compliance with the laws and regulations that materially affect its operations. While management does not expect that compliance with existing environmental laws will have a material adverse effect on the Company's financial condition or results of operations, there can be no assurance that future legislation, regulation or judicial or administrative decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for remediation of contamination at on-site and off-site waste management and disposal areas. Management believes that the Company is not likely to be required to incur material remediation costs related to its management, transportation and disposal of solid and hazardous materials and wastes, or to its pipeline operations. If the Company were to be required to incur such costs, however, management believes that such costs would not have a material adverse effect on the Company's results of operations. In addition, under the terms of the 1984 purchase agreement, the prior owner of the Houston facility, Petro-Tex, has indemnified the Company for liability arising from off-site disposal of any materials prior to June 1984. Notwithstanding the terms of the indemnity, in July 1994 Petro-Tex filed a claim for indemnity against the Company for any costs that may be attributable to Petro-Tex for the cleanup of the Malone Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other companies along the Gulf Coast allegedly sent wastes to the Malone site for disposal in the 1970s and possibly the early 1980s. Malone has been subject to several state enforcement actions regarding its waste disposal practices. It is not known whether the site will require remediation. The Company believes that it has meritorious defenses to Petro-Tex's claim and intends to contest the claim vigorously. Although no on-site contamination has been identified as requiring remediation, management believes that certain areas of the Houston facility were historically used for waste disposal. Based on limited, currently available information about these waste disposal areas and their contents, the Company believes that, if such remediation becomes necessary, any remediation costs would not have a material adverse effect on the Company's financial condition or results of operations. The Petro-Tex indemnity does not extend to these on-site waste disposal areas or their contents.
The day-to-day operations of the Company are subject to extensive regulation under the Resource Conservation and Recovery Act, the Federal Clean Water Act, the Clean Air Act (CAA) and similar requirements of state law. In particular, under the CAA, the EPA and the TNRCC have promulgated, or are required to promulgate, numerous regulations, which affect or will affect the operations of the Company. The most significant of these are the so-called Hazardous Organics National Emission Standard for Hazardous Air Pollutants or HON Rule, the requirements of Title V of the CAA and rules relating to the control of emissions of nitrogen, which are known as the Nitrogen Oxides Reasonably Available Control Technology rules ("NOx RACT Rules").
The HON Rule requires additional controls on emissions of certain listed hazardous air pollutants ("HAPs"). Butadiene, methanol, dimethylformamide, benzene, styrene, acrylonitrile and MTBE, which are manufactured, used and/or processed by the Company, have been identified as HAPs for purposes of regulation under the CAA. Areas of concern in the Company's operations for HAP emissions include equipment leaks, process vents, product storage, transfer operations and emissions from wastewater streams. The Company expended $600,000 on wastewater collection and treatment systems over the past year to comply with the HON rule.
The NOx RACT Rules require compliance by December 1999. The Company has examined the rules and believes that the main expenditure required to achieve compliance will involve the purchase and installation of monitoring equipment for NOx emissions, which can be either continuous emission monitors, predictive emission monitors or other approved monitoring methods. Management estimates that the cost to comply with the NOx RACT Rules will be $0.8 million.
The Company's Houston facility is located in Harris County, Texas, which has been designated as a non-attainment area for ozone under the CAA. Accordingly, the State of Texas is in the process of developing a revised State Implementation Plan ("SIP") which is expected to require significant reductions in emissions of ozone precursors, including volatile organic compounds and oxides of nitrogen in Harris County. To comply with the anticipated SIP, the Company installed new controls at a cost of approximately $7.8 million. The Company anticipates that the revised SIP may require certain additional emission reductions from the Company's facilities. Such reductions would
require the Company to modify existing controls, install additional controls for air emissions, or install new equipment. The Company is unable to predict the cost of modifying its facilities to comply with any additional requirements that the revised SIP may impose.
The Company has elected to participate in the CARE program sponsored by the TNRCC under which the Company will voluntarily obtain permits for certain air emission sources that had historically been "grandfathered" from certain permit requirements. The Company expects to be required to commit to certain emission reductions in connection with the CARE program. Since the Company joined the CARE program, the Texas Legislature enacted Senate Bill 766 which provides incentives for grandfathered emissions sources to apply for a voluntary emissions reduction permit instead of remaining grandfathered. In particular, grandfathered sources are invited to apply for a permit prior to September 1, 2001 that can establish less stringent or deferred emissions controls for facilities than are provided under permits for new emissions sources. Failure to apply for and obtain a permit will result in emissions fees that will treble annually until a grandfathered facility applies for a permit. The Texas Natural Resource Conservation Commission is currently developing rules to implement the requirements of Senate Bill 766. The Company will evaluate and pursue available options with respect to its grandfathered emissions sources that allow the Company to meet applicable air emissions requirements in a cost-effective manner. Measures likely to be required as part of the CARE program and/or Senate Bill 766 implementation are not anticipated to have a materially adverse impact on the Company or its operations.
Section 112 of the CAA requires prevention of accidental releases of certain listed extremely hazardous substances. The EPA's rules implementing portions of Section 112, which were signed by the EPA Administrator on May 24, 1996, required the Company to conduct a hazards assessment and develop a risk management plan by June 1999. The Company completed the plan and filed it with the appropriate agencies in a timely manner.
The regulations under Title V of the CAA will require a facility-wide inventory of emissions, sources and the air pollution control requirements applicable to those sources. The Company is in the process of compiling the required inventory. In connection with the Title V program, the Company may be required to upgrade its on-going monitoring program once it has received its operating permit. It is also possible that the Company may be required to make modifications to some of its equipment in order to comply with requirements identified through the facility-wide Title V permit process. These anticipated commitments are not expected to have a materially adverse impact on the Company's operations.
The Company has an active program to manage asbestos-containing material at its Houston facility in accordance with federal and state environmental, health and safety regulations. The Company does not believe that, when properly managed, these materials pose a hazard to the health of Company employees. There is no requirement to remove these materials, provided they are properly managed. As the plant is reconfigured or additions are made, asbestos-containing materials are removed or encapsulated by a certified contractor.
The wastewater treatment system for the Houston facility is 75% owned by the Company and 25% owned by Bayer Corporation ("Bayer"), the owner of an adjacent facility. Bayer has closed its facility, and the Company now operates the treatment system. The federal and state discharge permits are held jointly by the Company and Bayer. As a result of the change in operator the Company has applied for new discharge permits for the wastewater treatment system. The Company believes that the system has sufficient capacity for the Company's projected needs.
The Company has completed the first phase of its work on its storm water discharge system. An engineering study is under way to determine whether additional work will be required. The Company has completed installation of noise barriers for certain equipment.
The terminals in Baytown and Lake Charles are subject to many of the same or similar environmental laws and regulations as are applicable at the Houston facility. Management believes that the terminals are in substantial compliance with these requirements and that no significant expenditures will be required at these facilities to allow them to continue to comply with such laws and regulations.
The EPA has determined that butadiene is a probable human carcinogen. Effective February 1997, the Occupational Safety and Health Administration lowered the employee permissible exposure limit ("PEL") over an 8-hour time-weighted average for butadiene from 1000 parts per million ("ppm") to 1 ppm. The Company has conducted employee exposure monitoring and believes that it currently meets the PEL at most of its operations. For some operations, the Company anticipates employees will need to use respirators and that additional emission controls may be necessary. The Company does not expect that the current health concerns regarding butadiene will have a material adverse effect on the Company's financial condition or results of operations, although no assurance can be given that future studies will not result in more stringent regulation of butadiene.
MTBE ENVIRONMENTAL AND MARKET ISSUES
The possibly adverse effects of MTBE on health and the environment has become a statewide concern in California because MTBE has appeared in certain drinking water wells. It is believed that this is the result of leaks from older underground gasoline storage tanks and pipelines.
In addition, certain bodies of water have shown the presence of MTBE. A typical source of MTBE in these bodies is the operation of two-cycle outboard motors, which do not fully combust gasoline. Certain regulatory bodies are considering imposing limitations on the use of two-cycle outboard motors in bodies of water that are also used as sources of drinking water.
In California, the legislature required the state Department of Health Services (DHS) to assess MTBE and to set the maximum permissible levels of MTBE in drinking water in 1999. The levels are referred to as the primary and secondary maximum contaminant levels (MCLs). Secondary MCLs or secondary drinking water standards apply to chemicals in public drinking water that may adversely affect the taste, odor, or appearance of the water, and may cause people served by the public water system to discontinue its use. In January 1999, the DHS adopted 5 parts per billion (ppb) as the California secondary MCL for MTBE based upon the aesthetic factors alone.
The primary MCL for MTBE in California is pending in the regulatory process at this time. The DHS has proposed 13 ppb as the primary MCL for MTBE. It will accept public comments on the proposal through November 1, 1999. It is unknown at this time whether the proposed primary MCL would be adopted as the applicable standard in California or when it would become effective. The DHS is authorized to modify the proposed primary MCL for MTBE in response to public comments. The primary MCL for MTBE is based upon the public health goal (PHG) for MTBE, and the technical feasibility and costs associated with compliance. Notably, however, a public health goal of 13 ppb for MTBE was set by the California Office of Environmental Health Hazard Assessment (OEHHA) in March 1999 based exclusively on public health considerations. PHGs represent the level of chemicals in drinking water that would pose no significant health risks to individuals, and are non-mandatory goals. Until a primary MCL is adopted, the DHS will enforce the action level of 13 ppb for MTBE in lieu of the former level of 35 ppb set in 1991. If MTBE is found in a drinking water supply at levels exceeding 13 ppb, it is expected that the DHS will require treatment for the removal of MTBE from the water system to attain compliance.
On March 25, 1999, California Governor Gray Davis declared that, "on balance, there is a significant risk to the environment from using (MTBE) in gasoline in California," and issued an
executive order calling for the removal of MTBE from gasoline at the earliest possible date and no later than December 31, 2002. Governor Davis also mandated state agencies to conduct an environmental analysis and evaluation of ethanol as a possible substitute for MTBE and to seek relief from the requirement of the CAA to use oxygenates in gasoline in certain areas of the state. In September 1999, several bills codifying the Executive Order were before the California legislature. Senate Bill 192 would prohibit the sale of gasoline containing MTBE on or after January 1, 2003. The bill would also require the State Energy Resources Conservation and Development Commission to report to the legislature the amount of MTBE used in gasoline in California by refineries on a quarterly basis. Senate Bill 989 would require various state agencies to develop guidelines for the investigation, remediation, and clean up of MTBE in ground water. The bill would authorize the California Environmental Protection Agency to prohibit the use of MTBE in motor vehicle fuel before December 31, 2002, on a sub-regional basis in the Bay Area Air Basin, or in any other air basin in the state.
Although the EPA continues to require oxygenates to be added to gasoline in certain regions of the country either year-round or during the winter months, and MTBE continues to be the predominate oxygenate used, a panel appointed by the EPA has issued a report calling for the reduction in the use of MTBE in gasoline. No assurance can be given that actions will not be taken to restrict or prohibit the use of MTBE in certain areas of the country or to remove the oxygenate requirement from the CAA. Any restriction on or prohibition of the use of MTBE could have a material adverse effect on the Company's financial condition or results of operations.
EMPLOYEES
As of June 30, 1999, the Company had approximately 308 full-time employees, all of whom were salaried employees. In addition, the Company contracts with a third party to provide approximately 116 contract employees to perform routine maintenance on and around its Houston facility. The Company believes its relationship with its employees is satisfactory.
SAFETY RECORD
The Company maintains one of the best workman's compensation records in Texas, equivalent to most clerical operations. Over the last five years, the Company has not experienced a lost time injury at the Houston Plant Site. The Company believes this record is accomplished through extensive classroom and on-the-job training as well as the efforts of its highly trained, 75-member volunteer emergency response team.
ITEM 2.
ITEM 2. PROPERTIES
The Company's plant is located on a 257-acre tract approximately one mile from the Houston Ship Channel and near one of the chemical industry's largest domestic processing facilities. Approximately 230 acres is owned by the Company, and 25% of the remaining 27 acres is owned by Bayer. The Company leases from the Port of Houston two ship docks, which accommodate barge and ocean-going vessels, and has the facilities to be served by rail and by truck. In addition, the facility is connected by pipeline to customers and suppliers of raw materials, directly and through other major pipelines in the immediate area as well as in Texas City, and with salt dome storage facilities of other companies located at both Mont Belvieu and Pierce Junction, Texas. The Company's facility also has a laboratory for sampling and testing. The Company owns and operates a storage and terminal facility at Baytown, Texas, leases storage and terminal facilities in Lake Charles, Louisiana and Linden, New Jersey, and leases tank storage capacity in Bayonne, New Jersey. The Company also leases office space in Three Riverway Plaza, Houston, Texas as its principal executive offices. The Company believes that is has adequate facilities for the conduct of its current and planned operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In addition to the matters disclosed under "Environmental Regulation," the Company is a party to various claims and litigation arising in the ordinary course of its business. Management recognizes the uncertainties of litigation and the possibility that one or more adverse rulings could materially impact operating results. However, although no assurances can be given, management believes that other than as disclosed, based on the nature of and its understanding of the facts and circumstances which give rise to such claims and litigation, and after considering appropriate reserves that have been established, that the ultimate resolution of such issues, individually and in the aggregate, will not have a material adverse effect on the Company's financial position or results of operation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended June 30, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company set forth below for the three years ended June 30, 1999, the one month period ended June 30, 1996, the twelve months ended May 31, 1996 and the year ended May 31, 1995 should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements.
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(1) In January 1999, the estimated useful lives of certain plant assets were increased from 10 to 15 years. This change was accounted for as a change in accounting estimate and resulted in a $4.2 million decrease in depreciation expense.
(2) Net income (loss) for the twelve months ended May 31, 1996 includes a non-recurring charge for the impairment of investment in land of $12.6 million, with an associated income tax benefit of $4.7 million. Net loss for the year ended June 30, 1997 includes an extraordinary loss of $1.5 million for early extinguishment of debt.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company's revenues are derived primarily from merchant market sales of butadiene, MTBE, n-butylenes (butene-1 and butene-2) and specialty isobutylenes (isobutylene concentrate, high purity isobutylene, and diisobutylene). The Company's results of operations are affected by a number of factors, including variations in market demand, production volumes, and the pricing of its products and primary raw materials. The Company believes that the pricing for its principal products is primarily dependent on the balance between the global supply and North American demand for each product, the cost structure of the various global producers (including their cost of raw materials), and from time to time, other external factors, such as the implementation of the Clean Air Act Amendments of 1990, which has significantly increased the demand for MTBE over the past 10 years. Historically, the Company has successfully mitigated the cyclicality of the markets for certain of its end products by entering into contracts with pricing which allows for a fixed profit by linking prices directly or indirectly to raw material costs. In addition, the Company has attempted to optimize the use of isobutylene, an intermediate product produced by the Company, to produce MTBE or higher margin specialty products depending on prevailing market conditions. See "Environmental Regulation" section for a further discussion of MTBE.
REVENUES
The Company's revenues are a function of the volume of products sold by the Company and the prices for such products. The following tables set forth the Company's historical revenues and the percentages of historical revenues by product and volume of products sold.
REVENUES
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(1) Includes utility revenues and revenues realized from the Company's terminalling facilities.
SALES VOLUMES
YEAR ENDED JUNE 30, -------------------------------------------- 1997 1998 1999 ------------- ------------ ------------- (MILLIONS OF POUNDS, EXCEPT WHERE NOTED)
Butadiene 750.3 822.0 821.1 MTBE(1) 274.1 300.4 376.9 n-Butylenes 266.4 320.4 317.5 Specialty Isobutylenes 275.7 369.7 330.9
- ---------- (1) Volumes in millions of gallons. Includes 98.5 million, and 15.0 million gallons finished MTBE purchased for resale for the years ended June 30, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth an overview of the Company's results of operations.
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
REVENUES
The Company's revenues decreased by approximately 13%, or $66.6 million, to $448.2 million for the year ended June 30, 1999 from $514.8 million for the year ended June 30, 1998. The decrease was primarily due to lower product sales prices, which was partially offset by higher sales volumes.
Butadiene revenues decreased by approximately 27%, or $36.8 million, to $98.2 million for the year ended June 30, 1999 from $135.0 million for the year ended June 30, 1998. The decrease was attributable to a decrease in sales prices. Excess supply and imports of butadiene into the U.S. market contributed to lower prices. Sales volumes remained stable over the prior year.
MTBE revenues decreased by approximately 3%, or $6.1 million, to $229.3 million for the year ended June 30, 1999 from $235.4 million for the year ended June 30, 1998. The decrease was due to lower sales prices, which was partially offset by higher sales volumes. MTBE prices were lower in the current year due to the lower unleaded gasoline and crude oil prices. Sales volumes increased over the prior year due to purchases of finished MTBE for resale.
n-Butylenes revenues decreased by approximately 18%, or $10.0 million, to $45.2 million for the year ended June 30, 1999 from $55.2 million for the year ended June 30, 1998. n-Butylene sales revenue decreased due to lower sales prices during most of the fiscal year. Sales volumes of butene-1 and butene-2 were relatively unchanged as compared to the prior year.
Specialty isobutylene revenues decreased by approximately 15%, or $11.0 million, to $62.7 million for the year ended June 30, 1999 from $73.7 million for the year ended June 30, 1998. The decrease was due to lower sales prices of all of the Company's specialty products and lower sales volumes of isobutylene concentrate. Isobutylene concentrate sales volumes were lower due to a planned turnaround by one of the company's customers during the first half of the fiscal year.
GROSS PROFIT
Gross profit increased by approximately 5%, or $2.3 million, to $46.6 million for the year ended June 30, 1999 from $44.3 million for the year ended June 30, 1998. Gross margin during the period increased to 10.4% from 8.6%. The gross profit increase was primarily due to a change in accounting estimate, which reduced depreciation expense by $4.2 million during the current year. In January 1999, the depreciable lives of a certain plant assets were increased from 10 years to 15 years. With this adjustment excluded, gross margin would have decreased by $1.9 million over the prior year. The decrease is attributable to lower MTBE margins caused by a smaller spread between sales prices and raw materials. The decrease in MTBE margins was partially offset by improved margins in butadiene, specialty isobutylenes and reductions in operating costs.
INCOME FROM OPERATIONS
Income from operations increased by approximately 4%, or $1.4 million, to $38.7 million for the year ended June 30, 1999 from $37.3 million for the year ended June 30, 1998. Operating margin during this period increased to 8.6% from 7.2%. The increase in income from operations was primarily due to the same factors contributing the increase in gross profit described above, partially offset by an increase in selling, general and administrative expenses. This increase was associated with increased MTBE advocacy costs, software integration costs and business development activity in the current year.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
REVENUES
The Company's revenues increased by approximately 5%, or $24.6 million, to $514.8 million for the year ended June 30, 1998 from $490.2 million for the year ended June 30, 1997. The increase was primarily due to increased sales volumes of all products, which was partially offset by lower sales prices.
Butadiene revenues increased by approximately 3%, or $4.1 million, to $135.0 million for the year ended June 30, 1998 from $130.9 million for the year ended June 30, 1997. The increase was attributable to an increase in sales volumes of approximately 10% or 71.7 million pounds. Production rates during the year increased as a result of operating efficiencies and the availability of crude butadiene. The volume increase was offset by a decline in butadiene prices, which began during the second half of fiscal year. Excess supply and imports of butadiene into the U.S. market contributed to lower prices.
MTBE revenues increased by approximately 2%, or $5.1 million, to $235.4 million for the year ended June 30, 1998 from $230.3 million for the year ended June 30, 1997. The increase was due to higher sales volume, which was partially offset by lower sales prices. MTBE production levels increased during the period due to improved on-stream time of the Company's Dehydro units during the current fiscal year. MTBE prices were lower in the current year due to the lower unleaded gasoline and crude oil prices during the second half of the fiscal year.
n-Butylenes revenues increased by approximately 12%, or $5.8 million, to $55.2 million for the year ended June 30, 1998 from $49.4 million for the year ended June 30, 1997. n-Butylene sales revenue increased due to higher sales volumes particularly during the first half of the fiscal year. Sales volumes of butene-1 increased due to an unplanned shutdown of a major competitor in the market. The Company was able to successfully increase its butene-1 production rates to meet this demand from customers. Sales volumes of butene-2 to also increased during the current year.
Specialty isobutylene revenues increased by approximately 18%, or $11.4 million, to $73.7 million for the year ended June 30, 1998 from $62.3 million for the year ended June 30, 1997. The increase was due to higher sales volumes of all of the Company's specialty products. Isobutylene concentrate sales volumes returned to more historical levels during the current year after a down year in fiscal 1997. Sales volumes of high purity isobutylene and diisobutylene increased due to customer demand.
GROSS PROFIT
Gross profit increased by approximately 84%, or $20.2 million, to $44.3 million for the year ended June 30, 1998 from $24.1 million for the year ended June 30, 1997. Gross margin during the period increased to 8.6% from 4.9%. The gross profit increase was primarily due to higher margins on MTBE and increased sales volumes of butadiene, n-butylenes and specialty isobutylenes. MTBE margins improved primarily due to lower isobutane and methanol costs, which was partially offset by lower MTBE sales prices.
INCOME FROM OPERATIONS
Income from operations increased by approximately 104%, or $19.0 million, to $37.3 million for the year ended June 30, 1998 from $18.3 million for the year ended June 30, 1997. Operating margin during this period increased to 7.2% from 3.7%. The increase in income from operations was primarily due to the same factors contributing the increase in gross profit described above, offset slightly by and increase in selling, general and administrative expenses. This increase was associated with increased business development activity in the current year.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
Net cash provided by operating activities was $34.2 million for the year ended June 30, 1999 compared to $35.0 million for the year ended June 30, 1998. The decrease of $0.8 million was primarily attributable to lower profitability levels offset by changes in working capital. Net cash used in investing activities was $12.9 million for the year ended June 30, 1999 compared to $11.2 million for the year ended June 30, 1998. The increase of $1.7 million was primarily attributable to an increase in capital expenditures during the current year. Net cash used in financing activities was $22.1 million for the year ended June 30, 1999 compared to $23.0 million for the year ended June 30, 1998. The decrease of $0.9 million was primarily attributable to the net change in bank overdraft and reduction in the outstanding revolving line of credit.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
Net cash provided by (used in) operating activities was $35.0 million for the year ended June 30, 1998 compared to $(1.8) million for the year ended June 30, 1997. The change of $36.8 million was primarily attributable to improved profitability levels and changes in working capital. Net cash used in investing activities was $11.2 million for the year ended June 30, 1998 compared to $352.3 million for the year ended June 30, 1997. The change of $341.1 million was primarily attributable to the Acquisition of the Company on July 1, 1996, partially offset by proceeds from the sale of non-plant assets and Predecessor assets and investments. Net cash provided by (used in) financing activities was $(23.0) million for the year ended June 30, 1998 compared to $354.2 million for the year ended June 30, 1997. The change of $377.2 million was primarily attributable to the issuance of long-term debt and an investment from the Parent, in order to finance the Acquisition.
LIQUIDITY
On July 1, 1996 the Company issued $175 million of 11 1/8% Senior Subordinated Notes due 2006, $57.7 million of 13 1/2% Discount Notes dues 2007 and borrowed $140 million undeR the Bank Credit Agreement. The Company used the combined proceeds to finance the Acquisition of Texas Petrochemicals Corporation. The Company's liquidity needs arise primarily from principal and interest payments under the Bank Credit Agreement and the Subordinated Notes. Interest payments are not made on the Discount Notes until 2002. The Company's primary source of funds to meet debt service requirements is net cash flow provided by operating activities. Operating cash flow is significantly impacted by raw materials cost as well as the selling price and volume variances of finished goods. The Company enters into supply contracts for certain of its products in order to mitigate the impact of changing prices. Additionally, the Company has a $40 million Revolving Credit Facility, of which $2 million was in use at June 30, 1999, to provide funds for ongoing operations, working capital and planned capital expenditures. The Company believes that the availability of funds under the Revolving Credit Facility are sufficient to cover any current liquidity needs which could arise as a result of negative working capital. The Company's ability to borrow under the Revolving Credit Facility is limited by the terms of the Bank Credit Agreement, the Subordinated Notes and the Discount Notes. The Bank Credit Agreement, the Subordinated Notes and the Discount Notes include certain restrictive covenants, which include but are not limited to, limitations on capital expenditures, indebtedness, investments and sales of assets and subsidiary stock. Additionally, the Bank Credit Agreement requires the Company to maintain certain financial ratios. Effective June 30, 1999 the Company obtained an amendment to the Bank Credit Agreement to update the financial ratios relating to fixed charge coverage and debt to EBITDA for fiscal 2000.
In February 1998, the Company entered into a three-year swap agreement for $125 million of its Senior Subordinated Notes. The swap agreement effectively converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a floating debt with a structured collar. Under the agreement the Company's interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If LIBOR rates are set above 6.75% the Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June 30, 1999 LIBOR rates were set at 5.22%. In June 1998, the Company entered into a three-year interest rate cap for $64 million of its senior debt under the Bank Credit Agreement. The cap effectively converts a portion of the Company's floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates are set above 6.75%. The principal amount of the cap amortizes from $64 million to $32 million on a quarterly basis over the three-year term.
CASH BONUS PLAN
In connection with the Acquisition, the Predecessor established a $35 million Cash Bonus Plan covering substantially all employees of the Predecessor (or certain affiliates of the Predecessor) and covering certain third-party contractors who had contributed to the past success of the Predecessor. During the year ended June 30, 1999, $7.8 million of this amount was paid to eligible participants and the remaining $9.8 million will be made in five equal future quarterly installments.
CAPITAL EXPENDITURES
The Company's capital expenditures for fiscal 1999 related principally to improving operating efficiencies and maintaining environmental compliance. Capital expenditures for year ended June 30, 1999 were $14.4 million, compared to $12.5 million for the year ended June 30, 1998. The Company expenses approximately $20 million annually for plant maintenance. These maintenance costs are not treated as capital expenditures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has adopted the provisions of SFAS No. 132 with no material revisions to the disclosures in the financial statements. The Company has entered into interest rate swap and cap agreements, and may have entered into other types of contracts, which are included in the scope of SFAS No. 133. The Company will analyze SFAS No. 133 to determine what effect it will have on the Company's future financial statements and disclosures. In June 1999, SFAS No. 137 was issued to delay the required effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000.
YEAR 2000
The Company has recognized the need to ensure that its systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. The issues arise from computer programs, computer equipment and other equipment with embedded chips or processors that use two digits rather than four to designate the year. Date-sensitive computer operations may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failures or miscalculations, which could potentially cause operational disruptions.
In preparation the Company has established a Steering Committee composed of members of all functional groups of the organization to address these issues. This committee is responsible for prioritizing the Company's efforts and ensuring that the appropriate resources both internal and external have been dedicated to the project. The committee's assessment was focused on those areas, which were considered high-risk critical business processes. The assessment and future progress has been based on the following categories including plant automation and process control, client server, desktop, communications, enterprise infrastructure and overall readiness. The Company's overall readiness expressed as a percentage of completion as of September 15, 1999 is approximately 95%. The total estimated spending for all categories is expected to range from $15 to $16 million. The majority of these costs relate to capital investments made in automating our plant production processes and in upgrading our financial accounting systems.
The Company believes that all significant systems controlled by the Company will be Year 2000 ready in the last half of calendar 1999. The Company's operations are dependent upon third parties for continuous supply of raw materials, natural gas, transportation and storage. While the Company has attempted to obtain an assessment of the readiness of these third parties, there can be no assurance that all third parties will have their systems ready. The Company is developing contingency plans to be implemented prior to end of calendar 1999. These contingency plans are being developed to avoid any material interruption of our core business operations. These plans include alternative operating procedures and appropriate staffing on critical dates.
The Company believes that it has taken all of the appropriate steps to prevent any Year 2000 issues from arising. However, there can be no assurances that all internal and third party systems will operate as expected into calendar year 2000 and beyond. The failure of any such systems could have a material impact on the operation of the Company's production facilities and cause a general business interruption. The Company is unable to determine what the impact on the financial results of the Company could be from such failure.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Part I, Items 1 and 2 of this document include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in conjunction with the forward looking statements included herein ("Cautionary Disclosures"). Subsequent written or oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Disclosures.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has a credit facility and interest rate swap agreements, which subject the Company to the risk of loss associated with movements in market interest rates. As of June 30, 1999 the Company has $65.4 million of floating rate obligations under the credit facility. A 1% increase in interest rates could result in a $0.7 million increase in annual interest expense. The Company also has a swap agreement for $125 million of its Senior Subordinated Notes. The swap converts this amount of the fixed rate obligations to floating if LIBOR rates exceed 6.75%. If LIBOR rates were to exceed this level a 1% increase in interest rates could result in a $1.3 million increase in annual interest expense. As of June 30, 1999 LIBOR rates were set at 5.22%.
The Company's exposure to foreign currency market risk is minimal since sales prices are typically denominated in US dollars. The Company's exposure to changing commodity prices is also minimal since substantially all raw material acquisitions and finished goods sales prices are generally at posted or market related prices.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Auditors ......................................... 20
Financial Statements
Consolidated Balance Sheet ......................................... 21
Consolidated Statement of Operations ............................... 22
Consolidated Statement of Stockholder's Equity ..................... 23
Consolidated Statement of Cash Flows ............................... 24
Notes to Consolidated Financial Statements ......................... 25
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Texas Petrochemical Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Texas Petrochemical Holdings, Inc. and subsidiary (the "Company") as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at June 30, 1999 and 1998 and the results of its operations and its cash flows for each of the three years ended June 30, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas August 6, 1999
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET (IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSAND OF DOLLARS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
TEXAS PETROCHEMICAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
See accompanying notes to consolidated financial statements.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
On July 1, 1996, Texas Olefins Company, Texas Petrochemicals Corporation and a raw material supply contract of Clarkston Corporation were acquired for approximately $371 million in a series of transactions (the "Acquisition"). After the transactions, TOC was merged with and into Texas Petrochemicals Corporation with Texas Petrochemicals Corporation becoming a 100% owned subsidiary of Texas Petrochemicals Holdings, Inc. In connection with the Acquisition, Texas Petrochemicals Corporation issued $175 million of Senior Subordinated Notes due 2006 (the "Subordinated Notes") and borrowed $140 million under the Bank Credit Agreement. Texas Petrochemical Holdings, Inc. issued $57.7 million in Discount Notes due 2007 (the "Discount Notes") for net proceeds of $30 million and sold $43.8 million in common stock, $10 million of which was financed under the Bank Credit Agreement.
The Acquisition was accounted for using the purchase method of accounting and, therefore, the consolidated financial statements for the year ended June 30, 1997 reflect the acquisition cost allocated to the net assets acquired based on their estimated fair values as of July 1, 1996. The fair value of tangible assets acquired, net of liabilities assumed, was $179 million. The balance of the acquisition cost, $184 million, was recorded as goodwill and is being amortized over 40 years utilizing the straight-line method.
The Company through its facility in Houston, Texas is the third largest producer of butadiene, the largest producer of butene-1, and the third largest producer of methyl tertiary-butyl ether ("MTBE"), in North America. In addition, the Company is the sole producer of diisobutylene and isobutylene concentrate in the United States and is the largest domestic merchant supplier of high purity isobutylene to the chemical market. The Company's products include: (i) butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty isobutylenes, primarily used in the production of specialty rubbers, lubricant additives, detergents and coatings.
The Company's principal feedstocks are crude butadiene, isobutane and methanol. The Company purchases a significant portion of its crude butadiene requirements at prices, which are adjusted based on the Company's selling price of butadiene as well as the cost of natural gas used to produce butadiene, thereby providing the Company with a fixed profit on such sales. Methanol and isobutane are purchased at prices linked to prevailing market prices.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three years ended June 30, 1999 include the accounts of Texas Petrochemical Holdings, Inc. and its wholly owned subsidiary, TPC Holding Corp., (collectively referred to as) the "Company".
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INVENTORIES
Inventories consist of raw materials, finished goods and chemicals used in processing and are valued at the lower of average cost or market. The Company may enter into product exchange agreements with suppliers whereby certain inventories are exchanged for raw materials. These exchanges are recorded at the lower of cost or market. Any resulting gains or losses from the utilization of these exchanges are reflected in cost of chemical products sold. Balances related to quantities due to or payable by the Company are included in inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Turnaround costs for major units of the manufacturing facilities are capitalized and amortized over the life of the turnaround. Maintenance and repairs are charged to expense as incurred while significant improvements are capitalized. Upon retirement or sale of an asset, the asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.
DEPRECIATION
Depreciation of property, plant and equipment is computed using the straight-line method over their estimated useful lives ranging from 3 to 31 years. In January 1999, the estimated useful lives of certain plant assets were increased from 10 years to 15 years based on engineering analysis. This change was accounted for as a change in accounting estimate and resulted in a $4.2 million decrease in depreciation expense for fiscal 1999.
DEBT ISSUE COSTS AND OTHER
Debt issue costs relating to the Company's long-term debt are amortized to interest expense over the scheduled maturity of debt utilizing the effective interest method. Unamortized debt issue costs relating to long-term debt retired prior to its scheduled maturity are charged off as an extraordinary item. Other assets include patents and catalysts, which are amortized using the straight-line method over their useful lives ranging from 2 to 7 years.
REVENUE RECOGNITION
The Company recognizes revenue from sales of refined products in the period of delivery.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred taxes be provided at enacted tax rates on temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EARNINGS PER SHARE
Loss per share for three years ended June 30, 1999 has been computed using a weighted average shares outstanding of 478,045, 457,778 and 437,778, respectively. The weighted average shares outstanding used in the computation of earnings (loss) per share are net of 40,000, 60,000 and 80,000 shares held by the Employee Stock Ownership Plan that are not allocated to employees as of June 30, 1999, June 30, 1998 and 1997, respectively. For the year ended June 30, 1999 loss per share used in calculating earning per share has been reduced by an amount equivalent to the increase in the market value of the shares allocated to employees, to the extent that such increase has not already been recognized as compensation expense in the current year ($1,170,000). The effect options was antidilutive in fiscal 1999, therefore, 6,661 shares were excluded from the earnings per share calculation. The effect of options was not dilutive for fiscal years 1998 and 1997 for purposes of calculating diluted earnings per share.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has adopted the provisions of SFAS No. 132 with no material revisions to the disclosures in the financial statements. The Company has entered into interest rate swap and cap agreements, and may have entered into other types of contracts, which are included in the scope of SFAS No. 133. The Company will analyze SFAS No. 133 to determine what effect it will have on the Company's future financial statements and disclosures. In June 1999, SFAS No. 137 was issued to delay the required effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000.
RECLASSIFICATIONS
Certain reclassifications have been made to previously issued financial statements to conform to the current presentation.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS OF DOLLARS)
INVENTORIES:
JUNE 30, -------------------------- 1999 1998 ---------- ----------
Finished goods......................... $ 10,594 $ 4,701 Raw materials.......................... 8,053 10,415 Chemicals and supplies................. 1,326 2,094 ---------- ---------- $ 19,973 $ 17,210 ========== ==========
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CURRENT ASSETS: JUNE 30, ---------------------- 1999 1998 -------- --------
Catalyst Inventory ......................... $ 7,463 $ 4,849 Deferred turnaround costs .................. 2,585 1,265 Prepaid and other .......................... 8,528 7,522 -------- -------- $ 18,576 $ 13,636 ======== ========
PROPERTY, PLANT AND EQUIPMENT: JUNE 30, ---------------------- 1999 1998 -------- --------
Chemical plants ............................ $277,117 $260,808 Construction in progress ................... 8,834 13,624 Other ...................................... 5,202 2,308 -------- -------- 291,153 276,740 Less accumulated depreciation, depletion and amortization ............... 71,447 49,523 -------- -------- $219,706 $227,217 ======== ========
ACCRUED EXPENSES: JUNE 30, ---------------------- 1999 1998 -------- --------
Accrued interest ........................... $ 13,893 $ 14,581 Property and sales taxes ................... 1,995 2,836 Federal and state income taxes ............. 2,731 3,629 Other ...................................... 596 741 -------- -------- $ 19,215 $ 21,787 ======== ========
4. LONG-TERM DEBT JUNE 30, ---------------------- 1999 1998 -------- -------- Bank Credit Agreement: Term A Loan ................................ $ 18,002 $ 21,003 Term B Loan ................................ 41,407 42,393 ESOP Loan .................................. 4,000 6,000 Revolving Credit Loans ..................... 2,000 12,000 Senior Subordinated Notes .................... 225,000 225,000 Discount Notes ............................... 44,394 38,958 Deferred premium on Senior Subordinated Notes ......................... 2,250 2,571 Long-term financing .......................... 879 1,871 -------- -------- 337,932 349,796 Less current maturities .................... 7,465 6,982 -------- -------- Long-term debt ............................. $330,467 $342,814 ======== ========
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Bank Credit Agreement originally provided for term loans in the amount of $130 million, an ESOP loan of $10 million, and a revolving credit facility of up to $40 million. Quarterly principal and interest payments are made under the Bank Credit Agreement. The final payments under the ESOP Loan, Term A Loan and Term B Loan are due on June 30, 2001, December 31, 2002 and June 30, 2004, respectively. The Revolving Credit Loan facility is currently scheduled to expire on December 31, 2002. The debt under the Bank Credit Agreement bears interest, at the option of the borrower, based on the LIBOR rate plus a margin (2.5% and 3% at June 30, 1999) or the greater of the prime rate and the federal funds rate plus 1/2% plus a margin (1.5% at June 30, 1999). Substantially all assets of the Company are pledged as collateral under the Bank Credit Agreement. The Senior Subordinated Notes are due 2006 and bear interest at 11 1/8% payable semiannually on January 1 and July 1. The Discount Notes are due 2007 and bear interest at 13 1/2% payable semiannually on January 1 and July 1 beginning 2002. The Bank Credit Agreement and the Senior Subordinated Notes include certain restrictive covenants, which include but are not limited to, limitations on capital expenditures, indebtedness, investments and sales of assets and subsidiary stock. Additionally, the Bank Credit Agreement requires the Company to maintain certain financial ratios. Effective June 30, 1999 the Company obtained an amendment to the Bank Credit Agreement to update the financial ratios relating to fixed charge coverage and debt to EBITDA for fiscal 2000.
The fair value of the Senior Subordinated Notes, based on quoted market prices, was approximately $200 million and $244 million as of June 30, 1999 and 1998, respectively. There is currently not and active market for the Discount Notes, therefore, the Company estimated that the fair value based on current interest rates available for the Company and similar debt instruments, was approximately $35 million and $45 million as of June 30, 1999 and 1998, respectively. The long-term debt under the Bank Credit Agreement carries a floating interest rate, therefore, the Company estimates that the carrying amount of such debt was not materially different from its fair value as of June 30, 1999 and 1998.
In February 1998, the Company entered into a three-year swap agreement for $125 million of its Senior Subordinated Notes. The swap agreement effectively converts a portion of the 11 1/8% fixed rate Senior Subordinated Notes to a floating debt with a structured collar. Under the agreement the Company's interest rate is fixed at 10.8% while LIBOR is set between 5.45% and 6.75%. If LIBOR rates are set above 6.75% the Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates are set between 5.25% and 5.45% the Company's interest rate is floating at current LIBOR plus 5.35%. If LIBOR rates are set below 5.25% the Company's interest rate is fixed at 10.8%. As of June 30, 1999 LIBOR rates were set at 5.22%. In June 1998, the Company entered into a three-year interest rate cap for $64 million of its senior debt under the Bank Credit Agreement. The cap effectively converts a portion of the Company's floating rate bank debt to a fixed rate of 6.75% plus the margin if LIBOR rates are set above 6.75%. The principal amount of the cap amortizes from $64 million to $32 million on a quarterly basis over the three-year term.
The net premiums paid for interest rate swap agreements are charged to expense over the terms of the agreements. The Company is exposed to credit losses in the event of nonperformance by a counterparty to the derivative financial instruments. The Company anticipates, however, that the counterparties will be able to fully satisfy obligations under the contracts. Market risk arises from changes in interest rates.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate scheduled maturities outstanding debt for the succeeding five years are as follows: FISCAL YEAR ----------- 2000 ..................................... $ 7,465 2001 ..................................... 7,486 2002 ..................................... 6,386 2003 ..................................... 20,302 2004 ..................................... 24,647
5. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities at June 30, 1999 and June 30, 1998 are as follows (in thousands of dollars):
JUNE 30, -------------------- 1999 1998 -------- -------- Deferred tax asset (liability) - current: Cash bonus plan ................................... $ 2,756 2,756 Turnaround costs .................................. (905) (443) Other ............................................. (537) (49) -------- -------- $ 1,314 $ 2,264 ======== ======== Deferred tax asset (liability) - noncurrent: Investment in land ................................ $ 4,828 $ 4,813 Cash bonus plan ................................... 733 3,466 Interest .......................................... 5,037 3,135 Property, plant and equipment ..................... (65,872) (71,000) Other ............................................. (220) (220) -------- -------- $(55,494) $(59,806) ======== ========
The current deferred tax asset is included in other current assets in the accompanying balance sheet. The provision for federal and state income taxes is comprised of the following (in thousand of dollars):
YEAR ENDED JUNE 30, -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Current: Federal .................. $ 5,296 $ 4,259 $ (508) State .................... 708 943 63 ---------- ---------- ---------- 6,004 5,202 (445) ---------- ---------- ---------- Deferred: Federal .................. (3,363) (3,334) (4,378) State .................... - - - ---------- ---------- ---------- (3,363) (3,334) (4,378) ---------- ---------- ---------- Total provision (benefit) for income taxes $ 2,641 $ 1,868 $ (4,823) ========== ========== ==========
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income from continuing operations. The reasons for this difference are as follows:
YEAR ENDED JUNE 30, -------------------------------- 1999 1998 1997 ------- ------- -------
Statutory federal income tax rate ........ 35% 35% 35% Computed "expected" federal income tax ... $ 164 $ (926) $(6,596) Increase in tax resulting from: State income taxes, net of federal benefit .................. 460 612 41 Other, net .......................... 413 273 22 Amortization of goodwill and other .. 1,604 1,909 1,710 ------- ------- ------- Provision (benefit) for income taxes ..... $ 2,641 $ 1,868 $(4,823) ======= ======= =======
6. INVESTMENT IN AND ADVANCES TO LIMITED PARTNERSHIP
The Company and Hollywood Marine, Inc. formed a limited partnership, Hollywood/Texas Petrochemicals, Ltd., to operate four barges capable of transporting chemicals. The Company is a 50% limited partner in the limited partnership. The Company accounts for this investment under the equity method and records its portion of the limited partnership's net income as other income in the accompanying statement of operations. Summarized financial information of the partnership has not been presented because the Company's investment in and its proportionate share of the partnership's operations are not material.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows (in thousands of dollars):
YEAR ENDED JUNE 30, ------------------------------------------- 1999 1998 1997 --------- ---------- ---------
Interest ................... $ 34,641 $ 33,735 $ 20,600 Income taxes ............... 6,897 1,641 967
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases tank cars under noncancelable operating leases. Under the terms of the lease agreements, the Company is reimbursed by customers at a fixed rate per mile, based on the distance the tank cars travel. Reimbursements were approximately $0.5 million, $0.8 million, $0.8 million, for the three years ended June 30, 1999, respectively.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Total rent expense was approximately $4.6 million, $3.6 million and $3.9 million, (net of reimbursements described above and including $0.7 million, $0.7 million and $1.8 million for the rental of barges) for the three years ended June 30, 1999, respectively. Future minimum lease payments at June 30, 1999 are as follows (in thousands of dollars):
FISCAL YEAR ----------- 2000.............................. $ 3,918 2001.............................. 3,614 2002.............................. 2,450 2003.............................. 1,360 2004.............................. 270
PURCHASE COMMITMENTS
The Company has purchase commitments incident to the ordinary conduct of business. The prices of such purchase commitments are based on formulas, which are determined from the prevailing market rate for such products. These commitments generally have cancellation provisions given proper notification.
LITIGATION
The Company is involved in various routine legal proceedings which are incidental to the business. Management of the Company is vigorously defending such matters and is of the opinion that their ultimate resolution will not have a material adverse impact on the Company's financial position, results of operations or cash flows.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state and local laws and regulations administered by the U.S. Environmental Protection Agency, the U.S. Coast Guard, the Army Corps of Engineers, the Texas Natural Resource Conservation Commission, the Texas General Land Office, the Texas Department of Health and various local regulatory agencies. The Company holds all required permits and registrations necessary to comply substantially with all applicable environmental laws and regulations, including permits and registrations for wastewater discharges, solid and hazardous waste disposal and air emissions, and management believes that the Company is in substantial compliance with all such laws and regulations. While management does not expect the cost of compliance with existing environmental laws will have a material adverse effect on the Company's financial condition, results of operations or cash flows, there can be no assurance that future legislation, regulation or judicial or administrative decisions will not have such an effect.
Under federal and state environmental laws, companies may be liable for remediation of contamination at on-site and off-site waste management and disposal areas. Management believes that the Company is not likely to be required to incur remediation costs related to its management, transportation and disposal of solid and hazardous materials and wastes, or to its pipeline operations. If the Company were to be required to incur such costs, however, management believes that such costs would not have a material adverse effect on the Company's results of operations. In addition, under the terms of the 1984 purchase agreement, the prior owner of the Houston facility, Petro-Tex,
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
has indemnified the Company for liability arising from off-site disposal of any materials prior to June 1984. Notwithstanding the terms of the indemnity, in July 1994 Petro-Tex filed a claim for indemnity against the Company for any costs that may be attributable to Petro-Tex for the cleanup of the Malone Service Company ("Malone") site in Texas City, Texas. Petro-Tex and many other companies along the Gulf Coast allegedly sent wastes to the Malone site for disposal in the 1970s and possibly the early 1980s. Malone has been subject to several state enforcement actions regarding its waste disposal practices. It is not known whether the site will require remediation. The Company believes that it has meritorious defenses to Petro-Tex's claim and intends to contest the claim vigorously. Although no on-site contamination has been identified as requiring remediation, management believes that certain areas of the Houston facility were historically used for waste disposal. Based on limited, currently available information about these waste disposal areas and their contents, the Company believes that, if such remediation becomes necessary, any remediation costs would not have a material adverse effect on the Company's financial condition or results of operations. The Petro-Tex indemnity does not extend to these on-site waste disposal areas or their contents.
9. EMPLOYEE BENEFITS
PROFIT SHARING PLAN
The Company has a noncontributory profit sharing plan that covers all full-time employees that have completed one year or more of service. Employees can contribute up to 10% of their base compensation to a tax deferred fund which is matched by the Company at the rate of $.25 per one dollar contributed by the employee up to 6% of the employee's base compensation. The Company's expense to match employee contributions was approximately $0.2 million for each of the three years ended June 30, 1999, respectively. Additionally, the Company made additional discretionary contributions to the plan, which amounted to approximately $2.0 million, $2.1 million and $1.1 million, for the three years ended June 30, 1999, respectively. The Company's contributions vest with the employee at a rate of 20% per year.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, the Company established an Employee Stock Ownership Plan (the "ESOP"), covering substantially all full-time employees of the Company. The ESOP borrowed $10 million under the Bank Credit Agreement to purchase 100,000 shares of the Company's Common Stock at the closing of the Acquisition. The shares of Common Stock purchased by the ESOP were pledged as security for the ESOP Loan, and such shares will be released and allocated to ESOP participants' accounts as the ESOP Loan is discharged. For employees whose employment commenced prior to October 1, 1996 and who have attained 21 years, participation begins as of the Acquisition date or the date of commencement of the participant's employment. A participant's ESOP account vests at the rate of 20% per year. The Company's contributions to the ESOP, which are used to retire principal and pay interest on the loan is reported as compensation expense. Principal and interest payments made for the three years ended June 30, 1999 amounted to $2.4 million, $2.6 million and $2.7 million, respectively. The common stock held by the Employee Stock Ownership Plan and the related unearned compensation is reported between liabilities and permanent stockholders' equity in a manner similar to redeemable preferred stock as employees have an option to put the shares of the Company. As of June 30, 1999, 60,000 shares have been allocated to employees.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK OPTION PLAN
In October 1996, the Company approved the Stock Option Plan (the "Plan") to reserve up to 27,778 shares of Common Stock to certain officers, directors and key employees of the Company. In April 1998 the Company amended the Plan to reserve up to an additional 42,000 shares of Common Stock under the plan. The term of the options issued under the Plan cannot exceed ten years from the date of grant. The options issued to date vest ratably over a three-year period from the date of grant and are exercisable at $100 per share. Stock option activity under the Plan was as follows:
NUMBER OF SHARES --------- Balance July 1, 1996 - Granted .............................. 27,778 Exercised ............................ - Canceled ............................. - ------ Balance June 30, 1997 27,778
Granted .............................. 11,500 Exercised ............................ - Canceled ............................. (1,000) ------ Balance June 30, 1998 38,278
Granted .............................. - Exercised ............................ (667) Canceled ............................. (5,333) ------ Balance June 30, 1999 ................ 32,278 ======
The Company applies APB 25 and related Interpretations in accounting for the Plan. There has been no compensation cost recognized by the Company associated with the Plan as the exercise price of the options at the dates of measurement were equivalent to the estimated fair value of the common stock on that date. Had compensation cost for the Plan been determined based on the method consistent with SFAS 123, the Company's net loss and net loss per share for the three years ended June 30, 1999 would have been unchanged on a pro forma basis.
CASH BONUS PLAN LIABILITY
In connection with the Acquisition, the Predecessor established the $35 million Cash Bonus Plan covering substantially all employees of the Predecessor (or certain affiliates of the Predecessor) and covering the employees of certain third-party contractors who had contributed to the past success of the Predecessor. All participants of the plan as of July 2, 1996 were distributed 10% of the cash bonus in August 1996, and the remaining amount is to be paid in sixteen quarterly installments which began in October 1996.
TEXAS PETROCHEMICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED PARTY TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and Corporate Development in the amount of $200,000 of which $21,024 remained outstanding as of June 30, 1999. The proceeds from the loan were utilized to purchase outstanding shares of the Company's common stock at fair market value. The loan carries an interest rate of 7%. During fiscal 1999 and 1998 the Company made payments totaling $250,000 and $500,000, respectively, to a consulting firm whose majority shareholder is also an outside director and shareholder of the Company. The Chairman of the Company receives annual compensation of $150,000 for consulting services provided to the Company and reimbursements of approximately $25,000 per year for office expenses.
11. CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to chemical and petroleum based companies in North America. For the three years ended June 30, 1999 approximately 34%, 41% and 41%, respectively, of the Company's sales were to four customers. The Company had two customers, which represented 11% and 14% of sales during the year ended June 30, 1999, 13% and 15% of sales during the year ended June 30, 1998, and 11% and 17% of sales during the year ended June 30, 1997. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company's credit losses have been minimal.
The Company maintains its cash deposits and short-term investments with a major bank and a financial services company which at certain times exceed the federally insured limits. Management assesses the financial condition of these institutions and believes that any possible credit loss is minimal.
12. FINANCIAL INSTRUMENTS
At June 30, 1999 the Company estimated that the carrying value and fair value of its financial instruments, other than long-term debt (See Note 4), were approximately equal due to the short-term nature of the instruments. Such instruments include cash and cash equivalents, accounts receivable and accounts payable. The Company enters into certain derivative financial instruments as part of its interest rate risk management. Interest rate swaps, caps, collars and floors are classified as matched transactions. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment to interest expense.
The fair value of derivative financial instruments are the amounts at which they could be settled base on estimates from dealers. As of June 30, 1999, the carrying amounts and estimated fair values of derivative financial instruments were not significant.
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL GUARANTOR INFORMATION
TPC Holding Corp. a wholly owned subsidiary of Texas Petrochemical Holdings, Inc. has fully and unconditionally guaranteed, on a joint and several basis, Texas Petrochemical Holdings, Inc's. obligations relative to the Discount Notes due 2007 in an Event of Default. TPC Holding Corp. conducts its operations through its subsidiaries and is dependent upon distribution from these subsidiaries as its source of cash flow. Management has determined that separate, full financial statements of TPC Holding Corp. ("Guarantor") would not be material to investors and such financial statements are not provided. Supplemental combining financial information of Texas Petrochemical Holdings, Inc. is presented below:
Texas Petrochemical Holdings, Inc. Supplemental Combining Balance Sheet June 30, 1999 (in thousands)
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc. Supplemental Combining Balance Sheet June 30, 1998 (in thousands)
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc. Supplemental Consolidating Statement of Income Year Ended June 30, 1999 (in thousands)
Texas Petrochemical Holdings, Inc. Supplemental Consolidating Statement of Income Year Ended June 30, 1998 (in thousands)
Texas Petrochemical Holdings, Inc. Supplemental Consolidating Statement of Income Year Ended June 30, 1997 (in thousands)
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc. Supplemental Combining Statement of Cash Flows Year Ended June 30, 1999 (in thousands)
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc. Supplemental Combining Statement of Cash Flows Year Ended June 30, 1998 (in thousands)
TEXAS PETROCHEMICAL HOLDINGS, INC. (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Texas Petrochemical Holdings, Inc. Supplemental Combining Statement of Cash Flows Year Ended June 30, 1997 (in thousands)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the directors and executive officers of the Company. Each director is elected for a one-year term or until such person's successor is duly elected and qualified.
Mr. Cain is Chairman of the Board of Agennix Inc. and of Lexicon Genetics, Inc., biotechnology companies. From August 1982 until his retirement in December 31, 1992, he was Chairman of the Board of The Sterling Group, Inc. ("Sterling"). Mr. Cain was the Chairman of the Board of Sterling Chemicals, Inc. from 1986 until it was sold in August 1996 and was on the Board of Directors of Arcadian Corporation from May 1989 until it was sold in April 1997. Prior to organizing Sterling, Mr. Cain was involved in the purchase of a variety of businesses and provided consulting services to these and other companies. Mr. Cain was also Chairman of the Board of UltraAir, Inc. from 1991 to 1994, Chairman of the Board of Cain Chemical Inc. from its organization in March 1987 until its acquisition by Occidental Petroleum Corporation in May 1988 and the Chairman of the Board of Vista Chemical Company from 1984 until 1986.
Mr. Henry has held various manufacturing and management positions in the Dow Chemical Company, including Vice President - Business Operations for Latin America, Vice President - Manufacturing Dow Badische, General Manager - Michigan Division, President - Dow Brazil, President - Dow USA and Executive Vice President of Dow Chemical Company (1982 - 1988). Mr. Henry was on Dow's board from 1979 to 1993 and has served on the Executive, Compensation, Health and Safety Committees and as Chairman of the Finance and Investment Policy Committee. Mr. Henry also served as Chairman of the Board of Dowell Schlumberger, 1985 - 1988.
Mr. Huff has been President of the General Manager of WRH Partners, L.L.C., the General Partner of The Huff Alternative Income Fund, L.P. (the "Huff Fund") since 1994. He also has been President of one of the general managers of W.R. Huff Asset Management Co., L.L.C., an investment management firm, since 1984. Mr. Huff serves on the Board of Directors as the designee of the Huff Fund.
Mr. McMinn has been Chairman of the Board of the Company since 1996. He was Corporate Vice President and Manager of the Industrial Chemical Group of FMC Corporation, a manufacturer of machinery and chemical products, from 1973 through 1985. He became President and Chief Executive Officer of Cain Chemical Inc., a producer of petrochemicals, in 1987 and served in that capacity until its acquisition by Occidental Petroleum in May 1988. He became Chairman of the Board of Directors of Arcadian Corporation in August 1990 and served in that capacity until it was sold in April 1997
Mr. Nordaker has been a Managing Director of Chase Securities since August 1995. From 1982 to 1995, he was a Group Manager at Texas Commerce Bank National Association and, in addition, served in several capacities at Texas Commerce Bank in the Energy Group, including Section Manager and Division Manager. From May 1977 to March 1982, Mr. Nordaker was a Manager of Projects for The Frantz Company, an engineering consulting firm servicing the oil refinery and petrochemical industry. Prior thereto, he was a chemical engineer with Universal Oil Products. Mr. Nordaker serves on the Board of Directors as the Designee of Chase Venture, an affiliate of Chase Securities.
Ms. Rheney has been a principal of The Sterling Group, Inc. since February 1992. She worked as an independent financial consultant from December 1990 to January 1992. Prior to that time, from June 1987 to November 1990, she was an associate at Sterling. Ms. Rheney is also a director of AXIA Group, Inc., and American Plumbing & Mechanical, Inc.
Mr. Rosenthal has served as President of Heaney Rosenthal, Inc. which focuses on investment, acquisition and advice to various businesses since 1994, and as Chairman of the Board, President and CEO of AXIA Incorporated since 1998. Mr. Rosenthal previously served as Chairman of the Board (1990-1994) and CEO (1994) of Wheatley TXT Corp.
Mr. Shelton has been Vice Chairman of the Board, Executive Vice President and Chief Operations Officer of the Company since 1983. Prior thereto, Mr. Shelton held various positions in the chemicals industry including Vice President - Manufacturing of Oxirane Corporation and Manager - Manufacturing/Engineering of Atlantic Richfield Company.
Mr. Waycaster has been President and Chief Executive Officer of the Company since 1992. Prior thereto, Mr. Waycaster spent 27 years with The Dow Chemical Company and was serving as Vice President of the Hydrocarbons and Resources when he left to join the Company. Mr. Waycaster is a Board member of the Chemical Manufacturers Association, National Petrochemical and Refiners Association, and serves on the Advisory Board of ChemConnect, Inc..
Mr. McNeese retired from the Company on July 1, 1999, and has been retained as a consultant. Mr. McNeese was the Vice President - Operations of the Company from 1992 - 1999. He joined the Company in 1986 and has held positions in manufacturing, production and utilities. From 1984 to 1986, Mr. McNeese served as General Manager- Operations and Engineering for Paktank Corporation. Prior thereto, Mr. McNeese held various positions in a number of Atlantic Richfield Company businesses. Mr. McNeese has 36 years of experience in the chemicals industry.
Mr. Sebastian joined the Company in March 1998 as Vice President Marketing and Supply. Prior to joining the Company, he performed consulting activities in chemical and oil products marketing, operations and logistics, specializing in buying and selling physical assets and companies. Prior to that, he was Executive Vice President of Commonwealth Oil Refining Company and a Co-Founder of Arochem Corporation, both with refinery and petrochemical operations in Puerto Rico. He also brings extensive marketing and trading experience from Exxon Chemical Company and Phibro Energy.
Mr. Stutts joined the Company in April 1998 as Vice President of Finance and Corporate Development. Previously, he was a general partner of Columbine Venture Funds, an institutional venture capital fund focusing on investments in early stage companies. From 1971 to 1988 he held various management positions in Tenneco, Inc. and its subsidiary companies.
Mr. Wright joined the Company in August 1996 as Vice President and General Counsel. From January 1996 until he joined the Company, Mr. Wright was engaged in the private practice of law, either as a sole practitioner or of counsel to Andrews & Kurth, L.L.P. For over five years prior thereto, Mr. Wright was the Vice President and General Counsel or the Senior Vice President and General Counsel of Destec Energy, Inc.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company receive an annual retainer of $15,000 and a fee of $500 for each meeting of the Board or any committee thereof that they attend. Directors who are also employees of the Company do not receive Director compensation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by the Chief Executive Officer and the four most highly compensated executive officers, other than the Chief Executive Officer, who served as executive officers of the Company for the three years ended June 30, 1999.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS - --------------------------- ------ ------ -----
B. W. Waycaster, President and Chief Executive Officer ................... 1999 $300,000 $459,156 1998 300,000 507,186 1997 300,000 326,787 Stephen R. Wright, Vice President, Secretary and .................. 1999 $180,000 $275,494 General Counsel ........................... 1998 180,000 281,138 1997 165,000 50,104
Bill R. McNeese, Vice President, Operations ..................... 1999 $150,000 $229,579 1998 150,000 236,251 1997 148,500 63,869 H.E. Sebastian Vice President, Marketing and Supply ...... 1999 $175,000 $265,500 1998 58,333 19,779
Carl S. Stutts, Vice President, Finance and Corporate Development ........ 1999 $175,000 $267,841 1998 41,761 -- - ----------------
(1) None of the executive officers has received perquisites, the value of which exceeded the lesser of $50,000 or 10% of the salary and bonus of such executive officer.
There were no stock options granted during the fiscal year ended June 30, 1999 to the Named Executive Officers.
The following table sets forth the number and dollar value of exercised and unexercised options held by each of the Named Executive Officers at June 30, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 1, 1999, the number and percentage of the outstanding shares of Common Stock beneficially owned by (a) each person known by the Company to beneficially own more than 5% of such stock, (b) each director of the Company, (c) each of the Named Executive Officers of the Company, and (d) all directors and executive officers of the Company as a group.
AMOUNT AND NATURE % OF OF BENEFICIAL OWNERSHIP OUTSTANDING NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK - ------------------------------------ ----------------------- ------------ Gordon A. Cain ........................ 69,000 13.1% Eight Greenway Plaza, Suite 702 Houston, Texas 77046 Hunter W. Henry Jr .................... -- -- 1204 Brooks Hollow Rd ............... Austin, TX 78734 William R. Huff ....................... -- -- 67 Park Place Morristown, New Jersey 07960 William A. McMinn ..................... 13,333(1) 2.5% Eight Greenway Plaza, Suite 702 Houston, Texas 77046 Bill R. McNeese ....................... 2,000 0.4% Three Riverway, Suite 1500 Houston, Texas 77056 Steve A. Nordaker ..................... -- -- 707 Travis, 7th Floor Houston, TX 77002 Susan O. Rheney ....................... 5,000 0.9% Eight Greenway Plaza, Suite 702 Houston, Texas 77046 Gary L. Rosenthal ..................... 1,450(2) 0.7% 600 Travis, Suite 6110 Houston, TX 77002 H.E. Sebastian ........................ 2,167(3) 0.4% Two Penn Plaza, 22nd Floor New York, NY 10121 John T. Shelton ....................... 10,000 1.9% Eight Greenway Plaza, Suite 702 Houston, Texas 77046 Carl S. Stutts ........................ 4,167(4) 0.8% 3810 Swartmore Street Houston, TX 77056 B. W. Waycaster ....................... 42,285(5) 8.0% Three Riverway, Suite 1500 Houston, Texas 77056 Stephen R. Wright ..................... 2,550(6) 0.5% Three Riverway, Suite 1500 Houston, Texas 77056 All directors and Named Executive Officers as a group (12 persons) .... 150,502 28.5% Texas Petrochemicals Corporation ESOP . 100,000 18.9% Capital Southwest Corporation ......... 30,000 5.7% 12900 Preston Road, Suite 700 Dallas, Texas 75230 Chase Venture Capital Associates, L.P. 60,000 11.4% 380 Madison Avenue New York, New York 10017 The Huff Alternative Income Fund, L.P. 57,778 10.9% 67 Park Place Morristown, New Jersey 07960
(1) Includes 3,333 shares subject to options exercisable as of June 30, 1999. (2) Does not include 2,000 shares held in Trust for Mr. Rosenthal. Mr. Rosental disclaims beneficial ownership of the shares. (3) Includes 1,667 shares subject to options exerciseable as of June 30, 1999. (4) Includes 1,667 shares subject to options exerciseable as of June 30, 1999. (5) Includes 2,285 shares subject to options exerciseable as of June 30, 1999. (6) Includes 900 shares subject to options exerciseable as of June 30, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1998 the Company made a loan to its Vice President, Finance and Corporate Development in the amount of $200,000 of which $21,024 remained outstanding as of June 30, 1999. The proceeds from the loan were utilized to purchase outstanding shares of the Company's common stock at fair market value. The loan carries an interest rate of 7%. During fiscal 1999 and 1998 the Company made payments totaling $250,000 and $500,000, respectively, to a consulting firm whose majority shareholder is also an outside director and shareholder of the Company. The Chairman of the Company receives annual compensation of $150,000 for consulting services provided to the Company and reimbursements of approximately $25,000 per year for office expenses.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of Form S-1, File No. 333-37811).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of Form S-1, File No. 333-37811).
4.1 Indenture dated as of July 1, 1996 by and between the Company and Fleet National Bank, as Trustee, with respect to the 11 1/8% Senior Subordinated Notes due 2006, including the form of the Note (incorporated by reference to Exhibit 4.1 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
4.2 Indenture dated as of March 1, 1997 by and between the Company and Fleet National Bank, as Trustee, with respect to the 11 1/8% Series B Senior Subordinated Notes due 2006, including the form of Note (incorporated by reference to Exhibit 4.2 of Texas Petrochemicals Corporation's Form S-4, File No. 333-24589).
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the validity of the Discount Notes (incorporated by reference to Exhibit 5 of Form S-1, File No. 333-37811).
8 Opinion of Bracewell & Patterson, L.L.P. as to certain federal income tax matters (incorporated by reference to Exhibit 8 of Form S-1, File No. 333-37811).
10.1 Holdings' 1996 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 of Form S-1, File No. 333-37811).
10.2 TPC Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.2 of Texas Petrochemicals Corporation's Form S-4, file No. 333-11569).
10.3 TPC Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit 10.3 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.4 TPC Cash Bonus Plan (incorporated by reference to Exhibit 10.4 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.5 Security Agreement by and between Boatmen's Trust Company of Texas and the Company (incorporated by reference to Exhibit 10.5 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.6 TPC Profit Sharing Plan (incorporated by reference to Exhibit 10.6 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.7 Lease for Calcasieu Parish, Louisiana (incorporated by reference to Exhibit 10.7 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.8 Credit Agreement dated as of July 1, 1996 among the Company, Texas Commerce Bank, National Association, ABN AMRO North America, Inc., and The Bank of Nova
Scotia (incorporated by reference to Exhibit 10.8 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.9 Security Agreement date as of July 1, 1996 by and between the Company and Texas Commerce Bank, National Association (incorporated by reference to Exhibit 10.9 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.10 Pledge Agreement date as of July 1, 1996 by and between the Company and Texas Commerce Bank, National Association (incorporated by reference to Exhibit 10.10 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.11 Letter Agreement dated May 6, 1996 by and among The Sterling Group, Inc., Texas Petrochemical Holdings, Inc., TPC Holding, and the Company (incorporated by reference 10.11 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.12 Form of Indemnity Agreement between the Company and each of its officers and directors (incorporated by reference to Exhibit 10.12 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.13 Form of Tax Sharing Agreement among Texas Petrochemical Holdings, Inc., TPC Holding, the Company and Texas Butylene Chemical Corporation (incorporated by reference to Exhibit 10.13 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.14 Employment Agreement with Bill W. Waycaster (incorporated by reference to Exhibit 10.14 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
10.15 Form of Indemnity Agreement between the Company and each of its officers and directors.
10.16 Amendment to Credit Agreement dated as of June 30, 1998 by and among the Company, Chase Bank of Texas, National Association, ABN AMRO North America, Inc., the Bank of Nova Scotia and other financial institutions listed on the signature pages attached thereto (incorporated by reference to Exhibit 10.16 of Form S-1, File No. 333-37811).
10.17 Amendment to Credit Agreement dated as of June 30, 1999 by and among the Company, Chase Bank of Texas, National Association, ABN AMRO North America, Inc., the Bank of Nova Scotia and other financial institutions listed on the signature pages attached.
21 Subsidiaries of the Company (incorporated to Exhibit 21 of Form S-1, File No. 333-37811).
25.1 Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee under the Indenture dated as of July 1, 1996 (incorporated by reference to Exhibit 25.1 of Texas Petrochemicals Corporation's Form S-4, File No. 333-11569).
25.2 Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee under the Indenture dated as of March 1, 1997 (incorporated by reference to Exhibit 25.2 of Texas Petrochemicals Corporation's Form S-4, File No. 333-24589).
25.3 Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank as Trustee under the Indenture dated as of July 1, 1996 with respect to the Discount Notes (incorporated by reference to Exhibit 25.3 of Form S-1, File No. 333-37811).
27 Financial Data Schedule
(b) Financial Statement Schedules
Not applicable
(c) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 27, 1999.
TEXAS PETROCHEMICAL HOLDINGS, INC. (Registrant)
By: /s/ B.W. WAYCASTER B.W. Waycaster President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report to be signed below by the following persons on behalf of the registrant in the indicated capacities on September 27, 1999.
/s/ WILLIAM A. MCMINN Chairman William A. McMinn
/s/ B.W. WAYCASTER Director, President and Chief Executive Officer B.W. Waycaster
/s/ GORDON A. CAIN Director Gordon A. Cain
/s/ HUNTER W. HENRY JR. Director Hunter W. Henry Jr.
/s/ WILLIAM R. HUFF Director William R. Huff
/s/ STEVE A. NORDAKER Director Steve A. Nordaker
/s/ SUSAN O. RHENEY Director Susan O. Rheney
/s/ GARY L. ROSENTHAL Director Gary L. Rosenthal
/s/ JOHN T. SHELTON Director John T. Shelton
/s/ CARL S. STUTTS Vice President, Finance and Corporate Carl S. Stutts Development