-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdgJGUJh4X5sccvUrOpObSnO+P+BBQeDFNqQIFWW/iocDIu+us557YTRZaOLMVGj 3rVk/zIvwX1ECbYGTvaABQ== 0000950129-97-001806.txt : 19970502 0000950129-97-001806.hdr.sgml : 19970502 ACCESSION NUMBER: 0000950129-97-001806 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSAMERICAN REFINING CORP CENTRAL INDEX KEY: 0000927762 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 760229632 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-85930 FILM NUMBER: 97593787 BUSINESS ADDRESS: STREET 1: 1300 EAST NORTH BELT STREET 2: SUITE 320 CITY: HOUSTON STATE: TX ZIP: 77032-2949 BUSINESS PHONE: 713-986-88 MAIL ADDRESS: STREET 1: 1300 EAST NORTH BELT STREET 2: SUITE 320 CITY: HOUSTON STATE: TX ZIP: 77032-2949 10-K405 1 TRANSAMERICAN REFINING CORPORATION - 01/31/97 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- REGISTRATION NUMBER 33-85930 TRANSAMERICAN REFINING CORPORATION (Exact name of registrant as specified in its charter) TEXAS 76-0229632 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1300 NORTH SAM HOUSTON PARKWAY EAST SUITE 320 HOUSTON, TEXAS 77032 (Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8811 --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares of common stock and common stock purchase warrants of the registrant outstanding on April 30, 1997, was 30,000,000 and 7,495,313, respectively. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 7 Item 6. Selected Financial Data..................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 14 Item 8. Financial Statements and Supplementary Data................. 15 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 37 PART III Item 10. Directors and Executive Officers of the Registrant.......... 38 Item 11. Executive Compensation...................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 40 Item 13. Certain Relationships and Related Transactions.............. 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 43 Signatures............................................................ 46
3 PART I ITEM 1. BUSINESS GENERAL TransAmerican Refining Corporation (the "Company" or "TARC") was formed in 1987 to hold and operate the refinery assets of TransAmerican Natural Gas Corporation (together with its predecessors, "TransAmerican") and is engaged in the refining and storage of crude oil and petroleum products. TransAmerican Energy Corporation ("TEC") is a limited-purpose holding company formed in 1994 to hold certain shares of common stock of TransTexas Gas Corporation ("TransTexas") and all of the outstanding capital stock of TARC. TARC, TransTexas and TEC are all direct or indirect subsidiaries of TransAmerican. The address of TARC's principal executive offices is 1300 North Sam Houston Parkway East, Suite 320, Houston, Texas 77032, and its telephone number at that address is (281) 986-8811. BACKGROUND Founded in 1958 by John R. Stanley with a single gas station, TransAmerican grew rapidly and by the mid-1970s had developed into a chain of over 200 independent gasoline stations in New England and New York. In the early 1970s, TransAmerican sought to vertically integrate its retail gasoline operations by purchasing a refinery in Louisiana. During this period, TransAmerican also entered the exploration and production business by acquiring certain oil and gas properties in South Texas. In 1974, TransAmerican began construction of a $140 million ammonia plant that would use natural gas from its South Texas drilling operations as feedstock. Primarily as a result of a collapse in ammonia prices, TransAmerican was unable to obtain sufficient financing to complete construction of the plant. Unable to meet its obligations, TransAmerican and its affiliates filed a voluntary bankruptcy petition in October 1975. TransAmerican began operating pursuant to a confirmed plan of reorganization in May 1980. In 1979, TransAmerican began an expansion and modernization program at the refinery. However, in January 1983, before completion of the construction program and after expenditures of over $900 million, financial difficulties prevented completion of certain units of the refinery and forced a shutdown of operations. As a result, TransAmerican filed a voluntary bankruptcy petition. TransAmerican emerged from bankruptcy in October 1987. As a condition of the bankruptcy plan, TransAmerican formed TARC as a wholly owned subsidiary and transferred its refinery's net assets to TARC. From 1983 to August 1993, TransAmerican and TARC spent approximately $125 million on maintenance and capital expenditures at the refinery. In February 1995, TARC issued $340 million aggregate principal amount of 18 1/2% Guaranteed First Mortgage Discount Notes due 2002 and $100 million aggregate principal amount of 16 1/2% Guaranteed First Mortgage Notes due 2002 (together with the First Mortgage Discount Notes, the "TARC Notes"). The net proceeds from this offering were used to fund the expansion and upgrading of TARC's refinery, for working capital requirements, including construction costs incurred prior to the offering and repayment of intercompany debt to TransAmerican. The TARC Notes are unconditionally guaranteed on a senior secured basis (the "Guarantee") by TEC. The Guarantee and the TARC Notes are currently collateralized by TEC's only assets, which consist of 100% of the outstanding capital stock of TARC and 40 million shares of common stock (54% of the currently outstanding capital stock) of TransTexas held by TEC. In addition, 5.45 million shares of common stock (7.4% of the currently outstanding capital stock) of TransTexas held by TARC are pledged to collateralize the TARC Notes and the Guarantee. Under certain circumstances, shares of TransTexas common stock pledged to collateralize the Guarantee may be released from such pledge. If required to honor the Guarantee, TEC has no current ability to do so without selling its shares of capital stock of TransTexas or TARC. 1 4 BUSINESS OF TARC TARC's refinery is located in the Gulf Coast region along the Mississippi River, approximately 20 miles from New Orleans, Louisiana. TARC's business strategy is to modify, expand and reactivate its refinery and to maximize refining margins by converting low-cost, heavy, sour crude oils into high-value, light petroleum products including primarily gasoline and heating oil. In February 1995, TARC began a construction and expansion program designed to reactivate the refinery and increase its complexity (the "Capital Improvement Program"). From February 1995 through March 1997, TARC spent approximately $238 million on the Capital Improvement Program, procured a majority of the equipment required and completed substantially all of the process design engineering and a substantial portion of the remaining engineering necessary to complete this project. Primarily because additional financing was not available, TARC was unable to meet the construction completion timetable for the Capital Improvement Program as required under the TARC Notes Indenture. In February 1997, TARC solicited and received from the holders of the TARC Notes consents to certain waivers under and amendments to the Indenture governing the TARC Notes. Pursuant to this consent solicitation, the holders of the TARC Notes waived, until July 15, 1997, the default under the TARC Notes Indenture which would have occurred on February 15, 1997 as a result of TARC's failure to meet the required completion timetable. The waiver of this default will cease to be effective on July 15, 1997. Unless the default has been further waived, or the Company completes a recapitalization that satisfies the holders of the TARC Notes, such holders would then be entitled to pursue remedies available under the TARC Notes Indenture, including acceleration of the maturity of the TARC Notes. TARC must obtain substantial additional financing to fund any additional expansion or modification of the refinery. It is likely that the scope, completion schedule and other aspects of the Capital Improvement Program will be modified in connection with obtaining additional financing. The scope, completion schedule, amount of additional expenditures required and other aspects of additional expansion and modification of the refinery will depend upon, among other factors, the availability and timing of such financing. TEC and its operating subsidiaries are considering various financing alternatives, including a recapitalization of TEC, TARC and TransTexas. The Company expects that these recapitalizations can be completed by July 15, 1997. However, there can be no assurance that TARC will obtain the required additional financing. CURRENT OPERATIONS In March 1994, TARC commenced partial operations at the refinery with the start up of the No. 2 Vacuum Unit and has operated this unit intermittently since then based on operating margins. In addition, modifications and tie-ins to the No. 2 Crude Unit have been completed. Although both units are operational, TARC is not currently operating these units due to the low level of operating margins obtainable for these units on a stand-alone basis. TARC believes that the No. 2 Vacuum Unit has a capacity in excess of 200,000 BPD. TARC reactivated the No. 2 Vacuum Unit in March 1994. When the No. 2 Crude Unit is placed into operation, the No. 2 Vacuum Unit will process bottoms from the No. 2 Crude Unit into vacuum gas oil ("VGO") and, with the addition of cutterstocks, into No. 6 residual fuel oil. The No. 2 Crude Unit was designed to process heavy, sour crude oil and, prior to the 1983 shutdown, demonstrated a capacity of 175,000 BPD. Subsequent to year end, TARC entered into a commitment to purchase 0.6 million barrels of feedstock at $24.68 per barrel plus interest at 8.25%, demurrage, bank fees and other related costs. Based on a market value of approximately $18.15 per barrel at April 29, 1997, the loss on the feedstock is estimated to range between $4 and $5 million. CAPITAL IMPROVEMENT PROGRAM The Capital Improvement Program is designed to increase the capacity and complexity of the refinery. From February 1995 through March 1997, TARC spent approximately $238 million on the Capital 2 5 Improvement Program, procured a majority of the equipment required and completed substantially all of the process design engineering and a substantial portion of the remaining engineering necessary to complete this project. Substantial additional expenditures are necessary to complete the Capital Improvement Program. TARC must obtain additional financing to fund any additional expansion or modification of the refinery. TEC and its operating subsidiaries are considering various financing alternatives, including a recapitalization of TEC, TARC and TransTexas. The Company expects that these financing alternatives will provide the funds necessary to complete construction and expansion of the refinery. However, there can be no assurance that TARC will obtain additional financing. The expansion and modification of the refinery is expected to include the following significant projects: (i) conversion of the visbreaker unit into a delayed coking unit to process vacuum tower bottoms into lighter petroleum products, (ii) modernization and upgrade of a fluid catalytic cracking unit to increase gasoline production capacity and allow the direct processing of low cost atmospheric residual feedstocks, and (iii) upgrading and expanding hydrotreating, alkylation and sulfur recovery units to increase sour crude processing capacity. The Capital Improvement Program includes expenditures which TARC believes are necessary to ensure that the refinery is in compliance with certain existing air and water discharge regulations and that gasoline produced will comply with federal standards. It is likely that the scope and other aspects of the Capital Improvement Program will be modified in connection with obtaining additional financing for the refinery. The scope, completion schedule, amount of additional expenditures required and other aspects of additional expansion and modification of the refinery will depend upon, among other factors, the availability and timing of such financing. FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS TARC historically has entered into financing arrangements in order to maintain an available supply of feedstocks. Typically, TARC enters into an agreement with a third party to acquire a cargo of feedstock which is scheduled for delivery to TARC's refinery. TARC pays through the third party all transportation costs, related taxes and duties and letter of credit fees for the cargo, plus a negotiated commission. Prior to arrival at the refinery, another third party purchases the cargo, and TARC commits to purchase, at a later date, the cargo at an agreed price plus commission and costs. TARC also places margin deposits with the third party to permit the third party to hedge its price risk. TARC purchases these cargos in quantities sufficient to maintain expected operations and is obligated to purchase all of the cargos delivered pursuant to these arrangements. In the event the refinery is not operating, these cargos may be sold on the spot market. During the year ended January 31, 1997, approximately 1.1 million barrels of feedstocks with a cost of $23 million were sold by a third party on the spot market prior to delivery to TARC without a material gain or loss to TARC. In March 1996, TARC entered into a processing agreement with a third party for the processing of various feedstocks at the refinery. Under the terms of the agreement, the processing fee earned by TARC is based on the margin earned by the third party, if any, after deducting all of its related costs such as feedstock acquisition, hedging, transportation, processing and inspections plus a commission for each barrel processed. For the year ended January 31, 1997, TARC processed approximately 1.1 million barrels of feedstock pursuant to this agreement. TARC incurred a loss of approximately $2.6 million related to this processing agreement primarily as a result of low margins and price management activities. In April 1996, TARC entered into a similar processing agreement with another third party to process feedstocks. As of January 31, 1997, TARC had completed processing approximately 6.4 million barrels of feedstocks and is storing approximately 1.0 million barrels of intermediate and refined products under this agreement. TARC also entered into a processing agreement with this third party to process approximately 0.8 million barrels of the third party's feedstocks for a fixed price per barrel. Under the terms of this fixed price agreement, TARC met all quantity and quality yields earning the full price per barrel. For the year ended January 31, 1997, TARC recorded a net loss of approximately $4.5 million related to these processing arrangements primarily as a result of low margins and price management activities. 3 6 PRICE MANAGEMENT ACTIVITIES In order to mitigate the commodity price risks associated with the refining business, TARC has previously entered, and may in the future enter, into futures contracts, options on futures, swap agreements and forward sale agreements commensurate with its inventory levels and feedstock requirements and as permitted under the Indenture. If TARC believes it can capitalize on favorable market conditions, it will attempt to utilize the futures market to fix a portion of its crude oil costs and refined products values. This hedging strategy is designed to retain the value of a portion of its work-in-process inventory. CRUDE OIL AND FEEDSTOCK SUPPLY TARC purchases feedstocks on the spot market but has no long-term supply contracts. TARC believes that it will have access to adequate supplies of the crude oil it intends to process. Upon completion of the expansion and modification program, TARC expects to purchase heavy, sour crude oils produced in countries such as Venezuela and Mexico. TARC also expects to be able to take advantage of anticipated increases in production of sour crude oil from the Gulf of Mexico or the Persian Gulf. The refinery has a variety of supply channels. The Mississippi River permits delivery of feedstocks from both barge and ocean-going vessels. TARC has its own ship dock and barge dock. The ship dock can accommodate 100,000 deadweight ton ("dwt") tankers that draw less than 45 feet of water, or larger vessels that have been partially offloaded and draw less than 45 feet of water. The barge dock provides access to smaller cargos of intermediate feedstocks such as vacuum gas oil or atmospheric residuals. An adjacent storage terminal has four ship docks to which TARC has access for loading or unloading of feedstocks. TARC has executed a letter agreement for the exclusive use of one of these docks on a long-term basis for shipping petroleum coke and other refinery products. Additionally, TARC is connected to a Shell Oil Company crude pipeline that provides access to Louisiana Offshore Oil Port's 24-inch pipeline network, thereby permitting TARC to receive large quantities of foreign crude oil. This pipeline also provides access to domestic crudes. TARC has no crude oil reserves and is not engaged in the exploration for crude oil, and plans to obtain all its crude oil requirements from unaffiliated sources. TARC believes that it will be able to obtain adequate supplies of crude oil and feedstocks at generally competitive prices for the foreseeable future. Crude oil prices are affected by a variety of factors beyond the control of TARC. The principal factors currently influencing prices include the pricing and production policies of members of the Organization of Petroleum Exporting Countries, the availability to world markets of production from Kuwait, Iraq and Russia and the worldwide and domestic demand for oil and refined products. Oil pricing will continue to be unpredictable and greatly influenced by governmental and political forces. PRODUCT DISTRIBUTION TARC previously sold its refined products pursuant to a processing agreement with a third party, but currently has no long-term sales contracts. Major market areas for TARC's refined products will include the Gulf Coast region, the Mississippi River Valley and the East Coast of the United States as well as foreign markets. TARC's refined products will be transported by pipeline, train, ocean-going vessel and truck. TARC's refinery is connected, through third-party pipelines, to two major Gulf Coast common carrier pipelines, the Colonial and the Plantation, which will permit transportation of the refinery's products to East Coast markets. TARC is also connected to several pipelines designed to transfer refined products to a nearby refinery operated by Shell Oil Company. Railroad lines serve the refinery and adjacent industries. TARC's barge and ship docks, together and an adjacent terminal facility, provide access to the Mississippi River and the intracoastal waterway. FOREIGN TRADE ZONE The refinery is approved for purposes of processing foreign crude to operate as a foreign trade zone. This allows the refinery to realize the benefits of processing foreign crude and exporting the products duty free or deferring the duty on products sold domestically. 4 7 INSURANCE TARC maintains insurance in accordance with customary industry practices to cover some, but not all, risks. TARC currently maintains property insurance for the refinery in an amount and with deductibles that management believes will allow TARC to survive damage to the refinery. TARC plans to increase insurance coverage amounts from time to time as it completes certain portions of the expansion and modification program. SEASONALITY TARC anticipates that its operations will be subject to significant fluctuations in seasonal demand. In TARC's markets, demand for gasoline is typically higher during the first and second quarters of TARC's fiscal year. During winter months, demand for heating oil increases. The refinery is designed, upon completion of the expansion and modification program, to change its product yields to take advantage of seasonal demands. FLUCTUATION IN PRICES Factors that are beyond the control of TARC may cause the cost of crude oil purchased by TARC and the price of refined products sold by TARC to fluctuate widely. Although prices of crude oil and refined petroleum products generally move in the same direction, prices of refined products often do not respond immediately to changes in crude oil costs. An increase in market prices for crude oil or a decrease in market prices for refined products could have an adverse impact on TARC's earnings and cash flow. COMPETITION The industry in which TARC operates is highly competitive. TARC primarily competes with refiners in the Gulf Coast region, many of which are owned by large, integrated oil companies which, because of their more diverse operations, stronger capitalizations or crude oil supply arrangements, are better able than TARC to withstand volatile industry conditions, including shortages or excesses of crude oil or refined products or intense price competition. The principal competitive factors affecting TARC's refining operations are the quality, quantity and delivered costs of crude oil and other refinery feedstocks, refinery processing efficiency, mix of refined products, refined product prices and the cost of delivering refined products to markets. Competition also exists between the petroleum refining industry and other industries supplying energy and fuel to industrial, commercial and individual consumers. EMPLOYEES As of April 1, 1997, TARC had approximately 150 employees and will employ additional personnel as required by its operations and may engage the services of engineering and other consultants from time to time. Currently, none of TARC's employees is a party to a collective bargaining agreement. The Equal Employment Opportunity Commission ("EEOC") has initiated an investigation into the employment practices of TARC and Southeast Contractors (as defined), alleging discriminatory hiring and promotion practices. See Note 11 to the Notes to Financial Statements included elsewhere herein. Since July 1994, Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a subsidiary of TransAmerican, has provided construction personnel to TARC in connection with TARC's expansion and modification program. Southeast Contractors will provide construction personnel to TARC as required to expand and modify the refinery. These construction workers are temporary employees, and the number and composition of the workforce will vary throughout the reactivation at the refinery during the expansion and modification program. Southeast Contractors charges TARC for the direct costs it incurs, which consist solely of employee payroll and benefits, plus administrative costs and fees; such administrative costs and fees charged to TARC are $1.2 million per year. 5 8 ENVIRONMENTAL MATTERS For a discussion of environmental matters affecting TARC, see Note 11 of Notes to Financial Statements included elsewhere herein. OTHER GOVERNMENTAL REGULATIONS TARC must also comply with federal and state laws and regulations promulgated by the Department of Transportation for the movement of volatile and flammable materials, the U.S. Coast Guard for marine operations and oil spill prevention and the Occupational Safety and Health Administration ("OSHA") for worker and job site safety. To comply with OSHA regulations, TARC must conduct extensive Process Safety Management and Hazardous Operations reviews prior to placing units into service. ITEM 2. PROPERTIES TARC owns the approximately 215-acre site on which the refinery is located. TARC also has available, through ownership, lease agreement or other appropriate arrangements, the use of storage tanks, loading racks and other related facilities at the refinery site. TARC leases office space in Houston, Texas from TransTexas. TITLE INSURANCE The title insurance policy to insure against certain claims made against title to the refinery parcel site currently consists of a $440 million lender's title insurance policy for the benefit of the trustee under the TARC Notes Indenture. The title insurance policy has been reinsured through various title insurance companies in the United States. The ability to successfully recover under the policies is dependent on the creditworthiness of the title company and its reinsurers at the time of the claim and any defenses that the title insurers and its reinsurers may have. There can be no assurance that the amount of title insurance will be sufficient to cover any losses incurred by TARC or the trustee under the TARC Notes Indenture as a result of a title defect impairing the ability to use the refinery site or that the title insurers will be able to fulfill their financial obligations under the title insurance policy. The title policy contains customary exceptions to coverage, including taxes not yet due and payable, riparian rights and numerous servitudes, rights of way, rights of access and other encroachments in favor of utilities, railroads, pipelines and adjacent refineries and tank farms, as well as exceptions for (i) government claims with respect to, and public rights to use, TARC's property located between the Mississippi River and the road upon which pipe racks and TARC's docking facilities are located, (ii) a right of first refusal in favor of an adjacent landowner with respect to a certain portion of property which, in the event exercised, may require TARC to relocate at its expense certain pipelines that connect various refinery parcels, (iii) tax benefits that have been conveyed to certain tax lessors, (iv) the priority of liens that may be filed by materialmen and mechanics in connection with the expansion and modification program, and (v) certain rights of creditors pursuant to Federal or state bankruptcy and insolvency laws, which rights may affect the enforceability of the mortgage securing the TARC Notes. ITEM 3. LEGAL PROCEEDINGS See Note 11 and Note 12 of Notes to Financial Statements included elsewhere herein for a discussion of TARC's legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of TARC's security holders during the fourth quarter of the fiscal year ended January 31, 1997. 6 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for TARC's common stock or its common stock purchase warrants. On April 30, 1997, there was one record holder of TARC's common stock purchase warrants and one holder of TARC's common stock. TARC has not paid any cash dividends on its capital stock since inception. TARC's ability to pay dividends is restricted by the TARC Notes Indenture and will depend in part upon TARC's debt levels. In determining whether to declare and pay a dividend, the Board of Directors will consider various other factors, including TARC's capital requirements and financial condition. ITEM 6. SELECTED FINANCIAL DATA On January 29, 1996, TARC changed its fiscal year end for financial reporting purposes from July 31 to January 31. The following table sets forth selected financial data of TARC as of and for each of the four years ended July 31, 1995, the six months ended January 31, 1995 and 1996 and each of the two years ended January 31, 1997. This data has been derived from the financial statements of TARC and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto. The financial data for fiscal years ended July 31, 1992 and 1993 represent the results of operations and financial position of TARC prior to the partial reactivation of the refinery and initiation of the Capital Improvement Program. During these periods, TARC had only maintenance expenses and lease income from storage facilities. The data for the year ended July 31, 1994 reflects the limited operations of the refinery since March 1994 and expenses related to reactivation of portions of the refinery. Subsequent to March 1994, TARC has operated the No. 2 Vacuum Unit intermittently. TARC does not consider its historical results to be indicative of future results.
YEAR ENDED SIX MONTHS ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31, --------------------- ------------------- ----------------------------------------- 1997 1996 1996 1995 1995 1994 1993 1992 --------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Refining revenues................. $ 10,857 $176,229 $107,237 $ 71,035 $140,027 $174,143 $ -- $ -- Storage and other income.......... -- -- -- 551 552 3,035 5,178 3,179 Operating expenses................ 54,004 206,798 121,770 86,383 171,411 187,208 13,238 11,693 General and administrative expenses(1)..................... 11,848 12,610 7,438 8,442 13,614 4,496 11,341 7,057 Equity in income (loss) before extraordinary item of TransTexas...................... 12,325 (2,584) (156) -- (2,428) -- -- -- Other income (expense)(7)......... 52,076(5) (9,998) (3,944) 89 (5,966) (2,827) 28 666 Extraordinary item(2)............. -- (11,497) -- -- (11,497) -- -- -- Net income (loss)................. 9,406 (67,258) (26,071) (23,150) (64,337) (17,353) (19,373) (14,905) Net income (loss) per common share(3)........................ 0.25 (2.24) (0.87) (0.77) (2.14) (0.58) (0.65) (0.50) Weighted average number of common shares outstanding (in thousands)(3)................... 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 BALANCE SHEET DATA: Working capital (deficit)(6)...... $(407,018) $(17,707) $(17,707) $(35,509) $ 5,965 $(16,838) $ (1,494) $ (949) Long-term debt proceeds held in collateral account(4)........... -- 24,405 24,405 -- 140,857 -- -- -- Total assets...................... 564,241 518,323 518,323 229,462 499,879 176,327 70,900 70,579 Total long-term liabilities(6).... 74,571 368,091 368,091 112,719 352,696 45,373 64,512 45,636 Stockholder's equity.............. 81,363 71,957 71,957 77,250 87,837 100,400 4,253 23,626
- --------------- (1) Includes litigation accruals of $2.0 million for the six months ended January 31, 1996, and $4.5 million and $9.0 million for the years ended July 31, 1995 and 1993, respectively. 7 10 (2) Represents TARC's equity in the early extinguishment of debt at TransTexas. (3) Gives retroactive effect to a 30,000-for-1 stock split effected in July 1994. (4) Includes $14.7 million and $7.9 million at January 31, 1996 and July 31, 1995, respectively, which is classified as a current asset. (5) Includes a gain of $56.2 million related to the sale of 4.55 million shares of TransTexas common stock in March 1996. (6) The TARC Notes are classified as a current liability at January 31, 1997. The working capital deficit would have been $41,288 at January 31, 1997 if the TARC Notes had not been reclassified as of such date. (7) Net of capitalized interest of $68.8 million, $41.5 million, $26.2 million, $3.5 million and $18.9 million for the years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and 1995 and the year ended July 31, 1995, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with TARC's financial statements and notes thereto. RESULTS OF OPERATIONS General TARC's refinery was inoperative from January 1983 through February 1994. During this period, TARC's revenues were derived primarily from tank rentals and its expenses consisted of maintenance and repairs, tank rentals, general and administrative expenses and property taxes. TARC commenced partial operations at the refinery in March 1994 and has operated the No. 2 Vacuum Unit intermittently since that time. TARC could operate the No. 2 Crude Unit and/or the No. 2 Vacuum Unit if market conditions become favorable. TARC's decision to commence or suspend operations is based on the availability of financing, current operating margins and the need to tie-in units as they are completed. TARC does not consider its historical results to be indicative of future results. TARC's results of operations are dependent on the operating status of certain units within its refinery, which determines the types of feedstocks processed and refined product yields. The results are also affected by the unit costs of purchased feedstocks and the unit prices of refined products, which can vary significantly. The Capital Improvement Program is designed to significantly change TARC's throughput capacity, the feedstocks processed, and refined product yields. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS 121"). As of February 1, 1996, TARC adopted the requirements of SFAS No. 121. TARC currently believes, based on estimates of refining margins and current estimates for costs of the expansion and modification of the refinery, that future undiscounted cash flows will be sufficient to recover the cost of the refinery over its estimated useful life as well as the costs of related identifiable intangible assets. Management believes there have been no events or changes in circumstances that would require the recognition of an impairment loss. However, due to the inherent uncertainties in estimating future refining margins, in constructing and operating a large scale refinery and the uncertainty regarding TARC's ability to complete the Capital Improvement Program, there can be no assurance that TARC will ultimately recover the cost of the refinery. Management believes that the book value of the refinery is in excess of its current estimated fair market value. See Note 4 to Financial Statements. Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996 Total revenues for the year ended January 31, 1997 decreased to $10.9 million from $176.2 million for the same period in 1996, due primarily to a significant drop in the processing of purchased feedstocks for sale to third parties compared to the prior year. 8 11 Cost of products sold for the year ended January 31, 1997 decreased to $11.5 million from $185.3 million for the same period in 1996, due primarily to a significant drop in the purchase of feedstocks for processing compared to the prior year. Losses from processing arrangements of $7.1 million, discussed below in "Liquidity and Capital Resources," for the year ended January 31, 1997, were primarily due to price management activities. Operations and maintenance expense for the year ended January 31, 1997 increased to $23.9 million from $12.5 million for the same period in 1996, primarily due to a write-off of approximately $6.5 million for assets included in construction work in process that will not be used in the overall Capital Improvement Program, an increase in fuel costs during the first six months of fiscal 1997, and higher contract labor costs. Depreciation and amortization expense for the year ended January 31, 1997 increased $0.9 million to $7.2 million from $6.3 million for the same period in 1996, primarily due to the reclassification of construction work in process to depreciable assets during 1997. Taxes other than income taxes for the year ended January 31, 1997 increased to $4.2 million from $2.7 million for the same period in 1996, primarily due to increased property tax expense. General and administrative expense for the year ended January 31, 1997 decreased to $11.8 million from $12.6 million for the same period in 1996, primarily due to decreased litigation expense. Interest income for the year ended January 31, 1997 decreased by $6.1 million as compared to the same period in 1996, primarily due to interest earned in 1996 on a higher balance held in the Collateral Account. Interest expense, net, for the year ended January 31, 1997 decreased $13.8 million, primarily due to a larger portion of interest being capitalized as well as a reduction of product financing costs in 1997 versus 1996 due to lower volumes of feedstock purchases. During the year ended January 31, 1997, TARC capitalized approximately $68.8 million of interest related to construction activities at TARC's refinery, compared to $41.5 million for the year ended January 31, 1996. The equity in income of TransTexas for the year ended January 31, 1997 of $12.3 million reflects TARC's 20.3% equity interest in TransTexas until TARC's sale of 4.55 million shares of TransTexas stock in March 1996 and its 14.1% interest thereafter. This compares to $2.6 million equity in loss of TransTexas for the year ended January 31, 1996. The increase is a result of higher gas prices and a favorable litigation settlement at TransTexas. Other income for the year ended January 31, 1997 was $56.5 million, which was primarily a result of the $56.2 million gain on the sale of 4.55 million shares of TransTexas stock in March 1996. Other income for the year ended January 31, 1996 was $2.1 million, primarily resulting from trading gains on futures contracts. Six Months Ended January 31, 1996, Compared with the Six Months Ended January 31, 1995 Total revenues for the six months ended January 31, 1996 increased $35.6 million to $107.2 million from $71.6 million in the same period in 1995, primarily due to an increase in the volume of products sold to 6.1 million barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of the increase was due to an increase in the average product sales price of $0.19 per barrel in 1996 over 1995. Cost of products sold for the six months ended January 31, 1996 increased $36.2 million to $110.1 million from $73.9 million for the same period in 1995, primarily due to an increase in the volume of products sold, partially offset by a decrease in the average price of feedstocks purchased. Operations and maintenance expense for the six months ended January 31, 1996 increased $0.2 million to $7.9 million from $7.7 million for the same period in 1995, primarily due to an increase in the number of days the vacuum unit was operating. Depreciation and amortization expense for the six months ended January 31, 1996 increased $0.5 million to $3.2 million from $2.7 million for the same period in 1995, primarily due to the transfer of certain terminal facilities and tankage equipment from construction in progress to depreciable assets during the 1996 period. 9 12 General and administrative expense for the six months ended January 31, 1996, decreased $1.0 million to $7.4 million from $8.4 million for the same period in 1995, primarily as a result of a $2.5 million reduction in litigation accruals, partially offset by an increase in payroll of $1.1 million arising from operations support requirements. Taxes other than income taxes for the six months ended January 31, 1996 decreased $1.4 million to $0.7 million from $2.1 million for the same period in 1995, primarily due to lower property tax expense for the six months ended January 31, 1996. Interest income for the six month period ended January 31, 1996 increased $2.3 million compared to the same period in 1995 due primarily to interest earned on long-term debt proceeds held in the Collateral Account. Interest expense for the six month period ended January 31, 1996 increased $28.6 million due to interest accrued on long-term debt issued in February 1995, amortization of debt issue costs and financing costs associated with product purchases. During the six months ended January 31, 1996, TARC capitalized $26.2 million of interest related to construction activities associated with the Capital Improvement Program. Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994 Total revenues for the year ended July 31, 1995 decreased $36.6 million to $140.6 million from $177.2 million in the same period in 1994, primarily due to a decrease in the volume of products sold which was partially offset by an increase in the average price of products sold. Cost of products sold for the year ended July 31,1995 decreased $19.8 million to $149.1 million from $168.9 million for the same period in 1994, primarily as a result of a decrease in volume of products sold, partially offset by an increase in the average price of feedstocks purchased, and a contract cancellation loss of approximately $3.8 million. Operations and maintenance expense for the year ended July 31, 1995 increased $0.2 million to $12.3 million from $12.1 million for the same period in 1994, primarily as a result of an increase in the number of days the No. 2 Vacuum Unit was operating. Depreciation and amortization expense for the year ended July 31, 1995 increased $3.3 million to $5.9 million from $2.6 million for the same period in 1994, primarily as a result of increased depreciation expense being recorded for refinery assets which were taken out of discontinued operations during 1994. General and administrative expense for the year ended July 31, 1995 increased $9.1 million to $13.6 million from $4.5 million in the same period in 1994, primarily as a result of a litigation accrual of $4.5 million and increases in legal and consulting fees and insurance costs as a result of expanded refinery operations. Taxes other than income taxes for the year ended July 31, 1995 increased $0.5 million to $4.2 million from $3.7 million for the same period in 1994, primarily as a result of an increase in property taxes assessed. Interest income for the year ended July 31, 1995 increased $4.1 million compared to the same period in 1994 due primarily to interest earned on long-term debt proceeds held in the Collateral Account. Interest expense for the year ended July 31, 1995 increased $31.3 million due to interest accrued on long-term debt issued during 1995, amortization of debt issue costs and financing costs associated with product purchases. During the year ended July 31, 1995, TARC capitalized $18.9 million of interest related to construction activities associated with TARC's Capital Improvement Program. Other income for the year ended July 31, 1995 was $2.5 million compared to other expense of $2.9 million for the same period in 1994 primarily as a result of trading gains on futures contracts in 1995. For the year ended July 31, 1995, the loss before an extraordinary item increased $35.5 million over the same period in 1994, primarily due to interest associated with TARC's long-term debt and amortization of debt issue costs. In February 1995, TransAmerican contributed 55 million shares of TransTexas common stock to TEC. TEC then contributed 15 million of these shares of TransTexas common stock to TARC. The equity in loss of 10 13 TransTexas for the year ended July 31, 1995 reflects TARC's 20.3% equity interest in TransTexas' loss before an extraordinary item from the date of acquisition. The equity in extraordinary loss of TransTexas represents TARC's equity in a charge recorded by TransTexas in the fourth quarter for the early retirement of $500 million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds of the issuance by TransTexas in June 1995 of $800 million in 11 1/2% Senior Secured Notes due 2002. LIQUIDITY AND CAPITAL RESOURCES In connection with the issuance of the TARC Notes in February 1995, proceeds of $173 million were deposited into a cash collateral account, designated for use in the Capital Improvement Program. TARC sold 4.55 million shares of TransTexas common stock in March 1996, and deposited approximately $26.6 million in proceeds into the cash collateral account in accordance with the requirements of the TARC Notes Indenture. As of January 31, 1997, TARC had spent all amounts deposited in the cash collateral account. As of January 31, 1997, TARC had commitments for refinery construction and maintenance of approximately $53.0 million. In March 1997, TARC issued $36 million principal amount of 15% senior secured notes due 1998 to unaffiliated third parties. These notes are secured by a pledge of 5 million shares of TransTexas common stock, which were released from the lien securing the TARC Notes. Proceeds from the issuance of these notes have been or will be used for construction at the refinery and general corporate purposes. Primarily because additional financing was not available, TARC was unable to meet the construction completion timetable for the Capital Improvement Program as required under the TARC Notes Indenture. In February 1997, TARC solicited and received from the holders of the TARC Notes consents to certain waivers under and amendments to the TARC Notes Indenture. Pursuant to this consent solicitation, the holders of the TARC Notes waived, until July 15, 1997, the default under the TARC Notes Indenture which would have occurred on February 15, 1997 as a result of TARC's failure to meet the required completion timetable. The waiver of this default will cease to be effective on July 15, 1997. Unless the default has been further waived, or the Company completes a recapitalization that satisfies the holders of the TARC Notes, such holders would then be entitled to pursue remedies available under the TARC Notes Indenture, including acceleration of the maturity of the TARC Notes. TARC must obtain substantial additional financing to fund any additional expansion or modification of the refinery. It is likely that the scope, completion schedule and other aspects of the Capital Improvement Program will be modified in connection with obtaining additional financing. The scope, completion schedule, amount of additional expenditures required and other aspects of additional expansion and modification of the refinery will depend upon, among other factors, the availability and timing of such financing. TEC and its operating subsidiaries are considering various financing alternatives, including a recapitalization of TEC, TARC and TransTexas. The Company expects that these recapitalizations can be completed by July 15, 1997. However, there can be no assurance that TARC will obtain the required additional financing. TARC has incurred losses and negative cash flow from operations as a result of limited refining operations that did not cover the fixed costs of maintaining the refinery, increased working capital requirements and losses on refined product sales and processing arrangements. Such losses are due to financing costs, low margins and price management activities. In addition the TARC Notes are classified as a current liability as of January 31, 1997. Primarily as a result of these factors and accounts payable related to the Capital Improvement Program, TARC had negative working capital of $407.0 million at January 31, 1997. In order to operate the refinery at expected levels after completion of expansion and modification of the refinery, TARC will require additional working capital and ultimately must achieve profitable operations. TARC is not currently operating the completed units of the refinery because market conditions make limited operations uneconomic. If market conditions become favorable, TARC could resume limited processing operations. TARC, however, anticipates that in the near term and until additional operating units come on line, its capital needs will be limited to expenditures for the expansion and modification of the refinery, and for general and administrative and refinery maintenance costs. If TARC (i) does not obtain additional financing, (ii) does not complete a recapitalization that satisfies the holders of the TARC Notes, or (iii) does not complete construction of a refinery capable of profitable 11 14 operations, TARC's investment in the refinery may not be recovered. Without additional funding to complete expansion and modification of the refinery, and to provide working capital for operations and debt service, there is substantial doubt about TARC's continuation as a going concern. The financial statements do not include any adjustments for such uncertainties. Under certain circumstances, TransAmerican, TransAmerican Exploration Corporation, TARC or TEC may sell or otherwise dispose of shares of common stock of TransTexas. If, as a result of any sale or other disposition of TransTexas common stock, the aggregate ownership of TransTexas by TransAmerican and certain of its affiliates (the "TNGC Consolidated Group") is less than 80% (measured by voting power and value), TransTexas will no longer be a member of the TNGC Consolidated Group and, with certain exceptions, will no longer be obligated under the terms and conditions of, or entitled to the benefits of, the Tax Allocation Agreement among TransAmerican and certain of its affiliates, including TEC, TARC and TransTexas. Further, if TEC or TARC sells or otherwise transfers any stock of TARC, or issues any options, warrants or other similar rights relating to such stock, outside of the TNGC Consolidated Group, which when aggregated with the outstanding TARC Warrants represents more than 20% of the voting power or equity value of TARC, then a deconsolidation of both TARC and TransTexas from the TNGC Consolidated Group would occur. An event that results in deconsolidation of TARC from the TNGC Consolidated Group for federal income tax purposes could result in the acceleration of payment of a substantial amount of federal income taxes by TransAmerican. The tax liability to TransAmerican that would result from deconsolidation is estimated to be approximately $15 million at January 31, 1997. Each member of a consolidated group filing a consolidated federal income tax return is severally liable for the consolidated federal income tax liability of the consolidated group. There can be no assurance that TransAmerican will have the ability to satisfy the above tax obligation at the time due and, therefore, TARC, or other members of the group may be required to pay the tax. In July 1996, TARC executed a promissory note to TransAmerican for up to $25 million. The note bears interest at a rate of 15% per annum, payable quarterly beginning October 31, 1996, and matures on July 31, 1998. As of January 31, 1997, the entire $25 million was outstanding under the note. On November 1, 1996, TARC executed an additional $25 million promissory note to TransAmerican which bears interest at 15% per annum, payable quarterly beginning December 31, 1996, and which matures on September 30, 1998 (together with the first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had approximately $44.4 million outstanding under both of these notes. TransAmerican has waived any defaults arising from TARC's failure to make the scheduled interest payments provided for in these notes. In February 1997, the November 1996 promissory note was replaced with a $50 million note bearing interest at an annual rate of 15% and which matures on July 31, 2002. Interest payments are due quarterly commencing on April 30, 1997. The debt represented by the new note is subordinate in right of payment to the TARC Notes. As of April 25, 1997, approximately $31.4 million had been advanced under the new note. These and additional borrowings have been used by TARC to fund construction at the refinery, as well as working capital needs, pending additional financing from other sources. There can be no assurance that TransAmerican will make additional advances to TARC. TARC enters into financing arrangements in order to maintain an available supply of feedstocks. Typically, TARC enters into an agreement with a third party to acquire a cargo of feedstock which is scheduled for delivery to TARC's refinery. TARC pays through the third party all transportation costs, related taxes and duties and letter of credit fees for the cargo, plus a negotiated commission. Prior to arrival at the refinery, another third party purchases the cargo, and TARC commits to purchase, at a later date, the cargo at an agreed price plus commission and costs. TARC also places margin deposits with the third party to permit the third party to hedge its price risk. TARC purchases these cargos in quantities sufficient to maintain expected operations and is obligated to purchase all of the cargos delivered pursuant to these arrangements. In the event the refinery is not operating, these cargos may be sold on the spot market. During the year ended January 31, 1997, approximately 1.1 million barrels of feedstocks with a cost of $23 million were sold by a third party on the spot market prior to delivery to TARC without a material gain or loss to TARC. In March 1996, TARC entered into a processing agreement with a third party for the processing of various feedstocks at the refinery. Under the terms of the agreement, the processing fee earned by TARC is 12 15 based on the margin earned by the third party, if any, after deducting all of its related costs such as feedstock acquisition, hedging, transportation, processing and inspections plus a commission for each barrel processed. For the year ended January 31, 1997, TARC processed approximately 1.1 million barrels of feedstock pursuant to this agreement. TARC incurred a loss of approximately $2.6 million related to this processing agreement primarily as a result of low margins and price management activities. In April 1996, TARC entered into a similar processing agreement with another third party to process feedstocks. As of January 31, 1997, TARC had completed processing approximately 6.4 million barrels of feedstocks and is storing approximately 1.0 million barrels of intermediate and refined products under this agreement. TARC also entered into a processing agreement with this third party to process approximately 0.8 million barrels of the third party's feedstocks for a fixed price per barrel. Under the terms of this fixed price agreement, TARC met all quantity and quality yields earning the full price per barrel. For the year ended January 31, 1997, TARC recorded a net loss of approximately $4.5 million related to these processing arrangements primarily as a result of low margins and price management activities. Environmental compliance and permitting issues are an integral part of the capital expenditures anticipated in connection with the expansion and modification of the refinery. TARC does not expect to incur any additional significant expenses for environmental compliance during fiscal 1998 or fiscal 1999 other than those budgeted for the Capital Improvement Program. There is no assurance, however, that costs incurred to comply with environmental laws will not have a material adverse effect on TARC's future results of operations, cash flows or financial condition. TARC also has contingent liabilities with respect to litigation matters as more fully described in Note 11 of Notes to Financial Statements. INFLATION AND CHANGES IN PRICES TARC's revenues and feedstock costs have been, and will continue to be, affected by changes in the prices of petroleum and petroleum products. TARC's ability to obtain additional capital is also substantially dependent on refined product prices and refining margins, which are subject to significant seasonal, cyclical and other fluctuations beyond TARC's control. From time to time, TARC enters into futures contracts, options on futures, swap agreements and forward sale agreements for crude and refined products intended to protect against a portion of the price risk associated with price declines from holding inventory of feedstocks and refined products, or for fixed price purchase commitments. TARC's policy is not to enter into fixed price or other purchase commitments in excess of anticipated processing requirements. TARC believes that these current and anticipated futures transactions do not and will not constitute speculative trading as specified under and prohibited by the Indenture. RECENTLY ISSUED PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("SFAS 129"). These statements will be adopted by the Company effective January 31, 1998. SFAS 128 simplifies the computation of earnings per share by replacing primary and fully diluted presentations with the new basic and diluted disclosures. SFAS 129 establishes standards for disclosing information about an entity's capital structure. The Company has not determined the impact of these pronouncements on its financial statements. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP 96-1"), which establishes new accounting and reporting standards for the recognition and disclosure of environmental remediation liabilities. The Company does not believe the effect of adoption of SOP 96-1 in 1998 will have a material impact on the Company's financial position, results of operations or cash flows. 13 16 FORWARD-LOOKING STATEMENTS Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, are included throughout this report. All statements other than statements of historical facts included in this Annual Report on Form 10-K regarding the Company's financial position, business strategy, plans and objectives of management for future operations and expansion and modification of the refinery, including but not limited to words such as "anticipates," "expects," "believes," "estimates," "intends," "projects" and "likely" indicate forward-looking statements. TARC's management believes that its current views and expectations are based on reasonable assumptions; however, there are significant risks and uncertainties that could significantly affect expected results. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, TARC's success in raising additional capital to complete expansion and modification of the refinery, engineering problems, work stoppages, cost overruns, personnel or materials shortages, fluctuations in commodity prices for petroleum and refined products, casualty losses, conditions in the capital markets and competition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 14 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Report of Independent Accountants....... 16 Financial Statements: Balance Sheet......................... 17 Statement of Operations............... 18 Statement of Stockholder's Equity..... 19 Statement of Cash Flows............... 20 Notes to Financial Statements......... 21
15 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholder and Board of Directors TransAmerican Refining Corporation: We have audited the accompanying balance sheet of TransAmerican Refining Corporation ("TARC") as of January 31, 1997 and 1996 and the related statements of operations, stockholder's equity and cash flows for the year ended January 31, 1997, the six months ended January 31, 1996 and each of the two years in the period ended July 31, 1995. These financial statements are the responsibility of TARC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TransAmerican Refining Corporation as of January 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended January 31, 1997, the six months ended January 31, 1996 and each of the two years in the period ended July 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that TARC will continue as a going concern. TARC is required to obtain additional funds to amend or refinance the TARC Notes, expand its refinery and to fund its ongoing working capital requirements. There is no assurance that the TARC Notes can be amended or refinanced or that the necessary additional funding for the refinery expansion and working capital can be obtained or that profitable operations will be ultimately achieved. As a result there is substantial doubt about TARC's ability to continue as a going concern. Management's plans are described in Note 2. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. Houston, Texas April 25, 1997 16 19 TRANSAMERICAN REFINING CORPORATION BALANCE SHEET (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JANUARY 31, ---------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents............. $ 613 $ 2,779 Long-term debt proceeds held in collateral account................. -- 14,840 Accounts receivable................... -- 121 Receivable from affiliates............ 22 118 Inventories........................... -- 37,231 Other................................. 654 5,479 --------- --------- Total current assets.......... 1,289 60,568 --------- --------- Property and equipment.................. 555,816 430,858 Less accumulated depreciation and amortization.......................... 16,930 10,244 --------- --------- Net property and equipment.... 538,886 420,614 --------- --------- Long-term debt proceeds held in collateral account.................... -- 9,565 Receivable from affiliates.............. 393 -- Other assets, net....................... 23,673 27,576 --------- --------- $ 564,241 $ 518,323 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable...................... $ 20,033 $ 23,552 Payable to affiliates................. 7,094 2,957 Accrued liabilities................... 15,450 14,560 Product financing arrangements........ -- 37,206 Long-term debt........................ 365,730 -- --------- --------- Total current liabilities..... 408,307 78,275 --------- --------- Payable to affiliates................... 6,674 3,799 Notes payable to affiliate.............. 46,589 -- Long-term debt.......................... -- 316,538 Investment in TransTexas................ 20,706 46,586 Other................................... 602 1,168 Commitments and contingencies (Note 11)................................... -- -- Stockholder's equity: Common stock, $0.01 par value, 100,000,000 shares authorized, 30,000,000 shares issued and outstanding........................ 300 300 Additional paid-in capital............ 248,513 248,513 Accumulated deficit................... (167,450) (176,856) --------- --------- Total stockholder's equity.... 81,363 71,957 --------- --------- $ 564,241 $ 518,323 ========= =========
The accompanying notes are an integral part of the financial statements. 17 20 TRANSAMERICAN REFINING CORPORATION STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JANUARY 31, JANUARY 31, JULY 31, ---------------------- ---------------------- ------------------- 1997 1996 1996 1995 1995 1994 -------- ----------- -------- ----------- -------- -------- (UNAUDITED) (UNAUDITED) Revenues: Product sales.................. $ 10,857 $176,229 $107,237 $ 71,035 $140,027 $174,143 Tank rentals................... -- 1 -- 551 552 3,035 -------- -------- -------- -------- -------- -------- Total revenues......... 10,857 176,230 107,237 71,586 140,579 177,178 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of products sold.......... 11,544 185,277 110,052 73,862 149,087 168,855 Processing arrangements, net... 7,090 -- -- -- -- -- Operations and maintenance..... 23,945 12,482 7,910 7,727 12,299 12,103 Depreciation and amortization................ 7,225 6,308 3,159 2,706 5,855 2,589 General and administrative..... 11,848 12,610 7,438 8,442 13,614 4,496 Taxes other than income taxes....................... 4,200 2,731 649 2,088 4,170 3,661 -------- -------- -------- -------- -------- -------- Total costs and expenses............. 65,852 219,408 129,208 94,825 185,025 191,704 -------- -------- -------- -------- -------- -------- Operating loss................. (54,995) (43,178) (21,971) (23,239) (44,446) (14,526) -------- -------- -------- -------- -------- -------- Other income (expense): Interest income................ 204 6,346 2,263 4 4,087 37 Interest expense............... (73,503) (59,994) (32,180) (3,540) (31,354) (13) Interest capitalized........... 68,840 41,543 26,202 3,509 18,850 -- Equity in income (loss) before extraordinary item of TransTexas.................. 12,325 (2,584) (156) -- (2,428) -- Other income (expense)......... 56,535 2,106 (229) 116 2,451 (2,851) -------- -------- -------- -------- -------- -------- Total other income (expense)............ 64,401 (12,583) (4,100) 89 (8,394) (2,827) -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item.......... 9,406 (55,761) (26,071) (23,150) (52,840) (17,353) Extraordinary item: Equity in extraordinary loss of TransTexas.................. -- (11,497) -- -- (11,497) -- -------- -------- -------- -------- -------- -------- Net income (loss)................ $ 9,406 $(67,258) $(26,071) $(23,150) $(64,337) $(17,353) ======== ======== ======== ======== ======== ======== Net income (loss) per share: Income (loss) before extraordinary item.......... $ 0.25 $ (1.86) $ (0.87) $ (0.77) $ (1.76) $ (0.58) Extraordinary item............. -- (0.38) -- -- (0.38) -- -------- -------- -------- -------- -------- -------- $ 0.25 $ (2.24) $ (0.87) $ (0.77) $ (2.14) $ (0.58) ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements. 18 21 TRANSAMERICAN REFINING CORPORATION STATEMENT OF STOCKHOLDER'S EQUITY (IN THOUSANDS)
COMMON STOCK TOTAL ---------------- ADDITIONAL ACCUMULATED STOCKHOLDER'S SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY ------ ------ --------------- ----------- ------------- Balance, July 31, 1993........... 30,000 $300 $ 73,048 $ (69,095) $ 4,253 Net loss......................... -- -- -- (17,353) (17,353) Equity contribution by TransAmerican.................. -- -- 113,500 -- 113,500 ------ ---- -------- --------- --------- Balance, July 31, 1994........... 30,000 300 186,548 (86,448) 100,400 Net loss......................... -- -- -- (64,337) (64,337) Issuance of warrants............. -- -- 23,300 -- 23,300 Equity contribution by TransAmerican.................. -- -- 71,170 -- 71,170 Contribution of TransTexas stock by TEC......................... -- -- (32,505) -- (32,505) ------ ---- -------- --------- --------- Balance, July 31, 1995........... 30,000 300 248,513 (150,785) 98,028 Net loss......................... -- -- -- (26,071) (26,071) ------ ---- -------- --------- --------- Balance, January 31, 1996........ 30,000 300 248,513 (176,856) 71,957 Net income....................... -- -- -- 9,406 9,406 ------ ---- -------- --------- --------- Balance, January 31, 1997........ 30,000 $300 $248,513 $(167,450) $ 81,363 ====== ==== ======== ========= =========
The accompanying notes are an integral part of the financial statements. 19 22 TRANSAMERICAN REFINING CORPORATION STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JANUARY 31, JANUARY 31, JULY 31, ---------------------- ----------------------- -------------------- 1997 1996 1996 1995 1995 1994 -------- ----------- --------- ----------- --------- -------- (UNAUDITED) (UNAUDITED) Operating activities: Net income (loss)..................... $ 9,406 $(67,258) $ (26,071) $(23,150) $ (64,337) $(17,353) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization....... 7,225... 6,308 3,159 2,706 5,855 2,694 Litigation.......................... -- 2,000 2,000 4,500 4,500 -- Amortization of discount on long-term debt.................... 83 11,062 3,389 -- 7,673 -- Amortization of debt issue costs.... 6 790 238 -- 552 -- Equity in net (income) loss of TransTexas........................ (12,325) 14,081 156 -- 13,925 -- Inventory write down................ -- 5,671 4,406 -- 1,265 79 Gain on sale of TransTexas stock.... (56,162) -- -- -- -- -- Loss on disposition of equipment.... 6,513 -- -- -- -- -- Changes in assets and liabilities: Accounts receivable............... 121 1,340 3,671 6,901 4,570 (8,558) Inventories....................... 25 (4,070) 7,242 3,063 (8,249) (4,577) Prepayments and other............. 4,825 (5,258) 1,765 (221) (7,244) -- Accounts payable.................. 4,000 (4,260) (1,675) (105) (2,690) 5,194 Payable to affiliate, net......... 6,077 1,530 1,979 (765) (1,214) 1,239 Accrued liabilities............... 1,427 (886) (3,132) (4,871) (2,625) 11,391 Other assets...................... 63 (2,818) (130) 562 (2,126) (1,088) Other liabilities................. -- (157) -- (102) (259) (96) -------- -------- --------- -------- --------- -------- Net cash used by operating activities...................... (28,716) (41,925) (3,003) (11,482) (50,404) (11,075) -------- -------- --------- -------- --------- -------- Investing activities: Capital expenditures.................. (86,581) (174,633) (119,565) (52,306) (107,374) (57,209) Proceeds from sale of TransTexas stock............................... 42,607 -- -- -- -- -- -------- -------- --------- -------- --------- -------- Net cash used by investing activities...................... (43,974) (174,633) (119,565) (52,306) (107,374) (57,209) -------- -------- --------- -------- --------- -------- Financing activities: Issuance of long-term debt and warrants............................ -- 300,750 -- -- 300,750 -- Advances from TransAmerican and affiliates.......................... 49,152 17,333 16,698 86,925 87,560 68,523 Repayment of advances from TransAmerican and affiliates........ (1,925) (53,450) (13,450) (20,000) (60,000) -- Long-term debt proceeds held in collateral account.................. (26,549) (173,000) -- -- (173,000) -- Withdrawals from collateral account... 50,949 148,595 116,452 -- 32,143 -- Debt issue costs...................... -- (20,479) -- (3,126) (23,605) (220) Principal payments on capital lease obligations......................... (1,103) (458) (458) -- -- -- -------- -------- --------- -------- --------- -------- Net cash provided by financing activities...................... 70,524 219,291 119,242 63,799 163,848 68,303 -------- -------- --------- -------- --------- -------- Increase (decrease) in cash and cash equivalents................ (2,166) 2,733 (3,326) 11 6,070 19 Beginning cash and cash equivalents..... 2,779 46 6,105 35 35 16 -------- -------- --------- -------- --------- -------- Ending cash and cash equivalents........ $ 613 $ 2,779 $ 2,779 $ 46 $ 6,105 $ 35 ======== ======== ========= ======== ========= ======== Cash paid for: Interest, net of amounts capitalized......................... 2,426 1,365 836 -- 1,282 -- Noncash financing and investing activities: Forgiveness of advances from TransAmerican (including $25.0 million for property, plant and equipment transferred from TransAmerican at net book value in 1994)............................... -- 71,170 -- -- 71,170 100,000 Contribution of TransTexas stock...... -- 37,176 -- -- 37,176 -- TransTexas assumption of litigation liabilities......................... -- -- -- -- -- 13,500 Accounts payable for property and equipment........................... (7,519) 14,082 10,591 8,293 11,784 10,429 Capital lease obligations and other liabilities incurred for property and equipment....................... -- 2,544 1,643 66 967 1,336 Interest accretion on notes and discount notes capitalized in property and equipment.............. 49,109 29,306 18,186 -- 11,120 -- Product financing arrangements........ (37,206) 37,206 37,206 -- 27,671 --
The accompanying notes are an integral part of the financial statements. 20 23 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO THE YEAR ENDED JANUARY 31, 1996 AND INTERIM PERIOD ENDED JANUARY 31, 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Formation of TARC TransAmerican Refining Corporation (the "Company" or "TARC") is engaged in the refining and storage of crude oil and petroleum products. TARC's refinery is located in the Gulf Coast region along the Mississippi River approximately 20 miles from New Orleans, Louisiana. TARC was incorporated in September 1987 for the purpose of holding and eventually operating certain refinery assets previously held by TransAmerican Natural Gas Corporation ("TransAmerican") and its subsidiaries. TransAmerican emerged from a proceeding under Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed plan of reorganization. In 1987, TransAmerican transferred substantially all of its refinery assets at net book value to TARC. From 1987 through 1993, TARC incurred operating losses principally as a result of maintaining its idled refinery. TARC recommenced partial operations of the refinery in March 1994. The refinery has operated intermittently since then based on operating margins and has continued to incur operating losses. TARC plans major expansion and modifications which would significantly change the refinery's throughput capacity, feedstocks used and refined product yields. Funds for construction have historically been provided by TransAmerican; however, as more fully described in Note 7, TARC's issuance of long-term debt during 1995 provided $173 million for refinery construction. As discussed in Note 2, additional financing is required to complete the refinery expansion. In 1994, TransAmerican formed TransAmerican Energy Corporation ("TEC"), a limited-purpose holding company, to hold 55 million shares of common stock (74.3% of outstanding shares) of TransTexas Gas Corporation ("TransTexas") and all of TARC's capital stock. In February 1995, in connection with a public offering of debt securities by TARC, TransAmerican transferred 55 million shares of TransTexas' common stock to TEC. TEC then transferred 15 million of the shares (20.3% of the total outstanding) to TARC. In March 1996, TARC sold 4.55 million shares of TransTexas common stock (6.2% of the total outstanding) in a public offering, for proceeds of $42.7 million, $26.6 million of which were deposited in the cash collateral account. TARC recognized a $56.2 million gain on the March 1996 sale of TransTexas stock. An aggregate of 50.45 million shares of TransTexas common stock held by TEC and TARC are currently pledged as collateral for TARC's debt securities. Change in Fiscal Year On January 29, 1996, the Board of Directors approved a change in TARC's fiscal year end for financial reporting purposes from July 31 to January 31. The financial statements include presentation of the year ended January 31, 1997, the six months ended January 31, 1996 (the "Transition Period") and the comparable prior year and six month periods which are unaudited. Cash and Cash Equivalents TARC considers all highly liquid investments purchased with an original maturity of three months or less to be a cash equivalent. Inventories TARC's inventories, consisting primarily of feedstocks and refined products, are stated at the lower of average cost or market. TARC wrote down the value of its inventories by approximately $4.4 million and $1.3 million at January 31, 1996 and July 31, 1995, respectively, to reflect existing market prices. 21 24 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Price Management Activities TARC's revenues and feedstock costs have been, and will continue to be, affected by changes in the prices of petroleum and petroleum products. TARC's ability to obtain additional capital is also substantially dependent on refined product prices and refining margins, which are subject to significant seasonal, cyclical and other fluctuations that are beyond TARC's control. From time to time, TARC enters into commonly traded refinery feedstocks and finished goods related futures contracts, options on futures, swap agreements and forward sale agreements with the intent to protect against a portion of the price risk associated with price declines from holding inventory, or fixed price purchase commitments. Commitments involving future settlement give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a particular instrument and credit risk, which represents the potential loss if a counterparty is unable to perform. Under the guidelines of Statement of Financial Accounting Standards No. 80 ("SFAS 80"), gains and losses associated with such transactions that meet the hedge criteria in SFAS 80 will be deferred until realized. Those transactions which do not meet the hedging criteria in SFAS 80 are recorded at market value resulting in a gain or a loss which is recorded in other income in the period in which a change in market value occurs. Property and Equipment Property and equipment acquired subsequent to 1983, including assets transferred from TransAmerican in 1994, are stated at TransAmerican's or TARC's historical cost. During the period from 1987 through August 1993, property and equipment acquired prior to 1983 were carried at estimated net realizable value and no depreciation expense was charged. New or refurbished units are depreciated as placed in service. Depreciation of refinery equipment and other buildings and equipment is computed by the straight-line method at rates which will amortize the unrecovered cost of depreciable property and equipment including assets acquired under capital leases, over their estimated useful lives. Costs of improving leased property are amortized over the estimated useful lives of the assets or the terms of the leases, whichever is shorter. The cost of repairs and minor replacements is charged to operating expense while the cost of renewals and improvements is capitalized. At the time depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts. Gains or losses on dispositions in the ordinary course of business are included in the statement of operations. Impairment of property and equipment is reviewed whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Events or circumstances that may indicate impairment may include, among others, a prolonged shutdown of the refinery or a prolonged period of negative or low refining margins. Turnarounds A turnaround consists of a complete shutdown, inspection and maintenance of a unit. The estimated costs of turnarounds are accrued over the period to the next scheduled turnaround, which is generally greater than one year. Environmental Remediation Costs Environmental expenditures are expensed or capitalized as appropriate, depending on their future economic benefit. Expenditures relating to an existing condition caused by past operations that do not have future economic benefits are expensed. Liabilities for these expenditures are provided when the responsibility to remediate is probable and the amount of associated cost is reasonably estimable. 22 25 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Stockholder's Equity Stockholder's equity was retroactively adjusted to reflect a 30,000-for-1 stock split which was effective in July 1994. In July 1994, TARC increased its authorized capital to 100,000,000 shares and decreased the par value of its common stock from $1.00 to $0.01. Defined Contribution Plan TARC, through its parent company, TransAmerican, maintains a defined contribution plan, which incorporates a "401(k) feature" as allowed under the Internal Revenue Code. All investments are made through Massachusetts Mutual Life Insurance Company. Employees who are at least 21 years of age and have completed one year of credited service are eligible to participate on the next semiannual entry date. TARC matches 10%, 20% or 50% of employee contributions up to a maximum of 3% of the participant's compensation, based on years of plan participation. All contributions are currently funded. TARC recognized approximately $75,000, $32,000, $41,000 and $43,000 of expense related to the Defined Contribution Plan for the year ended January 31, 1997, the six months ended January 31, 1996 and the years ended July 31, 1995 and 1994, respectively. Revenue Recognition TARC recognizes revenue from sales of refined products in the period of delivery. Concentration of Credit Risk Financial instruments which potentially expose TARC to credit risk consist principally of cash, trade receivables and forward contracts. TARC selects depository banks based upon management's review of the financial stability of the institution. Balances periodically exceed the $100,000 level covered by federal deposit insurance. To date, there have been no losses incurred due to excess deposits in any financial institution. Trade accounts receivable are generally from companies with significant petroleum activities, who would be impacted by conditions or occurrences affecting that industry. All futures contracts were with major brokerage firms and, in the opinion of management, did not expose TARC to any undue credit risks. In addition, as of January 31, 1996, TARC had deposited cash totaling $5.1 million with two third parties to permit the third parties to hedge their price risk in connection with TARC's product financing arrangements. See Note 11. TARC performs ongoing credit evaluations and, generally, requires no collateral from its customers. For the year ended January 31, 1997, TARC had two customers which accounted for 96% of total revenues. For the six months ended January 31, 1996, TARC had three customers which accounted for 41% of total revenues. For the year ended July 31, 1995, TARC had two customers which accounted for 56% of total revenues. For the year ended July 31, 1994, TARC had two customers which accounted for 46% of total revenues. Income Taxes TARC files a consolidated tax return with TransAmerican. Income taxes are due from or payable to TransAmerican in accordance with a tax allocation agreement. It is TARC's policy to record income tax expense as though TARC had filed separately. Deferred income taxes are recognized, at enacted tax rates, to reflect the future effects of tax carryforwards and temporary differences arising between the tax bases of assets and liabilities and their financial reporting amounts in accordance with Statement of Financial Accounting Standards No. 109 and the Tax Allocation Agreement between TARC, TransAmerican, and TransAmerican's other direct and indirect subsidiaries. Income taxes include federal and state income taxes. 23 26 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments TARC includes fair value information in the notes to the financial statements when the fair value of its financial instruments is different from the book value. TARC uses quoted market prices or, to the extent that there are no available quoted market prices, market prices for similar instruments. When the book value approximates fair value, no additional disclosure is made. Net Income (Loss) Per Share Net income (loss) per share is calculated by dividing net income available for common shareholders by the weighted average number of shares of common stock and common stock equivalents. Warrants are regarded as common stock equivalents and are therefore considered in net income (loss) per share calculations, if dilutive. The number of common stock equivalents is determined using the treasury stock method. Reclassifications Certain reclassifications have been made in the prior years' financial statements to conform to the current year's presentation. The reclassifications did not affect net loss or stockholder's equity. Debt Issue Costs TARC defers costs associated with issuing long-term debt. Capitalized debt costs are amortized to interest expense over the scheduled maturity of the debt utilizing the interest method. 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 amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Issued Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("SFAS 129"). These statements will be adopted by the Company effective January 31, 1998. SFAS 128 simplifies the computation of earnings per share by replacing primary and fully diluted presentations with the new basic and diluted disclosures. SFAS 129 establishes standards for disclosing information about an entity's capital structure. The Company has not determined the impact of these pronouncements on its financial statements. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP 96-1"), which establishes new accounting and reporting standards for the recognition and disclosure of environmental remediation liabilities. The Company does not believe the effect of adoption of SOP 96-1 in 1998 will have a material impact on the Company's financial position, results of operations or cash flows. 2. ADDITIONAL FINANCING REQUIREMENTS Primarily because additional financing was not available, TARC was unable to meet the construction completion timetable for the Capital Improvement Program as required under the TARC Notes Indenture. In 24 27 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) February 1997, TARC solicited and received from the holders of the TARC Notes consents to certain waivers under and amendments to the TARC Notes Indenture. Pursuant to this consent solicitation, the holders of the TARC Notes waived, until July 15, 1997, the default under the TARC Notes Indenture which would have occurred on February 15, 1997 as a result of TARC's failure to meet the required completion timetable. The waiver of this default will cease to be effective on July 15, 1997. Unless the default has been further waived, or the Company completes a recapitalization that satisfies the holders of the TARC Notes, such holders would then be entitled to pursue remedies available under the TARC Notes Indenture, including acceleration of the maturity of the TARC Notes. TARC must obtain substantial additional financing to fund any additional expansion or modification of the refinery. It is likely that the scope, completion schedule and other aspects of the Capital Improvement Program will be modified in connection with obtaining additional financing. The scope, completion schedule, amount of additional expenditures required and other aspects of additional expansion and modification of the refinery will depend upon, among other factors, the availability and timing of such financing. TEC and its operating subsidiaries are considering various financing alternatives, including a recapitalization of TEC, TARC and TransTexas. The Company expects that these recapitalizations can be completed by July 15, 1997. However, there can be no assurance that TARC will obtain the required additional financing. TARC has incurred losses and negative cash flow from operations as a result of limited refinery operations which did not cover the fixed costs of maintaining the refinery, increased working capital requirements including debt service and losses on refined product sales and processing arrangements. In order to operate the refinery at expected levels after completion of expansion and modification of the refinery, TARC will require additional working capital and ultimately must achieve profitable operations. If TARC (i) does not obtain additional financing, (ii) does not complete a recapitalization that satisfies the holders of the TARC Notes, or (iii) does not complete construction of a refinery capable of profitable operations, TARC's investment in the refinery may not be recovered (See Note 4). Without additional funding to complete expansion and modification of the refinery and to provide working capital for operations and debt service, there is substantial doubt about TARC's continuation as a going concern. The financial statements do not include any adjustments as a result of such uncertainties. 3. INVENTORIES AND OTHER CURRENT ASSETS The major components of inventories are as follows (in thousands of dollars):
JANUARY 31, ------------------ 1997 1996 ------- ------- Refinery feedstocks and blendstocks......................... $ -- $ 4,395 Intermediate and refined products........................... -- 32,836 ------- ------- $ -- $37,231 ======= =======
The major components of other current assets are as follows (in thousands of dollars):
JANUARY 31, -------------- 1997 1996 ---- ------ Insurance prepayments....................................... $603 $1,027 Prepaid product charges..................................... 51 4,452 ---- ------ $654 $5,479 ==== ======
25 28 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT The major components of property and equipment are as follows (in thousands of dollars):
ESTIMATED JANUARY 31, USEFUL LIFE -------------------- (YEARS) 1997 1996 ----------- -------- -------- Land....................................................... $ 9,362 $ 9,362 Refinery................................................... 20 to 30 532,428 411,650 Other...................................................... 3 to 10 14,026 9,846 -------- -------- $555,816 $430,858 ======== ========
Approximately $45 million of refinery assets were being depreciated at January 31, 1997 and 1996. The remaining refinery and other assets are considered construction in process. Approximately $90.4 million of property, plant and equipment represents assets transferred by TransAmerican at net realizable value and $465.4 million represents additions recorded at historical cost. As of January 31, 1997, the Company changed the estimated useful lives of the refinery equipment currently under construction from 10 years to a range of 20 to 30 years. The change in estimate was not material to 1997 net income. TARC recognized $6.7 million, $2.9 million, $5.9 million and $2.7 million in depreciation expense for the year ended January 31, 1997, the six months ended January 31, 1996 and the years ended July 31, 1995 and 1994, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). As of February 1, 1996, TARC adopted the requirements of SFAS No. 121. TARC currently believes, based on estimates of refining margins and current estimates for costs of the Capital Improvement Program, that future undiscounted cash flows will be sufficient to recover the cost of the refinery over its estimated useful life as well as the costs of related identifiable intangible assets. Management believes there have been no events or changes in circumstances that would require the recognition of an impairment loss. However, due to the inherent uncertainties in estimating future refining margins, in constructing and operating a large scale refinery and the uncertainty regarding TARC's ability to complete the Capital Improvement Program, there can be no assurance that TARC will ultimately recover the cost of the refinery. Management believes that the book value of the refinery is in excess of its current estimated fair market value. 5. OTHER ASSETS The major components of other assets are as follows (in thousands of dollars):
JANUARY 31, ------------------ 1997 1996 ------- ------- Debt issue costs, net of accumulated amortization of $6,445 at January 31, 1997 and $2,819 at January 31, 1996........ $17,482 $20,786 Contractual rights and licenses, net of accumulated amortization of $992 at January 31, 1997 and $1,464 at January 31, 1996.......................................... 5,979 6,516 Other....................................................... 212 274 ------- ------- $23,673 $27,576 ======= =======
TARC uses the straight-line method to amortize intangibles over the periods estimated to be benefited. To the extent that TARC's participation in the recapitalization described in Note 2 results in extinguishment of the TARC Notes, the debt issue costs relating thereto will be charged to income in the period of the extinguishment. 26 29 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. ACCRUED LIABILITIES The major components of accrued liabilities are as follows (in thousands of dollars):
JANUARY 31, ------------------ 1997 1996 ------- ------- Interest.................................................... $ 7,608 $ 7,609 Litigation accrual.......................................... -- 2,500 Taxes other than income taxes............................... 3,365 321 Maintenance turnarounds..................................... 1,909 1,145 Payroll..................................................... 599 1,321 Insurance................................................... 1,222 380 Other....................................................... 747 1,284 ------- ------- $15,450 $14,560 ======= =======
7. LONG-TERM DEBT TARC's long-term debt is as follows (in thousands of dollars):
JANUARY 31, JANUARY 31, 1997 1996 ----------- ----------- Guaranteed First Mortgage Discount Notes due 2002........... $269,606 $221,155 Guaranteed First Mortgage Notes due 2002.................... 96,124 95,383 -------- -------- $365,730 $316,538 ======== ========
On February 23, 1995, TARC issued 340,000 A Units consisting of $340 million aggregate principal amount of Guaranteed First Mortgage Discount Notes due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase Warrants ("Warrants"), and 100,000 B Units consisting of $100 million aggregate principal amount of Guaranteed First Mortgage Notes due 2002 ("Mortgage Notes" and, together with the Discount Mortgage Notes, the "TARC Notes") and 1,683,540 Warrants. The TARC Notes are senior obligations of TARC, collateralized as of January 31, 1997 by a first priority lien on substantially all of TARC's property and assets and pledges of 50.45 million shares of common stock of TransTexas and all of TARC's outstanding common stock. The Warrants entitle holders to purchase in the aggregate 7,495,313 shares of TARC's common stock, representing 19.99% of TARC's common stock assuming the exercise of all of the Warrants, at an exercise price of $0.01 per share. The Warrants are immediately exercisable and expire on February 15, 2002. TARC allocated $23.3 million of the proceeds from the issuance of the TARC Notes to the Warrants based on their estimated fair value. The Discount Mortgage Notes and the Mortgage Notes initially bear interest at rates of 18 1/2% and 16 1/2%, respectively. Interest is payable semi-annually with the first interest payment on the Discount Mortgage Notes due August 15, 1998. Interest payments on the Mortgage Notes began August 15, 1995. TARC is required to redeem $110 million of the principal amount of the TARC Notes on each of February 15, 2000 and 2001. The TARC Notes mature on February 15, 2002. Upon the occurrence of a change of control, TARC is required to offer to purchase all outstanding TARC Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. In addition, TARC is required, subject to certain conditions, to make an offer to purchase the TARC Notes with the net proceeds of certain asset sales or dispositions of assets, with a percentage of excess cash (as defined), or if, at the end of each of any two consecutive quarters, commencing with the quarter ending January 31, 1998, TARC's Net Worth is less than $75 million and TARC's Consolidated Fixed Charge Coverage Ratio as of the end of each of such quarters is less than 1.25 to 1. TARC 27 30 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) will be required to generate net income or increase its present capital before January 1998, to comply with certain of these covenants. The indenture governing the TARC Notes ("TARC Notes Indenture") contains certain covenants which limit TARC's ability to incur additional indebtedness, transfer or sell assets, pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, or consummate a merger, consolidation or sale of all or substantially all of its assets. TARC received approximately $301 million from the sale of A Units and B Units. Net proceeds received by TARC approximated $92 million after deducting approximately $16 million for underwriting discounts, commissions, fees and expenses, approximately $20 million for the repayment of the balance of a loan from TransAmerican ("TransAmerican Loan"), and $173 million which was deposited into a cash collateral account ("Collateral Account") to fund the expansion and upgrading of TARC's refinery. Pursuant to a Disbursement Agreement, funds in the Collateral Account are held and invested by the Disbursement Agent until needed from time to time to fund the Capital Improvement Program. The Disbursement Agent disburses funds from the Collateral Account in accordance with a budget prepared by TARC and approved by the Construction Supervisor, a third party approved by the trustee and compensated by TARC. The Construction Supervisor is required to review each request by TARC for a disbursement from the Collateral Account to pay for the Capital Improvement Program. All funds in the Collateral Account are pledged as security for the repayment of the TARC Notes and are classified as "long-term debt proceeds held in collateral account" in the financial statements. To the extent TARC has current liabilities related to the Capital Improvement Program, the corresponding amount in the Collateral Account is classified as a current asset. As of January 31, 1997, TARC had expended all amounts deposited in the Collateral Account. In March 1997, TARC issued $36 million principal amount of 15% senior secured notes due 1998 to unaffiliated third parties. These notes are secured by a pledge of the 5 million shares of TransTexas common stock, which were released from the lien securing the TARC Notes. Proceeds from the issuance of these notes were deposited in a cash collateral account to be used for refinery construction and general corporate purposes. TARC's capitalized lease obligations were approximately $1.3 million and $2.4 million at January 31, 1997 and 1996, respectively. Maturities of such obligations are approximately $0.8 million, $0.3 million and $0.2 million in the years ending January 31, 1998, 1999 and 2000, respectively. The fair value of the TARC Notes, based on quoted market prices, was approximately $404 million and $295 million as of January 31, 1997 and 1996, respectively. 8. INCOME TAXES Long-term deferred tax assets and liabilities are comprised of the following (in thousands of dollars):
JANUARY 31, --------------------- 1997 1996 --------- -------- Deferred tax assets: Receivable from TransAmerican in lieu of Federal net operating loss carryforwards........................... $ 72,268 $ 63,997 Safe harbor leases........................................ 81,976 85,283 Other..................................................... 355 10,897 --------- -------- Gross deferred tax assets.............................. 154,599 160,177 Deferred tax liabilities: Depreciation.............................................. 4,331 6,617 --------- -------- Net deferred tax assets................................... 150,268 153,560 Valuation allowance....................................... (150,268) (153,360) --------- -------- $ -- $ -- ========= ========
28 31 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The net deferred tax asset valuation allowance for each respective period represents the amounts for which utilization is not assured due to the uncertainty of realizing deferred tax assets. Changes in the net deferred tax asset valuation allowance were primarily attributable to increases in tax loss carryforwards. On a separate return basis, TARC has incurred approximately $206.5 million of regular tax net operating losses from inception through January 31, 1997. TARC's regular tax net operating losses incurred from inception through January 31, 1997 would generally expire from 2004 through 2013. Under TARC's tax allocation agreement with TransAmerican and TransAmerican's other subsidiaries, as long as TARC remains in the consolidated group for tax purposes, TARC may receive benefits in the future for loss carryforwards in the form of reduced current taxes payable to the extent (i) its losses incurred are available for and utilized by TransAmerican and (ii) TransAmerican has the ability to pay its taxes without contributions from TARC. As of January 31, 1996, all of TARC's NOLs had been used by TransAmerican's consolidated group. At January 31, 1997, TARC had NOL carryforwards of approximately $32.6 million which have not been used by TransAmerican which would expire in 2013. A change of control or other event that results in deconsolidation of TARC from TransAmerican's consolidated group for federal income tax purposes could result in the acceleration of payment of a substantial amount of federal income taxes by TransAmerican. The tax liability to TransAmerican that would result from deconsolidation is estimated to be approximately $15 million at January 31, 1997. Each member of a consolidated group filing a consolidated federal income tax return is severally liable for the consolidated federal income tax liability of the consolidated group. There can be no assurance that TransAmerican will have the ability to satisfy the above tax obligation at the time due and, therefore, TARC, or other members may be required to pay all or a portion of the tax. A decision by TEC or TARC to sell TransTexas shares could result in deconsolidation of TransTexas for tax purposes. In the event TARC is not allowed to file a consolidated return with TransAmerican, the receivable in lieu of federal net operating loss carryforwards would not be available and the related valuation allowance would decrease by $72.3 million. Total income tax expense differs from amounts computed by applying the statutory federal income tax rate to income before income taxes as follows (in thousands of dollars):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JANUARY 31, JANUARY 31, JULY 31, -------------------- --------------------- ------------------ 1997 1996 1996 1995 1995 1994 ------ ----------- ------- ----------- -------- ------- (UNAUDITED) (UNAUDITED) Federal income tax expense (benefit) at the statutory rate............. $3,292 $(23,540) $(9,125) $(8,103) $(22,518) $(6,074) Increase (decrease) in tax resulting from: Net operating losses (utilized) not utilizable................. (3,292) 23,540 9,125 8,103 22,518 6,074 ------ -------- ------- ------- -------- ------- $ -- $ -- $ -- $ -- $ -- $ -- ====== ======== ======= ======= ======== =======
9. INVESTMENT IN TRANSTEXAS TARC uses the equity method to account for its investment in TransTexas and initially recorded this investment at TransAmerican's historical basis. The sale of TransTexas stock in March 1996 by TARC reduced TARC's interest in TransTexas from 20.3% to 14.1%. TARC recognized a gain of $56.2 million on the sale of TransTexas stock in March 1996. TARC continues to record its pro rata share of losses due to the common control of TransTexas and TARC by TransAmerican and TEC. The equity in extraordinary loss of TransTexas for the year ended July 31, 1995 represents TARC's equity in a charge by TransTexas for the early retirement of $500 million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds of the issuance by 29 32 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) TransTexas in June 1995 of $800 million in 11 1/2% Senior Secured Notes due 2002. The closing price of TransTexas' common stock on January 31, 1997 was $17.00. Summary financial information of TransTexas is as follows (in thousands of dollars):
JANUARY 31, ----------------------- 1997 1996 ---------- --------- ASSETS Total current assets........................................ $ 188,934 $ 159,438 Property and equipment, net................................. 846,393 715,340 Other assets................................................ 17,825 64,049 ---------- --------- $1,053,152 $ 938,827 ========== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Total current liabilities................................... $ 117,348 $ 115,836 Total noncurrent liabilities................................ 1,086,599 977,431 Total stockholders' deficit................................. (150,795) (154,440) ---------- --------- $1,053,152 $ 938,827 ========== =========
SIX MONTHS ENDED YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31, ----------------------- ------------------- ------------------- 1997 1996 1996 1995 1995 1994 ---------- ---------- -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Revenues........................... $406,347 $291,338 $141,156 $162,517 $312,699 $335,919 Operating costs and expenses....... 219,068 229,284 101,908 133,833 261,209 256,628 -------- -------- -------- -------- -------- -------- Operating income................. 187,279 62,054 39,248 28,684 51,490 79,291 Other expense...................... (91,463) (77,174) (40,436) (29,059) (65,797) (50,155) Income tax (expense) benefit....... (12,491) 2,700 416 131 2,415 (5,380) -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item............ 83,325 (12,420) (772) (244) (11,892) 23,756 Extraordinary item................. -- (56,637) -- -- (56,637) -- -------- -------- -------- -------- -------- -------- Net income (loss)................ $ 83,325 $(69,057) $ (772) $ (244) $(68,529) $ 23,756 ======== ======== ======== ======== ======== ========
10. TRANSACTIONS WITH AFFILIATES TransAmerican and its affiliates have provided TARC with substantially all of its corporate services requirements, including insurance, legal, accounting and treasury functions pursuant to a Services Agreement. TransAmerican and TransTexas charged TARC approximately $0.3 million, $0.2 million, $0.2 million and $0.1 million for the year ended January 31, 1997, the six months ended January 31, 1996 and the years ended July 31, 1995 and 1994, respectively, to cover its costs of providing these services, which management believes to be reasonable based on the limited services provided. Pursuant to this agreement, TARC is currently charged $26,000 per month for additional corporate services. In addition, third party charges incurred by TransAmerican and its affiliates have been charged directly or allocated to TARC on usage or other methods that management believes are reasonable. All significant transactions with affiliates are recorded in the payable to affiliates account. Southeast Louisiana Contractors of NORCO, Inc. ("Southeast Contractors"), a subsidiary of TransAmerican, provides construction personnel to TARC in connection with TARC's expansion and construction program. These construction workers are temporary employees, and the number and composition of the workforce will vary throughout TARC's expansion and construction program. Southeast Contractors charges 30 33 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) TARC for the direct costs it incurs (which consist solely of employee payroll and benefits) plus administrative costs and fees of $1.2 million per year. Total labor costs charged by Southeast Contractors were approximately $14.1 million, $20.2 million and $15.5 million for the year ended January 31, 1997, the six months ended January 31, 1996 and the year ended July 31, 1995, respectively. Amounts payable to Southeast Contractors were $1.8 million and $2.3 million at January 31, 1997 and 1996, respectively. No labor costs were charged by Southeast Contractors in prior years. TARC purchases natural gas from TransTexas on an interruptible basis. The total cost of natural gas purchased for the year ended January 31, 1997, the six months ended January 31, 1996 and years end July 31, 1995 and 1994 was approximately $2.7 million, $1.4 million, $2.5 million and $2.3 million, respectively, of which approximately $2.7 million and $0.1 million was payable at January 31, 1997 and 1996. During 1995, TransAmerican acquired an office building which it subsequently sold to TransTexas in February 1996 for $4 million. In February 1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC for working capital. In July 1996, TARC executed a promissory note to TransAmerican for up to $25 million. The note bears interest at a rate of 15% per annum, payable quarterly beginning October 31, 1996, and matures on July 31, 1998. As of January 31, 1997, the entire $25 million was outstanding under the note. On November 1, 1996, TARC executed an additional $25 million promissory note to TransAmerican which bears interest at 15% per annum, payable quarterly beginning December 31, 1996, and which matures on September 30, 1998 (together with the first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had approximately $44.4 million outstanding under both of these notes. TransAmerican has waived any default occurring as a result of TARC's failure to make the scheduled interest payment provided for in the notes. In February 1997, the November 1996 promissory note was replaced with a $50 million note bearing interest at an annual rate of 15% and which matures on July 31, 2002. Interest payments are due quarterly commencing on April 30, 1997. The debt represented by the new note is subordinate in right of payment to the TARC Notes. As of April 25, 1997, approximately $31.4 million had been advanced under the new note. Prior to the sale of the TARC Notes, TARC participated in TransAmerican's centralized cash management program. Funds required by TARC for daily operations and capital expenditures were advanced by TransAmerican. In October 1994, TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican advanced approximately $50 million of the proceeds from these stock sales to TARC, of which approximately $20 million was used by TARC to repay a portion of the intercompany debt owed to TransAmerican, and the remaining $30 million was used for working capital and general corporate purposes. TARC used approximately $30 million of the net proceeds of the sale of the TARC Notes to repay additional intercompany debt to TransAmerican. TransAmerican contributed to the capital of TARC (through TEC) all but $10 million of the remainder of TARC's intercompany debt owed to TransAmerican. In April 1995, TARC repaid the remaining $10 million of intercompany indebtedness owed to TransAmerican. In August 1995, TARC received an advance of $3 million from TransTexas which TARC used to settle its remaining portion of certain litigation. In September 1995, TARC received an advance of $1.7 million from TransAmerican which TARC used to purchase feedstock. In October 1995, TARC repaid these advances without interest. Additionally in October 1995, TARC received an advance of approximately $4 million from TransAmerican for working capital, which has not been repaid. In September 1995, TARC received an advance of $1 million from TransTexas which TARC used to purchase feedstock. This advance was repaid by TARC without interest. In December 1995, TARC advanced $1 million to TransTexas. This advance was repaid to TARC with interest. TransAmerican, its existing subsidiaries, including TARC, TEC, and TransTexas, entered into a Tax Allocation Agreement, the general terms of which require TransAmerican and all of its subsidiaries to file federal income tax returns as members of a consolidated group to the extent permitted by law. Filing on a 31 34 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) consolidated basis allows income and tax of one member to be offset by losses and credits of another and allows deferral of certain intercompany gains; however, each member is severally liable for the consolidated federal income tax liability of the consolidated group. The Tax Allocation Agreement requires each of TransAmerican's subsidiaries to pay to TransAmerican each year its allocable share of the federal income tax liabilities of the consolidated group ("Allocable Share"). The Tax Allocation Agreement provides for a reallocation of the group's consolidated federal income tax liabilities among the members if the IRS or the courts ultimately re-determine the group's regular tax or alternative minimum tax liability. In the event of an IRS audit or examination, the Tax Allocation Agreement generally gives TransAmerican the authority to compromise or settle disputes and to control litigation, subject to the approval of TARC, TEC or TransTexas, as the case may be, where such compromise or settlement affects the determination of the separate tax liability of that company. Under the Tax Allocation Agreement, each subsidiary's Allocable Share for each tax year will generally equal the amount of federal income tax it would have owed had it filed a separate federal income tax return for each year except that each subsidiary will be able to utilize net operating losses and credits of TransAmerican and the other members of the TransAmerican consolidated group effectively to defer payment of tax liabilities that it would have otherwise owed had it filed a separate federal income tax return. Each subsidiary will essentially pay the deferred taxes at the time TransAmerican (or the member whose losses or credits are utilized by such subsidiary) begins generating taxable income or tax. This will have the effect of deferring a portion of such subsidiary's tax liability to future years. The TARC Notes Indenture requires that, with certain exceptions, transactions between TARC and certain related parties be on terms no less favorable to TARC than would be available from an unrelated party and that are fair and reasonable to TARC. This standard will apply to future transactions, if any, with entities in which Mr. Stanley or members of his family may have an interest. A similar covenant is in the indentures governing notes issued by TransTexas. 11. COMMITMENTS AND CONTINGENCIES Legal Proceedings The following is a description of the legal proceedings of TARC. EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity Commission ("EEOC") issued a Commissioner's Charge against TARC and Southeast Contractors (the "Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. sec. 2000e et seq. ("Title VII"). In the Commissioner's Charge, the EEOC charged TARC and Southeast Contractors with engaging in unlawful discriminatory hiring and promotion practices based on race and gender. Each violation of Title VII, if proven, potentially could subject TARC and/or Southeast Contractors to liability for (i) monetary damages for backpay and/or front pay in an undetermined amount, and for compensatory damages and/or punitive damages in an amount that should not exceed $300,000, (ii) injunctive relief, (iii) attorney's fees, and/or (iv) interest. During the period covered by the Commissioner's Charge, TARC and Southeast Contractors estimate that they received a combined total of approximately 15,000 to 22,000 employment applications and hired (or rehired) a combined total of approximately 1,500 to 2,200 workers. TARC and Southeast Contractors have responded to the Commissioner's Charge and have denied engaging in any unlawful employment practices. TARC and Southeast Contractors have been cooperating fully with the EEOC in connection with its investigation. TARC and Southeast Contractors intend to vigorously defend against the allegations contained in the Commissioner's Charge in all proceedings before the EEOC and in any subsequent litigation. If TARC and/or Southeast Contractors are found liable for violations of Title VII based on the matters asserted in the Commissioner's Charge, TARC can make no assurance that such liability 32 35 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) would not have a material adverse effect on the financial condition of TARC or TARC's ability to pay interest or principal on the TARC Notes or the TransAmerican Notes. Rineheart. On October 8, 1996, Carlton Gene Rineheart, et al., and as representative of a class of persons similarly situated, filed suit against eighty-four individuals and corporations, including TARC, in the U.S. District Court, Middle District of Louisiana alleging negligent and improper storage, handling, treatment, and disposal of hazardous materials from 1976 to the present at two sites in Iberville Parish, Louisiana. The suit claims damages for physical, mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon and Indian Village. TARC intends to vigorously defend this claim. Shell Oil. On September 27, 1996, Shell Oil Company filed a third party suit against TARC in the U.S. District Court, Eastern District of Louisiana for contribution and/or indemnity relating to alleged contamination of the waters and water bottoms of Bayou Trepagnier. Shell dismissed this suit without prejudice. General. TARC is also named a defendant in other ordinary course, routine litigation incidental to its business. While the outcome of these other lawsuits cannot be predicted with certainty, TARC does not expect these matters to have a material adverse effect on its financial position, operations or cash flow. Environmental Matters Compliance Matters. TARC is subject to federal, state, and local laws, regulations, and ordinances ("Pollution Control Laws"), which regulate activities such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. TARC believes that it is in substantial compliance with applicable Pollution Control Laws. However, newly enacted Pollution Control Laws, as well as increasingly strict enforcement of existing Pollution Control Laws, may require TARC to make capital expenditures in order to comply with such laws and regulations. To ensure continuing compliance, TARC has made environmental compliance and permitting issues an integral part of its refinery's start-up plans and has budgeted for such capital expenditures in the Capital Improvement Program. TARC uses (and in the past has used) certain materials, and generates (and in the past has generated) certain substances or wastes that are or may be deemed hazardous substances or wastes. In the past, the refinery has been the subject of certain environmental enforcement actions, and incurred certain fines, as a result of certain of TARC's operations. TARC also was previously subject to enforcement proceedings relating to its prior production of leaded gasoline and air emissions. TARC believes that, with minor exception, all of these past matters were resolved prior to or in connection with the resolution of the bankruptcy proceedings of its predecessor in interest, TransAmerican, or are no longer applicable to TARC's operations. As a result, TARC believes that such matters will not have a material adverse effect on TARC's future results of operations, cash flows or financial position. Requirements Under the Federal Clean Air Act. The National Emission Standards for Hazardous Air Pollutants for Benzene Waste Operations (the "Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air Act, regulate benzene emissions from numerous industries, including petroleum refineries. The Benzene Waste NESHAPS require all existing, new, modified, or reconstructed sources to reduce benzene emissions to a level that will provide an ample margin of safety to protect public health. TARC will be required to comply with the Benzene Waste NESHAPS as its refinery operations start up. TARC believes that compliance with the Benzene Waste NESHAPS will not have a material adverse effect on TARC's financial position, results of operations or cash flow. However, until the refinery is in full operation, there can be no assurance that the regulations will not have such an effect. In addition, the Environmental Protection Agency ("EPA") promulgated National Emission Standards for Hazardous Air Pollutants for Hazardous Organics (the "Hazardous Organics NESHAPS") regulations for petroleum refineries under the Clean Air Act in 1995, and subsequently has amended such regulations. These regulations set "Maximum Achievable Control Technology" ("MACT") standards for petroleum 33 36 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) refineries. The Louisiana Department of Environmental Quality (the "LDEQ") has incorporated MACT Standards into TARC's air permits under federal and state air pollution prevention laws. TARC believes that compliance with the Hazardous Organics NESHAPS will not have a material adverse effect on TARC's financial position, results of operations or cash flow. However, until the refinery is in full operation, there can be no assurance that the regulations will not have such an effect. The EPA recently promulgated federal regulations pursuant to the Clean Air Act to control fuels and fuel additives (the "Gasoline Standards") that could have a material adverse effect on TARC. Under the new regulations, only reformulated gasoline can be sold in certain domestic geographic areas in which the EPA has mandated or approved its use. Reformulated gasoline must contain a minimum amount of oxygen, have a lower vapor pressure, and have reduced sulfur, olefins, benzene and aromatics compared to the average 1990 gasoline. The number and extent of the areas subject to reformulated gasoline standards may increase in the future if the EPA's National Ambient Air Quality Standards ("NAAQS") proposals for particulate matter and ozone are implemented Conventional gasoline may be used in all other domestic markets; however, a refiner's post-1994 average conventional gasoline must not be more polluting than it was in 1990. With limited exceptions, to determine its compliance as of January 1, 1995, a refiner must compare its post-1994 and 1990 average values of controlled fuel parameters and emissions. The Gasoline Standards recognize that many gasoline producers may not be able to develop an individual 1990 baseline for a number of reasons, including, for example, lack of adequate data or the absence or limited scope of operations in 1990. Under such circumstances, the refiner must use a statutory baseline reflecting the 1990 industry average. The EPA has authority, upon a showing of extenuating circumstances by a refiner, to grant an individual adjusted baseline or other appropriate regulatory relief to that refiner. TARC filed a petition with the EPA requesting an individual baseline adjustment or other appropriate regulatory relief based on extenuating circumstances. The extenuating circumstances upon which TARC relied in its petition include the fact that the refinery was not in operation in 1990 (and thus there is no 1990 average for purposes of the necessary comparison) and the fact that the start-up of the refinery is to occur on a phased-in basis. The EPA has denied TARC's request for an individual baseline adjustment and other appropriate regulatory relief. TARC will continue to pursue regulatory relief with the EPA. There can be no assurance that any action taken by the EPA will not have a material adverse effect on TARC's future results of operations, cash flows or financial position. Title V of the Clean Air Act requires states to implement an Operating Permit Program that codifies all federally enforceable limitations that are applicable to a particular source. The EPA has approved Louisiana's Title V Operating Permit Program. The deadline for a refinery to submit an Operating Permit Application under the Louisiana program was October 12, 1996. TARC timely submitted its Title V Operating Permit application and the LDEQ has designated the application as being administratively complete. As yet, the LDEQ has not responded further regarding the status of TARC's Title V Operating Permit. TARC believes that its application will be approved. However, there can be no assurance that additional expenditures required pursuant to Title V Operating Permit obligations will not have a material adverse effect on TARC's financial position, results of operations or cash flow. Cleanup Matters. TARC also is subject to federal, state and local laws, regulations and ordinances that impose liability for the costs of clean up relating to, and certain damages resulting from, past spills, disposals or other releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the past several years, TARC has been, and to a limited extent continues to be, engaged in environmental cleanup or remedial work relating to or arising out of operations or activities at the refinery. In addition, TARC has been engaged in upgrading its solid waste facilities, including the closure of several waste management units. Similar to numerous other industrial sites in the state, the refinery has been listed by the LDEQ on the Federal Comprehensive Environmental Response, Compensation and Liability Information System, as a result of TARC's prior waste management activities (as discussed below). 34 37 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In 1991, the EPA performed a facility assessment at the refinery pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA performed a follow up assessment in March 1996, but has not yet issued a report of its investigations. In July 1996, the EPA and LDEQ agreed that the LDEQ would serve as the lead agency with respect to the investigation and remediation of areas of concern identified in the investigations. TARC, under a voluntary initiative approved by the LDEQ, has submitted a work plan to the LDEQ to determine which areas may require further investigation and remediation. The LDEQ has not yet responded to TARC's submission or issued any further requests relating to this matter. As a result, TARC is unable at this time to estimate what the costs, if any, will be if the LDEQ does require further investigation or remediation of the areas identified. TARC has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination from hazardous substances at three Superfund sites (i.e. sites on the National Priorities List ("NPL")), to which it has been alleged that TARC, or its predecessors, sent hazardous substances in the past. CERCLA requires cleanup of sites from which there has been a "release" or threatened release of "hazardous substances" (as such terms are defined under CERCLA). CERCLA requires the EPA to include sites needing long-term study and cleanup on the NPL based on their potential effect on public health or the environment. CERCLA authorizes the EPA to take any necessary response actions at NPL sites and, in certain circumstances, to order PRPs liable for the release to take such actions. PRPs are broadly defined under CERCLA to include past and present owners and operators of a site, as well as generators and transporters of wastes to a site from which hazardous substances are released. The EPA may seek reimbursement of expenditures of federal funds from PRPs under Superfund. Courts have interpreted CERCLA to impose strict, joint and several liability upon all persons liable for the entire amount of necessary cleanup costs. As a practical matter, at sites where there are multiple PRPs for a cleanup, the costs of cleanup typically are allocated according to a volumetric or other standard among the parties. CERCLA also provides that responsible parties generally may recover a portion of the costs of cleaning up a site from other responsible parties. Thus, if one party is required to clean up an entire site, that party can seek contribution or recovery of such costs from other responsible parties. A number of states have laws similar to Superfund, pursuant to which cleanup obligations, or the costs thereof, also may be imposed. At one Superfund site, TARC has submitted information to the EPA indicating that it should have no liability for this matter, and negotiations with the EPA are continuing. With respect to the remaining two sites, TARC's liability for each such matter has not been determined, and TARC anticipates that it may incur costs related to the cleanup (and possibly including additional costs arising in connection with any recovery action brought pursuant to such matters) at each such site. After a review of the data available to TARC regarding the basis of TARC's alleged liability at each site, and based on various factors, which depend on the circumstances of the particular Superfund site (including, for example, the relationship of TARC to each such site, the volume of wastes TARC is alleged to have contributed to each such site in comparison to other PRPs without giving effect to the ability of any other PRPs to contribute to or pay for any liabilities incurred and the range of likely cleanup costs at each such site) TARC does not believe its ultimate liability will be significant; however, it is not possible to determine the ultimate environmental liabilities, if any, that may arise from the matters discussed above. Purchase Commitments TARC has various purchase commitments for materials, supplies and services incidental to the ordinary course of business and for the Capital Improvement Program. As of January 31, 1997, TARC had commitments for refinery construction and maintenance of approximately $53.0 million. TARC is acting as general contractor and can generally cancel or postpone capital projects. 35 38 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Subsequent to year end, TARC entered into a commitment to purchase 0.6 million barrels of feedstock at $24.68 per barrel plus interest at 8.25%, demurrage, bank fees and other related costs. Based on a market value of approximately $18.15 per barrel at April 29, 1997, the loss on the feedstock is estimated to range between $4 and $5 million. Price Management Activities TARC enters into futures contracts, options on future, swap agreements and forward sales agreements with the intent to protect against a portion of the price risk associated with price declines from holding inventory of feedstocks and refined products or fixed price purchase commitments. At January 31, 1997, TARC's position in open futures contracts, options on futures, swap agreements and forward sales agreements was not significant. A net trading gain of approximately $2.3 million and a trading loss of approximately $3.1 million were reflected in other income (expense) for the years ended July 31, 1995 and 1994, respectively. These transactions did not qualify for hedge accounting treatment under the guidelines of SFAS 80; therefore, gains or losses associated with these futures contracts were not deferred. Financing Arrangements and Processing Agreements TARC enters into financing arrangements in order to maintain an available supply of feedstocks. Typically, TARC enters into an agreement with a third party to acquire a cargo of feedstock which is scheduled for delivery to TARC's refinery. TARC pays through the third party all transportation costs, related taxes and duties and letter of credit fees for the cargo, plus a negotiated commission. Prior to arrival at the refinery, another third party purchases the cargo, and TARC commits to purchase, at a later date, the cargo at an agreed price plus commission and costs. TARC also places margin deposits with the third party to permit the third party to hedge its price risk. TARC purchases these cargos in quantities sufficient to maintain expected operations and is obligated to purchase all of the cargos delivered pursuant to these arrangements. In the event the refinery is not operating, these cargos may be sold on the spot market. During the year ended January 31, 1997, approximately 1.1 million barrels of feedstocks with a cost of $23 million were sold by a third party on the spot market prior to delivery to TARC without a material gain or loss to TARC. In March 1996, TARC entered into a processing agreement with a third party for the processing of various feedstocks at the refinery. Under the terms of the agreement, the processing fee earned by TARC is based on the margin earned by the third party, if any, after deducting all of its related costs such as feedstock acquisition, hedging, transportation, processing and inspections plus a commission for each barrel processed. For the year ended January 31, 1997, TARC processed approximately 1.1 million barrels of feedstock pursuant to this agreement. TARC incurred a loss of approximately $2.6 million related to this processing agreement primarily as a result of low margins and price management activities. In April 1996, TARC entered into a similar processing agreement with another third party to process feedstocks. As of January 31, 1997, TARC had completed processing approximately 6.4 million barrels of feedstocks and is storing approximately 1.0 million barrels of intermediate and refined products under this agreement. TARC also entered into a processing agreement with this third party to process approximately 0.8 million barrels of the third party's feedstocks for a fixed price per barrel. Under the terms of this fixed price agreement, TARC met all quantity and quality yields earning the full price per barrel. For the year ended January 31, 1997, TARC recorded a net loss of approximately $4.5 million related to these processing arrangements primarily as a result of price management activities. 36 39 TRANSAMERICAN REFINING CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Operating Leases As of January 31, 1997, TARC has long-term leases covering land and other property and equipment. Rental expense was approximately $4.2 million, $1.9 million, $4 million and $3 million for the year ended January 31, 1997, the six months ended January 31, 1996, and the years ended July 31, 1995 and 1994. Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of January 31, 1997, are as follows (in thousands of dollars): 1998........................................................ $3,236 1999........................................................ 2,969 2000........................................................ 183 2001........................................................ 183 2002........................................................ 183 Later years................................................. 522 ------ $7,276 ======
12. LITIGATION SETTLEMENTS GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit against TARC in the U.S. District Court, Eastern District of Louisiana alleging breach of an operating agreement to pay GATX $122,500 per month during 1996. TARC settled this litigation in November 1996. NLRB Proceeding. On July 13, 1994, the Oil, Chemical and Atomic Workers International Union ("OCAW") filed unfair labor practices charges against TARC with the New Orleans Regional Office of the National Labor Relations Board ("NLRB"). These charges allege that TARC refused to reinstate 22 former employees because of their union membership. The NLRB refused to issue a complaint and the OCAW appealed the decision to the NLRB General Counsel. The decision of the NLRB was upheld in November 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 37 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT TARC's directors and executive officers are as follows:
NAME POSITION AGE ---- -------- --- Donald B. Henderson.................. Director 46 Thomas B. McDade..................... Director 73 John R. Stanley...................... Director, Chairman of the Board, President and 58 Chief Executive Officer Gary L. Karr......................... Vice President of Refining 48 R. Glenn McGinnis.................... Vice President of Manufacturing 48 John R. Stanley, Jr.................. Vice President of Administration 35 Ed Donahue........................... Vice President and Secretary 46
Set forth below is a description of the backgrounds of the directors and executive officers of TARC. Donald B. Henderson has been a director of TARC and of TEC since July 1994. Mr. Henderson is a partner in the law firm of Blackburn & Henderson and is a director of Colonial Casualty Insurance Co. From 1972 to 1978, Mr. Henderson was a member of the Texas House of Representatives. Mr. Henderson was a member of the Texas Senate from 1982 through 1986. Mr. Henderson has been a director of TransAmerican from 1985 until his resignation in February 1995. Thomas B. McDade has been a director of TARC and of TEC since July 1994. He is also a director of TransTexas. Mr. McDade is primarily engaged in managing his personal investments and in providing consulting services in Houston, Texas. Mr. McDade served as a director of TransAmerican from 1985 until his resignation in February 1995. Prior to 1989, he served as a consultant to Texas Commerce Bancshares, Inc. and prior to July 1985 he served as Vice Chairman and Director of Texas Commerce Bancshares, Inc. and Vice Chairman and Advisory Director of Texas Commerce Bank. Mr. McDade is a former director and trustee of eleven registered investment companies for which John Hancock Funds serves as investment advisor in Boston, Massachusetts. Mr. McDade is a former director of Houston Industries, Inc. and Houston Lighting & Power Company. He is also a former member of the Board of Managers of the Harris County Hospital District and former Chairman of the State Securities Board of Texas. John R. Stanley has been a director and Chief Executive Officer of TARC since September 1987 and a director and Chief Executive Officer of TEC since July 1994. Mr. Stanley is the founder, Chairman of the Board, Chief Executive Officer, and sole stockholder of TNGC Holdings Corporation, which is the sole stockholder of TransAmerican. He has operated TransAmerican since 1958. Mr. Stanley is the father of John R. Stanley, Jr. Gary L. Karr has been the Vice President of Refining of TARC since January 1994 and served as Refinery Manager for approximately eight years prior thereto. Mr. Karr has been with TransAmerican or a subsidiary of TransAmerican since 1971 in various positions. R. Glenn McGinnis has been the Vice President of Manufacturing of TARC since July 1995. Prior to joining TARC, Mr. McGinnis held senior refining and supply positions in Canada with Imperial Oil Limited, an affiliate of Exxon Corporation. Mr. McGinnis was with Imperial Oil Limited for 23 years. John R. Stanley, Jr. has served as Vice President of Administration of TARC since October 1995. From May 1992 until October 1995, he served as Manager of Audit and Security for TARC. Mr. Stanley is the son of John R. Stanley. Edwin B. Donahue has served as Vice President and Secretary of TARC since February 1997. Mr. Donahue also serves as Vice President, Chief Financial Officer and Secretary of TransTexas and TTC and 38 41 as Vice President and Secretary of TransAmerican and TEC. Mr. Donahue has been employed in various positions with TransAmerican for over 20 years. COMMITTEES OF THE BOARD OF DIRECTORS TARC has an Audit Committee and a Compensation Committee. The Audit Committee is composed of Messrs. Henderson and McDade. The Audit Committee reviews the scope of the independent auditors' examinations of TARC's financial statements and receives and reviews their reports. The Audit Committee meets with the independent auditors, receives recommendations or suggestions for changes in accounting procedures, and initiates or supervises any special investigations it may choose to undertake. The Compensation Committee is composed of Messrs. Henderson and McDade. The Compensation Committee determines the nature and amount of compensation of TARC's executive officers. DIRECTOR COMPENSATION Each director, other than John R. Stanley, receives an annual director's fee of $75,000, plus $750 for each board meeting and committee meeting attended (other than committee meetings held on the same day as board meetings). ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during the fiscal years ended July 31, 1994 and 1995, the transition period ended January 31, 1996, and the fiscal year ended January 31, 1997 to TARC's Chief Executive Officer and each other executive officer of TARC whose total annual salary and bonus exceeded $100,000 in the fiscal year ended January 31, 1997: SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION FISCAL ANNUAL COMPENSATION ALL OTHER IN TARC YEAR SALARY COMPENSATION(A)(B) --------------------------- ------ ------------------- ------------------- John R. Stanley(c)......................... 1997 $397,117 $5,154 Chief Executive Officer 1996* 175,000 807 1995 350,000 4,620 1994 350,000 4,620 Gary L. Karr............................... 1997 $140,192 $3,348 Vice President of Refining 1996* 67,500 311 1995 140,192 2,312 1994 125,577 4,228 R. Glenn McGinnis.......................... 1997 $233,653 $ 727 Vice President of Manufacturing 1996* 116,937 -- 1995 8,654 -- John R. Stanley, Jr........................ 1997 $117,308 $3,519 Vice President of Administration 1996* 63,750 2,231 1995 94,058 2,270 1994 75,162 2,255
- --------------- * Six months ended January 31, 1996 (Transition Period) (a) Certain of TARC's executive officers receive personal benefits in addition to salary and cash bonuses. The aggregate amount of the personal benefits, however, does not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus reported for the named executive officer and accordingly has been excluded from the table. (b) Reflects the amount contributed under the Savings Plan (as defined below). (c) All amounts shown were paid by TransTexas. 39 42 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION TARC's compensation committee is composed of Messrs. Henderson and McDade. During the year ended January 31, 1997, none of the members of the compensation committee was an officer or employee of TARC, and none had any relationship with TARC requiring disclosure under Item 404 of Regulation S-K. The TARC Notes Indenture prohibits TARC and any Guarantor under the TARC Notes from paying compensation to Mr. Stanley in excess of $1 million per year, in the aggregate. SAVINGS PLAN TransAmerican maintains a long-term savings plan (the "Savings Plan") in which eligible employees of TARC and certain of its affiliates may elect to participate. Each employee becomes eligible to participate in the Savings Plan on January 1 or July 1 following the completion of one year of service with TARC or its participating affiliates and attainment of age 21. The Savings Plan is intended to constitute a qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") and contains a salary reduction arrangement described in Section 401(k) of the Code. Each participant may elect to reduce his compensation by a percentage equal to 2% to 15% and TARC will contribute that amount to the Savings Plan on a pre-tax basis on behalf of the participant. The Code limits the annual amount that a participant may elect to have contributed on his behalf on a pre-tax basis to the Savings Plan. For 1997, this limit is $9,500. TARC presently makes a matching contribution in an amount equal to 10%, 20%, or 50% of the amount elected to be contributed by each participant on a pre-tax basis, up to a maximum of 3% of each participant's compensation, depending on whether the employee has been a participant in the Savings Plan for one year, two years or three years. Each participant also may elect to contribute up to 10% of his compensation to the Savings Plan on an after-tax basis. The Code imposes nondiscrimination tests on contributions made to the Savings Plan pursuant to participant elections and on TARC's matching contributions, and limits amounts which may be allocated to a participant's Savings Plan account each year. In order to satisfy the nondiscrimination tests, contributions made on behalf of certain highly compensated employees (as defined in the Code) may be limited. Contributions made to the Savings Plan pursuant to participant elections and matching contributions are at all times 100% vested. Contributions to the Savings Plan are invested, according to specified investment options selected by the participants, in investment funds maintained by the trustee of the Savings Plan. Generally, a participant's vested benefits will be distributed from the Savings Plan as soon as administratively practicable following a participant's retirement, death, disability or other termination of employment. In addition, a participant may elect to withdraw his after-tax contributions from the Savings Plan prior to his termination of employment, and subject to certain strict limitations and exceptions, the Savings Plan provides for withdrawals of a participant's pre-tax contributions prior to a participant's termination of employment in the event of the participant's severe financial hardship or attainment of age 59 1/2. The Savings Plan may be amended or terminated by the Board of Directors of TARC. As of January 31, 1997, approximately 194 employees were eligible to participate in the Savings Plan, including Messrs. Karr, McGinnis and Stanley. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT TEC owns 30 million shares (100%) of TARC's outstanding shares of common stock. TEC's address is 1300 North Sam Houston Parkway East, Suite 200, Houston, Texas 77032. Pursuant to the TARC Notes Indenture, all shares of TARC's common stock are pledged as collateral and are held by the trustee under the TARC Notes Indenture, First Union National Bank. A foreclosure by the holders of TARC's debt securities on the shares of TARC's common stock, under certain circumstances, constitutes a "change of control" of TARC under the TARC Notes Indenture, which allows the holders thereof to require TARC to repurchase the TARC Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest. 40 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TransAmerican and its affiliates have provided TARC with substantially all of its corporate services requirements, including insurance, legal, accounting and treasury functions pursuant to a Services Agreement. TransAmerican and TransTexas charged TARC approximately $0.3 million, $0.2 million, $0.2 million and $0.1 million for the year ended January 31, 1997, the six months ended January 31, 1996 and the years ended July 31, 1995 and 1994, respectively, to cover its costs of providing these services, which management believes to be reasonable based on the limited services provided. Pursuant to this agreement, TARC is currently charged $26,000 per month for additional corporate services. In addition, third party charges incurred by TransAmerican and its affiliates have been charged directly or allocated to TARC on usage or other methods that management believes are reasonable. All significant transactions with affiliates are recorded in the payable to affiliates account. Southeast Louisiana Contractors of NORCO, Inc. ("Southeast Contractors"), a subsidiary of TransAmerican, provides construction personnel to TARC in connection with TARC's expansion and construction program. These construction workers are temporary employees, and the number and composition of the workforce will vary throughout TARC's expansion and construction program. Southeast Contractors charges TARC for the direct costs it incurs (which consist solely of employee payroll and benefits) plus administrative costs and fees of $1.2 million per year. Total labor costs charged by Southeast Contractors were approximately $14.1 million, $20.2 million and $15.5 million for the year ended January 31, 1997, the six months ended January 31, 1996 and the year ended July 31, 1995, respectively. Amounts payable to Southeast Contractors were $1.8 million and $2.3 million at January 31, 1997 and 1996, respectively. No labor costs were charged by Southeast Contractors in prior years. TARC purchases natural gas from TransTexas on an interruptible basis. The total cost of natural gas purchased for the year ended January 31, 1997, the six months ended January 31, 1996 and years end July 31, 1995 and 1994 was approximately $2.7 million, $1.4 million, $2.5 million and $2.3 million, respectively, of which approximately $2.7 million and $0.1 million was payable at January 31, 1997 and 1996. During 1995, TransAmerican acquired an office building which it subsequently sold to TransTexas in February 1996 for $4 million. In February 1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC for working capital. In July 1996, TARC executed a promissory note to Trans American for up to $25 million. The note bears interest at a rate of 15% per annum, payable quarterly beginning October 31, 1996, and mature on July 31, 1998. As of January 31, 1997, the entire $25 million was outstanding under the note. On November 1, 1996, TARC executed an additional $25 million promissory note to TransAmerican which bears interest at 15% per annum, payable quarterly beginning December 31, 1996, and which matures on September 30, 1998 (together with the first promissory note, the "TransAmerican Notes"). At January 1, 1997, TARC had approximately $44.4 million outstanding under the TransAmerican Notes. TransAmerican has waived any default occurring as a result of TARC's failure to make the scheduled interest payment provided for in these notes. In February 1997, the November 1996 promissory note was replaced with a $50 million note bearing interest at an annual rate of 15% and which matures on July 31, 2002. Interest payments are due quarterly commencing on April 30, 1997. The debt represented by the new note is subordinate in right of payment to the TARC Notes. As of April 25, 1997, approximately $31.4 million had been advanced under the new note. Prior to the sale of the TARC Notes, TARC participated in TransAmerican's centralized cash management program. Funds required by TARC for daily operations and capital expenditures were advanced by TransAmerican. In October 1994, TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican advanced approximately $50 million of the proceeds from these stock sales to TARC, of which approximately $20 million was used by TARC to repay a portion of the intercompany debt owed to TransAmerican, and the remaining $30 million was used for working capital and general corporate purposes. TARC used approximately $30 million of the net proceeds of the sale of the TARC Notes to repay additional other intercompany debt to TransAmerican. TransAmerican contributed to the capital of TARC (through TEC) all but $10 million of the remainder of TARC's intercompany debt owed to TransAmerican. In April 1995, TARC repaid the remaining $10 million of intercompany indebtedness owed to TransAmerican. 41 44 In August 1995, TARC received an advance of $3 million from TransTexas which TARC used to settle its remaining portion of certain litigation. In September 1995, TARC received an advance of $1.7 million from TransAmerican which TARC used to purchase feedstock. In October 1995, TARC repaid these advances without interest. Additionally in October 1995, TARC received an advance of approximately $4 million from TransAmerican for working capital, which has not been repaid. In September 1995, TARC received an advance of $1 million from TransTexas which TARC used to purchase feedstock. This advance was repaid by TARC without interest. In December 1995, TARC advanced $1 million to TransTexas. This advance was repaid to TARC with interest. TransAmerican, its existing subsidiaries, including TARC, TEC and TransTexas, entered into a Tax Allocation Agreement, the general terms of which require TransAmerican and all of its subsidiaries to file federal income tax returns as members of a consolidated group to the extent permitted by law. Filing on a consolidated basis allows income and tax of one member to be offset by losses and credits of another and allows deferral of certain intercompany gains; however, each member is severally liable for the consolidated federal income tax liability of the consolidated group. The Tax Allocation Agreement requires each of TransAmerican's subsidiaries to pay to TransAmerican each year its allocable share of the federal income tax liabilities of the consolidated group ("Allocable Share"). The Tax Allocation Agreement provides for a reallocation of the group's consolidated federal income tax liabilities among the members if the IRS or the courts ultimately re-determine the group's regular tax or alternative minimum tax liability. In the event of an IRS audit or examination, the Tax Allocation Agreement generally gives TransAmerican the authority to compromise or settle disputes and to control litigation, subject to the approval of TARC, TEC or TransTexas, as the case may be, where such compromise or settlement affects the determination of the separate tax liability of that company. Under the Tax Allocation Agreement, each subsidiary's Allocable Share for each tax year will generally equal the amount of federal income tax it would have owed had it filed a separate federal income tax return for each year except that each subsidiary will be able to utilize net operating losses and credits of TransAmerican and the other members of the TransAmerican consolidated group effectively to defer payment of tax liabilities that it would have otherwise owed had it filed a separate federal income tax return. Each subsidiary will essentially pay the deferred taxes at the time TransAmerican (or the member whose losses or credits are utilized by such subsidiary) begins generating taxable income or tax. This will have the effect of deferring a portion of such subsidiary's tax liability to future years. The TARC Notes Indenture requires that, with certain exceptions, transactions between TARC and certain related parties be on terms no less favorable to TARC than would be available from an unrelated party and that are fair and reasonable to TARC. This standard will apply to future transactions, if any, with entities in which Mr. Stanley or members of his family may have an interest. A similar covenant is in the indentures governing the Notes issued by TransTexas. 42 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
PAGE ---- (1) Report of Independent Accountants....................... 16 Balance Sheet........................................... 17 Statement of Operations................................. 18 Statement of Stockholder's Equity....................... 19 Statement of Cash Flows................................. 20 Notes to Financial Statements........................... 21
(2) All schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto. (3) Exhibits The following instruments are included as exhibits to this Annual Report on Form 10-K and are filed herewith unless otherwise indicated. Exhibits incorporated by reference are so indicated by parenthetical information. 2.1 -- Stock Transfer Agreement dated as of February 23, 1995, between TARC, TEC and TransAmerican (previously filed as Exhibit 2 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 3.1 -- Articles of Incorporation of TARC (previously filed as Exhibit 3.1(i) to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 3.2 -- By-laws of TARC (previously filed as Exhibit 3.1(ii) to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 4.1 -- Indenture dated as of February 15, 1995, between TARC, First Fidelity Bank, National Association, as Trustee and TEC, with respect to the Guaranteed First Mortgage Discount Notes and the Guaranteed First Mortgage Notes (together, the "Notes"), including the forms of Notes as exhibits (previously filed as Exhibit 3 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.2 -- Warrant Agreement dated as of February 23, 1995, among the Company, TEC and First Fidelity Bank, National Association, as Warrant Trustee, with respect to the Common Stock Purchase Warrants including the form of Warrant as an exhibit (previously filed as Exhibit 4 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.3 -- Pledge Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 5 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.4 -- Security Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 6 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference)
43 46 4.5 -- Cash Collateral and Disbursement Agreement dated as of February 23, 1995, among TARC, First Fidelity Bank, National Association, as Trustee, First Fidelity Bank, N.A., as Disbursement Agent, and Baker & O'Brien, Inc., as Construction Supervisor (previously filed as Exhibit 7 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.6 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from TARC in favor of First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 8 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.7 -- Registration Rights Agreement dated as of February 23, 1995, between TransTexas, TARC, and TEC (previously filed as Exhibit 10 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) *4.8 -- First Supplemental Indenture dated as of February 24, 1997 among the Company, TEC and First Union National Bank, f/k/a First Fidelity Bank, N.A. *4.9 -- Indenture dated as of March 14, 1997, between TARC and First Union National Bank, as Trustee, with respect to the $36 million Senior Secured Notes due 1998, including the form of Note as an exhibit. *4.10 -- Pledge Agreement dated as of March 14, 1997, from TARC to First Union National Bank, as Trustee. *4.11 -- Security Agreement dated as of March 14, 1997, from TARC to First Union National Bank, as Trustee. *4.12 -- Cash Collateral and Disbursement Agreement dated as of March 14, 1997, between TARC and First Union National Bank, as Trustee and Disbursement Agent. *4.13 -- First Amendment to Cash Collateral and Disbursement Agreement dated as of April 3, 1997, between TARC and First Union National Bank, as Trustee and Disbursement Agent. 10.1 -- Services Agreement dated August 24, 1993, by and among TARC, TEC, TransTexas and TransAmerican, as amended (previously filed as Exhibit 10.1 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.2 -- Tax Allocation Agreement dated August 24, 1993, by and among TransAmerican, TEC, TARC, TransTexas and the other subsidiaries of TransAmerican, as amended (previously filed as Exhibit 10.2 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.3 -- Indemnification Agreement by and between TARC and each of its directors (previously filed as Exhibit 10.3 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.4 -- Interruptible Gas Sales Terms and Conditions dated between TARC and TransTexas, as amended (previously filed as Exhibit 10.4 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.5 -- Intercompany Note dated as of August 12, 1994, executed by TARC for the benefit of TransAmerican (previously filed as Exhibit 10.5 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference)
44 47 10.6 -- Processing Agreement dated March 20, 1996 by and between TARC and J. Aron & Company (previously filed as an exhibit to TARC's Form 10-K for the transition period ended January 31, 1996, and incorporated herein by reference) 10.7 -- Employment Agreement dated June 12, 1995, between TARC and R. Glenn McGinnis (previously filed as an exhibit to TARC's Form 10-K for the transition period ended January 31, 1996, and incorporated herein by reference) 10.8 -- Processing Agreement dated April 22, 1996 between TARC and Glencore Ltd. (previously filed as an exhibit to TARC's Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference) *11.1 -- Statement of Computation of Net Income (Loss) Per Share. 21.1 -- Schedule of Subsidiaries (previously filed as Exhibit 21.1 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) *27.1 -- Financial Data Schedule.
- --------------- * Filed herewith. (b) Reports on Form 8-K. There were no current reports on Form 8-K filed during the fourth quarter of the fiscal year ended January 31, 1997. 45 48 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 May 1, 1997. TRANSAMERICAN REFINING CORPORATION By: /s/ JOHN R. STANLEY ------------------------------------- John R. Stanley Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on May 1, 1997.
NAME TITLE ---- ----- /s/ JOHN R. STANLEY Director, Chairman of the Board, President, - ----------------------------------------------------- and Chief Executive Officer (Principal John R. Stanley Executive Officer) /s/ DONALD B. HENDERSON Director - ----------------------------------------------------- Donald B. Henderson /s/ THOMAS B. MCDADE Director - ----------------------------------------------------- Thomas B. McDade /s/ EDWIN B. DONAHUE Vice President and Secretary - ----------------------------------------------------- (Principal Financial and Edwin B. Donahue Accounting Officer
46 49 INDEX TO EXHIBITS The following instruments are included as exhibits to this Annual Report on Form 10-K and are filed herewith unless otherwise indicated. Exhibits incorporated by reference are so indicated by parenthetical information. 2.1 -- Stock Transfer Agreement dated as of February 23, 1995, between TARC, TEC and TransAmerican (previously filed as Exhibit 2 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 3.1 -- Articles of Incorporation of TARC (previously filed as Exhibit 3.1(i) to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 3.2 -- By-laws of TARC (previously filed as Exhibit 3.1(ii) to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 4.1 -- Indenture dated as of February 15, 1995, between TARC, First Fidelity Bank, National Association, as Trustee and TEC, with respect to the Guaranteed First Mortgage Discount Notes and the Guaranteed First Mortgage Notes (together, the "Notes"), including the forms of Notes as exhibits (previously filed as Exhibit 3 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.2 -- Warrant Agreement dated as of February 23, 1995, among the Company, TEC and First Fidelity Bank, National Association, as Warrant Trustee, with respect to the Common Stock Purchase Warrants including the form of Warrant as an exhibit (previously filed as Exhibit 4 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.3 -- Pledge Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 5 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.4 -- Security Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 6 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.5 -- Cash Collateral and Disbursement Agreement dated as of February 23, 1995, among TARC, First Fidelity Bank, National Association, as Trustee, First Fidelity Bank, N.A., as Disbursement Agent, and Baker & O'Brien, Inc., as Construction Supervisor (previously filed as Exhibit 7 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.6 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from TARC in favor of First Fidelity Bank, National Association, as Trustee (previously filed as Exhibit 8 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) 4.7 -- Registration Rights Agreement dated as of February 23, 1995, between TransTexas, TARC, and TEC (previously filed as Exhibit 10 to TARC's and TEC's Current Report on Form 8-K dated March 14, 1995 and incorporated herein by reference) *4.8 -- First Supplemental Indenture dated as of February 24, 1997 among the Company, TEC and First Union National Bank, f/k/a First Fidelity Bank, N.A. *4.9 -- Indenture dated as of March 14, 1997, between TARC and First Union National Bank, as Trustee, with respect to the $36 million Senior Secured Notes due 1998, including the form of Note as an exhibit.
50 *4.10 -- Pledge Agreement dated as of March 14, 1997, from TARC to First Union National Bank, as Trustee. *4.11 -- Security Agreement dated as of March 14, 1997, from TARC to First Union National Bank, as Trustee. *4.12 -- Cash Collateral and Disbursement Agreement dated as of March 14, 1997, between TARC and First Union National Bank, as Trustee and Disbursement Agent. *4.13 -- First Amendment to Cash Collateral and Disbursement Agreement dated as of April 3, 1997, between TARC and First Union National Bank, as Trustee and Disbursement Agent. 10.1 -- Services Agreement dated August 24, 1993, by and among TARC, TEC, TransTexas and TransAmerican, as amended (previously filed as Exhibit 10.1 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.2 -- Tax Allocation Agreement dated August 24, 1993, by and among TransAmerican, TEC, TARC, TransTexas and the other subsidiaries of TransAmerican, as amended (previously filed as Exhibit 10.2 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.3 -- Indemnification Agreement by and between TARC and each of its directors (previously filed as Exhibit 10.3 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.4 -- Interruptible Gas Sales Terms and Conditions dated between TARC and TransTexas, as amended (previously filed as Exhibit 10.4 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.5 -- Intercompany Note dated as of August 12, 1994, executed by TARC for the benefit of TransAmerican (previously filed as Exhibit 10.5 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) 10.6 -- Processing Agreement dated March 20, 1996 by and between TARC and J. Aron & Company (previously filed as an exhibit to TARC's Form 10-K for the transition period ended January 31, 1996, and incorporated herein by reference) 10.7 -- Employment Agreement dated June 12, 1995, between TARC and R. Glenn McGinnis (previously filed as an exhibit to TARC's Form 10-K for the transition period ended January 31, 1996, and incorporated herein by reference) 10.8 -- Processing Agreement dated April 22, 1996 between TARC and Glencore Ltd. (previously filed as an exhibit to TARC's Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference) *11.1 -- Statement of Computation of Net Income (Loss) Per Share.
51 21.1 -- Schedule of Subsidiaries (previously filed as Exhibit 21.1 to TARC's and TEC's Registration Statement on Form S-1 (Registration No. 33-82200) and incorporated herein by reference) *27.1 -- Financial Data Schedule.
- --------------- * Filed herewith. EX-4.8 2 FIRST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.8 - -------------------------------------------------------------------------------- TRANSAMERICAN REFINING CORPORATION, Issuer and TRANSAMERICAN ENERGY CORPORATION, Guarantor and FIRST UNION NATIONAL BANK, f/k/a FIRST FIDELITY BANK, NATIONAL ASSOCIATION, Trustee _________________________ FIRST SUPPLEMENTAL INDENTURE dated as of February 24, 1997 _________________________ $340,000,000 Guaranteed First Mortgage Discount Notes due 2002 and $100,000,000 Guaranteed First Mortgage Notes due 2002 - -------------------------------------------------------------------------------- 2 THIS FIRST SUPPLEMENTAL INDENTURE, dated as of February 24, 1997 (the "Supplemental Indenture"), is made and entered into by and among TRANSAMERICAN REFINING CORPORATION, a Texas corporation (the "Company"), TRANSAMERICAN ENERGY CORPORATION, a Delaware corporation ("TEC"), and FIRST UNION NATIONAL BANK, formerly known as First Fidelity Bank, National Association, (the "Trustee"), under an Indenture dated as of February 15, 1995, by and among the Company, TEC and the Trustee (the "Current Indenture"). All capitalized terms used in this Supplemental Indenture that are defined in the Current Indenture, either directly or by reference therein, have the meanings assigned to them therein, except to the extent such terms are defined in this Supplemental Indenture or the context clearly requires otherwise. WHEREAS, Section 9.2 of the Current Indenture provides, among other things, that with the consent of the Holders of not less than a majority in aggregate principal amount of then outstanding Notes or, with respect to certain matters, 66-2/3% of the aggregate principal amount of the Mortgage Notes and Discount Mortgage Notes at the time outstanding, the Obligors, when authorized by Board Resolutions, and the Trustee may amend or supplement the Current Indenture or the Securities or enter into an indenture supplemental thereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Current Indenture or the Securities or of modifying in any manner the rights of the Holders under the Current Indenture or the Securities; and WHEREAS, the Company has, upon the terms set forth in a Consent Solicitation Statement dated February 3, 1997, as supplemented and amended by that certain Supplement to Consent Solicitation Statement dated February 6, 1997 (collectively, the "Consent Solicitation Statement"), and in the related form of Consent, solicited Consents from the Holders of the Notes to certain amendments to the Current Indenture to modify certain of the covenants and other provisions contained in the Current Indenture, as more particularly described in the Consent Solicitation Statement and in this Supplemental Indenture (the "Proposed Amendments"); and WHEREAS, the Holders of at least 66-2/3% of the aggregate principal amount of the Mortgage Notes and Discount Mortgage Notes have consented to the Proposed Amendments pursuant to the Consent Solicitation Statement; and WHEREAS, the Boards of Directors of the Obligors have adopted resolutions authorizing and approving the Proposed Amendments and the Company, the Guarantor and the Trustee are executing and delivering this Supplemental Indenture in order to provide for such amendments; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Supplemental Indenture hereby agree as follows: ARTICLE I AMENDMENTS TO CURRENT INDENTURE Section 1.1. Section 1.1 of the Current Indenture. The definition of Permitted Liens in Section 1.1 of the Current Indenture is hereby amended to read in its entirety as follows: "Permitted Liens" means (a) Liens imposed by governmental authorities for taxes, assessments, or other charges not yet due or which are being contested in good faith and by 3 appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or other like Liens arising by operation of law in the ordinary course of business provided that (i) the underlying obligations are not overdue for a period of more than 60 days, or (ii) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (c) deposits to secure the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds, and other obligations of a like nature incurred in the ordinary course of business; (d) easements, rights-of- way, zoning, similar restrictions and other similar encumbrances or title defects incurred in the ordinary course of business which, in the aggregate, are not material in amount and which do not, in any case, materially detract from the value of the property subject thereto (as such property is used by the Company or any of its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (e) Liens arising by operation of law in connection with judgments, only to the extent, for an amount and for a period not resulting in an Event of Default with respect thereto; (f) Liens existing on the Issue Date not exceeding $2 million; (g) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, and other types of social security legislation; (h) if the Company has obtained a Revolving Credit Facility that satisfies the requirements of Section 4.13 and the Company has deposited in the Collateral Account $50,000,000 of the proceeds of Debt incurred pursuant to such Revolving Credit Facility, Liens on (i) accounts receivable owned by the Company and its Subsidiaries or (ii) inventory owned by the Company and its Subsidiaries, in either case, securing Debt of the Company pursuant to such Revolving Credit Facility; (i) Liens on the assets of any entity existing at the time such assets are acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise so long as such Liens (i) are not created, incurred or assumed in contemplation of such assets being acquired by the Company or such Subsidiary and (ii) do not extend to any other assets of the Company or any of its Subsidiaries; (j) Liens (including extensions and renewals thereof) on real or personal property acquired after the Issue Date, except for property acquired in whole or in part with the proceeds of this offering; provided, however, that (i) such Lien is created solely for the purpose of securing Debt Incurred to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of, or within six months after the later of the acquisition, the completion of construction, or the commencement of full operation of such property, (ii) the principal amount of the Debt secured by such Lien does not exceed 100% of such cost, and (iii) any such Lien shall not extend to or cover any property or assets other than such item or property or assets and any improvements on such item; (k) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Subsidiaries, taken as a whole; (l) Liens in favor of the Company; (m) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (o) Liens encumbering customary initial deposits and margin deposits securing Interest Swap Obligations or Permitted Hedging Transactions; (p) until the Company obtains a Revolving Credit Facility, Liens on cash deposits of up to $30,000,000 to secure reimbursement obligations with respect to letters of credit; (q) Liens encumbering funds disbursed from the collateral account in accordance with the Disbursement Agreement; (r) Liens on up to 5,000,000 shares of Common Stock of TransTexas Gas Corporation released pursuant to 2 4 Section 12.6(b)(9) from the security interest created by the Pledge Agreement to secure Debt of the Company described in Section 4.13(i); and (s) any replacement of the Permitted Liens set forth in the foregoing clauses (a) through (r) that is on substantially similar terms and does not secure any additional Debt or encumber or otherwise affect or relate to any additional property; provided, however, that the aggregate amount of Debt secured by Liens pursuant to the foregoing clauses (i), (j) and (p), shall not exceed $50 million plus the amount of any Debt, not in excess of $10 million, incurred to finance the acquisition of tank storage facilities. Section 1.2. Section 4.13 of the Current Indenture. The first paragraph of Section 4.13 of the Current Indenture is hereby amended to read in its entirety as follows: Limitation on Incurrences of Additional Debt and Issuances of Disqualified Capital Stock. Neither the Company nor any Guarantor shall, and neither the Company nor any Guarantor shall permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or otherwise become liable for, contingently or otherwise (to "Incur" or, as appropriate, an "Incurrence"), any Debt or issue any Disqualified Capital Stock (other than Capital Stock of the Company issued to TEC), except (a) Debt evidenced by the Notes pursuant to the Indenture; (b) Subordinated Debt of the Company solely to any wholly owned Subsidiary of the Company, or Debt of any wholly owned Subsidiary of the Company solely to the Company or to any wholly owned Subsidiary of the Company, provided that neither the Company nor any Subsidiary of the Company shall become liable to any person other than the Company or another wholly owned Subsidiary of the Company; (c) Debt of the Company pursuant to a Revolving Credit Facility outstanding at any time in an aggregate principal amount not to exceed the greater of (i) $70,000,000 or (ii) the Borrowing Base, less, in each case, the amount of any Debt of the Accounts Receivable Subsidiary; (d) Debt of the Company outstanding at any time in an aggregate principal amount, or Disqualified Capital Stock of the Company outstanding at any time with an aggregate liquidation value, or any combination thereof, not to exceed $50,000,000 in the aggregate, plus the amount of any Debt, not in excess of $10 million, incurred to finance the acquisition of tank storage facilities; (e) Subordinated Debt of the Company outstanding at any time in an aggregate principal amount not to exceed $200,000,000 in the aggregate; (f) the Company may Incur Debt as an extension, renewal, replacement, or refunding of any of the Debt permitted to be Incurred by clause (a) or (c) above, or this clause (f) (such Debt is collectively referred to as "Refinancing Debt"), provided, that (i) the maximum principal amount of Refinancing Debt (or, if such Refinancing Debt does not require cash payments prior to maturity, the original issue price of such Refinancing Debt) permitted under this clause (f) may not exceed the lesser of (x) the principal amount of the Debt being extended, renewed, replaced, or refunded plus reasonable financing fees and other associated reasonable out-of-pocket expenses (including any premium and defeasance costs) other than those paid to a Related Person (collectively, "Refinancing Fees"), or (y) if such Debt being extended, renewed, replaced, or refunded was issued at an original issue discount, the original issue price, plus amortization of the original issue discount at the time of the Incurrence of the Refinancing Debt plus Refinancing Fees, (ii) the Refinancing Debt as a Weighted Average Life and a final maturity that is equal to or greater than the Debt being extended, renewed, replaced, or refunded at the time of such extension, renewal, replacement, or refunding, (iii) the Refinancing Debt shall rank with respect to the Notes to an extent no more favorable in respect thereof than the Debt being refinanced, and (iv) Refinancing Debt Incurred pursuant to clause (c) may be renewed, replaced, refunded or refinanced only with another Revolving Credit Facility; (g) Debt of the Company represented by 3 5 trade payables or accrued expenses, in each case, incurred on normal, customary terms in the ordinary course of business, not overdue for a period of more than 45 days (or, if overdue for a period of more than 45 days, being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto being maintained on the books of the Company in accordance with GAAP) and not constituting any amounts due to banks or other financial institutions; (h) Debt Incurred and Disqualified Capital Stock issued by any Person at a time when that Person is not a Subsidiary of the Company or a Guarantor, which Debt or Disqualified Capital Stock is outstanding at the time such Person becomes, or is merged into, or consolidated with, a Subsidiary of the Company or a Guarantor, was not incurred or issued in contemplation of such Person becoming or being merged into, or consolidated with, a Subsidiary of the Company or a Guarantor, and is in an aggregate amount not to exceed $25,000,000; and (i) Debt of the Company outstanding at any time in an aggregate principal amount not to exceed $50,000,000 in the aggregate. For the purpose of determining the amount of outstanding Debt that has been Incurred pursuant to clause (c) above, there shall be included in such clause the principal amount then outstanding of any Debt originally Incurred pursuant to such clause and, after any refinancing or refunding of such Debt, any outstanding Debt Incurred pursuant to clause (e) above so as to refinance or refund such Debt Incurred pursuant to clause (c) and any subsequent refinancings or refundings thereof. For purposes of clause (h) above, Debt shall be deemed to be incurred, and Disqualified Capital Stock shall be deemed to be issued, as the case may be, at the time such Person becomes or is merged into or consolidated with, a Subsidiary of the Company or a Guarantor. Section 1.3. Section 12.6(b) of the Current Indenture. Section 12.6(b) of the Current Indenture is hereby amended to add the following clause (9) following the end thereof, which clause (9) shall read in its entirety as follows: (9) Up to 5,000,000 shares of pledged TransTexas common stock owned by the Company may be released from the security interest created by the Company Pledge Agreement at any time upon the request of the Company. Section 1.4. Section 12.6(h) of the Current Indenture. Section 12.6(h) of the Current Indenture is hereby amended to read in its entirety as follows: (h) Notwithstanding the foregoing, no Collateral may be released from the security interest created by the Security Documents if at the time of such proposed release, a Default or Event of Default has occurred and is continuing or would occur as a result of such release. Any shares of TransTexas common stock that is released pursuant to this Section 12.6 (other than subsection (b)(9) hereof) in connection with a sale of such stock shall be sold for cash at prices no less favorable to the seller than those that could be obtained in arms-length transactions with unrelated persons. ARTICLE II GENERAL PROVISIONS Section 2.1. Effectiveness. This Supplemental Indenture is effective as of the date first above written. 4 6 Section 2.2. Ratification of Indenture. The Current Indenture is in all respects acknowledged, ratified and confirmed, and shall continue in full force and effect in accordance with the terms thereof and as supplemented by this Supplemental Indenture. The Current Indenture and this Supplemental Indenture, shall be read, taken and construed as one and the same instrument. Section 2.3. Certificate and Opinion as to Conditions Precedent. Simultaneously with and as a condition to the execution of this Supplemental Indenture, the Company is delivering to the Trustee (a) an Officer's Certificate in the form attached hereto as Exhibit A; and (b) an Opinion of Counsel covering the matters described in Exhibit B. Section 2.4. Effect of Headings. The Article and Section headings in this Supplemental Indenture are for convenience only and shall not affect the construction of this Supplemental Indenture. Section 2.5. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. Section 2.6. Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute the same instrument. IN WITNESS WHEREOF, the parties to this Supplemental Indenture have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, on this 24th day of February, 1997. TRANSAMERICAN REFINING CORPORATION Attest: /s/ Douglas Widlaski By: /s/ Ed Donahue ------------------------------ --------------------------------- Douglas Widlaski Ed Donahue Assistant Secretary Vice President TRANSAMERICAN ENERGY CORPORATION Attest: /s/ Douglas Widlaski By: /s/ Ed Donahue ------------------------------ --------------------------------- Douglas Widlaski Ed Donahue Assistant Secretary Vice President 5 7 FIRST UNION NATIONAL BANK, f/k/a FIRST FIDELITY BANK, NATIONAL ASSOCIATION, Trustee Attest: /s/ Diane M. Oelsh By: /s/ W. Jeffrey Kramer ---------------------------- --------------------------------- Its: Vice President ----------------------------- 6 8 EXHIBIT A TRANSAMERICAN REFINING CORPORATION OFFICERS' CERTIFICATE The undersigned, John R. Stanley, President and Chief Executive Officer, and Douglas Widlaski, Assistant Secretary, of TransAmerican Refining Corporation, a Texas corporation (the "Company"), do hereby certify pursuant to Section 2.3 of that certain First Supplemental Indenture, dated as of February 24, 1997, among the Company, TransAmerican Energy Corporation, a Delaware corporation ("TEC"), and First Union National Bank, f/k/a First Fidelity Bank, National Association (the "Trustee"), and Sections 7.2(b), 9.6 and 14.4 of that certain Indenture, dated as of February 15, 1995, among the Company, TEC and the Trustee (the "Indenture"), as follows: 1. The undersigned have read Article IX of the Indenture. 2. The undersigned have monitored the solicitation from the holders of Notes (as defined in the Indenture) of consents to the Proposed Amendments (as defined in the Supplemental Indenture). The Company has received consents to the Proposed Amendments from the Holders (as defined in the Indenture) as of the Record Date (as defined in the Consent Solicitation Statement of the Company dated February 3, 1997, as modified by the Supplement thereto dated February 6, 1997, copies of which are attached as Exhibit A hereto) of not less than 66 2/3% of the aggregate principal amount of the Mortgage Notes (as defined in the Indenture) and the Discount Mortgage Notes (as defined in the Indenture) at the time outstanding, which is aggregate principal amount of the Mortgage Notes and the Discount Mortgage Notes required by the Indenture to approve the Proposed Amendments. 3. In our opinion, we have made such examination and investigation as is necessary to enable us to express an informed opinion as to whether or not the conditions precedent in the Indenture requiring compliance by the Company and TEC prior to or concurrently with the execution and delivery by the Company, TEC and the Trustee of the First Supplemental Indenture have been complied with. 4. In our opinion, each of the conditions precedent in the Indenture requiring compliance by the Company and TEC prior to or concurrently with the execution and delivery by the Company, TEC and the Trustee of the First Supplemental Indenture have been complied with, and the Company, TEC and the Trustee are authorized or permitted, pursuant to Article IX of the Indenture, to execute the First Supplemental Indenture. IN WITNESS WHEREOF, we have executed this Certificate as of February ___, 1997. ---------------------------- John R. Stanley, President and Chief Executive Officer ---------------------------- Douglas Widlaski Assistant Secretary 9 EXHIBIT B Form of Gardere & Wynne, L.L.P. Opinion Each of the conditions precedent in the Current Indenture requiring compliance by the Company and TEC prior to or concurrently with the execution and delivery by the Company, TEC and the Trustee of the First Supplemental Indenture has been complied with, and the Company, TEC and the Trustee are authorized or permitted by Article IX of the Current Indenture to execute the First Supplemental Indenture. EX-4.9 3 INDENTURE 1 EXHIBIT 4.9 ================================================================================ TRANSAMERICAN REFINING CORPORATION, Issuer and FIRST UNION NATIONAL BANK Trustee ______________ INDENTURE Dated as of March 14, 1997 ______________ $36,000,000 Senior Secured Notes due March 14, 1998 ================================================================================ 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Incorporation by Reference of TIA . . . . . . . . . . 15 Section 1.3 Rules of Construction . . . . . . . . . . . . . . . . 16 ARTICLE II THE NOTES Section 2.1 Form and Dating . . . . . . . . . . . . . . . . . . 16 Section 2.2 Execution and Authentication . . . . . . . . . . . . 16 Section 2.3 Registrar and Paying Agent . . . . . . . . . . . . . 17 Section 2.4 Paying Agent to Hold Assets in Trust . . . . . . . . 17 Section 2.5 Noteholder Lists . . . . . . . . . . . . . . . . . . 18 Section 2.6 Transfer and Exchange . . . . . . . . . . . . . . . . 18 Section 2.7 Replacement Notes . . . . . . . . . . . . . . . . . . 18 Section 2.8 Outstanding Notes . . . . . . . . . . . . . . . . . . 18 Section 2.9 Treasury Securities . . . . . . . . . . . . . . . . . 19 Section 2.10 Temporary Notes . . . . . . . . . . . . . . . . . . . 19 Section 2.11 Cancellation . . . . . . . . . . . . . . . . . . . . 19 Section 2.12 Defaulted Interest . . . . . . . . . . . . . . . . . 19 ARTICLE III REDEMPTION Section 3.1 Right of Redemption . . . . . . . . . . . . . . . . . 20 Section 3.2 Notices to Trustee . . . . . . . . . . . . . . . . . 21 Section 3.3 Notice of Redemption . . . . . . . . . . . . . . . . 21 Section 3.4 Effect of Notice of Redemption . . . . . . . . . . . 21 Section 3.5 Deposit of Redemption Price . . . . . . . . . . . . . 22 ARTICLE IV COVENANTS Section 4.1 Payment of Notes . . . . . . . . . . . . . . . . . . 22 Section 4.2 Maintenance of Office or Agency . . . . . . . . . . . 22 Section 4.3 Limitation on Use of Proceeds . . . . . . . . . . . . 23 Section 4.4 Construction . . . . . . . . . . . . . . . . . . . . 23 Section 4.5 Limitation on Restricted Payments . . . . . . . . . . 23 Section 4.6 Corporate Existence . . . . . . . . . . . . . . . . . 23 Section 4.7 Payment of Taxes and Other Claims . . . . . . . . . . 23 Section 4.8 Maintenance of Properties and Insurance . . . . . . . 24 Section 4.9 Compliance Certificate; Notice of Default . . . . . . 24 Section 4.10 SEC Reports . . . . . . . . . . . . . . . . . . . . . 24 Section 4.11 Limitation on Status as Investment Company or Public Utility Company . . . . . . . . . . . . . . . . . . . 25 Section 4.12 Limitation on Transactions with Related Persons . . . 25
3 Section 4.13 Limitation on Incurrences of Additional Debt and Issuances of Disqualified Capital Stock . . . . . . . 26 Section 4.14 Limitation on Restricting Subsidiary Dividends . . . 27 Section 4.15 Limitation on Liens . . . . . . . . . . . . . . . . . 28 Section 4.16 Limitation on Asset Sales . . . . . . . . . . . . . . 28 Section 4.17 Waiver of Stay, Extension or Usury Laws . . . . . . . 30 Section 4.18 Restriction on Sale and Issuance of Subsidiary Stock 31 Section 4.19 Limitations on Line of Business . . . . . . . . . . . 31 Section 4.20 Limitation on Speculative Trading . . . . . . . . . . 31 Section 4.21 Accounts Receivable Subsidiary . . . . . . . . . . . 31 Section 4.22 Separate Existence and Formalities . . . . . . . . . 32 Section 4.23 Revolving Credit Facility . . . . . . . . . . . . . . 33 Section 4.24 Registration of Pledged Shares . . . . . . . . . . . 33 Section 4.25 Limitation on Sale/Leaseback Transactions . . . . . . 33 ARTICLE V SUCCESSOR CORPORATION Section 5.1 When Company May Merge, Etc. . . . . . . . . . . . . 33 Section 5.2 Successor Corporation Substituted . . . . . . . . . . 34 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1 Events of Default . . . . . . . . . . . . . . . . . . 36 Section 6.2 Acceleration of Maturity Date; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . . . 37 Section 6.3 Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . . . 38 Section 6.4 Trustee May File Proofs of Claim . . . . . . . . . . 39 Section 6.5 Trustee May Enforce Claims Without Possession of Notes . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.6 Priorities . . . . . . . . . . . . . . . . . . . . . 39 Section 6.7 Limitation on Suits . . . . . . . . . . . . . . . . . 40 Section 6.8 Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . . . . . . . 40 Section 6.9 Rights and Remedies Cumulative . . . . . . . . . . . 40 Section 6.10 Delay or Omission Not Waiver . . . . . . . . . . . . 41 Section 6.11 Control by Holders . . . . . . . . . . . . . . . . . 41 Section 6.12 Waiver of Past Default . . . . . . . . . . . . . . . 41 Section 6.13 Undertaking for Costs . . . . . . . . . . . . . . . . 41 Section 6.14 Restoration of Rights and Remedies . . . . . . . . . 42 ARTICLE VII TRUSTEE Section 7.1 Duties of Trustee . . . . . . . . . . . . . . . . . . 42 Section 7.2 Rights of Trustee . . . . . . . . . . . . . . . . . . 43 Section 7.3 Individual Rights of Trustee . . . . . . . . . . . . 43 Section 7.4 Trustee's Disclaimer . . . . . . . . . . . . . . . . 43 Section 7.5 Notice of Default . . . . . . . . . . . . . . . . . . 44 Section 7.6 Reports by Trustee to Holders . . . . . . . . . . . . 44 Section 7.7 Compensation and Indemnity . . . . . . . . . . . . . 44 Section 7.8 Replacement of Trustee . . . . . . . . . . . . . . . 45
ii 4 Section 7.9 Successor Trustee by Merger, Etc. . . . . . . . . . . 45 ARTICLE VIII SATISFACTION AND DISCHARGE Section 8.1 Satisfaction, Discharge of the Indenture and Defeasance of the Notes . . . . . . . . . . . . . . . 46 Section 8.2 Termination of Obligations Upon Cancellation of the Notes . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 8.3 Survival of Certain Obligations . . . . . . . . . . . 47 Section 8.4 Acknowledgment of Discharge by Trustee . . . . . . . 47 Section 8.5 Application of Trust Assets . . . . . . . . . . . . . 48 Section 8.6 Repayment to the Company . . . . . . . . . . . . . . 48 Section 8.7 Reinstatement . . . . . . . . . . . . . . . . . . . . 48 ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 9.1 Supplemental Indentures Without Consent of Holders . 48 Section 9.2 Amendments, Supplemental Indentures and Waivers with Consent of Holders . . . . . . . . . . . . . . . . . 49 Section 9.3 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . 50 Section 9.4 Revocation and Effect of Consents . . . . . . . . . . 50 Section 9.5 Notation on or Exchange of . . . . . . . . . . . . . 51 Section 9.6 Trustee to Sign Amendments, Etc. . . . . . . . . . . 51 ARTICLE X MEETINGS OF NOTEHOLDERS Section 10.1 Purposes for Which Meetings May Be Called . . . . . . 51 Section 10.2 Manner of Calling Meetings . . . . . . . . . . . . . 51 Section 10.3 Call of Meetings by Company or Holders . . . . . . . 52 Section 10.4 Who May Attend and Vote at Meetings . . . . . . . . . 52 Section 10.5 Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment . . . . . . . . . 52 Section 10.6 Voting at the Meeting and Record to Be Kept . . . . . 53 Section 10.7 Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting . . . . . . . 53 ARTICLE XI RIGHT TO REQUIRE REPURCHASE Section 11.1 Repurchase of Notes at Option of the Holder Upon Change of Control . . . . . . . . . . . . . . . . . . 53 ARTICLE XII SECURITY Section 12.1 Security Documents . . . . . . . . . . . . . . . . . 55 Section 12.2 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . 55 Section 12.3 Authorization of Actions to be Taken by the Trustee Under the Security Documents . . . . . . . . . . . . 55 Section 12.4 Authorization of Receipt of Funds by the Trustee Under the Security Documents . . . . . . . . . . . . 55
iii 5 Section 12.5 Termination of Security Interest . . . . . . . . . . 56 Section 12.6 Release of Collateral . . . . . . . . . . . . . . . . 56 ARTICLE XIII MISCELLANEOUS Section 13.1 TIA . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 13.2 Notices . . . . . . . . . . . . . . . . . . . . . . . 57 Section 13.3 INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . 58 Section 13.4 Certificate and Opinion as to Conditions Precedent . 58 Section 13.5 Statements Required in Certificate or Opinion . . . . 58 Section 13.6 Rules by Trustee, Paying Agent, Registrar . . . . . . 59 Section 13.7 Legal Holidays . . . . . . . . . . . . . . . . . . . 59 Section 13.8 Governing Law . . . . . . . . . . . . . . . . . . . . 59 Section 13.9 No Adverse Interpretation of Other Agreements . . . . 60 Section 13.10 No Recourse against Others . . . . . . . . . . . . . 60 Section 13.11 Successors . . . . . . . . . . . . . . . . . . . . . 60 Section 13.12 Duplicate Originals . . . . . . . . . . . . . . . . . 60 Section 13.13 Severability . . . . . . . . . . . . . . . . . . . . 60 Section 13.14 Table of Contents, Headings, Etc. . . . . . . . . . . 60
EXHIBITS Exhibit A -- Form of Senior Secured Note . . . . . . . . . . . . . . . . . A-1 Exhibit B -- Form of Security Agreement . . . . . . . . . . . . . . . . . . B-1 Exhibit C -- Form of Pledge Agreement . . . . . . . . . . . . . . . . . . C-1 Exhibit D -- Form of Cash Collateral and Disbursement Agreement . . . . . . D-1 iv 6 INDENTURE, dated as of March 14, 1997, between TRANSAMERICAN REFINING CORPORATION, a Texas corporation (the "Company") and FIRST UNION NATIONAL BANK, as Trustee. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Company's Senior Secured Notes due March 14, 1998: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Acceleration Notice" shall have the meaning specified in Section 6.2. "Acceptance Amount" shall have the meaning specified in Section 4.16(c). "Accounts Receivable Subsidiary" means a subsidiary of the Company designated as an Accounts Receivable Subsidiary for the purpose of financing the accounts receivable of the Company. "Accounts Receivable Subsidiary Notes" means the notes to be issued by the Accounts Receivable Subsidiary for the purchase of accounts receivable. "Accumulated Amount" shall have the meaning specified in Section 4.16(a). "Affiliate" means, with respect to any specified Person, (a) any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such specified Person or (b) any officer, director or controlling shareholder of such other Person. For purposes of this definition, the term "control" means (i) the power to direct the management and policies of a Person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise, or (ii) without limiting the foregoing, the beneficial ownership of 5% or more of the voting power of the voting common equity of such Person (on a fully diluted basis) or of warrants or other rights to acquire such equity (whether or not presently exercisable). "Agent" means any Registrar, Paying Agent or co-Registrar. "Asset Sale" shall have the meaning specified in Section 4.16. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP or, in the event that such rate of interest is not reasonably determinable, discounted at the rate of interest borne by the Notes) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors, as amended from time to time. "Board of Directors" means, with respect to any Person, the Board of Directors of such Person or any committee of the Board of Directors of such Person authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such Person. 7 "Board Resolution" means, with respect to any Person, a duly adopted resolution of the Board of Directors of such Person. "Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85% of the book value of all accounts receivable owned by the Company and its Subsidiaries (excluding any accounts receivable from a Related Person or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to such current accounts receivable) calculated on a consolidated basis and in accordance with GAAP and (b) 80% of the current market value of all inventory owned by the Company and its Subsidiaries as of such date. To the extent that information is not available as to the amount of accounts receivable as of a specific date, the Company may utilize, to the extent reasonable, the most recent available information for purposes of calculating the Borrowing Base. "Business Day" means a day that is not a Legal Holiday. "Capital Expenditures" of a Person means expenditures (whether paid in cash or accrued as a liability) by such Person or any of its Subsidiaries that, in conformity with GAAP, are or would be included in "capital expenditures," "additions to property, plant or equipment" or comparable items in the consolidated financial statements of such Person consistent with prior accounting practices. "Capital Improvement Program" means the proposed expansion and modification of the Company's refinery in accordance with the Plans, including Phase I and Phase II thereof. "Capital Stock" means, with respect to any Person, any capital stock of such Person and shares, interests, participation or other ownership interests (however designated), of such Person and any rights (other than debt securities convertible into corporate stock), warrants or options to purchase any of the foregoing, including without limitation each class of common stock and preferred stock of such Person if such Person is a corporation and each general and limited partnership interest of such Person if such Person is a partnership. "Capitalized Lease Obligation" means obligations under a lease that are required to be capitalized for financial reporting purposes in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board as in effect on the Issue Date) and the amount of Debt represented by such obligations shall be the capitalized amount of such obligations, as determined in accordance with GAAP, unless such obligations arise as a result of a Sale/Leaseback Transaction, in which case the amount of debt represented by such obligation shall be the Attributable Debt in respect of such Sale/Leaseback Transaction. "cash" means U.S. Legal Tender. "Cash Equivalents" means (a) United States dollars, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (c) certificates of deposit with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months, and overnight bank deposits, in each case, with any Eligible Institution, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any Eligible Institution, and (e) commercial paper rated "P-1," "A-1" or the equivalent thereof by Moody's or S&P, respectively, and in each case maturing within six months after the date of acquisition. "Change of Control" means (a) any sale, lease, transfer or other conveyance or disposition, whether direct or indirect, of more than 50% of the fair market value of the assets of the Company, on a consolidated basis, to any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), other than to or among the Company's wholly owned Subsidiaries, whether in a single transaction or a series of related transactions, unless immediately after such transaction, John 2 8 R. Stanley has, directly or indirectly, in the aggregate, sole beneficial ownership of more than 50%, on a fully diluted basis, of the total voting power entitled to vote in the election of directors, managers, or trustees of the transferee, (b) the liquidation or dissolution of the Company, or (c) any transaction, event or circumstance pursuant to which any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), other than John R. Stanley and his wholly owned Subsidiaries, is or becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Company's then outstanding Voting Stock, unless at the time of the occurrence of an event specified in clause (a), (b) or (c), the Mortgage Notes have an Investment Grade Rating; provided, however, that if at any time within 120 days after such occurrence, the Mortgage Notes cease having an Investment Grade Rating, such event shall be a "Change of Control." "Change of Control Offer" shall have the meaning specified in Section 11.1. "Change of Control Payment Date" shall have the meaning specified in Section 11.1. "Change of Control Purchase Price" shall have the meaning specified in Section 11.1. "Closing Price" of a share of common stock on any day shall mean (a) the closing sales price regular way per share of common stock on such day on the New York Stock Exchange ("NYSE"), or (b) if the common stock is not listed on the NYSE, the last reported sales price regular way, or in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, on the principal national securities exchange on which the common stock is admitted for trading, or (c) if the common stock is not listed or admitted for trading on any national securities exchange, the last reported sales price regular way per share of common stock on such day, or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case, on the Nasdaq National Market. "Collateral" means (a) the Account Collateral, as such term is defined in the Security Agreement, and (b) the Pledged Collateral, as such term is defined in the Pledge Agreement. "Collateral Account" shall have the meaning provided in the Disbursement Agreement. "Common Stock" means the common stock, par value $.01 per share, of the Company, now or hereafter issued. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to the Indenture and thereafter means such successor. "Consolidated EBITDA" of any Person for any period means (a) the Consolidated Net Income of such Person for such period, plus (b) the sum, without duplication (and only to the extent such amounts are deducted from net revenues in determining such Consolidated Net Income), of (i) the provision for income taxes for such period for such Person and its consolidated Subsidiaries, (ii) depreciation and amortization of such Person and its consolidated Subsidiaries during such period, and (iii) Consolidated Fixed Charges of such Person for such period, determined, in each case, on a consolidated basis for such Person and its consolidated Subsidiaries in accordance with GAAP unless otherwise defined herein. "Consolidated Fixed Charge Coverage Ratio" on any date (the "Transaction Date") means, with respect to any Person, the ratio, on a pro forma basis, of (a) the aggregate amount of Consolidated EBITDA of such Person (attributable to continuing operations and businesses and exclusive of the amounts attributable to operations and businesses discontinued or disposed of, on a pro forma basis) for the Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person (exclusive of amounts attributable to discontinued 3 9 operations and businesses, but only to the extent that the obligations giving rise to such Consolidated Fixed Charges would no longer be obligations contributing to such Person's Consolidated Fixed Charges subsequent to the Transaction Date) during the Reference Period; provided, that for purposes of such computation, in calculating Consolidated EBITDA and Consolidated Fixed Charges, (i) the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on the first day of the Reference Period, (ii) the incurrence of any Debt or issuance of Disqualified Capital Stock during the Reference Period or subsequent thereto and on or prior to the Transaction Date (and the application of the proceeds therefrom) shall be assumed to have occurred on the first day of such Reference Period, and (iii) Consolidated Interest Expense attributable to any Debt (whether existing or being incurred) bearing a floating interest rate shall be computed as if the rate in effect on the Transaction Date had been the applicable rate for the entire period, unless such Person or any of its Subsidiaries is a party to an Interest Swap Obligation (that remains in effect for the 12-month period after the Transaction Date) that has the effect of fixing the interest rate on the date of computation, in which case such rate (whether higher or lower) shall be used. "Consolidated Fixed Charges" of any Person for any period means (without duplication) the sum of (a) Consolidated Interest Expense of such Person for such period, (b) dividend requirements of such Person and its Subsidiaries (whether in cash or otherwise (except dividends payable solely in shares of Qualified Capital Stock)) with respect to Preferred Stock, paid or accrued during such period, in each case to the extent attributable to such period and excluding items eliminated in consolidation, and (c) fees paid or accrued during such period by such Person and its Subsidiaries in respect of performance bonds or other guarantees of payment. For purposes of clause (b) above, dividend requirements shall be increased to an amount representing the pretax earnings that would be required to cover such dividend requirements; accordingly, the increased amount shall be equal to a fraction, the numerator of which is such dividend requirements and the denominator of which is 1 minus the applicable actual combined Federal, state, local, and foreign income tax rate of such Person and its Subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Consolidated Fixed Charges. "Consolidated Interest Expense" of any Person means, for any period, the aggregate interest (without duplication), whether expensed or capitalized, paid or accrued during such period in respect of all Debt of such Person and its consolidated Subsidiaries (including (a) amortization of deferred financing costs and original issue discount and noncash interest payments or accruals, (b) the interest portion of all deferred payment obligations, calculated in accordance with the effective interest method, and (c) all commissions, discounts, other fees, and charges owed with respect to letters of credit and banker's acceptance financing and costs associated with Interest Swap Obligations, in each case to the extent attributable to such period) determined on a consolidated basis in accordance with GAAP. For purposes of this definition, (i) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Board of Directors of such Person (as evidenced by a Board Resolution) to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and (ii) Consolidated Interest Expense attributable to any Debt represented by the guarantee by such Person or a Subsidiary of such Person other than with respect to Debt of such Person or a Subsidiary of such Person shall be deemed to be the interest expense attributable to the item guaranteed. "Consolidated Net Income" of any Person for any period means the net income (loss) of such Person and its consolidated Subsidiaries for such period, determined in accordance with GAAP, excluding (without duplication) (a) all extraordinary, unusual, and nonrecurring gains, (b) the net income, if positive, of any other Person, other than a consolidated Subsidiary in which such Person or any of its consolidated Subsidiaries has an interest, except to the extent of the amount of any dividends or distributions actually paid in cash to such Person or a consolidated Subsidiary of such Person during such period, but not in excess of such Person's pro rata share of such other Person's aggregate net income earned during such period, (c) the net income, if positive, of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, and (d) the net income, if positive, of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or any 4 10 agreement, instrument (other than the Indenture), judgment, decree, order, statute, rule, or governmental regulation applicable to such Subsidiary; provided, however, that the Consolidated Net Income of the Company shall not include any income of the Company arising from dividends or distributions paid to the Company by TransTexas. "consolidated Subsidiary" means, for any Person, each Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated for financial statement reporting purposes with the financial statements of such Person in accordance with GAAP. "Construction Supervisor" means Baker & O'Brien, Inc., in its capacity as Construction Supervisor under the Mortgage Notes Disbursement Agreement, and any successor thereto. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Debt" means, with respect to any Person, (a) all liabilities, contingent or otherwise, of such Person (i) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures, or similar instruments or letters of credit or representing the balance deferred and unpaid of the purchase price of any property or services, (iii) evidenced by bankers' acceptances or similar instruments issued or accepted by banks or Interest Swap Obligations, or (iv) for the payment of money relating to a Capitalized Lease Obligation; (b) reimbursement obligations of such Person with respect to letters of credit; (c) all liabilities of others of the kind described in the preceding clause (a) or (b) that such Person has guaranteed or that are otherwise its legal liability; (d) all obligations secured by a Lien to which the property or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such Person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such Person's legal liability; (e) the Attributable Debt associated with any Sale/Leaseback Transactions; and (f) any and all deferrals, renewals, extensions, refinancings, and refundings (whether direct or indirect) of, or amendments, modifications, or supplements to, any liability of the kind described in any of the preceding clauses (a) through (e) whether or not between or among the same parties. "Default" means an event or condition, the occurrence of which is, or with the lapse of time would be, or giving of notice, or both, would be an Event of Default. "Defaulted Interest" shall have the meaning specified in Section 2.12. "Disbursement Agent" means First Union National Bank, in its capacity as Disbursement Agent under the Disbursement Agreement, and any successor thereto. "Disbursement Agreement" means the Cash Collateral and Disbursement Agreement, among the Company, the Trustee and the Disbursement Agent substantially in the form of Exhibit C hereto, as amended from time to time in accordance with the terms hereof. "Disqualified Capital Stock" means, with respect to any Person, any Capital Stock of such Person or its Subsidiaries that, by its terms or by the terms of any security into which it is convertible or exchangeable, is or, upon the happening of an event or the passage of time, would be required to be redeemed or repurchased, in whole or in part, by such Person or its subsidiaries, including any redemption or repurchase at the option of the holder, or has or, upon the happening of an event or passage of time, would have a redemption, repurchase or similar payment due, on or prior to March 14, 1998. 5 11 "Eligible Institution" means a domestic commercial banking institution that has combined capital and surplus of not less than $500,000,000, whose debt is rated "A" (or higher) according to S&P or Moody's at the time as of which any investment or rollover therein is made. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "Event of Default" shall have the meaning specified in Section 6.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Final Change of Control Put Date" shall have the meaning specified in Section 11.1. "Final Put Date" shall have the meaning specified in Section 4.16. "Force Majeure" means strikes, lockouts or other labor trouble, fire or other casualty, governmental preemption in connection with a national emergency, any rule, order or regulation of any governmental agency or any department or subdivision thereof, or inability to secure materials or labor because of any such emergency, rule, order, regulation, war, civil disturbance or other emergency, cause or event beyond the reasonable control of the Company. "GAAP" means generally accepted accounting principles, as in effect in the United States on the Issue Date, applied on a basis consistent with those used in the preparation of the audited financial statements of the Company included in the most recent annual report on Form 10-K filed with the SEC. "Gas Purchase Agreement" means the Interruptible Gas Sales Terms and Conditions between the Company and TransTexas, as in effect on the Issue Date and as amended from time to time, provided that any such amendment is not adverse to the holders of the Notes. "Government Securities" means direct obligations of the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Registrar's books. "Incur" shall have the meaning specified in Section 4.13. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "Interest Payment Date" means the stated due date of an installment of interest on the Notes. "Interest Swap Obligation" means (a) any obligation of any Person pursuant to any arrangement whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or floating rate of interest on the same notional amount, and (b) any interest rate exchange, collar, cap, swap option or similar agreement providing interest rate protection. "Investment" by any Person in any other Person means (a) the acquisition (whether for cash, property, services, securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other 6 12 ownership interests or other securities of such other Person or any agreement to make any such acquisition; (b) the making by such Person of any deposit with, or advance, loan, contribution or other extension of credit to, such other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person) and (without duplication) any amount committed to be advanced, loaned or extended to such other Person; (c) the entering into of any guarantee of, or other contingent obligation with respect to, Debt or any other liability of such other Person; or (d) the entering into of any Interest Swap Obligation with such other Person. "Investment Grade Rating" means, with respect to the Mortgage Notes, a rating in one of the four highest letter rating categories (without regard to "+" or "-" or other modifiers) by both S&P and Moody's or any successor rating agency to either entity, or, if any such rating agency has ceased using letter rating categories or the four highest of such letter rating categories are not considered to represent "investment grade" ratings, the comparable "investment grade" ratings (as designated by such rating agency). "Issue Date" means the date of first issuance of the Notes under this Indenture. "Junior Debt" means Debt of the Company that (a) requires no payment of principal prior to or on the date on which all principal of and interest on the Notes is paid in full or (b) is subordinate or junior in right of payment to the Notes. "Legal Holiday" shall have the meaning provided in Section 13.7. "Lien" means any mortgage, lien, pledge, charge, security interest, or other encumbrance of any kind, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement and any lease deemed to constitute a security interest and any option or other agreement to give any security interest). "Market Value" means, as of any date, with respect to any number of shares of any equity security, the average of the Closing Prices of such security for the 20 Trading Day period for such security immediately preceding such date multiplied by such number of shares. "Marketable Securities" means (a) Government Securities, (b) any certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution, (c) commercial paper maturing not more than 270 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "A-l" (or higher) according to S&P or "P-1" (or higher) according to Moody's, issued or offered by an Eligible Institution, (d) any bankers' acceptances or money market deposit accounts issued or offered by an Eligible Institution, and (e) any fund investing exclusively in investments of the types described in clauses (a) through (d) above. "Maturity Date", when used with respect to the Notes, means the date on which the principal of such Notes becomes due and payable as therein or herein provided, whether at the Stated Maturity, Change of Control Payment Date, Purchase Date, Accelerated Payment Date or by declaration of acceleration, call for redemption or otherwise. "Minimum Accumulation Date" shall have the meaning provided in Section 4.16. "Moody's" means Moody's Investors Service, Inc. "Mortgage Notes" means, collectively, the Company's Guaranteed First Mortgage Notes due 2002 and the Company's Guaranteed First Mortgage Discount Notes due 2002, in each case issued pursuant to the Mortgage Notes Indenture. 7 13 "Mortgage Notes Disbursement Agreement" means the Cash Collateral and Disbursement Agreement, dated February 15, 1995, among the Company, First Union Bank, National Association, as Trustee and First Union Bank, National Association, as Disbursement Agent and the Construction Supervisor. "Mortgage Notes Indenture" means the Indenture dated as of February 15, 1995 among the Company, the Guarantors named therein and First Union Bank, National Association, as Trustee, as amended by the First Supplemental Indenture dated as of February 24, 1997 among the Company, the Guarantors named therein and First Union National Bank, as Trustee. "Mortgage Notes Company Pledge Agreement" means the Company Pledge Agreement, dated February 23, 1995, between the Company and First Union Bank, National Association, as Trustee. "NASD" means the National Association of Securities Dealers, Inc. "Net Cash Proceeds" shall have the meaning specified in Section 4.16. "Net Proceeds" means the cash proceeds received from the sale of TransTexas common stock less reasonable and customary underwriting discounts and broker's commissions incurred in connection with such sale and less the amount of any tax liabilities arising as a result of such sale other than as a result of TransTexas ceasing to be a member of TransAmerican's consolidated group for Federal tax purposes. "Net Worth" of any Person means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of such Person and its Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation), less any amounts included therein attributable to Disqualified Capital Stock or any equity security convertible into or exchangeable for Debt, the cost of treasury stock, and the principal amount of any promissory notes receivable from the sale of the Capital Stock of such Person or any of its Subsidiaries, each item to be determined in conformity with GAAP. "Non-Recourse Debt" of any Person means Debt of such Person that (a) is not guaranteed by any other Person (except a wholly owned Subsidiary of such Person), (b) is not recourse to and does not obligate any other Person (except a wholly owned Subsidiary of such Person) in any way, (c) does not subject any property or assets of any other Person (except a wholly owned Subsidiary of such Person), directly or indirectly, contingently or otherwise, to the satisfaction thereof, and (d) is not required by GAAP to be reflected on the financial statements of any other Person (other than a Subsidiary of such Person) prepared in accordance with GAAP. "Note Redemption" means a redemption of Notes by the Company pursuant to Article III. "Note Repurchase" means a purchase of Notes by the Company, other than pursuant to a Change of Control Offer or an Offer to Purchase, provided that all Notes purchased are delivered to the Trustee for cancellation promptly upon their receipt by the Company. "Notes" means the Company's 15% Senior Secured Notes due March 14, 1998 as supplemented from time to time in accordance with the terms hereof, issued under this Indenture. "Offer Amount" shall have the meaning specified in Section 4.16. "Offer Price" shall have the meaning specified in Section 4.16. "Offer to Purchase" means any offer made by the Company to Holders of the Notes required by the provisions of Section 4.16(a) and made pursuant to the provisions of Section 4.16(b), otherwise, also referred to as a "Section 4.16 Offer." 8 14 "Officer" means, with respect to the Company the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of the Company. "Officers' Certificate" means, with respect to the Company, a certificate signed by two Officers or by an Officer and an Assistant Secretary of the Company and otherwise complying with the requirements of Sections 13.4 and 13.5. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of Sections 13.4 and 13.5. Unless otherwise required by the Trustee, the counsel may be outside counsel to the Company. "Paying Agent" shall have the meaning specified in Section 2.3. "Permitted Hedging Transactions" means transactions in futures contracts and related options that are permitted under Section 4.20. "Permitted Investment" means, when used with reference to the Company or any of its Subsidiaries, (a) trade credit extended to persons in the ordinary course of business; (b) a purchase of (i) readily marketable obligations of, or obligations guaranteed unconditionally by, the United States of America maturing in one year or less from the date of purchase, (ii) commercial paper having the highest rating obtainable from either Moody's or S&P (or any successor rating agency to either entity), (iii) certificates of deposit maturing in one year or less from the date of purchase issued by, bankers' acceptances and deposit accounts of, and time deposits with, commercial banks of recognized standing chartered in the United States of America or Canada with capital, surplus, and undivided profit aggregating in excess of $250,000,000, (iv) demand or fully insured time deposits used in the ordinary course of business with commercial banks insured by the Federal Deposit Insurance Corporation, (v) Eurodollar time deposits, or (vi) shares of money market funds that invest solely in Permitted Investments of the kind described in clauses (i) through (v) above; (c) an Investment in the Company or a Person that is or upon such Investment becomes a wholly owned Subsidiary that is engaged in a Related Business; (d) any Interest Swap Obligation permitted to be incurred under Section 4.13; (e) the receipt of capital stock or notes in lieu of cash in connection with the settlement of litigation to the extent that cash is not otherwise available to the Person obligated to make such settlement payment; (f) an advance to an officer or employee in connection with the performance of his duties in the ordinary course of business in an amount that, together with all other such advances to officers and employees that are outstanding, does not exceed $3,000,000 at any time; (g) a margin deposit in connection with a Permitted Hedging Transaction; or (h) any investment by the Company in TEC or TransTexas. "Permitted Liens" means (a) Liens imposed by governmental authorities for taxes, assessments, or other charges not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or other like Liens arising by operation of law in the ordinary course of business provided that (i) the underlying obligations are not overdue for a period of more than 60 days, or (ii) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (c) deposits to secure the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds, and other obligations of a like nature incurred in the ordinary course of business; (d) easements, rights-of-way, zoning, similar restrictions and other similar encumbrances or title defects incurred in the ordinary course of business which, in the aggregate, are not material in amount and which do not, in any case, materially detract from the value of the property subject thereto (as such property is used by the Company or any of its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (e) Liens arising by operation of law in connection with judgments, only to the extent, for an amount and for a period not resulting in 9 15 an Event of Default with respect thereto; (f) Liens existing on the Issue Date not exceeding $2 million; (g) pledges or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, and other types of social security legislation; (h) if the Company has obtained a Revolving Credit Facility that satisfies the requirements of Section 4.13 and the Company has deposited in the Collateral Account $50,000,000 of the proceeds of Debt incurred pursuant to such Revolving Credit Facility, Liens on (i) accounts receivable owned by the Company and its Subsidiaries or (ii) inventory owned by the Company and its Subsidiaries, in either case, securing Debt of the Company pursuant to such Revolving Credit Facility; (i) Liens on the assets of any entity existing at the time such assets are acquired by the Company or any of its Subsidiaries, whether by merger, consolidation, purchase of assets or otherwise so long as such Liens (i) are not created, incurred or assumed in contemplation of such assets being acquired by the Company or such Subsidiary and (ii) do not extend to any other assets of the Company or any of its Subsidiaries; (j) Liens (including extensions and renewals thereof) on real or personal property acquired after the Issue Date, except for property acquired in whole or in part with the proceeds of this offering; provided, however, that (i) such Lien is created solely for the purpose of securing Debt incurred to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of, or within six months after the later of the acquisition, the completion of construction, or the commencement of full operation of such property, (ii) the principal amount of the Debt secured by such Lien does not exceed 100% of such cost, and (iii) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (k) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Subsidiaries, taken as a whole; (l) Liens in favor of the Company; (m) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (o) Liens encumbering customary initial deposits and margin deposits securing Interest Swap Obligations or Permitted Hedging Transactions; (p) until the Company obtains a Revolving Credit Facility, Liens on cash deposits of up to $30,000,000 to secure reimbursement obligations with respect to letters of credit; (q) Liens encumbering funds disbursed from the Collateral Account in accordance with the Disbursement Agreement; (r) Liens granted pursuant to the Mortgage Notes Indenture and the security documents executed in connection therewith; (s) Liens granted pursuant to this Indenture and the Security Documents; and (t) any replacement of the Permitted Liens set forth in the foregoing clauses (a) through (s) that is on substantially similar terms and does not secure any additional Debt or encumber or otherwise affect or relate to any additional property; provided, however, that the aggregate amount of Debt secured by Liens pursuant to the foregoing clauses (i), (j) and (p), shall not exceed $50 million plus the amount of any Debt, not in excess of $10 million, incurred to finance the acquisition of tank storage facilities. "Permitted Proceeds Uses" means for general corporate purposes of the Company, but in no event for the purpose of distribution to any Affiliate of the Company. "Person" means any corporation, individual, joint stock company, joint venture, partnership, unincorporated association, governmental regulatory entity, country, state or political subdivision thereof, trust, municipality or other entity. "Phase I Completion Date" or shall have the meaning as set forth in the Mortgage Notes Indenture. "Plans" means the "Plans" as such term is defined in Mortgage Notes Indenture. "Pledge Agreement" means the Pledge Agreement between the Company and the Trustee, substantially in the form of Exhibit B hereto, as amended from time to time in accordance with the terms hereof. "8% Preferred Stock" means Preferred Stock of the Company that is Qualified Capital Stock, is not entitled to receive cash dividends, is not entitled to any voting rights (other than as required by law), is not 10 16 convertible or exchangeable into any other security (whether or not of the Company), is issued at a price at least equal to its liquidation preference, and provides for dividends or distributions payable only in additional shares of 8% Preferred Stock at a rate less than or equal to 8% per annum of the purchase price thereof. "Preferred Stock" means, with respect to any corporation, any class or classes (however designated) of Capital Stock of such Person which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or distribution of such corporation over shares of Capital Stock of any other class of such corporation. "Project Costs" means, with respect to a proposed expansion or modification of the Company's refinery, the aggregate costs required to complete such expansion or modification of the refinery in accordance with the Plans therefor and applicable legal requirements, including direct costs related thereto such as construction, engineering and design costs and the cost of site work, construction permits, certificates and bonds, fixtures, machinery, and equipment. "Principal" of any Debt (including the Notes) means the principal of such Debt plus, without duplication, any applicable premium, if any, on such Debt. "Property" means any right or interest in or to property or assets of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Public Equity Offering" means a public offering by the Company of Qualified Capital Stock of the Company underwritten by a nationally recognized member of the National Association of Securities Dealers pursuant to an effective registration statement filed with the Securities and Exchange Commission pursuant to the Securities Act. "Public Market Value" means, as of any date, with respect to any equity security, the product of the weighted average number of shares of such security outstanding during the 20 Trading Day period for such security immediately preceding such date multiplied by the average of the Closing Prices of such security for such period. Notwithstanding the foregoing, if such security is not listed or admitted for trading on any national securities exchange or the Nasdaq National Market, the Public Market Value of such security shall be zero. "Purchase Date" shall have the meaning specified in Section 4.16(b). "Qualified Capital Stock" means any Capital Stock of the Company that is not Disqualified Capital Stock. "Record Date" means a Record Date specified in the Notes whether or not such Record Date is a Business Day. "Redemption Date", when used with respect to any Note to be redeemed, means the date fixed for such redemption pursuant to this Indenture and Paragraph 5 in the form of Note attached hereto as Exhibit A. "Redemption Price", when used with respect to any Security to be redeemed, means the redemption price for such redemption pursuant to Paragraph 5 in the form of Note attached hereto as Exhibit A, which shall include, without duplication, in each case, accrued and unpaid interest to the Redemption Date. "Reference Period" with regard to any Period means the four full fiscal quarters for which financial statements are available of such Period ended on or immediately preceding any date upon which any determination is to be made pursuant to the terms of the Notes or the Indenture; provided, however, that for purposes of calculating the Consolidated Fixed Charge Coverage Ratio of the Company in connection with the 11 17 definition of "Required Phase I Completion Date" or Section 12.6 hereof, "Reference Period" means the three-month period ending on the date as of which the Consolidated Fixed Charge Coverage Ratio is calculated. "Refinancing Debt" shall have the meaning specified in Section 4.13. "Refinancing Fees" shall have the meaning specified in Section 4.13. "Registrar" shall have the meaning specified in Section 2.3. "Registration Rights Agreement" means the Registration Rights Agreement among TransTexas, the Company, the Trustee and TEC, as in effect on February 15, 1995 and as amended from time to time, provided that any such amendment is not adverse to the holders of the Notes. "Related Business" means the business of processing, blending, storing, marketing (other than through operating retail gasoline stations), refining, or distilling crude oil, condensate, natural gas liquids, petroleum blendstocks or refined products thereof. "Related Person" means, with respect to any Person, (a) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the referenced Person (or any Subsidiary of the Company if the Company is the referenced Person) or any officer, director, or employee of the referenced person (or any Subsidiary of the Company if the Company is the referenced Person) or of such Person, (b) the spouse, any immediate family member, or any other relative who has the same principal residence of any Person described in clause (a) above, and any Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with, such spouse, family member or other relative, and (c) any trust in which any Person described in clause (a) or (b), above, is a fiduciary or has a beneficial interest. For purposes of this definition the term "control" means (i) the power to direct the management and policies of a Person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise, or (ii) the beneficial ownership of 10% or more of the voting common equity of such Person (on a fully diluted basis) or of warrants or other rights to acquire such equity (whether or not presently exercisable). "Related Person Transaction" shall have the meaning specified in Section 4.12. "Required Phase I Completion Date" means July 15, 1997. "Restricted Investment" means any direct or indirect Investment other than a Permitted Investment. "Restricted Payment" means, with respect to any Person, (a) any Restricted Investment by such Person, (b) any dividend or other distribution on shares of Capital Stock of such Person, (c) any direct or indirect payment on account of the purchase, redemption, or other acquisition or retirement for value of any shares of Capital Stock of such Person or any Subsidiary of such Person, and (d) any defeasance, redemption, repurchase, or other acquisition or retirement for value, or any payment in respect of any amendment (in anticipation of or in connection with any such retirement, acquisition, or defeasance) in whole or in part, of any Junior Debt, directly or indirectly, of such Person or a Subsidiary of such Person prior to the scheduled maturity or prior to any scheduled repayment of principal in respect of such Junior Debt; provided, however, that, with respect to the Company, the term "Restricted Payment" does not include (i) any dividend, distribution, or other payment on shares of Capital Stock of an issuer solely in shares of Qualified Capital Stock of such issuer that is at least as junior in ranking as the Capital Stock on which such dividend, distribution, or other payment is to be made, (ii) any dividend, distribution, or other payment to the Company, or any of its directly or indirectly owned Subsidiaries, by any of its Subsidiaries, (iii) any defeasance, redemption, repurchase, or other acquisition or retirement for value, in whole or in part, of any Junior Debt payable solely in shares of Qualified Capital Stock of such Person or (iv) payments by the Company to TEC, in an aggregate amount not to exceed $350,000 per fiscal 12 18 year, as reimbursement for expenses of TEC in connection with accounting, legal, financial and other expenses. For purposes of clause (a) of the immediately preceding sentence, the aggregate amount of Restricted Investments made by the Company and its Subsidiaries after the Issue Date shall equal the aggregate gross amount of such Restricted Investments, less amounts received in cash without restriction by the Company or its wholly owned Subsidiaries upon the disposition, liquidation, or repayment of any portion of such Restricted Investment (not to exceed the original cost of such portion), to the extent not reflected in the Consolidated Net Income of the Company, in either case, less the cost of disposition, liquidation, or repayment. "Revolving Credit Facility" means any revolving credit facility of the type and with such terms as are customarily entered into with banks, between the Company or any of its Subsidiaries, on the one hand, and any banks or other lenders, on the other hand; provided that all indebtedness incurred pursuant to such facility would be reflected on the balance sheet of the Company or its Subsidiaries as current liabilities in accordance with GAAP. "Sale/Leaseback Transaction" means an arrangement relating to property owned on the Issue Date or thereafter acquired whereby the Company, or a Subsidiary of the Company transfers such property to a Person and leases it back from such Person, other than (i) any such arrangement (a) the term of which is for not more than one year and (b) the Attributable Debt associated with which is less than $1.0 million (aggregating any series of related transactions), and (ii) any such arrangement between the Company and a wholly owned Subsidiary of the Company, or between wholly owned subsidiaries of the Company. "S&P" means Standard & Poor's Ratings Service, a division of McGraw-Hill, Inc., and its successors. "SEC" means the Securities and Exchange Commission. "Section 4.16 Offer" shall refer to an "Offer to Purchase," as defined in Section 4.16. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Security Agreement" means the Security Agreement between the Company and the Trustee, substantially in the form attached as Exhibit B hereto, as amended from time to time in accordance with the terms hereof. "Security Documents" means (a) the Security Agreement, (b) the Pledge Agreement, (c) the Disbursement Agreement, and (d) each other agreement relating to the pledge of assets to secure the Notes that may be entered into after the Issue Date pursuant to the terms of this Indenture. "Senior Debt" means, with respect to any Person, any Debt that is not Subordinated Debt. "Services Agreement" means the Services Agreement among the Company, TEC, TransTexas, and TransAmerican dated as of February 15, 1995, as in effect on the Issue Date and as amended from time to time, provided that any such amendment is not adverse to the holders of the Notes. "Significant Subsidiary" means, with respect to any Person, a Subsidiary of such Person that would be a "significant subsidiary," within the meaning of Rule 1-02 of Regulation S-X of the Securities and Exchange Commission, if such Person were deemed to be the "registrant" referred to therein. "Southeast" means Southeast Louisiana Contractors of Norco, Inc., a Louisiana corporation. 13 19 "Special Record Date" for payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 2.12. "Stated Maturity", when used with respect to the Notes, means March 14, 1998. "Stock Transfer Agreement" means the Stock Transfer Agreement among TransAmerican, TEC and the Company dated as of February 15, 1995, as in effect on the Issue Date and as amended from time to time, provided that any such amendment is not adverse to the holders of the Notes. "Subordinated Debt" means Debt of the Company that (a) requires no payment of principal prior to or on the date on which all principal of and interest on the Notes is paid in full and (b) is subordinate and junior in right of payment to the Notes in all respects. "Subsidiary" means, with respect to any Person, (a) a corporation of which such Person, one or more Subsidiaries of such Person or such Person and one or more Subsidiaries of such Person, directly or indirectly, owns at least 50% of the Voting Stock, or (b) a partnership of which such Person or a Subsidiary of such Person is a general partner, or (c) any entity (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly, has (i) at least a 50% ownership interest or (ii) the power to elect or direct the election of the directors or other governing body of such entity. For the purposes of this Indenture, "Subsidiary" shall not include (x) the Accounts Receivable Subsidiary, except for purposes of determining the Consolidated Fixed Charge Coverage Ratio of the Company, or (y) TransTexas or any of its Subsidiaries. "Surviving Person" shall have the meaning specified in Section 5.1(a). "TARC Warrants" means common stock purchase warrants initially exercisable for 5,811,773 shares of the common stock of TransAmerican Refining Corporation. "Tax Allocation Agreement" means the Tax Allocation Agreement among TransAmerican, TEC, the Company, TransTexas, and TransAmerican's other subsidiaries, dated as of February 15, 1995, as in effect on the Issue Date and as amended from time to time, provided that any such amendment is not adverse to the holders of the Notes. "TEC" means TransAmerican Energy Corporation, a Delaware corporation. "TEC Preferred" means the Series A Preferred Stock $.01 par value per share of TransAmerican Energy Corporation. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of the execution of this Indenture. "Trading Day" means any day on which the securities in question are quoted on the Nasdaq National Market, or if such securities are not approved for listing on the Nasdaq National Market, on the principal national securities market or exchange on which such securities are listed or admitted. "TransAmerican" means Transamerican Natural Gas Corporation, a Texas corporation. "TransAmerican Lease" means a lease to be entered into between TransAmerican and the Company, as amended from time to time, with respect to an office building owned by TransAmerican located in Houston, Texas, which lease will provide for payments by the Company to TransAmerican not in excess of $950,000 per year. 14 20 "TransTexas" means TransTexas Gas Corporation, a Delaware corporation. "TransTexas Indenture" shall have the meaning specified in Section 6.1. "Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Trust Officer" means any officer within the corporate trust department (or any successor group) of the Trustee including any vice president, assistant vice president, secretary, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the Persons who at that time shall be such officers, and also means, with respect to a particular corporate trust matter, any other officer of the corporate trust department (or any successor group) of the Trustee to whom such trust matter is referred because of his knowledge of and familiarity with the particular subject. "U.S. Legal Tender" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "Voting Stock" means, with respect to any corporation, Capital Stock of such corporation having generally the right to vote in the election of directors of such corporation. "wholly owned Subsidiary" means with respect to any Person, at any time, a Subsidiary of such Person, all of the Capital Stock of which (except any director's qualifying shares, the TARC Warrants and the TEC Preferred) is at the time owned directly or indirectly by such Person. "Weighted Average Life" means, as of the date of determination, with respect to any debt instrument, the quotient obtained by dividing (a) the sum of the products, for each scheduled principal payment of such debt instrument, of (i) the number of years from the date of determination to the date of such scheduled principal payment and (ii) the amount of such principal payment, by (b) the sum of all such scheduled principal payments. Section 1.2 Incorporation by Reference of TIA. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Notes. "indenture securityholder" means a Holder or a Noteholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them thereby. 15 21 Section 1.3 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) words in the singular include the plural, and words in the plural include the singular; (e) provisions apply to successive events and transactions; (f) "herein", "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (g) references to Sections or Articles means reference to such Section or Article in this Indenture, unless stated otherwise. ARTICLE II THE NOTES Section 2.1 Form and Dating. The Notes and the Trustee's certificate of authentication in respect thereof shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall approve the form of the Notes and any notation, legend or endorsement on them. Any such notations, legends or endorsements not contained in the form of Note attached as Exhibit A hereto shall be delivered in writing to the Trustee. Each Security shall be dated the date of its authentication. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to the terms and provisions contained in the forms of Notes and to be bound thereby. Section 2.2 Execution and Authentication. One Officer shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall not be required to be impressed, affixed, imprinted or reproduced on the Notes. If an Officer whose signature is on a Note was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless and the Company shall nevertheless be bound by the terms of the Notes and this Indenture. A Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Note but such signature shall be conclusive evidence that the Note has been authenticated pursuant to the terms of this Indenture. The Trustee shall authenticate Notes for original issue in the aggregate principal amount of up to $36,000,000 upon a written order of the Company in the form of an Officers' Certificate. The Officers' 16 22 Certificate shall specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated. The aggregate principal amount of Notes outstanding at any time may not exceed $36,000,000 except as provided in Section 2.7. Upon the written order of the Company in the form of an Officers' Certificate, the Trustee shall authenticate Notes in substitution of Notes originally issued to reflect any name change of the Company. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company, any Affiliate of the Company, or any of its Subsidiaries. Notes shall be issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. Section 2.3 Registrar and Paying Agent. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency each in the Borough of Manhattan, The City of New York, where Notes may be presented for payment ("Paying Agent") and where notices and demands to or upon the Company in respect of the Notes may be served. The Company may act as its own Registrar or Paying Agent, except that, for the purposes of Articles III, VIII, XI and Section 4.16 none of the Company or any Affiliate of the Company shall act as Paying Agent. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may have one or more co-Registrars and one or more additional Paying Agents. The term "Paying Agent" includes any additional Paying Agent. The Company hereby initially appoints the Trustee as Registrar and Paying Agent, and the Trustee hereby initially agrees so to act. The Company shall enter into an appropriate written agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall promptly notify the Trustee in writing of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such; provided and on the express condition that the Company delivers all necessary files, records and information to permit the Trustee to act as the Registrar and the Paying Agent. Section 2.4 Paying Agent to Hold Assets in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, or interest on, the Notes (whether such assets have been distributed to it by the Company, or any other obligor on the Notes), and shall notify the Trustee in writing of any Default in making any such payment. If the Company or a Subsidiary of the Company acts as Paying Agent, it shall segregate such assets and hold them as a separate trust fund for the benefit of the Holders or the Trustee. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent (if other than the Company) shall have no further liability for such assets. Section 2.5 Noteholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall 17 23 furnish to the Trustee on or before the third Business Day preceding each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee reasonably may require of the names and addresses of Holders. Section 2.6 Transfer and Exchange. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes of other authorized denominations, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Notes surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Notes at the Registrar's or co-Registrar's request. No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments, or similar governmental charge payable upon exchanges or transfers pursuant to Section 2.2, 2.10, 4.16, 9.5, or 11.1). The Registrar or co-Registrar shall not be required to register the transfer of or exchange of (a) any Note to be redeemed pursuant to Article III hereof, or (b) any Note for a period beginning 15 Business Days before the mailing of a notice of an offer to repurchase pursuant to Article XI or Section 4.16 hereof or redeem Notes pursuant to Article III hereof and ending at the close of business on the day of such mailing. Section 2.7 Replacement Notes. If a mutilated Note is surrendered to the Trustee or if the Holder of a Note claims and submits an affidavit or other evidence, satisfactory to the Trustee, to the Trustee to the effect that the Note has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Note is replaced. The Company may charge such Holder for its reasonable, out-of-pocket expenses in replacing a Security. Every replacement Note is an additional obligation of the Company. Section 2.8 Outstanding Notes. Notes outstanding at any time are all the Notes that have been authenticated by the Trustee except those cancelled by it, those delivered to it for cancellation and those described in this Section 2.8 as not outstanding. A Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note, except as provided in Section 2.9. If a Note is replaced pursuant to Section 2.7 (other than a mutilated Note surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. A mutilated Note ceases to be outstanding upon surrender of such Note and replacement thereof pursuant to Section 2.7. If on a Redemption Date or the Maturity Date the Paying Agent (other than the Company or an Affiliate of the Company) holds U.S. Legal Tender or Government Securities sufficient to pay all of the principal and interest due on the Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them ceases to accrue. 18 24 Section 2.9 Treasury Securities. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, amendment, supplement, waiver or consent, Notes owned by the Company and Affiliates of the Company shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, amendment, supplement, waiver or consent, only Notes that the Trustee knows are so owned shall be disregarded. Section 2.10 Temporary Notes. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations, not inconsistent with the terms of this Indenture, that the Company reasonably and in good faith considers appropriate for temporary Notes. Without unreasonable delay the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as permanent Notes authenticated and delivered hereunder. Section 2.11 Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Company or an Affiliate of the Company), and no one else, shall cancel and, at the written direction of the Company, shall dispose of all Notes surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.7, the Company may not issue new Notes to replace Notes that have been paid or delivered to the Trustee for cancellation. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section 2.11, except as expressly permitted in the form of Notes and as permitted by this Indenture. Section 2.12 Defaulted Interest. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Note (or one or more predecessor Notes) is registered at the close of business on the Record Date for such interest. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date plus, to the extent lawful, any interest payable on the defaulted interest, at the rate provided in the Note, compounded semi-annually (herein called "Defaulted Interest"), shall forthwith cease to be payable to the registered holder on the relevant Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Notes (or their respective predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as provided in this clause (a). Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed 19 25 payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company, cause a similar notice to be published at least once in a newspaper, customarily published in the English language on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, but such publication shall not be a condition precedent to the establishment of such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the persons in whose names the Notes (or their respective predecessor Notes) are registered on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. ARTICLE III REDEMPTION Section 3.1 Right of Redemption. Redemption of Notes, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article III. The Notes may be redeemed at the election of the Company, as a whole, at any time on or after July 1, 1997, at 100% of the principal amount thereof, including accrued and unpaid interest to the Redemption Date. The Notes shall be redeemed, as a whole, upon the occurrence of the events set forth in Paragraph 5 of the Notes, at 100% of the principal amount thereof, including accrued and unpaid interest to the Redemption Date. Section 3.2 Notices to Trustee. If the Company elects to redeem Notes pursuant to Paragraph 5 of the Notes, it shall notify the Trustee in writing of the Redemption Date and the principal amount of Notes to be redeemed. The Company shall give each notice to the Trustee provided for in this Section 3.2 at least 7 days before an optional Redemption Date and at least 10 days prior to the date any notice pursuant to Section 3.3 is to be mailed to Holders by the Trustee at the Company's request (unless a shorter notice shall be satisfactory to the Trustee in its sole discretion). 20 26 Section 3.3 Notice of Redemption. At least 7 days but not more than 45 days before an optional Redemption Date, the Company shall give a notice of redemption by first class mail, postage prepaid, or by telecopy, to the Trustee and each Holder. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. Each notice for redemption shall identify the Notes to be redeemed and shall state: (a) the Redemption Date; (b) the Redemption Price, including the amount of accrued and unpaid interest to be paid upon such redemption; (c) the name, address and telephone number of the Paying Agent; (d) that Notes must be surrendered to the Paying Agent at the address specified in such notice to collect the Redemption Price; (e) that, unless the Company defaults in its obligation to deposit U.S Legal Tender with the Paying Agent in accordance with Section 3.4 hereof, interest on Notes ceases to accrue on and after the Redemption Date and the only remaining right of the Holders of such Notes is to receive payment of the Redemption Price, including accrued and unpaid interest, upon surrender to the Paying Agent of the Notes and to be redeemed; (f) the CUSIP number, if any, of the Notes; and (g) that the notice is being sent pursuant to this Section 3.3 and pursuant to the optional redemption provisions of Paragraph 5 of the Notes. Section 3.4 Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.3, the Notes become due and payable on the Redemption Date and at the Redemption Price, including accrued and unpaid interest. Upon surrender to the Trustee or Paying Agent, the Notes shall be paid at the Redemption Price, including interest, if any, accrued and unpaid on the Redemption Date; provided that if the Redemption Date is after a regular Record Date and on or prior to the Interest Payment Date, the accrued interest shall be payable to the Holder of the redeemed Notes registered on the relevant Record Date; and provided, further, that if a Redemption Date is a Legal Holiday, payment shall be made on the next succeeding Business Day and no interest shall accrue for the period from such Redemption Date to such succeeding Business Day. Section 3.5 Deposit of Redemption Price. On or prior to the Redemption Date, the Company shall deposit with the Paying Agent (other than the Company or an Affiliate of the Company) U.S. Legal Tender sufficient to pay the Redemption Price of, including accrued and unpaid interest on, all Notes on such Redemption Date (other than Notes called for redemption on that date that have been delivered by the Company to the Trustee for cancellation). The Paying Agent shall promptly return to the Company any U.S. Legal Tender so deposited which is not required for that purpose upon the written request of the Company. If the Company complies with the preceding paragraph and the other provisions of this Article III, interest on the Notes will cease to accrue on the applicable Redemption Date, whether or not such Notes are presented for payment. Notwithstanding anything herein to the contrary, if any Note surrendered for redemption in the manner provided in the Notes shall not be so paid upon surrender for redemption because of the failure of 21 27 the Company to comply with the preceding paragraph, interest shall continue to accrue and be paid from the Redemption Date until such payment is made on the unpaid principal, and on any interest not paid on such unpaid principal, in each case, at the rate and in the manner provided in Section 4.1 hereof and the Note. ARTICLE IV COVENANTS Section 4.1 Payment of Notes. The Company shall pay in New York, New York the principal of and interest on the Notes on the dates and in the manner provided in the Notes. The principal amount of or an installment of interest on the Notes shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Company, or an Affiliate of the Company) holds for the benefit of the Holders, on or before 10:00 a.m., New York City time on that date, U.S. Legal Tender deposited and designated for and sufficient to pay such amount or installment. The Company shall pay interest on overdue principal and on overdue installments of interest at the rate specified in the Notes compounded semi-annually, to the extent lawful. Section 4.2 Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 13.2. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Corporate Trust Office of the Trustee as such office of the Company. Section 4.3 Limitation on Use of Proceeds. The Company shall use the net proceeds derived from the sale of the Notes only for Permitted Proceeds Uses; including without limitation redemption of the Company's 17% Senior Notes due July 15, 1997; provided, however, that pending the use of such net proceeds to pay such Permitted Proceeds Uses, such proceeds shall be deposited in the Collateral Account and invested by the Disbursement Agent in cash, Cash Equivalents and Marketable Securities. Proceeds deposited in the Collateral Account shall be disbursed to the Company in accordance with the Disbursement Agreement. Section 4.4 Construction. The Company shall use its best efforts to continue to expand and to modify its refinery with diligence and continuity in a good and workmanlike manner in accordance with the Plans except during the 22 28 existence of delays caused by Force Majeure. The Company shall use its best efforts to prevent and to minimize any delays caused by Force Majeure. Section 4.5 Limitation on Restricted Payments. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, make any Restricted Payment, if, at the time or after giving effect thereto on a pro forma basis, (a) the Company's Consolidated Fixed Charge Coverage Ratio does not exceed 3.5 to 1, (b) the Company's Net Worth is not equal to or greater than $170 million, (c) Default or an Event of Default would occur or be continuing, or (d) the aggregate amount of all Restricted Payments made by the Company and all of its Subsidiaries, including such proposed Restricted Payment and all payments made pursuant to the proviso at the end of this sentence (if not made in cash, then the fair market value of any property used therefor), from and after the Issue Date and on or prior to the date of such Restricted Payment, shall exceed an amount equal to (i) 25% of Consolidated Net Income of the Company accrued for the period (taken as one accounting period) from the first full fiscal quarter that commenced after the Issue Date to and including the fiscal quarter ended immediately prior to the date of each calculation for which financial statements are available (or, if the Company's Consolidated Net Income for such period is a deficit, then minus 100% of such deficit), minus (ii) 100% of the amount of any write-downs, write-offs, other negative reevaluations, and other negative extraordinary charges not otherwise reflected in the Company's Consolidated Net Income during such period, provided, that the foregoing clauses shall not prohibit the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing provisions. Section 4.6 Corporate Existence. Subject to Article V, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate or other existence of each of its Subsidiaries in accordance with the respective organizational documents of each of them and the rights (charter and statutory) and corporate franchises of the Company and each of its Subsidiaries; provided, however, that the Company shall not be required to preserve, with respect to itself, any right or franchise, and with respect to any of its Subsidiaries, any such existence, right or franchise, if (a) the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and (b) the loss thereof is not disadvantageous in any material respect to the Holders. Section 4.7 Payment of Taxes and Other Claims. The Company shall, and shall cause each of its Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Company or any of its Subsidiaries or any of their respective properties and assets and (b) all lawful claims, whether for labor, materials, supplies, services or anything else, which have become due and payable and which by law have or may become a Lien (other than a Permitted Lien) upon the property and assets of the Company or any of its Subsidiaries; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which disputed amounts adequate reserves have been established in accordance with GAAP. Section 4.8 Maintenance of Properties and Insurance. The Company shall cause the properties used or useful to the conduct of its business and the business of each of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its reasonable 23 29 judgment may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. The Company shall provide, or cause to be provided, for itself and each of its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the reasonable, good faith opinion of the Company are adequate and appropriate for the conduct of the business of the Company and such Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be customary, in the reasonable, good faith opinion of the Company and adequate and appropriate for the conduct of the business of the Company and such Subsidiaries in a prudent manner for companies engaged in a similar business; provided, that the Company shall not be required to obtain business interruption insurance and delay in start up insurance until 90 days after the first introduction of hydrocarbons into the Company's crude unit. Section 4.9 Compliance Certificate; Notice of Default. The Company shall deliver to the Trustee within 90 days after the end of each of its fiscal years a written report of a firm of independent certified public accountants with an established national reputation stating that in conducting their audit for such fiscal year, nothing has come to their attention that caused them to believe that the Company or any Subsidiary of the Company was not in compliance with the provisions set forth in Section 4.3, 4.5, 4.13 or 4.16 of this Indenture. The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, immediately upon becoming aware of any Default or Event of Default under this Indenture, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. The Trustee shall not be deemed to have knowledge of a Default or an Event of Default unless one of its trust officers receives an Officers' Certificate specifying the Default or Event of Default giving rise thereto from the Company or written notice specifying the occurrence of a Default or an Event of Default from any of the Holders. Section 4.10 SEC Reports. The Company shall deliver to the Trustee and each Holder, within 15 days after it files the same with the SEC, copies of all reports and information (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe), if any, which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act or pursuant to the immediately following sentence. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act (or otherwise required to file reports pursuant to the immediately preceding sentence), the Company shall deliver to the Trustee and to each Holder, within 15 days after it would have been required to file such information with the SEC were it required to do so, financial statements, including any notes thereto (and, in the case of a fiscal year end, an auditors' report by an independent certified public accounting firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," substantially equivalent to that which it would have been required to include in such quarterly or annual reports, information, documents or other reports if it had been subject to the requirements of Section 13 or 15(d) of the Exchange Act. Section 4.11 Limitation on Status as Investment Company or Public Utility Company. The Company shall not become, and the Company shall not permit any of its Subsidiaries to become, an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended) or a "holding company" or a "public utility company" (as such terms are defined in the Public Utility Holding Company Act of 1935, as amended) or otherwise subject to regulation under the Investment Company Act or the Public Utility Holding Company Act. 24 30 Section 4.12 Limitation on Transactions with Related Persons. The Company shall not, and the Company shall not permit any of its Subsidiaries to, enter directly or indirectly into, or permit to exist, any transaction or series of related transactions with any Related Person of the Company (including without limitation: (a) the sale, lease, transfer, or other disposition of properties, assets, or securities to such Related Person; (b) the purchase or lease of any properties, assets, or securities from such Related Person; (c) an Investment in such Related Person (other than a Restricted Investment permitted by Section 4.5); and (d) entering into or amending any contract or agreement with or for the benefit of a Related Person) (each a "Related Person Transaction"), except for (i) permitted Restricted Payments and transactions made in good faith, the terms of which are: (x) fair and reasonable to the Company or Subsidiary, as the case may be, and (y) at least as favorable as the terms which could be obtained by the Company or Subsidiary, as the case may be, in a comparable transaction made on an arm's length basis with Persons who are not Related Persons, (ii) transactions between the Company and any of its wholly owned Subsidiaries and transactions between wholly owned Subsidiaries of the Company, (iii) transactions pursuant to the Services Agreement, the Tax Allocation Agreement, the Gas Purchase Agreement, the Stock Transfer Agreement, the Registration Rights Agreement, and the TransAmerican Lease, (iv) any employee compensation arrangement in an amount which, together with the amount of all other compensation to such employee, shall not exceed $1,000,000 in any fiscal year of such employee's employer and which has been approved, if the Company or one of its Subsidiaries is the employer, by a majority of the Company's directors and found in good faith by such directors to be in the best interests of the Company or Subsidiary, as the case may be, and (v) $10,000,000 of indebtedness owed by the Company to TransAmerican and outstanding on February 15, 1995. Notwithstanding the foregoing, (a) the Company shall not issue any Capital Stock or securities convertible or exchangeable into Capital Stock to John R. Stanley or any of his affiliates other than 8% Preferred Stock, (b) the Company may not permit any of its Subsidiaries to, directly or indirectly, loan or advance any funds to John R. Stanley, and the aggregate amount of total compensation that the Company may pay John R. Stanley shall not exceed $1 million per year and (c) the amount payable by the Company or its Subsidiaries to Southeast shall not exceed the actual costs Southeast incurs to provide employee services to the Company, which costs consist solely of employee payroll and benefits, plus related administrative costs and an administrative fee, which administrative costs and fee shall not exceed $1,200,000 in the aggregate per year. Without limiting the foregoing, except for sales of accounts receivable to an Accounts Receivable Subsidiary in accordance with Section 4.21, (a) with respect to any Related Person Transaction or series of Related Person Transactions with an aggregate value in excess of $1,000,000, such transaction must first be approved by a majority of the Board of Directors of the Company and a majority of the directors of the Company who are disinterested in the transaction pursuant to a Board Resolution, as (i) fair and reasonable to the Company or Subsidiary, as the case may be, and (ii) on terms which are at least as favorable as the terms which could be obtained by the Company or Subsidiary, as the case may be, on an arm's length basis with Persons who are not Related Persons, and (b) with respect to any Related Person Transaction or series of Related Person Transactions with an aggregate value in excess of $5,000,000, the Company or Subsidiary, as the case may be, must first obtain a favorable written opinion as to the fairness of such transaction to the Company or Subsidiary, as the case may be, from a financial point of view from a "big 6 accounting firm" or a nationally recognized investment banking firm that has not received and does not receive any fees or other compensation (other than solely for such opinion or other opinions pursuant hereto) from the Company, or any of its Subsidiaries, or a Related Person within 24 months prior to, and 12 months after, such opinion. Section 4.13 Limitation on Incurrences of Additional Debt and Issuances of Disqualified Capital Stock. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or otherwise become liable for, contingently or otherwise (to "Incur or, as appropriate, an "Incurrence"), any Debt or issue any Disqualified Capital Stock (other than Capital Stock of the Company issued to TEC), except (a)(i) Debt evidenced by the Notes pursuant to the Indenture; and (ii) Debt 25 31 evidenced by the Mortgage Notes pursuant to the Mortgage Notes Indenture; (b) Subordinated Debt of the Company solely to any wholly owned Subsidiary of the Company, or Debt of any wholly owned Subsidiary of the Company solely to the Company or to any wholly owned Subsidiary of the Company, provided that neither the Company nor any Subsidiary of the Company shall become liable to any person other than the Company or another wholly owned Subsidiary of the Company; (c) Debt of the Company pursuant to a Revolving Credit Facility outstanding at any time in an aggregate principal amount not to exceed the greater of (i) $70,000,000 or (ii) the Borrowing Base, less, in each case, the amount of any Debt of the Accounts Receivable Subsidiary; (d) Debt of the Company outstanding at any time in an aggregate principal amount, or Disqualified Capital Stock of the Company outstanding at any time with an aggregate liquidation value, or any combination thereof, not to exceed $50,000,000 in the aggregate, plus the amount of any Debt, not in excess of $10 million, incurred to finance the acquisition of tank storage facilities; (e) Subordinated Debt of the Company outstanding at any time in an aggregate principal amount not to exceed $200,000,000 in the aggregate; (f) the Company may Incur Debt as an extension, renewal, replacement, or refunding of any of the Debt permitted to be Incurred by clause (a) or (c) above, or this clause (f) (such Debt is collectively referred to as "Refinancing Debt"), provided, that (i) the maximum principal amount of Refinancing Debt (or, if such Refinancing Debt does not require cash payments prior to maturity, the original issue price of such Refinancing Debt) permitted under this clause (f) may not exceed the lesser of (x) the principal amount of the Debt being extended, renewed, replaced, or refunded plus reasonable financing fees and other associated reasonable out-of-pocket expenses (including any premium and defeasance costs) other than those paid to a Related Person (collectively, "Refinancing Fees"), or (y) if such Debt being extended, renewed, replaced, or refunded was issued at an original issue discount, the original issue price, plus amortization of the original issue discount at the time of the Incurrence of the Refinancing Debt plus Refinancing Fees, (ii) the Refinancing Debt as a Weighted Average Life and a final maturity that is equal to or greater than the Debt being extended, renewed, replaced, or refunded at the time of such extension, renewal, replacement, or refunding, (iii) the Refinancing Debt shall rank with respect to the Notes to an extent no more favorable in respect thereof than the Debt being refinanced, (iv) Refinancing Debt Incurred pursuant to clause (c) may be renewed, replaced, refunded or refinanced only with another Revolving Credit Facility; (g) Debt of the Company represented by trade payables or accrued expenses, in each case, incurred on normal, customary terms in the ordinary course of business, not overdue for a period of more than 45 days (or, if overdue for a period of more than 45 days, being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto being maintained on the books of the Company in accordance with GAAP) and not constituting any amounts due to banks or other financial institutions; and (h) Debt Incurred and Disqualified Capital Stock issued by any Person at a time when that Person is not a Subsidiary of the Company, which Debt or Disqualified Capital Stock is outstanding at the time such Person becomes, or is merged into, or consolidated with, a Subsidiary of the Company, was not incurred or issued in contemplation of such Person becoming or being merged into, or consolidated with, a Subsidiary of the Company, and is in an aggregate amount not to exceed $25,000,000. For the purpose of determining the amount of outstanding Debt that has been Incurred pursuant to clause (c) above, there shall be included in such clause the principal amount then outstanding of any Debt originally Incurred pursuant to such clause and, after any refinancing or refunding of such Debt, any outstanding Debt Incurred pursuant to clause (e) above so as to refinance or refund such Debt Incurred pursuant to clause (c) and any subsequent refinancings or refundings thereof. For purposes of clause (h) above, Debt shall be deemed to be incurred, and Disqualified Capital Stock shall be deemed to be issued, as the case may be, at the time such Person becomes or is merged into or consolidated with, a Subsidiary of the Company. Notwithstanding the foregoing provisions of this covenant, (a) the Company may Incur Senior Debt of the Company and the Company may issue Disqualified Capital Stock if, at the time such Senior Debt is Incurred or such Disqualified Capital Stock is issued, (i) no Default or Event of Default shall have occurred and be continuing at the time or immediately after giving effect to such transaction on a pro forma basis, and (ii) immediately after giving effect to the Consolidated Interest Expense in respect of such Debt being Incurred or Disqualified Capital Stock being issued and the application of the proceeds therefrom to the extent used to reduce Debt or Disqualified Capital Stock, on a pro forma basis, (x) the Consolidated Fixed Charge Coverage Ratio of the Company for the Reference Period is greater than 3.5 to 1, and (y) the rating agencies have indicated in writing that the Mortgage Notes will be rated "BB-" or higher by S&P and "Ba3" or higher by Moody's, and 26 32 (b) the Company may Incur Subordinated Debt if, at the time such Subordinated Debt is incurred, (i) no Default or Event of Default shall have occurred and be continuing at the time or immediately after giving effect to such transaction on a pro forma basis, and (ii) immediately after giving effect to the Consolidated Interest Expense in respect of such Subordinated Debt being incurred and the application of the proceeds therefrom to the extent used to reduce Debt, on a pro forma basis, (x) the Consolidated Fixed Charge Coverage Ratio of the Company for the Reference Period is greater than 2.5 to 1 and (y) the rating agencies have indicated in writing that the Mortgage Notes will be rated "BB-" or higher by S&P and "Ba3" or higher by Moody's. Debt Incurred and Disqualified Capital Stock issued by any Person that is not a Subsidiary of the Company which Debt or Disqualified Capital Stock is outstanding at the time such Person becomes, or is merged into, or consolidated with, a Subsidiary of the Company shall be deemed to have been Incurred or issued, as the case may be, at the time such Person becomes, or is merged into or consolidated with, a Subsidiary of the Company. For the purpose of determining compliance with this covenant, (a) if an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company shall have the right to determine in its sole discretion the category to which such Debt applies and shall not be required to include the amount and type of such Debt in more than one of such categories and (b) the amount of any Debt which does not pay interest in cash shall be deemed to be equal to the amount of the liability in respect thereof determined in accordance with GAAP. Section 4.14 Limitation on Restricting Subsidiary Dividends. The Company shall not and the Company shall not permit any of its Subsidiaries to, directly or indirectly, create, assume, or suffer to exist any consensual encumbrance or restriction on the ability of any of its Subsidiaries to (a) pay dividends or make other distributions on the Capital Stock of any such Subsidiary or pay any obligation to the Company, or any of its Subsidiaries or (b) otherwise transfer assets or make or pay loans or advances to the Company, or any of its Subsidiaries, except encumbrances and restrictions existing under any agreement of a Person acquired by the Company, or one of its Subsidiaries, which encumbrances and restrictions existed at the time of acquisition, were not put in place in anticipation of such acquisition and are not applicable to any Person or property, other than the Person or any property of the Person so acquired. Section 4.15 Limitation on Liens. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, Incur, or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Permitted Liens. Section 4.16 Limitation on Asset Sales. (a) The Company shall not, and the Company shall not permit any of its Subsidiaries to, in one or a series of related transactions, convey, sell, transfer (other than the granting of any Permitted Lien), or otherwise dispose of (including through damage or destruction for which insurance proceeds are paid or by condemnation), directly or indirectly, any of its properties, businesses, or assets, whether owned on the Issue Date or thereafter acquired (an "Asset Sale") unless: (i) the Net Cash Proceeds therefrom are applied to the repurchase of the Notes pursuant to an Offer to Purchase and (ii) at least 85% of the value of the consideration for such Asset Sales consists of (x) cash, (y) the assumption of Debt of the Company, or any of its Subsidiaries and the release of the Company or Subsidiary from all liability on such Debt in connection with such Asset Sale, or (z) securities received by the Company or any of its Subsidiaries from the transferee that are promptly converted by the Company or Subsidiary into cash. Notwithstanding the foregoing: 27 33 (i) any Subsidiary of the Company may convey, sell, lease, transfer, or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or a wholly owned Subsidiary of the Company; (ii) the Company and any Subsidiary of the Company may convey, sell, lease, transfer, or otherwise dispose of assets in the ordinary course of business and on ordinary business terms if the aggregate proceeds from all such Asset Sales not otherwise permitted do not exceed $2 million in any twelve-month period; (iii) the Company may convey, sell, lease, transfer, or otherwise dispose of assets pursuant to and in accordance with Section 5.1; (iv) the Company and any Subsidiary of the Company may (a) sell damaged, worn out, or other obsolete property in the ordinary course of business or other property no longer necessary for the proper conduct of the business or (b) abandon such property if it cannot, through reasonable efforts, be sold; (v) the Company and its Subsidiaries may sell accounts receivable to an Accounts Receivable Subsidiary in accordance with Section 4.21; (vi) the Company and its Subsidiaries may convey, sell, transfer or otherwise dispose of crude oil and refined products in the ordinary course of business; and (vii) the Company may sell two Avon 1535 Gas Turbines and related equipment for cash proceeds of at least $6 million; (viii) the Company may sell or otherwise dispose of shares of TransTexas common stock only in accordance with Section 12.6. For purposes of the foregoing, "Net Cash Proceeds" means the aggregate amount of cash received by the Company and its Subsidiaries in respect of an Asset Sale (other than those expressly permitted in clauses (i) through (viii) of the immediately preceding sentence), including any cash as and when received from the proceeds of any property which itself was acquired in consideration of an Asset Sale, less the sum of (i) all reasonable out-of-pocket fees, commissions, and other expenses incurred in connection with such Asset Sale, including the amount (estimated in good faith by the Company) of income, franchise, sales, and other applicable taxes required to be paid by the Company and its Subsidiaries in connection with such Asset Sale and (ii) the aggregate amount of cash so received which is used to retire any then existing Debt of the Company or its Subsidiaries (other than the Notes) that is required by the terms of such Debt to be repaid in connection with such Asset Sale. The Company shall accumulate all Net Cash Proceeds and the aggregate amount of such accumulated Net Cash Proceeds not timely used for the purposes permitted above is referred to as the "Accumulated Amount." (b) For purposes of this Section 4.16, "Minimum Accumulation Date" means each date, on and after the date that all of the obligations under the Mortgage Notes Indenture shall have been paid in full, on which the Accumulated Amount exceeds $20,000,000. Not later than 10 Business Days after a Minimum Accumulation Date, the Company shall make an irrevocable, unconditional offer (an "Offer to Purchase") to the Holders to purchase, on a pro rata basis, Notes having a principal amount (the "Offer Amount") equal to the Accumulated Amount, at a purchase price (the "Offer Price") equal to 100% of the principal amount thereof, plus accrued but unpaid interest, to and including the date the Notes tendered are purchased and paid for in accordance with this Section 4.16, which date shall be no later than 25 Business Days after the first date on which the Offer to 28 34 Purchase is required to be made (the "Purchase Date"). Notice of an Offer to Purchase shall be sent at least 20 Business Days prior to the close of business on the third Business Day prior to the Purchase Date (the "Final Put Date"), by first-class mail, by the Company to each Holder at its registered address, with a copy to the Trustee. The notice to the Holders shall contain all information, instructions, and materials required by applicable law or otherwise material to such Holders' decision to tender Notes pursuant to the Offer to Purchase. The notice, which shall govern the terms of the Section 4.16 Offer, shall state: (1) that the Offer to Purchase is being made pursuant to such notice and this Section 4.16; (2) the Offer Amount, the Offer Price (including the amount of accrued and unpaid interest), the Final Put Date, and the Purchase Date, which Purchase Date shall be on or prior to forty Business Days following the Minimum Accumulation Date; (3) that any Note or portion thereof not tendered or accepted for payment will continue to accrue interest; (4) that, unless the Company defaults in depositing U.S. Legal Tender with the Paying Agent in accordance with the last paragraph of this clause (b) or such payment is otherwise prevented, any Note or portion thereof accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest after the Purchase Date; (5) that Holders electing to have a Note or portion thereof purchased pursuant to an Offer to Purchase will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent (which may not, for purposes of this Section 4.16, notwithstanding any other provision of this Indenture, be the Company or any Affiliate of the Company) at the address specified in the notice prior to the close of business at least three Business Days prior to the Final Put Date; (6) that Holders will be entitled to withdraw their elections, in whole or in part, if the Paying Agent (which may not for purposes of this Section 4.16, notwithstanding any other provision of this Indenture, be the Company or any Affiliate of the Company) receives, up to the close of business on the Final Put Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes the Holder is withdrawing and a statement containing a facsimile signature that such Holder is withdrawing his election to have such principal amount of Notes purchased; (7) that if Notes in a principal amount in excess of the principal amount of Notes to be acquired pursuant to the Offer to Purchase are tendered and not withdrawn, the Company shall purchase Notes on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000 or integral multiples of $1,000 shall be acquired); (8) that Holders whose Notes were purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; and (9) the circumstances and relevant facts regarding such Asset Sales. Any such Offer to Purchase shall comply with all applicable provisions of Federal and state laws, including those regulating tender offers, if applicable, and any provisions of this Indenture that conflict with such laws shall be deemed to be superseded by the provisions of such laws. 29 35 On or before a Purchase Date, the Company shall (i) accept for payment Notes or portions thereof properly tendered pursuant to the Offer to Purchase on or prior to the Final Put Date (on a pro rata basis if Notes in a principal amount in excess of the principal amount of Notes to be acquired are tendered and not withdrawn), (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Offer Price for all Notes or portions thereof so accepted, and (iii) deliver to the Trustee Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail or deliver to Holders of Notes so accepted payment in an amount equal to the Offer Price for such Notes. The Trustee shall promptly cancel all Notes accepted by the Company pursuant to the Offer to Purchase and authenticate and mail or deliver to the Holders of Notes so accepted a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Offer to Purchase on or as soon as practicable after the Purchase Date. (c) If the amount required to acquire all Notes tendered by Holders pursuant to the Offer to Purchase (the "Acceptance Amount") shall be less than the Offer Amount, the excess of the Offer Amount over the Acceptance Amount may be used by the Company for general corporate purposes without restriction, unless otherwise restricted by the other provisions of this Indenture. Upon consummation of any Offer to Purchase made in accordance with the terms of this Section 4.16, the Accumulated Amount as of the Minimum Accumulation Date shall be reduced to zero and accumulations thereof shall be deemed to recommence from the day next following such Minimum Accumulation Date. Section 4.17 Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 4.18 Restriction on Sale and Issuance of Subsidiary Stock. The Company shall not, and the Company shall not permit any of its Subsidiaries to, issue or sell any shares of Capital Stock of any Subsidiary of the Company to any Person other than the Company or a wholly owned Subsidiary of the Company; provided, however, that the Company shall be permitted to issue additional shares of Capital Stock (a) to TEC, or (b) in connection with an Equity Offering as defined in the Mortgage Notes Indenture. Notwithstanding the foregoing, no additional shares of Capital Stock, or securities convertible or exchangeable into Common Stock, of the Company (other than 8% Preferred Stock) may be issued to John R. Stanley or any of his Related Persons. Section 4.19 Limitations on Line of Business. Neither the Company nor any of its Subsidiaries shall directly or indirectly engage to any substantial extent in any line or lines of business activity other than a Related Business. Section 4.20 Limitation on Speculative Trading. The Company shall not, and the Company shall not permit any of its Subsidiaries to, engage in transactions in futures contracts and options for speculative purposes. The Company and its Subsidiaries may engage in such transactions only as part of normal business operations as a risk-management strategy or hedge 30 36 against changes resulting from market conditions in the petroleum refining industry related to the operations of the Company or Subsidiary. Section 4.21 Accounts Receivable Subsidiary. (a) Notwithstanding the provisions of Section 4.5 the Company may, and may permit any of its Subsidiaries to, make Investments in an Accounts Receivable Subsidiary (i) the proceeds of which are applied within five Business Days of the making thereof solely to finance the purchase of accounts receivable of the Company and its Subsidiaries and (ii) in the form of Accounts Receivable Subsidiary Notes to the extent permitted by clause (b) below; provided that the aggregate amount of such Investments shall not exceed $20,000,000 at any time; (b) The Company shall not, and the Company shall not permit any of its Subsidiaries to, sell accounts receivable to an Accounts Receivable Subsidiary except for consideration in an amount not less than that which would be obtained in an arm's length transaction and solely in the form of cash or Cash Equivalents; provided that an Accounts Receivable Subsidiary may pay the purchase price for any such accounts receivable in the form of Accounts Receivable Subsidiary Notes so long as, after giving effect to the issuance of any such Accounts Receivable Subsidiary Notes, the aggregate principal amount of all Accounts Receivable Subsidiary Notes outstanding shall not exceed 20% of the aggregate purchase price paid for all outstanding accounts receivable purchased by an Accounts Receivable Subsidiary since the date of this Indenture (and not written off or required to be written off in accordance with the normal business practice of an Accounts Receivable Subsidiary); (c) The Company shall not permit an Accounts Receivable Subsidiary to sell any accounts receivable purchased from the Company and its Subsidiaries or participation interests therein to any other Person except on an arm's length basis and solely for consideration in the form of cash or Cash Equivalents; (d) The Company shall not, and the Company shall not permit any of its Subsidiaries to, enter into any guarantee, subject any of their respective properties or assets (other than the accounts receivable sold by them to an Accounts Receivable Subsidiary) to the satisfaction of any liability or obligation or otherwise incur any liability or obligation (contingent or otherwise), in each case, on behalf of an Accounts Receivable Subsidiary or in connection with any sale of accounts receivable or participation interests therein by or to an Accounts Receivable Subsidiary, other than obligations relating to breaches of representations, warranties, covenants, and other agreements of the Company or any of its Subsidiaries with respect to the accounts receivable sold by the Company or any of its Subsidiaries to an Accounts Receivable Subsidiary or with respect to the servicing thereof; provided that neither the Company nor any of its Subsidiaries shall at any time guarantee or be otherwise liable for the collectibility of accounts receivable sold by them; (e) The Company shall not permit an Accounts Receivable Subsidiary to engage in any business or transaction other than the purchase and sale of accounts receivable or participation interests therein of the Company and its Subsidiaries and activities incidental thereto; (f) The Company shall not permit an Accounts Receivable Subsidiary to incur any Debt other than the Accounts Receivable Subsidiary Notes, Debt owed to the Company and Non-Recourse Debt; provided that the aggregate principal amount of all such Debt of an Accounts Receivable Subsidiary shall not exceed the book value of its total assets as determined in accordance with GAAP; (g) The Company shall cause any Accounts Receivable Subsidiary to remit to the Company or a wholly owned Subsidiary of the Company on a monthly basis as a distribution all available cash and Cash Equivalents not held in a collection account pledged to acquirors of accounts receivable or participation interests therein, to the extent not applied to (i) pay interest or principal on the Accounts Receivable Subsidiary Notes or any Debt of such Accounts Receivable Subsidiary owed to the Company, (ii) pay or maintain reserves 31 37 for reasonable operating expenses of such Accounts Receivable Subsidiary or to satisfy reasonable minimum operating capital requirements, or (iii) to finance the purchase of additional accounts receivable of the Company and its Subsidiaries; and (h) The Company shall not, and shall not permit any of its Subsidiaries to, sell accounts receivable to, or enter into any other transaction with or for the benefit of, an Accounts Receivable Subsidiary (i) if such Accounts Receivable Subsidiary pursuant to or within the meaning of any Bankruptcy Law (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes general assignment for the benefit of its creditors, or (E) generally is not paying its debts as they become due; or (ii) if a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against such Accounts Receivable Subsidiary in an involuntary case, (B) appoints a Custodian of such Accounts Receivable Subsidiary or for all or substantially all of the property of such Accounts Receivable Subsidiary, or (C) orders the liquidation of such Accounts Receivable Subsidiary, and, with respect to clause (ii) hereof, the order or decree remains unstayed and in effect for 60 consecutive days. Section 4.22 Separate Existence and Formalities. The Company hereby covenants and agrees that: (a) the funds and other assets of the Company and its Subsidiaries will not be commingled with those of TEC, TransAmerican or TransTexas, other than pursuant to the Services Agreement; (b) all actions taken by the Company and its Subsidiaries will be taken pursuant to authority granted by the Board of Directors of the Company or such Subsidiary, as the case may be, to the extent required by law or the Certificate of Incorporation or By-laws of the Company or its Subsidiaries; (c) the Company and its Subsidiaries will maintain records and books of account separate from those of TEC, TransAmerican and TransTexas in each case in accordance with generally accepted accounting principles; (d) the Company and its Subsidiaries will conduct their business at offices that are identifiably segregated from the offices of TEC, TransAmerican and TransTexas; (e) the Company and its Subsidiaries will conduct their businesses solely in their own names and will not knowingly or negligently mislead any other Person as to the identity or authority of the Company or its Subsidiaries; (f) all oral and written communications of the Company and its Subsidiaries, including, without limitation, letters, invoices, purchase orders, contracts, statements and applications, will be made solely in the name of the Company or its Subsidiaries, as the case may be; (g) the Company and its Subsidiaries will provide for all of their operating expenses and liabilities from their own separate funds; (h) each of the Company and its Subsidiaries will maintain correct minutes of the meetings and other corporate proceedings of the owners of its capital stock and of its Board of Directors and otherwise comply with requisite corporate formalities required by law; (i) except as set forth in the Tax Allocation Agreement, the Company nor any of its Subsidiaries will hold itself out or knowingly permit itself to be held out as having agreed to pay or as being liable for any indebtedness of TEC, TransAmerican or TransTexas; and 32 38 (j) the Company will take full advantage of their respective rights and privileges under the Stock Transfer Agreement, and the Company will not amend the Stock Transfer Agreement in a manner adverse to the Holders or the Company. Section 4.23 Revolving Credit Facility. If the Company obtains a Revolving Credit Facility, the Company shall promptly deposit the proceeds thereof in the manner, and to the extent, if any, required pursuant to the Mortgage Notes Indenture. Section 4.24 Registration of Pledged Shares. The Company shall cause TransTexas to effect a shelf registration of the TransTexas common stock pledged pursuant to the Pledge Agreement. Section 4.25 Limitation on Sale/Leaseback Transactions. The Company will not, and the Company will not permit any of its Subsidiaries to, enter into any Sale/Leaseback Transaction unless (a) the Company could have (i) incurred Debt in the amount equal to the aggregate amount of Attributable Debt relating to such Sale/Leaseback Transaction pursuant to Section 4.13 and (ii) incurred a Lien to secure such Debt pursuant to Section 4.15, (b) the gross cash proceeds of such Sale/Leaseback Transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors of the Company) of the property that is subject to such Sale/Leaseback Transaction and (c) the transfer of assets in such Sale/Leaseback Transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with Section 4.16. ARTICLE V SUCCESSOR CORPORATION Section 5.1 When Company May Merge, Etc. (a) The Company shall not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or, directly or indirectly, sell, lease, assign, transfer or convey all or substantially all of its assets (computed on a consolidated basis), to another Person or group of Affiliated Persons, unless: (1) either (a) the Company shall be the continuing Person, or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company are transferred as an entirety or substantially as an entirety (the Company or such other Person being hereinafter referred to as the "Surviving Person") shall be a corporation or partnership organized and validly existing under the laws of the United States, any State thereof or the District of Columbia, and shall expressly assume, by an indenture supplemental hereto, and any supplements to any Security Documents as the Trustee in its sole discretion may require, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes, the Security Documents and this Indenture; (2) on a pro forma consolidated basis, immediately after giving effect to such transaction and the assumption of the obligations contemplated by clause (1), above, and the incurrence or anticipated incurrence of any Debt or Disqualified Capital Stock to be incurred or issued in connection therewith (x) the Net Worth of the Surviving Person is at least equal to the Net Worth of the Company and its Subsidiaries immediately prior to such transaction and (y) the rating agencies have indicated in writing that, immediately thereafter, the Mortgage Notes will be rated "BB-" or higher by S&P and "Ba3" or higher by Moody's or the ratings of the Mortgage Notes by S&P and Moody's will be higher than before the transaction; 33 39 (3) immediately before and on a pro forma basis immediately after giving effect to such transaction and the assumption of the obligations as set forth in clause (1), above, and the incurrence or issuance or anticipated incurrence or issuance of any Debt to be incurred or Disqualified Capital Stock to be issued in connection therewith, no Default or Event of Default shall exist or shall occur; and (4) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, assignment, or transfer and such supplemental indenture comply with this Article V, that such consolidation, merger, assignment or transfer will not have any adverse effect on the validity, legality or enforceability of the Notes and that all conditions precedent herein provided relating to such transaction have been satisfied. For purposes of this Section 5.1, the Consolidated Fixed Charge Coverage Ratio shall be determined on a pro forma consolidated basis (giving effect to such merger, sale or consolidation) for the four fiscal quarters for which financial information is available immediately preceding such merger, sale or consolidation. (b) For purposes of clause (a), the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Company which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Section 5.2 Successor Corporation Substituted. Upon any consolidation or merger, or any transfer of assets in accordance with Section 5.1, the Surviving Person formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such Surviving Person had been named as the Company herein. When a Surviving Person duly assumes all of the obligations of the Company pursuant hereto and pursuant to the Notes and Security Documents the predecessor shall be released from such obligations. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be caused voluntarily or involuntarily or effected, without limitation, by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Note as and when the same becomes due and payable, and the continuance of such default for a period of 15 days; (b) default in the payment of all or any part of the principal of (or premium, if any. applicable to) the Notes when and as the same becomes due and payable at maturity, redemption, by acceleration or otherwise, including default in the payment of the Change of Control Purchase Price in accordance with Article XI, the Offer Price in accordance with Section 4.16; 34 40 (c) default in the observance or performance of, or breach of, any covenant, agreement or warranty of the Company contained in the Security Documents, the Notes or this Indenture (other than a default in the performance of any covenant, agreement or warranty which is specifically dealt with elsewhere in this Section 6.1), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee, or to the Company, and the Trustee by Holders of at least a majority of the aggregate principal amount of the outstanding Notes, a written notice specifying such default or breach, requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (d) a default which extends beyond any stated period of grace applicable thereto, including any extension thereof, under any mortgage, indenture or instrument under which there is outstanding any Debt of the Company, or any of its Subsidiaries with an aggregate principal amount in excess of $10,000,000, or failure to pay such Debt at its stated maturity, it being understood that a waiver by the lenders of such default shall constitute a waiver hereunder for the same period; (e) a decree, judgment, or order by a court of competent jurisdiction shall have been entered adjudging the Company or any of its Significant Subsidiaries as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or any of its Significant Subsidiaries under any bankruptcy or similar law, and such decree or order shall have continued undischarged and unstayed for a period of 30 days; or a decree or order of a court of competent jurisdiction over the appointment of a receiver, liquidator, trustee, or assignee in bankruptcy or insolvency of the Company or any of its Significant Subsidiaries, or of the property of any such Person, or for the winding up or liquidation of the affairs of any such Person, shall have been entered, and such decree, judgment, or order shall have remained in force undischarged and unstayed for a period of 30 days; (f) the Company or any of its Significant Subsidiaries shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under any bankruptcy or similar law or similar statute, or shall consent to the filing of any such petition, or shall consent to the appointment of a Custodian, receiver, liquidator, trustee, or assignee in bankruptcy or insolvency of it or any of its assets or property, or shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall, within the meaning of any Bankruptcy Law, become insolvent, fail generally to pay their debts as they become due, or take any corporate action in furtherance of or to facilitate, conditionally or otherwise, any of the foregoing; (g) final judgments not covered by insurance for the payment of money, or the issuance of any warrant of attachment against any portion of the property or assets of the Company or any of its Subsidiaries, which, in the aggregate, equal or exceed $10,000,000 at any one time shall be entered against the Company or any of its Subsidiaries by a court of competent jurisdiction and not be stayed, bonded or discharged for a period (during which execution shall not be effectively stayed) of 60 days (or, in the case of any such final judgment which provides for payment over time, which shall so remain unstayed, unbonded or undischarged beyond any applicable payment date provided therein); (h) any of the Security Documents shall for any reason cease to be in full force and effect, or shall cease to give the Trustee for the ratable benefit of the Holders the Liens, rights, powers and privileges purported to be created thereby including but not limited to, a perfected security interest in, and Lien on, all of the Collateral in accordance with the terms thereof, or a default shall occur under any of the Security Documents; (i) there shall have occurred any amendment to the Certificate of Incorporation or Bylaws of the Company or any of its Subsidiaries that would materially adversely affect the interests of the Noteholders and the failure to correct such violation, failure or amendment continues for a period of 10 days (or 90 days if a Public Equity Offering has occurred) after written notice is given to the Company by the Trustee or to 35 41 the Company and the Trustee by the Holders of at least a majority of the in aggregate principal amount of the Notes outstanding; or (j) there shall have occurred any "Event of Default" under either (i) the Mortgage Notes Indenture, or (ii) the indenture, dated as of June 15, 1995 (the "TransTexas Indenture"), by and between TransTexas, TransTexas Transmission Corporation, as guarantor, and American Bank National Association, as trustee, if, as a result thereof, any of the Mortgage Notes or the notes issued under the TransTexas Indenture, as the case may be, shall become due and payable by declaration of acceleration or otherwise; Any Defaults under Sections 4.5, 4.13, or 5.1 of this Indenture shall be Events of Default without the notice specified in clause (c) above and upon the passage of 10 days. Section 6.2 Acceleration of Maturity Date; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 6.1(e) or (f) relating to the Company or any of its Subsidiaries) occurs and is continuing and subject to Section 4.9 hereof, then, and in every such case, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of not less than a majority of aggregate principal amount of Notes then outstanding, by a notice in writing to the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"), may declare all of the principal of the Notes (or the Change of Control Purchase Price if the Event of Default includes failure to pay the Change of Control Purchase Price), determined as set forth below, including in each case accrued interest thereon, to be due and payable immediately. If an Event of Default specified in Section 6.1(e) or (f) relating to the Company or any of its Subsidiaries occurs, all principal and accrued interest on the Notes shall be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Trustee or the Holders. At any time after such a declaration of acceleration being made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article VI, the Holders of a majority in aggregate principal amount of then outstanding Notes, by written notice to the Company and the Trustee, may waive, on behalf of all Holders, any such declaration of acceleration if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all overdue interest on all Notes, (ii) the principal of (and premium, if any, applicable to) any Notes which would become due otherwise than by such declaration of acceleration, and interest thereon at the rate borne by the Notes, (iii) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Notes, (iv) all sums paid or advanced by the Trustee hereunder and the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and (b) all Events of Default, other than the non-payment of the principal of, premium, if any, and interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.12, including, if applicable, any Event of Default relating to the covenants contained in Section 11.1. Notwithstanding the previous sentence of this Section 6.2, no waiver shall be effective for any Event of Default or event which with notice or lapse of time or both would be an Event of Default with respect to 36 42 any covenant or provision which cannot be modified or amended without the consent of the Holder of each of the outstanding Notes, unless all such affected Holders agree, in writing, to waive such Event of Default or event. No such waiver shall cure or waive any subsequent default or impair any right consequent thereon. Section 6.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if an Event of Default in payment of principal, premium or interest specified in clause (a) or (b) or Section 6.1 occurs and is continuing, the Company shall, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal, premium (if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to, and expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust in favor of the Holders, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 37 43 Section 6.4 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company or any obligor for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise to take any and all actions under the TIA, including (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same pursuant to Section 6.6 hereof; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.6 or Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment, or composition affecting the Notes or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.5 Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust in favor of the Holders, and any recovery of judgment shall, after provision for the payment of compensation to, and expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. Section 6.6 Priorities. Any money or other property collected by the Trustee pursuant to this Article VI shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money or other property on account of principal, premium (if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the Trustee in payment of all amounts due pursuant to Section 7.7; SECOND: To the Holders in payment of the amounts then due and unpaid for principal of premium (if any) and interest on, the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (if any) and interest respectively; and 38 44 THIRD: on and after the date on which all of the obligations under this Indenture have been satisfied in full and the Lien on the Pledged Collateral has been released, to the Trustee under the Mortgage Notes for application thereby in accordance with the terms and conditions of the Mortgage Notes Indenture; and FOURTH: To whomsoever may be lawfully entitled thereto, the remainder, if any. Section 6.7 Limitation on Suits. No Holder of any Note shall have any right to order or direct the Trustee to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than a majority of the principal amount of then outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee security or indemnity, acceptable to the Trustee, against the costs, expenses and liabilities to be incurred or reasonably probable to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the outstanding Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. Section 6.8 Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision of this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of, and premium (if any) and interest on, such Note on the Maturity Dates of such payments as expressed in such Note (in the case of redemption, the Redemption Price on the applicable Redemption Date, in the case of the Change of Control Purchase Price, on the applicable Change of Control Payment Date, and in the case of the Offer Price, on the Purchase Date and to institute suit for the enforcement of any such payment after such respective dates, and such rights shall not be impaired without the consent of such Holder. Section 6.9 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in Section 2.7, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 39 45 Section 6.10 Delay or Omission Not Waiver. No delay or omission by the Trustee or by any Holder of any Note to exercise any right or remedy arising upon any Event of Default shall impair the exercise of any such right or remedy or constitute a waiver of any such Event of Default. Every right and remedy given by this Article VI or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 6.11 Control by Holders. Subject to Section 6.7, the Holder or Holders of a majority in aggregate principal amount of then outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, provided, that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee shall not determine that the action so directed would be unjustly prejudicial to the Holders not taking part in such direction, and (c) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 6.12 Waiver of Past Default. Subject to Section 6.8, the Holder or Holders of not less than a majority in aggregate principal amount of the outstanding Notes may, on behalf of all Holders, prior to the declaration of the maturity of the Notes, waive any past default hereunder and its consequences, except a default (a) in the payment of the principal of, premium, if any, or interest on, any Note as specified in clauses (a) and (b) of Section 6.1, or (b) in respect of a covenant or provision hereof which, under Article XI, cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair the exercise of any right arising therefrom. Section 6.13 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted to be taken by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by a group of Holders, holding in the aggregate more than a majority of the aggregate principal amount of the outstanding Notes, or to any suit instituted by any Holder for enforcement of the payment of principal of, or premium (if any) or interest on, any Note on or after the respective Maturity Date expressed in such Note (including, in the case of redemption, on or after the Redemption Date). 40 46 Section 6.14 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE VII TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. Section 7.1 Duties of Trustee. (a) If a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of a Default or an Event of Default: (i) The Trustee need perform only those duties as are specifically set forth in this Indenture and no others, and no covenants or obligations shall be implied in or read into this Indenture which are adverse to the Trustee. (ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) This paragraph does not limit the effect of paragraph (b) of this Section 7.1. (ii) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (iii) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.11. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or at the request, order or direction of the Holders or in the exercise of any 41 47 of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (d) and (f) of this Section 7.1. (f) The Trustee shall not be liable for interest on any assets received by it except as the Trustee may agree in writing with the Company. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 7.2 Rights of Trustee. Subject to Section 7.1: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may consult with counsel and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 13.4 and 13.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders, pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company, its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Notes and it shall not be accountable for the Company's use of the proceeds from the Notes, and it shall not be responsible for any statement in the Notes, other than the Trustee's certificate of authentication, or the use or application of any funds received by a Paying Agent other than the Trustee. 42 48 Section 7.5 Notice of Default. If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Noteholder notice of the uncured Default or Event of Default within 45 days after such Default or Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal (or premium, if any) of, or interest on, any Note (including all payments due on any Maturity Date), including a default in the payment of the Redemption Price, the Offer Price or the Change of Control Purchase Price the Trustee may withhold the notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or responsible officers of the Trustee in good faith determines that withholding the notice is in the interest of the Holders. As soon as practicable, but in any event within 5 Business Days after an Event of Default has occurred that is continuing and is known to the Trustee, the Trustee shall promptly give written notice to the Disbursement Agent that an Event of Default under the Indenture has occurred and is continuing (unless the Person serving as the Trustee is also serving as the Disbursement Agent). Section 7.6 Reports by Trustee to Holders. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, the Trustee shall, if required, mail to each Noteholder a brief report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b) and 313(c). A copy of each report at the time of its mailing to Noteholders shall be mailed to the Company and filed by the Trustee with the SEC and each securities exchange, if any, on which the Notes are listed. Section 7.7 Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents, accountants, experts and counsel. The Company shall indemnify the Trustee (in its capacity as Trustee) and each of its officers directors, attorneys-in-fact and agents for, and hold it harmless against, any claim, demand, expense (including but not limited to, reasonable compensation, disbursements and expenses of the Trustees' agents and counsel), loss or liability incurred by it without negligence or bad faith on its part, arising out of or in connection with the administration of this trust and its rights or duties hereunder including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity. The Company need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct. To secure the Company's payment obligations to the Trustee in this Section 7.7, the Company and the Holders agree that the Trustee shall have a lien prior to the Notes on all assets held or collected by the Trustee, in its capacity as Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(e) or (f) occurs, the Company and the Holders agree that the expenses and the compensation for the services are deemed to constitute expenses of administration under any Bankruptcy Law. 43 49 The Company's obligations under this Section 7.7 and any lien arising hereunder shall survive the resignation or removal of the Trustee, the discharge of the Company's obligations pursuant to Article VIII of this Indenture and any rejection or termination of this Indenture under any Bankruptcy Law. Section 7.8 Replacement of Trustee. The Trustee may resign by so notifying the Company in writing. The Holder or Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Company and the Trustee in writing and may appoint a successor Trustee with the Company's consent. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged bankrupt or insolvent; or (c) a receiver, Custodian, or other public officer takes charge of the Trustee or its property. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holder or Holders of a majority in principal amount of the Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after delivery of such acceptance and provided that all sums owing to the Trustee provided for in Section 7.7 have been paid, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holder or Holders of at least a majority of the principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Noteholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. Section 7.9 Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. 44 50 ARTICLE VIII SATISFACTION AND DISCHARGE Section 8.1 Satisfaction, Discharge of the Indenture and Defeasance of the Notes. The Company shall be deemed to have paid and discharged the entire Debt on the Notes and the provisions of this Indenture shall cease to be of further effect (subject to Section 8.3), if: (a) The Company irrevocably deposits in trust for the benefit of the Holders of the Notes with the Trustee, pursuant to an irrevocable trust and security agreement (i) U.S. Legal Tender in an amount, (ii) Government Securities which, after payment of all Federal, state and local taxes or other charges or assessments in respect of such Government Securities payable by the Trustee, through the payment of principal and interest will provide, not later than one day before the due date of payment in respect of the Notes, U.S. Legal Tender in an amount, or (iii) a combination thereof, which, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof (in form and substance reasonably satisfactory to the Trustee) delivered to the Trustee, is sufficient to pay the principal of, premium, if any, and each installment of principal and interest on the Notes then outstanding on the dates on which any such payments are due and payable in accordance with the terms of this Indenture and of the Notes; (b) Such deposits shall not cause the Trustee to have a conflicting interest as defined in and for purposes of the TIA; (c) No Default or Event of Default shall have occurred or be continuing on the date of such deposit or shall occur on or before the 91st day (or one day after such greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws) after the date of such deposit, and such deposit will not result in a Default or Event of a Default under this Indenture or a breach or violation of, or constitute a default under, any other instrument to which the Company, or any Subsidiary of the Company is a party or by which it or its property is bound; (d) The deposit, defeasance and discharge will not be deemed, or result in, a Federal income taxable event to the Holders of the Notes and the Holders will be subject to Federal income tax in the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (e) The deposit shall not result in the Company, the Trustee or the trust being subject to regulation under the Investment Company Act of 1940; (f) After the passage of 90 days (or any greater period of time in which any such deposit of trust funds may remain subject to Bankruptcy Laws insofar as those laws apply to the Company) following the irrevocable deposit of the trust funds, such funds will not be subject to any Bankruptcy Laws affecting creditors' rights generally; (g) Holders of the Notes will have a valid, perfected and unavoidable (under applicable bankruptcy or insolvency laws), subject to the passage of time referred to in clause (f) above, first-priority security interest in the trust funds; and (h) The Company has delivered to a Trustee an Officers' Certificate and an Opinion of Counsel (who may be outside counsel to the Company, but not in-house counsel to the Company), each in form and substance satisfactory to the Trustee, stating that all conditions precedent specified herein relating to the defeasance contemplated by this Section 8.1 have been complied with. 45 51 In the event all of any portion of the Notes are to be redeemed through such irrevocable trust, the Company must make arrangements satisfactory to the Trustee, at the time of such deposit, for the giving of the notice of such redemption or redemptions by the Trustee in the name and at the expense of the Company. In the event that the Company takes the necessary action to comply with the provisions described in this Section 8.1 and the Notes are declared due and payable because of the occurrence of an Event of Default within the time period specified in Section 8.1(c), or at any time under Section 8.3, the Company will remain liable for all amounts due on the Notes at the time of acceleration resulting from such Event of Default in excess of the amount of U.S. Legal Tender and Government Securities deposited with the Trustee pursuant to this Section 8.1 at the time of such acceleration. Section 8.2 Termination of Obligations Upon Cancellation of the Notes. In addition to the Company's rights under Section 8.1, the Company may terminate all of their respective obligations under this Indenture (subject to Section 8.3) when: (a) either (i) all Notes theretofore authenticated and delivered (other than Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.7) have been delivered to the Trustee for cancellation or (ii) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable or will become due and payable within one year and the Company has irrevocably deposited or caused to be deposited in trust for the benefit of the Holders of the Notes with the Trustee U.S. Legal Tender or Government Securities in an amount sufficient to pay and discharge the entire indebtedness of the Notes, not theretofore delivered to the Trustee for cancellation, including principal of, premium if any, and interest on the Notes through the Stated Maturity and with respect to this clause (ii) no default or Event of Default shall have occurred or be continuing on the date of such deposit of trust funds may remain subject to bankruptcy or insolvency laws) after the date of such deposit, and such deposit will not result in a Default or Event of Default under this Indenture or a breach or violation of, or constitute a default under, any other instrument to which the Company, or any subsidiary of the Company or is a party or by which it or its property is bound; (b) the Company has paid or caused to be paid all sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent specified herein relating to the satisfaction and discharge of this Indenture have been complied with. Section 8.3 Survival of Certain Obligations. Notwithstanding the satisfaction and discharge of this Indenture and of the Notes referred to in Section 8.1 or 8.2, the respective obligations of the Company and the Trustee under Sections 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.11, 2.12, Article III, 4.1, 4.2, 4.6, 6.8, 7.7, 7.8, 8.5, 8.7, and this Section 8.3 shall survive until the Notes are no longer outstanding, and thereafter the obligations of the Company and the Trustee under Sections 6.8, 7.7, 7.8, 8.5, 8.6, 8.7 and this Section 8.3 shall survive. Nothing contained in this Article VIII shall abrogate any of the obligations or duties of the Trustee under this Indenture. Section 8.4 Acknowledgment of Discharge by Trustee. After (a) the conditions of Section 8.1 or 8.2 have been satisfied, (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent referred to in clause (a) above, relating to the satisfaction and discharge of this Indenture have been complied with, the Trustee 46 52 upon request shall acknowledge in writing the discharge of each of the Company's obligations under this Indenture except for those surviving obligations specified in Section 8.3. Section 8.5 Application of Trust Assets. The Trustee shall hold any U.S. Legal Tender or Government Securities deposited with it in the irrevocable trust established pursuant to Section 8.1 or 8.2. The Trustee shall apply the deposited U.S. Legal Tender or Government Securities, together with earnings thereon, through the Paying Agent (other than the Company or any Subsidiary of the Company), in accordance with this Indenture and the terms of the irrevocable trust agreement, to the payment of principal of and interest on the Notes. Section 8.6 Repayment to the Company. Upon termination of the trust established pursuant to Section 8.1 or 8.2, the Trustee and the Paying Agent shall promptly pay to the Company upon request any excess U.S. Legal Tender or Government Securities held by them. The Trustee and the Paying Agent shall pay to the Company upon request, and, if applicable, in accordance with the irrevocable trust established pursuant to Section 8.1 or 8.2, any U.S. Legal Tender or Government Securities held by them for the payment of principal of or interest on the Notes that remain unclaimed for two years after the date on which such payment shall have become due; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may, at the expense of the Company, cause to be published once, in a newspaper customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company. After payment to the Company, Holders entitled to such payment must look to the Company for such payment as general creditors unless an applicable abandoned property law designates another Person. Section 8.7 Reinstatement. If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender or Government securities in accordance with Section 8.1 or 8.2 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 or 8.2 until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender or Government Securities in accordance with Section 8.1 or 8.2; provided, however, that if the Company has made any payment of principal of or interest on any Notes because of the reinstatement of the obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the U.S. Legal Tender or Government Securities held by the Trustee or Paying Agent. ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 9.1 Supplemental Indentures Without Consent of Holders. Without the consent of any Holder, the Company, when authorized by Board Resolutions, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto or amended Security Documents, in form satisfactory, to the Trustee, for any of the following purposes: 47 53 (a) to cure any ambiguity, defect, or inconsistency, or to make any other provisions with respect to matters or questions arising under this Indenture or the Security Documents which shall not be inconsistent with the provisions of this Indenture or the Security Documents, provided such action pursuant to this clause (a) shall not adversely affect the interests of any Holder in any respect; (b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company or to make any other change that does not adversely affect the rights of any Holder, provided, that the Company has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel stating that such change does not adversely affect the rights of any Holder; (c) to provide for additional collateral for the Notes; (d) to evidence the succession of another Person to the Company, and the assumption by any such successor of the obligations of the Company, herein and in the Notes in accordance with Article V; or (e) to comply with the TIA. Section 9.2 Amendments, Supplemental Indentures and Waivers with Consent of Holders. Subject to Section 6.8, with the consent of the Holders of not less than a majority in aggregate principal amount of then outstanding Notes, by written act of said Holders delivered to the Company and the Trustee, the Company, when authorized by Board Resolutions, and the Trustee may amend or supplement this Indenture or the Notes or enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or the Notes or of modifying in any manner the rights of the Holders under this Indenture or the Notes. Notwithstanding any of the above, however, no such amendment, supplemental indenture or waiver shall, without the consent of the Holder of each outstanding Note affected thereby: (a) reduce the percentage of Notes whose Holders must consent to an amendment, supplement or waiver of any provision of this Indenture or the Notes; (b) reduce the rate or extend the time for payment of interest on any Note; (c) reduce the principal amount of any note, reduce the Change of Control Purchase Price, the Offer Price, or the Redemption Price; (d) change the Stated Maturity or the Change of Control Payment Date, or the Purchase Date of any Note; (e) alter the redemption provisions of Article III or paragraph 5 of the Notes or the terms or provisions of Section 4.16 or the terms or provisions of Article XI, in any case, in a manner adverse to any holder; (f) make any changes in the provisions concerning waivers of Defaults or Events of Default by Holders of the Notes (except to increase any required percentage or to provide that certain other provisions hereof cannot be modified or waived without the consent of the Holders of each outstanding Note affected thereby) or the rights of holders to recover the principal or premium of, interest on, or redemption payment with respect to, any Note; (g) make any changes in Section 6.4, 6.7 or this third sentence of this Section 9.2; or 48 54 (h) make the principal of, or the interest on, any Note payable with anything or in any manner other than as provided for in this Indenture (including changing the place of payment where, or the coin or currency in which, any Note or any premium or the interest thereon is payable) and the Notes as in effect on the date hereof. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. After an amendment, supplement or waiver under this Section 9.2 or 9.4 becomes effective, it shall bind each Holder. In connection with any amendment, supplement or waiver under this Article IX, the Company may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or to all Holders, consideration for such Holder's consent to such amendment, supplement or waiver. Section 9.3 INTENTIONALLY OMITTED. Section 9.4 Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of his Note by written notice to the Company or the Person designated by the Company as the Person to whom consents should be sent if such revocation is received by the Company or such Person before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall be the date so fixed by the Company notwithstanding the provisions of the TIA. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date, and only those Persons (or their duly designated proxies), shall be entitled to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Noteholder, unless it makes a change described in any of clauses (a) through (h) of Section 9.2, in which case, the amendment, supplement or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided, that any such waiver shall not impair or affect the right of any Holder to receive payment of principal and premium of and interest on a Note, on or after the respective dates set for such amounts to become due and payable expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates. 49 55 Section 9.5 Notation on or Exchange of Notes. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder of the Note to deliver it to the Trustee or require the Holder to put an appropriate notation on the Note. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Any failure to make the appropriate notation or to issue a new Note shall not affect the validity of such amendment, supplement or waiver. Section 9.6 Trustee to Sign Amendments, Etc. The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article IX; provided, that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article IX is authorized or permitted by this Indenture and that all conditions precedent have been complied with. ARTICLE X MEETINGS OF NOTEHOLDERS Section 10.1 Purposes for Which Meetings May Be Called. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article X for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to waive or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article VI; (b) to remove the Trustee or appoint a successor Trustee pursuant to the provisions of Article VII; (c) to consent to an amendment, supplement or waiver pursuant to the provisions of Section 9.2; or (d) to take any other action (i) authorized to be taken by or on behalf of the Holder or Holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture, or authorized or permitted by law or (ii) which the Trustee deems necessary or appropriate in connection with the administration of this Indenture. Section 10.2 Manner of Calling Meetings. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.1, to be held at such time and at such place in the City of New York, New York or elsewhere as the Trustee shall determine. Notice of every meeting of Noteholders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed by the Trustee, first-class 50 56 postage prepaid, to the Company and to the Holders at their last addresses as they shall appear on the registration books of the Registrar, not less than 10 nor more than 60 days prior to the date fixed for a meeting. Any meeting of Noteholders shall be valid without notice if the Holders of all Notes then outstanding are present in Person or by proxy, or if notice is waived before or after the meeting by the Holders of all Notes outstanding, and if the company and the Trustee are either present by duly authorized representatives or have before or after the meeting, waived notice. Section 10.3 Call of Meetings by Company or Holders. In case at any time the Company, pursuant to a Board Resolution, or the Holders of not less than a majority of the aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders to take any action specified in Section 10.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or the Holders of Notes in the amount above specified may determine the time and place in the City of New York, New York or elsewhere for such meeting and may call such meeting for the purpose of taking such action, by mailing or causing to be mailed notice thereof as provided in Section 10.2, or by causing notice thereof to be published at least once in each of two successive calendar weeks (on any Business Day during such week) in a newspaper or newspapers printed in the English language, customarily published at least five days a week of a general circulation in the City of New York, State of New York, the first such publication to be not less than 10 nor more than 60 days prior to the date fixed for the meeting. Section 10.4 Who May Attend and Vote at Meetings. To be entitled to vote at any meeting of Noteholders, a Person shall (a) be a registered Holder of one or more Notes, or (b) be a Person appointed by an instrument in writing as proxy for the registered Holder or Holders of Notes. The only Persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 10.5 Regulations May Be Made by Trustee; Conduct of the Meeting; Voting Rights; Adjournment. Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any action by or any meeting of Noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think appropriate. If the Company has not already set a record date and time for determining the Holders of record of Notes entitled to vote at such meeting, such regulations may do so, and in either case those and only those Persons who are Holders of Notes at the record date and time so fixed, or their proxies, shall be entitled to vote at such meeting whether or not they shall be such Holders at the time of the meeting. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Noteholders as provided in Section 10.3, in which case the Company or the Noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote. At any meeting each Noteholder or proxy shall be entitled to one vote for each $1,000 principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any 51 57 meeting in respect of any Notes challenged as not outstanding and ruled by the chairman of the meeting to be not then outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Noteholders. Any meeting of Noteholders duly called pursuant to the provisions of Section 10.2 or Section 10.3 may be adjourned from time to time by vote of the Holder or Holders of a majority in aggregate principal amount of the Notes represented at the meeting and entitled to vote, and the meeting may be held as so adjourned without further notice. Section 10.6 Voting at the Meeting and Record to Be Kept. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballots on which shall be subscribed the signatures of the Holders of Notes or of their representatives by proxy and the principal amount of the Notes voted by the ballot. The permanent chairman of the meeting shall appoint two inspectors of votes, who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts, setting forth a copy of the notice of the meeting and showing that such notice was mailed as provided in Section 10.2 or published as provided in Section 10.3 The record shall be signed and verified by the affidavits of the permanent chairman and the secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.7 Exercise of Rights of Trustee or Holders May Not Be Hindered or Delayed by Call of Meeting. Nothing contained in this Article X shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. ARTICLE XI RIGHT TO REQUIRE REPURCHASE Section 11.1 Repurchase of Notes at Option of the Holder Upon Change of Control. (a) In the event that a Change of Control occurs, each Holder of Notes shall have the right, at such Holder's option, to require the Company to repurchase all or any part of such Holder's Notes (provided that the principal amount of such Notes at maturity must be $1,000 or an integral multiple thereof) on the date that is no later than 40 Business Days after the occurrence of a Change of Control (the "Change of Control Payment Date"), at a cash purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, plus accrued and unpaid interest, to and including the Change of Control Payment Date. (b) Within five Business Days after each date upon which the Company knows of the occurrence of a Change of Control requiring the Company to make a Change of Control Offer pursuant to this Section 11.1, the Company shall so notify the Trustee. Within 10 Business Days after the Company knows of the occurrence of a Change of Control, the Company shall make an irrevocable unconditional offer (a "Change of 52 58 Control Offer") to all Holders to purchase for cash all of the Notes pursuant to the offer described in clause (c) of this Section 11.1 at the Change of Control Purchase Price. (c) Notice of a Change of Control Offer shall be sent, at least 20 Business Days prior to the Final Change of Control Put Date (as defined below), by first class mail, by the Company to each Holder at its registered address, with a copy to the Trustee. The notice to the Holders shall contain all instructions and materials required by applicable law and shall contain or make available to Holders other information material to such Holders' decision to tender Notes pursuant to the Change of Control Offer. The notice, which shall govern the terms of the offer, shall state: (i) that the Change of Control Offer is being made pursuant to this Section 11.1 and that all Notes or portions thereof tendered will be accepted for payment; (ii) the Change of Control Purchase Price (including the amount of accrued and unpaid interest), the Change of Control Payment Date and the Final Change of Control Put Date (as defined below); (iii) that any Note, or portion thereof not tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in depositing U.S. Legal Tender with the Paying Agent in accordance with the last paragraph of this clause (c), or payment is otherwise prevented, any Note or portion thereof accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (v) that Holders electing to have a Note or portion thereof purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent (which may not for purposes of this Section 11.1, notwithstanding anything in this Indenture to the contrary, be the Company or any Affiliate of the Company) at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date (the "Final Change of Control Put Date"); (vi) that Holders will be entitled to withdraw their election, in whole or in part, if the Paying Agent receives, prior to the close of business on the Final Change of Control Put Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes the Holder is withdrawing and a statement that such Holder is withdrawing his election to have such principal amount of Notes purchased; and (vii) a brief description of the events resulting in such Change of Control. Any such Change of Control Offer shall comply with all applicable provisions of Federal and state laws, including those regulating tender offers, if applicable, and any provisions of this Indenture which conflict with such laws shall be deemed to be superseded by the provisions of such laws. On or before the Change of Control Payment Date, the Company shall (i) accept for payment Notes or portions thereof properly tendered pursuant to the Change of Control Offer prior to the close of business on the Final Change of Control Put Date, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Change of Control Purchase Price (together with accrued and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted together with an Officers' Certificate listing the Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the Change of Control Purchase Price (together with accrued and unpaid interest). The Trustee shall promptly cancel all Notes accepted by the Company pursuant to the Change of Control Offer and delivered to it, 53 59 and authenticate and mail or deliver to the Holders of Notes so accepted a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. ARTICLE XII SECURITY Section 12.1 Security Documents. Each Holder, by accepting a Note, agrees to all of the terms and provisions of the Security Documents. The due and punctual payment of the principal of, interest on and premium (if any) on the Notes when and as the same shall be due and payable, whether on an interest payment date, at a Maturity Date, by acceleration, call for redemption or otherwise, and interest on the overdue principal and interest, if any, of the Notes and payment and performance of all other obligations of the Company to the Holders or the Trustee under this Indenture and the Notes, according to the terms hereunder or thereunder, shall be secured as provided in the Security Documents. The Company shall make, or cause its Subsidiaries to make, an assignment of their right, title and interest in and to the Collateral to the Trustee as required by and in accordance with the Security Documents. Section 12.2 INTENTIONALLY OMITTED. Section 12.3 Authorization of Actions to be Taken by the Trustee Under the Security Documents. The Trustee may, in its sole discretion and without the consent of the Holders, but subject to Article VII hereof, take all actions it deems necessary or appropriate in order to (a) enforce or effect the Security Documents and (b) collect and receive any and all amounts payable in respect to the obligations of the Company hereunder in accordance with and to the extent provided in the Security Documents. Such actions shall include, but not be limited to, advising, instructing or otherwise directing the Disbursement Agent in accordance with the Security Documents in connection with enforcing or effecting any term or provision of the Disbursement Agreement. Subject to the provisions of the Security Documents, the Trustee shall have the power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts which may be unlawful or in violation of the Security Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security hereunder or be prejudicial to the interests of the Holders or of the Trustee). Section 12.4 Authorization of Receipt of Funds by the Trustee Under the Security Documents. The Trustee is authorized to receive any funds for the benefit of Holders distributed under the Security Documents, and to make further distributions of such funds to the Holders according to the provisions of this Indenture. Section 12.5 Termination of Security Interest. 54 60 Upon the payment in full of all obligations of the Company under this Indenture and the Notes, all liens, security interests and encumbrances created by the Security Documents shall be automatically released and discharged, and the Trustee shall, at the request of the Company, deliver a certificate to the Disbursement Agent stating that such obligations have been paid in full and that all liens, security interests, and encumbrances created by the Security Documents or this Indenture have been released and discharged. Section 12.6 Release of Collateral. (a) Collateral may be released from the security interest created by the Security Documents, and shall thereafter cease to be "Collateral," in accordance with the provisions of the Security Documents. (b) Shares of TransTexas common stock may be released from the security interest created by the Pledge Agreement as follows: (1) Up to 5,000,000 shares of pledged TransTexas common stock (subject to adjustment upon the occurrence of certain events, including subdivision, combinations and reclassifications, affecting TransTexas common stock) owned by the Company may be released from the security interest created by the Pledge Agreement if (A) such shares are sold for cash and the Net Proceeds are immediately deposited in the Collateral Account or (B) if the Company issues and sells Preferred Stock that is exchangeable for TransTexas common stock and the Net Proceeds of such sale are deposited concurrently in the Collateral Account, provided such Net Proceeds are at least equal to the Market Value, as of the date of such release, of the shares of TransTexas common stock that are released. Any such shares sold by the Company shall be sold at prices no less favorable to the Company than those that could be obtained in arm's-length transactions with unrelated persons. (2) All of the pledged shares of TransTexas common stock owned by the Company shall be released from the security interest created by the Pledge Agreements upon the occurrence of a Change of Control on the day after the Change of Control Payment Date if a Change of Control Offer has been consummated in accordance with the Indenture. (c) The release of any Collateral from the terms hereof and of the Security Documents will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the Security Documents or this Section 12.6. The Trustee and each of the Holders acknowledge that a release of Collateral in accordance with the terms of the Security Documents or this Section 12.6 will not be deemed for any purpose to be an impairment of the security under this Indenture. Notwithstanding any provision of this Indenture or the Security Documents to the contrary, to the extent applicable, the Company shall not be required to comply with TIA Sections 314(c) and (d). (d) Any Collateral that may be released from the security interest created by any of the Security Documents pursuant to this Section 12.6 or the Security Documents (other than disbursements from the Collateral Account that are made in accordance with the Disbursement Agreement) shall be released by the Trustee upon (i) the Trustee's receipt of written notice from the Company, in the case of Company Collateral, specifying the Collateral to be released and the circumstances for the release (including the provision of the Indenture or Security Document pursuant to which the Collateral is to be released), (ii) compliance by the Company with Section 13.4(a), and (iii) if one of the conditions for the release of any Collateral is that any funds be deposited in the Collateral Account, such funds shall have been deposited in the Collateral Account concurrently with the Trustee's release of such Collateral. (e) Notwithstanding the foregoing, no Collateral may be released from the security interest created by the Security Documents if at the time of such proposed release, a Default or Event of Default has occurred and is continuing or would occur as a result of such release. Any shares of TransTexas common 55 61 stock that is released pursuant to this Section 12.6 in connection with a sale of such stock shall be sold for cash at prices no less favorable to the seller than those that could be obtained in arm's-length transactions with unrelated persons. (f) The Company shall give written notice to the holders of the Notes within 10 days of any release of pledged shares of TransTexas common stock. Such notice shall set forth the date of such release, the number of shares released, and the provision of the Indenture pursuant to which such shares were released. ARTICLE XIII MISCELLANEOUS Section 13.1 TIA. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of the TIA, the imposed duties of this Indenture shall control. This Indenture will not be qualified under the TIA. Section 13.2 Notices. Any notices or other communications to the Company or the Trustee required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Company: TransAmerica Refining Corporation 1300 East North Belt, Suite 320 Houston, Texas 77060 Attention: Ed Donahue if to the Trustee: First Union National Bank 40 Broad Street Suite 550 New York, New York 10004 Attention: Corporate Trust Administration 56 62 with a copy to: Edwards & Angel 750 Main Street Hartford, Connecticut 06103-2715 Attention: Mr. Justin M. Sullivan The Company or the Trustee by notice to each other party may designate additional or different addresses as shall be furnished in writing by such party. Any notice or communication to the Company or the Trustee shall be deemed to have been given or made as of the date so delivered, if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; and five Business Days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Noteholder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 13.3 INTENTIONALLY OMITTED. Section 13.4 Certificate and Opinion as to Conditions Precedent. (a) Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate (in form and substance reasonably satisfactory to the Trustee) stating that, in the opinion of the officers signing such certificate, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel (in form and substance reasonably satisfactory to the Trustee) stating that, in the opinion of such counsel, all such conditions precedent have been complied with. (b) If any action taken by the Trustee under this Indenture is subject to any condition subsequent, the Company shall, within 5 Business Days after all conditions subsequent for such action have been satisfied, furnish to the Trustee: (1) an Officers' Certificate (in form and substance reasonably satisfactory to the Trustee) stating that, in the opinion of the officers signing such certificate, all conditions subsequent provided for in this Indenture relating to the action have been complied with; and (2) an Opinion of Counsel (in form and substance reasonably satisfactory to the Trustee) stating that, in the opinion of such counsel, all such conditions subsequent have been complied with. Section 13.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: 57 63 (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based: (c) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. Section 13.6 Rules by Trustee, Paying Agent, Registrar. The Trustee may make reasonable rules for action by or at a meeting of Noteholders. The Paying Agent or Registrar may make reasonable rules for its functions. Section 13.7 Legal Holidays. A "Legal Holiday" used with respect to a particular place of payment is a Saturday, a Sunday or a day on which banking institutions at such place are not required to be open. If a payment date is a Legal Holiday at such place, payment may be made at such place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 13.8 Governing Law. THIS INDENTURE AND THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THIS INDENTURE AND THE TRANSACTIONS DESCRIBED HEREIN SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, WITH RESPECT TO ALL ISSUES, INCLUDING (WITHOUT LIMITATION) ISSUES OF VALIDITY, INTERPRETATION, EFFECT, PERFORMANCE AND REMEDIES. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY NOTEHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 58 64 Section 13.9 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10 No Recourse against Others. A director, officer, employee, stockholder or incorporator, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creations. Each Noteholder, by accepting a Note, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Notes. Section 13.11 Successors. All agreements of the Company in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.12 Duplicate Originals. All parties may sign any number of copies or counterparts of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement. Section 13.13 Severability. In case any one or more of the provisions in this Indenture or in the Notes shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. Section 13.14 Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table and headings of the Articles and the Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 59 65 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above. TRANSAMERICAN REFINING CORPORATION By: /s/ Ed Donahue ------------------------------------ Authorized Signatory FIRST UNION NATIONAL BANK, as Trustee By: /s/ W. Jeffrey Kramer ------------------------------------ Authorized Signatory 66 Exhibit A [Form of Senior Secured Note] TRANSAMERICAN REFINING CORPORATION SENIOR SECURED NOTE DUE MARCH 14, 1998 No. $ TransAmerican Refining Corporation, a Texas corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________________, or registered assigns, the principal sum of _________________ Dollars, on March 14, 1998. Interest Payment Dates: September 14, 1997 and the Maturity Date Record Dates: September 1, 1997 and March 1, 1998 Reference is made to the further provisions of this Note on the reverse side, which will, for all purposes, have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Instrument to be duly executed under its corporate seal. Dated: TRANSAMERICAN REFINING CORPORATION By: -------------------------------- Authorized Signatory A-1 67 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By: ---------------------------- Authorized Signatory Dated: A-2 68 TRANSAMERICAN REFINING CORPORATION SENIOR SECURED NOTE DUE MARCH 14, 1998 1. Interest. TransAmerican Refining Corporation, a Texas corporation (the "Company"), promises to pay interest on the principal amount of the Notes at a rate of 15.0% per annum (subject to adjustment). To the extent it is lawful, the Company promises to pay interest on any interest payment due but unpaid on such principal amount at a rate of 15.0% per annum (subject to adjustment) compounded semiannually. The Company will pay interest on September 14, 1997 and at the Maturity Date (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from March 14, 1997. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. 2. Method of Payment. The Company shall pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders at the close of business on the Record Date immediately preceding the Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments. Except as provided below, the Company shall pay in New York principal and interest in such coin or currency of the United States of America as at the time of payment shall be legal tender for payment of public and private debts ("U.S. Legal Tender"). The Company may pay principal and interest by wire transfer of Federal funds, or interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest payment to the Paying Agent. 3. Paying Agent and Registrar. Initially, First Union National Bank, (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Holders. The Company or any of its Subsidiaries may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. 4. Indenture. The Company issued the Notes under an Indenture, dated as of March 14, 1997 (the "Indenture"), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA, as in effect on the date of the Indenture. The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and said Act for a statement of them. The Notes are senior obligations of the Company limited in aggregate principal amount to $36,000,000. 5. Redemption. The Notes may be redeemed at the election of the Company, as a whole, at any time on and after July 1, 1997, at 100% of the principal amount thereof, together with any accrued but unpaid interest to the Redemption Date. The Company shall redeem the entire principal amount of the Notes on a date (the "Redemption Date") that is not more than 7 days after the date of completion of an Equity Exchange Offer (as such term is defined A-3 69 in the Mortgage Notes Indenture), or other exchange offer, tender offer or other form of refinancing of the Mortgage Notes. Such redemption shall be made at 100% of the principal amount thereof, plus accrued interest to the Redemption Date. 6. Notice of Redemption. Notice of redemption will be given at least 7 days but not more than 45 days before the Redemption Date to each Holder of Notes to be redeemed, by first class mail or by telecopy, his registered address. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Notes called for redemption shall have been deposited with the Paying Agent on such Redemption Date the Notes called for redemption will cease to bear interest and the only right of the Holders of such Notes will be to receive payment of the Redemption Price and any accrued and unpaid interest to the Redemption Date. 7. Denominations; Transfer; Exchange. The Notes are in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A Holder may register the transfer of, or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Notes selected for redemption. 8. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 9. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent(s) will pay the money back to the Company at its written request. After that, all liability of the Trustee and such Paying Agent(s) with respect to such money shall cease. 10. Discharge Prior to Redemption or Maturity. If the Company at any time deposits into an irrevocable trust with the Trustee U.S. Legal Tender or Government Securities sufficient to pay the principal of and interest on the Notes to redemption or maturity and complies with the other provisions of the Indenture relating thereto, the Company will be discharged from certain provisions of the Indenture and the Notes (including the financial covenants, but excluding its obligation to pay the principal of and interest on the Notes). 11. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing Default or Event of Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency, or make any other change that does not adversely affect the rights of any Holder of a Note. A-4 70 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company, and its Subsidiaries to, among other things, incur additional Debt or issue Disqualified Capital Stock, make payments in respect of its Capital Stock enter into transactions with Related Persons, incur Liens, sell assets, change the nature of its business, merge or consolidate with any other Person and sell, lease, transfer or otherwise dispose of substantially all of its properties or assets. The Indenture requires the Company to repurchase Notes under certain circumstances with the Net Cash Proceeds of certain Asset Sales. The limitations are subject to a number of important qualifications and exceptions. The Company must report to the Trustee on compliance with such limitations on a quarterly basis. 13. Change of Control. In the event there shall occur any Change of Control, each Holder of Notes shall have the right, at such Holder's option but subject to the limitations and conditions set forth in the Indenture, to require the Company to purchase on the Change of Control Payment Date in the manner specified in the Indenture, all or any part (in integral multiples of $1,000) of such Holder's Notes at a Change of Control Purchase Price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the Change of Control Payment Date. 14. Successors. When a successor assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor will be released from those obligations. 15. Defaults and Remedies. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority of the aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture of the Notes. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Notes notices of any continuing Default or Event of Default (except a Default in payment of principal, premium, if any, or interest, including a Default at any Maturity Date), if it determines that withholding notice is in their interest. 16. No Recourse Against Others No stockholder, director, officer, employee or incorporator, as such, past, present or future, of the Company or any successor corporation shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a by accepting a Note waives and release all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 17. Authentication. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. A-5 71 18. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Note or an assignee. such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). A-6 72 ASSIGNMENT I or we assign this Note to: -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- (Print or type name, address and zip code of assignee) Please insert Social Security or other identifying number of assignee: -------------------------------------- and irrevocably appoint _______________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: -------------- Signature: ------------------------------- (Sign exactly as name appears on the other side of this Note) A-7 73 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.16 or Article XI of the Indenture, check the appropriate box: [ ] Section 4.16 [ ] Article XI If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.16 or Article XI of the Indenture, as the case may be, state the amount you want to be purchased: $ ---------------------- Dated: -------------------- Signature: ----------------------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ------------------------------------------- A-8 EX-4.10 4 PLEDGE AGREEMENT 1 EXHIBIT 4.10 ================================================================================ TRANSAMERICAN REFINING CORPORATION, as Pledgor and FIRST UNION NATIONAL BANK as Trustee _________________________________________ PLEDGE AGREEMENT Dated as of March 14, 1997 _________________________________________ $36,000,000 Senior Secured Notes due March 14, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page ---- Section 1. Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Representations, Warranties and Covenants of the Pledgor . . . 2 Section 3. Administration of the Pledged Collateral . . . . . . . . . . . 4 Section 4. Release and Substitution of Pledged Collateral . . . . . . . . 4 Section 5. Voting Rights, Dividends, Etc . . . . . . . . . . . . . . . . . 4 Section 6. Default; Remedies . . . . . . . . . . . . . . . . . . . . . . . 5 Section 7. Trustee Appointed Attorney-in-Fact . . . . . . . . . . . . . . 7 Section 8. Purchase of Pledged Collateral by Trustee or Holders . . . . . 7 Section 9. Disposition of Proceeds . . . . . . . . . . . . . . . . . . . . 7 Section 10. Waiver of Claims . . . . . . . . . . . . . . . . . . . . . . . 7 Section 11. Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . 8 Section 12. Additional Collateral . . . . . . . . . . . . . . . . . . . . 8 Section 13. Further Assurances . . . . . . . . . . . . . . . . . . . . . . 8 Section 14. Indemnification and Expenses . . . . . . . . . . . . . . . . . 9 Section 15. Registration Rights, etc . . . . . . . . . . . . . . . . . . . 9 Section 16. Pledgor's Indenture Obligations Absolute . . . . . . . . . . . 10 Section 17. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 18. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 19. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 20. Binding Agreement; Assignment . . . . . . . . . . . . . . . . 11 Section 21. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 22. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 23. Severability . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 24. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 3
Page ---- Section 25. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 26. Cooperation of TransTexas . . . . . . . . . . . . . . . . . . 11 Section 27. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 11
3 4 PLEDGE AGREEMENT This PLEDGE AGREEMENT, together with any amendments, replacements and supplements hereafter entered into (the "Pledge Agreement"), dated as of March 14, 1997, between TransAmerican Refining Corporation (together with its successors and assigns, the "Pledgor") and First Union National Bank, (together with its successors and assigns, the "Trustee"), is made for the benefit of the Holders. As used herein, all capitalized terms not otherwise defined herein shall have the meanings set forth in the Indenture (the "Indenture"), dated the date hereof, between the Pledgor and the Trustee, relating to the Pledgor's Senior Secured Notes due March 14, 1998 (the "Notes"), as amended from time to time in accordance with the terms thereof. W I T N E S S E T H: WHEREAS, the Pledgor will issue $36,000,000 aggregate principal amount of Notes; WHEREAS, the Pledgor is the legal and beneficial owner of the issued and outstanding shares of capital stock of TransTexas Gas Corporation, a Texas Corporation ("TransTexas") as more fully set forth on Schedule A attached hereto (the "TransTexas Shares"); and WHEREAS, in order to secure the payment and performance in full of the Indenture obligations of the Pledgor, the parties hereto desire to set forth their mutual understanding and certain agreements regarding the terms and conditions of the pledge of the Pledged Collateral (as defined below) made by the Pledgor to the Trustee for the benefit of the Holders of the Notes; WHEREAS, the Pledgor has issued the Mortgage Notes and has pledged all of the TransTexas Shares for the benefit of the holders of Mortgage Notes pursuant to the Mortgage Notes Indenture; WHEREAS, the holders of the Mortgage Notes have consented to release the Lien of the Mortgage Notes Company Pledge Agreement on up to 5,000,000 shares of the TransTexas Shares and the other Company Pledge Collateral (as such term is defined in the Mortgage Notes Indenture) related thereto in order to permit the Pledgor to obtain the financing contemplated by the Indenture; and NOW, THEREFORE, in consideration of the premises and other benefits to the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Pledge. As collateral security for the indefeasible payment and performance in full of the Indenture obligations of the Pledgor, the Pledgor hereby pledges, assigns, transfers, sets over and delivers unto the Trustee, and hereby grants unto the Trustee for the benefit of FIRST, the Holders and unto their respective successors and assigns, and SECOND the holders of the Mortgage Notes and unto their respective successors and assigns, a continuing security interest in all of the right, title and interest of the Pledgor in, to and under any and all of the following described property, rights and interests (collectively, the "Pledged Collateral"): (a) 5,000,000 shares of the TransTexas Shares; (b) all securities, certificates and instruments representing or evidencing ownership of any of the property described in Section 1(a) hereof (the property described in Section 1(a) and Section 1(b) hereof being herein referred to collectively as the "Pledged Securities"); (c) any additional property of the kind or type described in this Section 1 required to be supplied under the terms of this Pledge Agreement; and 1 5 (d) all proceeds and products of the Pledged Securities, including without limitation dividends, distributions, cash, instruments and other property or securities, now or hereafter at any time or from time to time received or receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the Pledged Securities; TO HAVE AND TO HOLD the Pledged Collateral, together with all rights, titles, interests, powers, privileges and preferences pertaining or incidental thereto, unto the Trustee for the benefit of FIRST, the Holders and unto their respective successors and assigns, and SECOND, the holders of the Mortgage Notes and unto their respective successors and assigns. Section 2. Representations, Warranties and Covenants of the Pledgor. The Pledgor hereby represents and warrants (as of the date of execution hereof as to the Pledged Collateral existing on such date and as of the date of acquisition as to the Pledged Collateral acquired subsequently), covenants and agrees that: (a) The Pledgor is the legal and beneficial owner of the Pledged Collateral, holds the Pledged Collateral free and clear of all Liens (except for (i) the security interest granted hereunder to the Trustee for the benefit of (A) first, the Holders of Notes, and (B) second, the holders of the Mortgage Notes, and (iii) Liens for taxes not yet payable), and has not made and will not make any other pledge, assignment, mortgage, hypothecation or transfer of the Pledged Collateral. The Pledged Securities are not subject to any put, call, option or other right in favor of any other person whatsoever. (b) The Pledged Securities have been duly authorized and validly issued and are fully paid and non-assessable. (c) Upon delivery of physical certificates evidencing the Pledged Securities to the Trustee, the Trustee will have a perfected first priority security interest in the Pledged Securities, securing the indefeasible payment and performance in full of the Indenture obligations of the Pledgor. (d) The Pledgor has the requisite corporate power and authority to pledge the Pledged Collateral in the manner hereby done or contemplated and will defend its title thereto against the lawful claims of all persons whomsoever and shall maintain and preserve the security interest granted hereunder with respect to the Pledged Collateral as long as this Pledge Agreement shall remain in full force and effect. (e) Neither the execution and delivery of this Pledge Agreement by the Pledgor, the performance by the Pledgor of its obligations hereunder, nor the transactions herein contemplated will (i) violate the Pledgor's charter or bylaws, (ii) violate the terms of any agreement, indenture, mortgage, deed of trust, equipment lease, instrument or other document to which the Pledgor is a party, including, without limitation, the Mortgage Notes Indenture and the Mortgage Notes Company Pledge Agreement, (iii) violate any law, order, rule or regulation applicable to the Pledgor or any court or any government, regulatory body or administrative agency or other governmental body having jurisdiction over the Pledgor or its properties, or (iv) result in or require the creation or imposition of any Lien (other than the Lien contemplated hereby), upon or with respect to any of the property now owned or hereafter acquired by the Pledgor, which violation or conflict would have a material adverse effect on the financial condition, business, assets or liabilities of the Pledgor or on the value of the Pledged Collateral or a material adverse effect on the security interests hereunder; provided, that a foreclosure by the Trustee with respect to the Pledged Collateral may result in a "Change of Control" under the indenture relating to the 11 1/2% Senior Secured Notes due 2002 of TransTexas Gas Corporation. (f) The Pledged Securities include 5,000,000 shares of the issued and outstanding shares of Capital Stock of TransTexas as described in Schedule A attached hereto, and as of the date of execution hereof, there are no outstanding options, warrants or other rights to subscribe for or purchase any property described in Section l(a). 2 6 (g) No consent or approval which has not been obtained prior to the date hereof of any other person or entity and no authorization, approval or other action (other than delivery of physical certificates evidencing the Pledged Securities) by, and no notice to or filing with any governmental body (other than UCC filings), regulatory authority or securities exchange, was or is necessary as a condition to the validity of the pledge hereunder of the Pledged Collateral, and such pledge is effective to vest in the Trustee the rights of the Trustee in the Pledged Collateral as set forth herein. There are no restrictions on the transferability of any of the Pledged Collateral transferred or delivered by the Pledgor hereunder or, except for restrictions related to federal and state securities laws governing the sale of "restricted stock" or "control stock," with respect to the foreclosure, transfer or disposition thereof by the Trustee. (h) The Pledgor shall deliver to the Trustee concurrently with the execution of this Pledge Agreement or, to the extent acquired subsequent to the date of execution hereof, immediately upon the Pledgor's acquisition thereof: (i) all certificates and instruments representing the Pledged Securities, and (ii) each other item of Pledged Collateral (including all certificates, instruments and notes representing any such Pledged Collateral). Any and all Pledged Securities delivered to the Trustee shall be accompanied by undated duly executed powers in blank and by such other instruments of transfer or documents as the Trustee may reasonably request. The Trustee shall hold the certificates representing the Pledged Securities delivered to it in its own name or in the name of its nominee, all in form and substance satisfactory to the Trustee. The Pledgor hereby acknowledges that the Trustee may, in its discretion, appoint one or more financial institutions to act as the Trustee's agent in holding in custodial accounts, instruments or other financial assets in which the Trustee is granted a security interest hereunder, including, without limitation, certificates of deposit and other instruments evidencing short term obligations. (i) The Trustee shall at all times have full and free access during normal business hours to all of the books, correspondence and records of the Pledgor relating to the Pledged Collateral (other than information that is privileged and confidential), and the Trustee and its representatives may examine the same, make abstracts therefrom and make photocopies thereof, and the Pledgor agrees to render to the Trustee, at the Pledgor's cost and expense, such clerical and other assistance as may be reasonably requested by the Trustee with regard thereto. (j) The Pledgor shall use its best efforts to prohibit TransTexas from issuing any securities of the type required to be pledged hereunder unless such securities are promptly pledged and delivered hereunder to the Trustee in accordance with Section 2(h). (k) If, while this Pledge Agreement is in effect, any stock dividend, stock split, reclassification, readjustment, reorganization, merger, consolidation, exchange offer, tender offer or other change in the capital structure, including the creation of any subscription or other rights relating to the Pledged Securities, is declared or made, or proposed to be declared or made, by TransTexas or any other issuer of Pledged Collateral, all substituted and additional securities or interest issued with respect to the Pledged Collateral and evidenced by certificates shall be endorsed in blank by the Pledgor promptly upon receipt thereof or otherwise appropriately transferred to the Trustee in negotiable form, and all certificates or instruments evidencing such securities shall be delivered to the Trustee to be held under the terms of this Pledge Agreement in the same manner as, and as a part of, the Pledged Collateral. All Pledged Securities shall be evidenced by one or more certificates. Any securities that may be issued upon exercise of any subscription or other rights relating to the Pledged Securities shall be endorsed in blank and delivered to the Trustee with any necessary powers. (l) The Pledgor shall pay and discharge all taxes, assessments and governmental charges or levies against any Pledged Collateral prior to delinquency thereof and shall keep all Pledged Collateral free of all unpaid charges whatsoever, unless contested in good faith and appropriate reserves have been set aside in accordance with GAAP. 3 7 (m) The Pledgor has, independently and without reliance on the Trustee or any Holder and based on such documents and information as it deemed appropriate, made its own credit analysis and decision to enter into this Pledge Agreement. (n) The Pledgor shall promptly notify the Trustee (i) of any material changes in any fact or circumstance represented or warranted by the Pledgor with respect to any material portion of the Pledged Collateral, (ii) of any material impairment of the Pledged Collateral and (iii) of any claim, action or proceeding affecting title to all or any of the Pledged Collateral. (o) The chief executive office and principal place of business of the Pledgor is located at 1300 East North Belt, Houston, Texas 77060. The Pledgor shall not relocate its principal place of business or chief executive office to another county or state unless the Pledgor gives 30 days' prior written notice to the Trustee, which notice shall specify the county and state into which such relocation is to be made. Section 3. Administration of the Pledged Collateral. The Trustee shall administer the Pledged Collateral in accordance with the provisions hereof and of the Indenture. Section 4. Release and Substitution of Pledged Collateral. The Pledged Collateral shall not be released from the security interest created hereunder and no property shall be substituted for any of the Pledged Collateral, except (a) in accordance with the provisions of Section 12.6 of the Indenture and (b) in accordance with the provisions of Section 18 hereof. The Trustee shall return the physical certificates and related stock powers evidencing Pledged Collateral in its possession when so permitted by the Indenture or this Pledge Agreement. Section 5. Voting Rights, Dividends, Etc. (a) Until an Event of Default (as defined below) shall have occurred and be continuing: (i) except as otherwise provided in this Pledge Agreement, the Pledgor shall be entitled to exercise any and all voting or consensual rights and powers, including subscription rights, accruing to an owner of the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement or any agreement giving rise to any of the Indenture obligations; and (ii) the Trustee shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor, all such proxies, powers of attorney, dividend orders and other instruments as the Pledgor may reasonably request for the purpose of enabling it to exercise the voting or consensual rights and powers which the Pledgor is entitled to exercise pursuant to the foregoing Section 5(a)(i). (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Pledgor to exercise the voting or consensual rights and powers which the Pledgor would otherwise be entitled to exercise pursuant to Section 5(a)(i) shall automatically cease, and all such rights shall thereupon become vested in the Trustee, which shall then have the sole and exclusive right and authority to exercise, in its sole discretion, all such voting and consensual rights and powers. (c) The Trustee shall have the sole and exclusive right and authority to receive and retain as Pledged Collateral all dividends, distributions and other payments which are paid on the Pledged Collateral in cash or property. Any and all money and other property paid over to or received by the Trustee pursuant to the provisions of this Section 5(c) shall be retained by the Trustee as additional Pledged Collateral hereunder and shall be administered and applied in accordance with the provisions of this Pledge Agreement and the Indenture. All dividends and interest payments which are received by the Pledgor contrary to the provisions of this Section 5(c) shall be received in trust for the benefit of the Trustee, shall be segregated from other funds of 4 8 the Pledgor and shall be forthwith paid over to the Trustee as Pledged Collateral in the same form as so received (with any necessary endorsement). Section 6. Default; Remedies. (a) Defined. For purposes of this Pledge Agreement, the terms "Default" and "Event of Default" shall have the respective meanings provided in the Indenture. (b) Exercise of Remedies Under the Pledge Agreement. If an Event of Default shall have occurred and be continuing to the actual knowledge of the Trustee, the Trustee shall commence the taking of such actions (or refrain from taking actions) toward collection or enforcement of this Pledge Agreement and the Pledged Collateral (or any portion thereof), including without limitation action toward foreclosure upon any Pledged Collateral, as it deems appropriate in its sole discretion or as instructed by the Requisite Holders (as defined in Section 6(f) below) to the extent allowed by law. If any Event of Default that was the basis for the commencement of such action shall have been cured or waived, and, in the case where there has been an acceleration, rescission of such acceleration shall have occurred, in each case in accordance with the terms of the Indenture, any direction to the Trustee to take any action in connection with the aforementioned notice shall be deemed rescinded upon notification by that percentage of Holders necessary to effect such waiver with respect to such Event of Default as provided for in the Indenture. The Trustee shall have no obligation to take any collection or enforcement action except upon satisfaction of the conditions set forth in Section 6.7 and Section 6.11 of the Indenture applied to this Pledge Agreement. (c) Remedies Generally. If an Event of Default shall have occurred and be continuing, the Trustee itself or by its agents or attorneys may (i) exercise any or all of its rights and remedies hereunder, under the Indenture, the Security Agreement or any other instrument or agreement securing, evidencing or relating to the Indenture obligations or under applicable laws (including all of the rights and remedies of a secured creditor under the Uniform Commercial Code then in effect in the State of New York; (the "NYUCC"), (ii) retain possession of the Pledged Collateral or (iii) sell, assign, transfer, or dispose of, endorse and deliver the whole or, from time to time, any part of the Pledged Collateral at public or private sale or sales, at any exchanges, brokers board or at any of the Trustee's offices or elsewhere, for cash, upon credit or for other property, for immediate or future delivery, and, to the extent permitted by applicable law, for such price or prices and on such other terms as the Trustee may deem commercially reasonable. Upon consummation of any such sale, the Trustee shall have the right to assign, transfer, endorse and deliver to the purchaser or purchasers thereof the Pledged Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to the full extent permitted by law) all rights of redemption, stay or appraisal which the Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Trustee shall give the Pledgor ten (10) Business Days' written notice (which the Pledgor agrees shall be deemed to be reasonable notification within the meaning of Section 9-504(3) of the NYUCC) of the Trustee's intention to make any such public or private sale. Any such sale shall be held at such time or times and at such place or places as the Trustee may fix. At any such sale, the Pledged Collateral, or portion thereof to be sold, may be sold as an entirety or in separate portions, as the Trustee may, in its sole discretion, determine. The Trustee shall not be obligated to make any sale of the Pledged Collateral if it shall determine not to do so, regardless of the fact that notice of sale of the Pledged Collateral may have been given. The Trustee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Pledged Collateral is made on credit for future delivery, the Pledged Collateral so sold may be retained by the Trustee until the sale price is paid by the purchaser or purchasers thereof, but the Trustee shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Collateral so sold and, in case of any such failure, such Pledged Collateral may be sold again upon like notice. As an alternative to exercising the power of sale herein conferred upon it, the Trustee may proceed by suit or suits at law or in equity to exercise its remedies regarding the Pledged Collateral and sell the Pledged Collateral or any portion thereof 5 9 pursuant to judgment or decree of a court or courts having competent jurisdiction. If under mandatory requirements of applicable law, the Trustee shall be required to make disposition of the Pledged Collateral within a period of time that does not permit the giving of notice to the Pledgor as hereinbefore provided, the Trustee need give the Pledgor only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of law. (d) Remedies; Obtaining the Collateral Upon Default. The Pledgor agrees that if any Event of Default shall have occurred and be continuing, then and in every such case, and in addition to the rights and remedies available to a secured party under any applicable provision of the NYUCC, or any other applicable law, the Trustee may: (i) personally, or by agents or attorneys, immediately take possession of the Pledged Collateral or any part thereof from the Pledgor or any other person who then has possession of any part thereof, with or without notice or process of law, and for that purpose may enter upon the Pledgor's premises where any of the Pledged Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of the Pledgor; (ii) instruct the obligor or obligors on any agreement, instrument or other obligation constituting Pledged Collateral to make any payment or render any performance required by the terms of such agreement, instrument or obligation directly to the Trustee or its designee; (iii) sell or otherwise liquidate, or direct the Pledgor to sell or otherwise liquidate, any or all investments made in whole or in part with the Pledged Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation; and (iv) take possession of the Pledged Collateral or any part thereof by directing the Pledgor in writing to deliver the same to the Trustee at any place or places designated by the Trustee, in which event the Pledgor shall at its own expense: (A) forthwith cause the same to be moved to the place or places so designated by the Trustee and there delivered to the Trustee; (B) store and keep any Pledged Collateral so delivered to the Trustee at such place or places pending further action by the Trustee as provided in this Section 6(d); and (C) while any such Pledged Collateral shall be so stored and kept, provide such guard and maintenance services as shall be necessary to protect the same and to preserve and maintain such Pledged Collateral in good condition; it being understood that the Pledgor's obligation so to deliver the Pledged Collateral is of the essence of this Pledge Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Trustee shall be entitled to a decree requiring specific performance by the Pledgor of such obligation. (e) Preventing Impairment of the Pledged Collateral. Regardless of whether or not there shall have occurred any Default or Event of Default, the Trustee may institute and maintain or cause in the name of the Pledgor or of the Trustee, or any of them, to be instituted and maintained, such suits and proceedings as the Trustee may be advised by counsel shall be necessary or expedient to prevent any impairment of the security interest in or perfection of the Pledged Collateral in contravention of the terms of the Indenture. The Pledgor agrees not to knowingly take or permit to be taken any action which would impair the Pledged Collateral or the Trustee's rights in the Pledged Collateral. 6 10 (f) Requisite Holders. For purposes of this Section 6, "Requisite Holders" means the Holder or Holders of a majority of the aggregate principal amount of the outstanding Notes. Section 7. Trustee Appointed Attorney-in-Fact. The Pledgor hereby constitutes and appoints the Trustee its attorney-in-fact for the purpose of carrying out the provisions, but subject to the terms and conditions, of this Pledge Agreement and taking any action and executing any instrument, including, without limitation, any financing statement or continuation statement, and taking any other action to maintain the validity, perfection, priority and enforcement of the security interest intended to be created hereunder, that the Trustee may reasonably deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest; provided, however, that nothing herein contained shall be construed as requiring or obligating the Trustee to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice, or to take any action with respect to the Pledged Collateral or any part thereof or the monies due or to become due in respect thereof or any property covered thereby, and no action taken or omitted shall give rise to any defense, counterclaim or right of action against the Trustee, unless the Trustee's actions are taken or omitted to be taken with gross negligence or bad faith or constitute willful misconduct. Section 8. Purchase of Pledged Collateral by Trustee or Holders. At any sale of the Pledged Collateral, whether pursuant to power of sale or otherwise hereunder, the Trustee or any Holder may, to the extent permitted by applicable law, bid for and purchase, free from any right of redemption, stay or appraisal (all such rights being hereby waived and released by the Pledgor to the extent permitted by law), the Pledged Collateral or any part thereof or an interest therein and upon compliance with the terms of such sale may hold, retain, exploit, resell or otherwise dispose of such property without further accountability to the Pledgor for the proceeds of such sale (except in the event that there is a surplus of such proceeds in excess of the Indenture obligations, in which case, the Trustee shall account to the Pledgor for such surplus). The Pledgor will execute and deliver or cause to be executed and delivered, such instruments, endorsements, assignments, waivers, certificates and other documents and take such further action as the Trustee shall request in connection with any such sale. Section 9. Disposition of Proceeds. The proceeds of any sale of the whole or any part of the Pledged Collateral, together with any other monies held by the Trustee under the provisions of this Pledge Agreement, shall be applied by the Trustee in accordance with the provisions of the Indenture. Section 10. Waiver of Claims. Except as otherwise provided in this Pledge Agreement, THE PLEDGOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OF JUDICIAL HEARING IN CONNECTION WITH THE TRUSTEE'S TAKING POSSESSION OR THE TRUSTEE'S DISPOSITION OF ANY OF THE PLEDGED COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICES AND HEARINGS FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT THE PLEDGOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and to the full extent permitted by applicable law, the Pledgor hereby further waives: (a) all damages occasioned by such taking of possession or disposition except any damages which are the direct result of the Trustee's gross negligence, bad faith or willful misconduct; (b) all other requirements as to the time, place and terms of sale or other requirements, with respect to the enforcement of the Trustee's rights and powers hereunder; and (c) except as provided in Section 6(c) hereof, all rights of redemption, appraisement, valuation, stay, marshalling of assets, extension or moratorium, existing at law or in equity, by statute or otherwise, now or hereafter in force, in order to prevent or delay the enforcement of this Pledge Agreement or the 7 11 sale or other disposition of the Pledged Collateral or any portion thereof, and the Pledgor, for itself and all who may claim under it, insofar as it now or hereafter lawfully may, hereby waives all such rights. Any sale of, or the exercise of any options to purchase, or any other realization upon, any Pledged Collateral shall operate to divest all right, title, interest, claim and demand, at law or in equity, of the Pledgor therein and thereto, and shall be a perpetual bar both at law and in equity against the Pledgor and against any and all persons claiming or attempting to claim the Pledged Collateral so sold, optioned or realized upon, or any part thereof, through and under the Pledgor. Section 11. Remedies Cumulative; No Waiver. Each right, power and remedy of the Trustee provided for herein, in the Indenture, the Security Agreement or in any other agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder, or now or hereafter existing at law or in equity, by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power or remedy of the Trustee or any Holder provided for herein, in the Indenture, the Security Agreement or in any other agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder or now or hereafter existing at law or in equity, by statute or otherwise. No failure on the part of the Trustee or any Holder to exercise, and no delay in exercising, any right, power or remedy hereunder, or under the Indenture, the Security Agreement or under any other agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder or now or hereafter existing at law or in equity, by statute or otherwise, shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No notice to or demand on the Pledgor hereunder shall, of itself, entitle the Pledgor to any other or further notice or demand in the same, similar or other circumstances. Section 12. Additional Collateral. Without notice or consent of the Pledgor and without impairment of the security interests and rights created by this Pledge Agreement, the Trustee may accept from any person or persons additional collateral or other security for the Indenture obligations. Neither the creation of the security interests created hereunder nor the acceptance of any such additional collateral or security shall prevent the Trustee from resorting to such additional collateral or security or to the Pledged Collateral, in any order, without affecting the Trustee's rights hereunder. Section 13. Further Assurances. The Pledgor agrees (a) that it shall, at its own expense, promptly file or record such notices, financing statements, continuation statements or other documents and take all further action as may be necessary to perfect, maintain and protect the perfection of the security interests of the Trustee hereunder or to enable the Trustee to exercise and enforce its rights and remedies hereunder with respect to the Pledged Collateral, and as the Trustee may reasonably request, such instruments to be in form and substance satisfactory to the Trustee, and (b) that it shall, at its own expense, do such further acts and things and execute and deliver to the Trustee such additional conveyances, assignments, endorsements, agreements and instruments as the Trustee may at any time reasonably request in connection with the administration and enforcement of this Pledge Agreement or relative to the Pledged Collateral or any part thereof or in order to assure and confirm unto the Trustee its rights, powers and remedies hereunder. Section 14. Indemnification and Expenses. (a) The Pledgor agrees to indemnify the Trustee from and against any and all claims, losses and liabilities growing out of or resulting from this Pledge Agreement (including, without limitation, enforcement of this Pledge Agreement), except (i) valid claims (as determined by a nonappealable order of any court of competent jurisdiction) arising out of a breach by the Trustee of this Agreement or (ii) claims, losses or liabilities resulting from the Trustee's gross negligence, bad faith, recklessness or willful misconduct, as determined by a final judgment of a court of competent jurisdiction. The indemnification of the Trustee set forth in the immediately preceding sentence is cumulative and not exclusive of any indemnity of the Trustee set forth in the Indenture. 8 12 (b) The Pledgor will pay upon demand to the Trustee the amount of any and all reasonable out-of-pocket expenses, including the reasonable fees and charges of its counsel and of any experts and agents, that the Trustee may incur in connection with (i) the negotiation, execution and enforcement of this Pledge Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of the Trustee or the Holders hereunder or (iv) the failure by the Pledgor to perform or observe any of the provisions hereof, and all amounts so incurred by the Trustee shall be entitled to the benefits of Section 7.7 of the Indenture. Section 15. Registration Rights, etc. (a) If the Trustee determines that the registration of any of the securities included in the Pledged Collateral under, or other compliance with, the Securities Act or any similar Federal or state law is desirable, upon or at any time after an Event of Default and acceleration of the Notes in accordance with Section 6.2 of the Indenture, the Pledgor will use its best efforts to cause such registration or compliance to be effectively made, at no expense to the Trustee or to the Holders, and to continue any such registration effective for such time as may be reasonably necessary in the opinion of the Trustee. The Pledgor will reimburse the Trustee upon demand for any expenses incurred by the Trustee (including reasonable attorneys' fees) incurred in connection therewith, which obligation to pay such expenses shall be secured hereunder. (b) If the Pledgor is unable to effect a public sale of any or all of the Pledged Collateral or if the Trustee determines that it is desirable to sell the Pledged Collateral in one or more private sales, the Trustee may limit such sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to distribution or resale. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Trustee shall be under no obligation to delay a sale of any of the Pledged Collateral for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Securities Act or under applicable state securities laws even if such issuer would agree to do so. (c) The Pledgor further agrees to do or use all reasonable efforts to cause to be done, to the extent the Pledgor may legally do so, all such other acts and things as may be necessary to make such sale or sales of all or any part of the Pledged Collateral valid and binding and in compliance with any and all applicable laws, rules and regulations and orders and decrees of any and all courts having jurisdiction over such sales, all at the Pledgor's expense. The Pledgor further agrees that a breach of any of the covenants contained in this Pledge Agreement will cause irreparable injury to the Trustee, as secured party, for which the Trustee would have no adequate remedy at law in respect of such breach and, as a consequence, agrees that each and every covenant contained in this Section 15 shall be specifically enforceable against the Pledgor and, to the full extent permitted by applicable law, the Pledgor waives and agrees not to assert as a defense against an action for specific performance of such covenants that (i) Pledgor's failure to perform such covenants will not cause irreparable injury to the Trustee or the Holders or (ii) the Trustee on behalf of the Holders has an adequate remedy at law in respect of such breach. Section 16. Pledgor's Indenture Obligations Absolute. The liability of the Pledgor under this Pledge Agreement shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by: (a) any change in the time, place or manner of payment of all or any of the Indenture obligations, or in any other term of the Indenture, the Security Agreement or the Notes, any waiver, indulgence, renewal, extension, amendment or modification of or addition, consent or supplement to or deletion from or any other action or inaction under or in respect of the Indenture, the Security Agreement or the Notes, or any assignment or transfer thereof; (b) any lack of validity or enforceability, in whole or in part, of the Indenture, the Security Agreement or the Notes, (c) any furnishing of any additional security for the Indenture obligations or any acceptance thereof or any release or non-perfection of any security interest in property; (d) any 9 13 limitation on any party's liability or obligations under the Indenture, the Security Agreement or the Notes; (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Pledgor or any Person other than the Pledgor, or any action taken with respect to this Pledge Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not the Pledgor shall have notice or knowledge of any of the foregoing; or (f) any exchange, release or amendment or waiver of or consent to departure from the Security Agreement any other agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of the Holder, pursuant to which a person other than the Pledgor has granted a security interest. Section 17. Waiver. To the extent permitted by applicable law, the Pledgor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Indenture obligations and this Pledge Agreement and any requirement that the Trustee protect, secure, perfect or insure any security interest or any property subject thereto or exhaust any right or take any action against the Pledgor or any other person or entity; provided, however, that the Trustee shall in any event take such care in the handling of any Pledged Securities in its possession as it takes with respect to its own property of a similar nature in its possession. Section 18. Termination. Upon indefeasible payment and performance in full and satisfaction of all of the Indenture obligations and all other amounts payable under this Pledge Agreement, this Pledge Agreement shall terminate and the Trustee shall continue to hold, or shall otherwise deliver the Pledged Collateral, pursuant to the terms of the Mortgage Notes Company Pledge Agreement. In the event that the Mortgage Notes Company Pledge Agreement shall not then be in full force and effect and otherwise shall have terminated, the Company shall assign and redeliver to the Pledgor all of the Pledged Collateral hereunder that has not been sold, disposed of, retained or applied by the Trustee in accordance with the terms hereof and the Indenture. Such reassignment and redelivery shall be without warranty by or recourse to the Trustee, and shall be at the expense of the Pledgor. At such time, this Pledge Agreement shall no longer constitute a Lien upon or a grant of any security interest in any of the Pledged Collateral, and the Trustee shall, at the Pledgor's expense deliver to the Pledgor written acknowledgment thereof and of cancellation of this Pledge Agreement in a form reasonably requested by the Pledgor; provided, however, that this Pledge Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indenture obligations is rescinded or must otherwise be returned upon the insolvency, bankruptcy or reorganization of the Pledgor all as though such payment had not been made. Section 19. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed as provided in Section 13.2 of the Indenture. Section 20. Binding Agreement; Assignment. This Pledge Agreement shall be binding upon and inure to the benefit of the Trustee, the Pledgor and their respective successors and permitted assigns. Neither this Pledge Agreement nor any interest herein or in the Pledged Collateral, or any part thereof, may be assigned by the Pledgor without the prior written consent of the Trustee (which consent shall not be unreasonably withheld), except as expressly permitted herein or in the Indenture. This Pledge Agreement shall be deemed to be automatically assigned by the Trustee to any person who succeeds to the Trustee in accordance with Section 7.8 or Section 7.9 of the Indenture, and its assignee shall have all rights and powers of, and act as, the Trustee hereunder. Section 21. Governing Law. This Pledge Agreement shall be construed in accordance with, and this Pledge Agreement and the transactions described herein shall be governed by, the laws of the State of New York as to all issues, including (without limitation) issues of validity, interpretation, effect, performance and remedies. 10 14 Section 22. Amendments. This Pledge Agreement may not be amended or modified, except in accordance with Article IX of the Indenture. Section 23. Severability. In the event that any provision contained in this Pledge Agreement shall for any reason be held to be illegal or invalid under the laws of any jurisdiction, such illegality or invalidity shall in no way impair the effectiveness of any other provision hereof, or of such provision under the laws of any other jurisdiction; provided, that in the construction and enforcement of such provision under the laws of the jurisdiction in which such holding of illegality or invalidity exists, and to the extent only of such illegality or invalidity, this Pledge Agreement shall be construed and enforced as though such illegal or invalid provision had not been contained herein. Section 24. Headings. Section headings used herein are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Pledge Agreement. Section 25. Counterparts. This Pledge Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, and all of which shall together constitute but one and the same instrument. A complete set of counterparts shall be lodged with the Trustee. Section 26. Cooperation of TransTexas. The Pledgor shall use reasonable efforts to cause TransTexas to take all actions necessary to facilitate the Pledgor's compliance with the terms hereof. Section 27. Confidentiality. The parties agree that they and their employees have maintained and will maintain, in confidence, all data, summaries, reports or information of all kinds, whether oral or written, provided pursuant to this Pledge Agreement or acquired or developed in any manner from the other party's personnel or files (the "Confidential Information"), and that they have not and will not reveal the same to any persons not employed by the other party except: (a) at the written direction of such party; (b) to the extent necessary to comply with the law, reporting requirements imposed by the Securities and Exchange Commission, or the valid order of a court of competent jurisdiction, in which event the disclosing party shall so notify the other party as promptly as practicable (and, if possible, prior to making any disclosure) and shall seek confidential treatment of such information, or in connection with any arbitration proceeding; (c) as part of its normal reporting or review procedure to its parent company, its auditors and its attorneys, and such parent company, auditors and attorneys agree to be bound by the provisions of this Section; (d) in order to enforce any of its rights pursuant to, or in any other dispute with respect to, this Agreement; (e) if, at the time of disclosure to the recipient, the Confidential Information is in the public domain; (f) if, after disclosure to the recipient, the Confidential Information becomes part of the public domain by written publication through no fault of the recipient; or (g) to any one or more Holders and their representatives and agents. 11 15 IN WITNESS WHEREOF, the Pledgor and the Trustee have caused this Pledge Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. TRANSAMERICAN REFINING CORPORATION By: /s/ Ed Donahue ------------------------------- Authorized Signatory FIRST UNION NATIONAL BANK, as Trustee By: /s/ W. Jeffrey Kramer ------------------------------- Authorized Signatory 12 16 SCHEDULE A Pledged Securities
Class of Stock Certificate Par Stock Issue Stock No.(s) Value Number of Shares - ------------------------ ----------- ----------------- ---------- ----------------- TransTexas Gas Common TTXG-0037 $0.01 5,000,000 Corporation Stock
A-1 EX-4.11 5 SECURITY AGREEMENT 1 EXHIBIT 4.11 ================================================================================ TRANSAMERICAN REFINING CORPORATION and FIRST UNION NATIONAL BANK, as Trustee ____________________________ SECURITY AGREEMENT Dated as of March 14, 1997 ____________________________ $36,000,000 Senior Secured Notes due March 14, 1998 ================================================================================ 2 SECURITY AGREEMENT This SECURITY AGREEMENT, together with any amendments, replacements and supplements hereafter entered into (the "Security Agreement"), dated as of March 14, 1997, between TransAmerican Refining Corporation (together with its successors and assigns, the "Company") and First Union National Bank, (together with its successors and assigns, the "Trustee"), is made for the benefit of the Holders. As used herein, all capitalized terms not otherwise defined herein shall have the meanings set forth in the Indenture (the "Indenture"), dated the date hereof, between the Company and the Trustee, relating to the Company's Senior Secured Notes due March 14, 1998 (the "Notes"), as amended from time to time in accordance with the terms thereof. W I T N E S S E T H: WHEREAS, the Company will issue $36,000,000 aggregate principal amount of Notes pursuant to the Indenture; WHEREAS, pursuant to the Disbursement Agreement, the Company has opened the custodial account described in Schedule I hereto (the "Collateral Account") at and with First Union National Bank, (the "Disbursement Agent"), at its corporate trust offices at 40 Broad Street, Suite 550, New York, New York 10004, and will make an initial deposit of $36,000,000 to the Collateral Account, consisting of the entire proceeds of the sale of the Notes; and WHEREAS, in order to secure the payment and performance in full of the Indenture obligations, the parties hereto desire to set forth their mutual understanding and certain agreements regarding the terms and conditions of the granting of a security interest in the Account Collateral(as defined below) made by the Company to the Trustee for the benefit of the Holders of the Notes. NOW, THEREFORE, in consideration of the premises and other benefits to the Company, the receipt and sufficiency of which are hereby acknowledge, the parties hereto hereby agree as follows: Section 1. Grant of Security. The Company hereby assigns and pledges to the Trustee for the ratable benefit of the Holders, and hereby grants to the Trustee for the ratable benefit of the Holders, a security interest in all of the Company's right, title and interest in and to all of the following (collectively, the "Account Collateral"): (a) the Collateral Account, all funds therein and all certificates and instruments, if any, from time to time representing or evidencing the Collateral Account; (b) all Collateral Investments (as hereinafter defined) from time to time and all certificates and instruments, if any, from time to time representing or evidencing the Collateral Investments; (c) all notes, certificates of deposit, deposit accounts, checks and other instruments from time to time hereafter delivered to or otherwise possessed by the Trustee for or on behalf of the Company, in substitution for or in addition to any or all of the then existing Account Collateral; and (d) all interest, dividends, cash, instruments and other property and assets from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Account Collateral. Section 2. Security for Obligations. This Security Agreement secures the prompt and complete payment and performance of all obligations under the Indenture including, without limitation, the payment of all amounts owed by the Company to the Trustee or the Holders under or with respect to the Indenture, the Notes or any Security Document. 2 3 Section 3. The Company Remains Liable. Anything herein to the contrary notwithstanding, (a) the Company shall remain liable under the contracts and agreements included in the Account Collateral to the extent set forth therein to perform all of the Company's duties and obligations thereunder to the same extent as if this Security Agreement had not been executed: (b) the exercise by the Trustee of any of the rights hereunder shall not release the Company from any of its duties or obligations under the contracts and agreements included in the Account Collateral; and (c) neither the Trustee nor any Holder shall have any obligation or liability under the contracts and agreements included in the Account Collateral by reason of this Security Agreement, nor shall the Trustee or any Holder be obligated to perform any of the obligations or duties of the Company thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Section 4. Delivery of Account Collateral. All certificates or instruments representing or evidencing Account Collateral shall be delivered to and held by the Disbursement Agent on behalf of the Trustee for the benefit of the Holders of the Notes pursuant to this Agreement and the Disbursement Agreement and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Trustee. The Trustee shall have the right, at any time and without notice to the Company, to transfer to or to register in the name of the Trustee or any of its nominees any or all of the Account Collateral. In addition, the Trustee shall have the right at any time to exchange certificates or instruments representing or evidencing Account Collateral for certificates or instruments of smaller or larger denominations. Section 5. Maintaining the Collateral Account. So long as any Indenture obligation shall remain unpaid and until such time as the Indenture shall have been satisfied and discharged in accordance with Article VIII thereof; (a) the Company shall maintain the Collateral Account only with the Disbursement Agent, and with the sole dominion and control of the Trustee and the Disbursement Agent; and (b) except as permitted by the Disbursement Agreement, it shall be a term and condition of the Collateral Account, notwithstanding any term or condition to the contrary in any other agreement relating to such Collateral Account and except as otherwise provided in Section 12 hereof, that no amount (including interest on Collateral Investments) shall be paid or released to or for the account of, or withdrawn by or for the account of, the Company or any other Person from the Collateral Account. The Collateral Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System and of any other appropriate banking or governmental authority, as may now or hereafter be in effect. Section 6. Investing of Amounts in the Collateral Account. The Trustee will, upon receipt of the written instructions of the Company from time to time, subject to Section 12 hereof, instruct the Disbursement Agent to (a) invest amounts on deposit in the Collateral Account in such Cash Equivalents and Marketable Securities in the name of the Trustee as the Company may select; and (b) invest interest paid on the Cash Equivalents and Marketable Securities referred to in clause (a) above, and reinvest other proceeds of any such Cash Equivalents or Marketable Securities that may mature or be sold in the name of the Trustee as the Company may select. 3 4 The Cash Equivalents and Marketable Securities referred to in clauses (a) and (b) above are herein referred to, collectively, "Collateral Investments". Interest and proceeds that are not invested or reinvested in Collateral Investments as provided in the immediately preceding sentence shall be deposited and held in the Collateral Account. The Trustee shall have no liability for investments made in accordance with the Company's written instructions, except for losses and damages due to the gross negligence, recklessness or willful misconduct of the Trustee. Section 7. Representations and Warranties. The Company represents and warrants for itself and the Account Collateral as follows: (a) The Company is the legal and beneficial owner of the Account Collateral in which it is granting a security interest free and clear of any Lien, except for Liens created hereunder in favor of the Trustee and Permitted Liens (as such term is defined in the Indenture). No effective financing statement or other instrument similar in effect covering all or any part of the Account Collateral is on file in any recording office, except such as may have been filed in favor of the Trustee relating to this Security Agreement or such as may relate to Permitted Liens. (b) The Company is authorized to enter into this Security Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Security Agreement represents a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability hereof may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws relating to creditors' rights generally and by general principals of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) This Security Agreement and the pledge and assignment of the Account Collateral pursuant hereto create a valid security interest in the Account Collateral, securing the payment of the Indenture obligations. (d) Neither the execution and delivery of this Security Agreement by the Company, the consummation of the transactions herein contemplated nor the fulfillment of the terms hereof will (i) violate the Company's charter or bylaws, (ii) violate the terms of any agreement, indenture, mortgage, deed of trust, equipment lease, instrument or other document to which the Company is a party, the violation of which would (x) have a material adverse effect on the business, assets, operation or condition of the Company or (y) materially impair the rights of the benefits available to the Trustee under this Security Agreement or (z) materially impair the value of the Account Collateral, (iii) violate any law, order, rule or regulation applicable to the Company of any court or any other governmental body having jurisdiction over the Company or its properties, the violation of which would (x) have a material adverse effect on the business, assets, operation or condition of the Company or (y) materially impair the rights of the benefits available to the Trustee under this Security Agreement or (z) materially impair the value of the Account Collateral, or (iv) result in or require the creation or imposition of any Lien (other than the Lien contemplated hereby) upon or with respect to any of the Account Collateral. (e) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other third party is required for (i) the grant by the Company of the pledge, assignment and security interest granted hereby or the execution, delivery or performance of this Security Agreement by the Company, (ii) the perfection or maintenance of the pledge, assignment and security interest crated hereby, or (iii) the exercise by the Trustee of its rights provided for in this Security Agreement or the remedies in respect of the Account Collateral pursuant to this Security Agreement, other than those authorizations, approvals, actions, notices and filings which have been obtained, taken, given or made, as applicable. Section 8. Certain Covenants. So long as the payment or performance of any Indenture obligation remains outstanding and until such time as the Indenture shall have been satisfied and discharged in accordance with Article VIII hereof, the Company shall: 4 5 (a) comply, and cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with the Employment Retirement Income Security Act of 1974, as amended, and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970; (b) pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent (i) all taxes, assessments and governmental charges or levies imposed upon the Account Collateral and (ii) all lawful claims that, if unpaid, might by law become a Lien upon the Account Collateral in accordance with, and to the extent required under, Section 4.7 of the Indenture; (c) from time to time, at the sole expense of the Company, (i) promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or reasonably desirable, or that the Trustee may reasonably request, in order to perfect and protect any pledge, assignment or security interest granted or purported to be granted hereby or to enable the Trustee to exercise and enforce its rights and remedies hereunder with respect to any Account Collateral; and (ii) furnish to the Trustee statements and schedules further identifying and describing the Account Collateral and such other reports in connection with the Account Collateral as the Trustee may reasonably request, all in reasonable detail (provided, however, that the Trustee shall have no liability in the event that it determines not to make such request). The Company hereby authorizes the Trustee to file one or more financing or continuation statements, and amendments thereto, relating to all or any party of the Account Collateral without the signature of the Company where permitted by law and by power of attorney where acquired. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Account Collateral or any part thereof shall be sufficient as a financing statement where permitted by law; (d) permit the Trustee, for the benefit of the Holders, at all times to have full and free access during normal business hours to all the books, correspondence and records of the Company relating to the Account Collateral (other than information which is privileged and confidential), and the Trustee, for the benefit of the Holders, may examine the same, make abstracts therefrom and make photocopies thereof, and the Company agrees to render to the Trustee, for the benefit of the Holders, at the Company's sole cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto; (e) not change its name or conduct any significant portion of its business under any new tradenames, identity or corporate structure until (i) it shall have given to the Trustee, for the benefit of the Holders, not less than thirty (30) days prior written notice of its intention to do so in the case of a change of name, identity or corporate structure, or thirty (30) days prior written notice of its intention to do so in the case of a new tradename, clearly describing such new name, identity or corporate structure or such new tradename and providing such other information in connection therewith as the Trustee, for the benefit of the Holders, may reasonably request, and (ii) with respect to such new name, identity or corporate structure or such new tradename, it shall have taken all action satisfactory to the Trustee, as the Trustee, for the benefit of the Holders, may reasonably request to maintain the security interest in the Account Collateral intended to be granted hereby at all times fully perfected with the same or better priority and in full force and effect; (f) not take or permit to be taken any action which is reasonably likely to impair the Account Collateral or the Trustee's rights in the Account Collateral; (g) not create, incur or permit to exist, will defend the Account Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Account Collateral, other than the 5 6 Liens created hereby and Permitted Liens and will defend the right, title and interest of the Trustee for the benefit of the Holders in and to any of the Account Collateral against the claims and demands of all Persons whomsoever (other than the holders of a Permitted Lien); and (h) not sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Account Collateral. Section 9. Trustee Appointed Attorney-in-Fact. The Company hereby appoints the Trustee the Company's attorney-in-fact, effective upon the occurrence and during the continuance of an Event of Default, which appointment is irrevocable and coupled with an interest, with full authority in the place and stead of the Company and in the name of the Company or otherwise, from time to time, to take any action and to execute any instrument necessary to accomplish the purposes of this Security Agreement, including, without limitation, to file any claims or take any action or institute any proceedings necessary for the collection of any of the Account Collateral, to enforce compliance with the terms and conditions of any agreements that are part of the Account Collateral or to enforce the rights of the Trustee with respect to any of the Account Collateral. Section 10. Trustee May Perform. If the Company fails to perform any agreement contained herein, the Trustee may itself perform, or cause performance of, such agreement, and the expenses of the Trustee incurred in connection therewith shall be payable by the Company under Section 15(b) hereof. Regardless of whether or not there shall have occurred any Default or Event of Default, the Trustee may institute and maintain or cause in the name of the Company or the Trustee, or any of them, to be instituted and maintained, such suits and proceedings as the Trustee may be advised by counsel shall be necessary or expedient to prevent any impairment of the security interest in or perfection of the Account Collateral in contravention of the terms of the Indenture. Section 11. Trustee's Duties. The powers conferred on the Trustee hereunder are solely to protect its interest in the Account Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Account Collateral in its actual possession or under its exclusive control, and the accounting for moneys actually received by it hereunder, and except as otherwise expressly set forth herein, in the Indenture and in the Disbursement Agreement, the Trustee shall have no duty as to any Account Collateral, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Account Collateral. Section 12. Default; Remedies. (a) "Event of Default" shall have the meaning set forth in the Indenture. (b) If an Event of Default shall have occurred and be continuing to the actual knowledge of the Trustee, the Trustee shall commence the taking of such actions (or refrain from taking actions) toward collection or enforcement of the Security Agreement and the Account Collateral (or any portion thereof), including, without limitation, action toward foreclosure upon any Account Collateral, as it deems appropriate in its sole discretion or as instructed by the Requisite Holders (as defined in Section 12(g) below) to the extent allowed by law. If any Event of Default that was the basis for the commencement of such action shall have been cured or waived, and, in the case where there has been an acceleration, rescission of such acceleration shall have occurred, in each case in accordance with the terms of the Indenture, any direction to the Trustee to take any action in connection with the aforementioned notice shall be deemed rescinded upon notification by that percentage of Holders necessary to effect such waiver with respect to such Event of Default as provided for in the Indenture. The Trustee shall have no obligation to take any collection or enforcement action except upon satisfaction of the conditions set forth in Section 6.7 and 6.11 of the Indenture applied to this Security Agreement. (c) If an Event of Default shall have occurred and be continuing, the Trustee itself or by its agents or attorneys may (i) exercise any or all of its rights and remedies under the Indenture, any Security Document or any other instrument or agreement securing, evidencing or relating to the Indenture obligations or 6 7 under applicable laws, (ii) retain, gain or acquire possession of the Account Collateral of (iii) sell, assign, transfer or dispose of, or endorse and deliver, the whole or, from time to time, any part of the Account Collateral at public or private sale or sales, at any exchanges, brokers board or at any of the Trustee's offices or elsewhere, for cash, upon credit or for other property, for immediate or future delivery and, to the extent permitted by law, for such price or prices and on such other terms as the Trustee may deem commercially reasonable. Upon consummation of any such sale, the Trustee shall have the right to assign, transfer, endorse and deliver to the purchaser or purchasers thereof the Account Collateral so sold. Each such purchaser at any such sale shall holder the property sold absolutely free from any claim or right on the part of the Company, and the Company hereby waives (to the full extent permitted by law) all rights of redemption, stay or appraisal that the Company now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Trustee shall give the Company ten (10) business days' notice (which the Company agrees shall be deemed to be reasonable notification within the meaning of Section 9-504(3) of the UCC) of the Trustee's intention to make any such public or private sale. Any such sale shall be held at such time or times and at such place or places as the Trustee may fix. At any such sale, the Account Collateral, or portion thereof to be sold, may be sold as an entirety or in separate portions, as the Trustee may, in its sole discretion, determine. The Trustee shall not be obligated to make any sale of the Account Collateral if it shall determine not to do so, regardless of the fact that notice of sale of the Account Collateral may have been given. The Trustee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Account Collateral is made on credit for future delivery, the Account Collateral so sold may be retained by the trustee until the sale price is paid by the purchaser or purchasers thereof, but the Trustee shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Account Collateral so sold and, in case of any such failure, such Account Collateral may be sold again upon like notice. As an alternative to exercising the power of sale herein conferred upon it, the Trustee may proceed by suits or suits at law or in equity to foreclose the lien created by this Security Agreement and sell the Account Collateral or any portion thereof pursuant to judgment or decree of a court or courts having competent jurisdiction. If under mandatory requirements of applicable law, the Trustee shall be required to make disposition of the Account Collateral within a period of time that does not permit the giving of notice to the Company as hereinbefore provided, the Trustee need give the Company only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of law. (d) The Company agrees that, if any Event of Default shall have occurred and be continuing, than and in every case, and in addition to the rights and remedies available to a secured party under any applicable provision of the UCC, or any other applicable law, the Trustee may: (i) instruct the obligor or obligors on any instrument or other obligation constituting the Account Collateral to make any payment or render any performance required by the terms of such instrument or obligation directly to the Trustee or its designee; (ii) sell or otherwise liquidate, or direct the Company to sell or other liquidate, any or all investments made in whole or in part with the Account Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation; (iii) exercise any and all rights and remedies of the Company in respect of the Account Collateral, including, without limitation, any and all rights of the Company to demand or otherwise require payment of any amount under, or performance of any provision of, any agreement, and all payments received by the Company under or in connection with any agreement, and all payments received by the Company under or in connection with any agreement or otherwise in respect of the Account Collateral shall be received in trust for the benefit of the Trustee, shall be segregated from other property and funds of the Company and shall be forthwith paid over to the Trustee in the same form as so received (with any necessary endorsement); or 7 8 (iv) without notice to the Company except as required by law and at any time or from time to time, charge, set off and otherwise apply all or any part of the Account Collateral against all or any part of the Indenture obligation and, in connection therewith, the Trustee, without notice to the Company, may instruct the Disbursement Agent in writing to deliver all or any part of the Account Collateral to the Trustee. (e) At any public sale of the Account Collateral, whether pursuant to power of sale or otherwise hereunder, the Trustee or any Holder may, to the extent permitted by applicable law, bid for and purchase, free from any right of redemption, stay or appraisal (all such rights being hereby waived and released by the Company to the extent permitted by law), the Account Collateral or any part thereof or an interest therein and upon compliance with the terms of such public sale may hold, retain, exploit, resell or otherwise dispose of such property without further accountability to the Company for the proceeds of such public sale, except to the extent that there is a surplus of such proceeds in excess of the Indenture obligations, in which case, such surplus shall be delivered to the Company. The Company will execute and deliver or cause to be executed and delivered, such instruments, endorsements, assignments, waivers, certificates and other documents and take such further action as the Trustee shall request in connection with any such public sale. (f) If an Event of Default shall have occurred and be continuing, all proceeds received by the Trustee in respect of any sale of, collection from, or other realization upon all or any of the Account Collateral, together with any monies held by the Trustee under the provisions of this Security Agreement, shall be applied by the Trustee in accordance with the provisions of Section 6.6 of the Indenture. All payments received by the Company under or in respect of the Account Collateral shall be received in trust for the benefit of the Trustee, shall be segregated from other property of the Company shall be forthwith paid over to the Trustee in the same form as received (with any necessary endorsement). (g) For purposes of this Section 12, "Requisite Holders" means the Holder or Holders of a majority of the aggregate principal amount of the outstanding Notes. Section 13. Sale of Account Collateral. If the Trustee shall determine to exercise its right to sell, assign or transfer all or any of the Account Collateral pursuant to Section 12 hereof, the Company agrees that, upon request of the Trustee, the Company will do or cause to be done all acts and things as may be necessary to make such sale, assignment or transfer of the Account Collateral or any part thereof valid and binding and in compliance with applicable law. The Trustee is authorized, in connection with any sale of the Account Collateral pursuant to Section 12 hereof, to deliver or otherwise disclose to any prospective purchaser of the Collateral any information in its possession relating to the Account Collateral. The Company acknowledges the impossibility of ascertaining the amount of damages that would be suffered by the Trustee or the Holders by reason of the failure by the Company to perform any of the covenants contained in this Section 13 and, consequently, agrees that, if the Company shall fail to perform any of such covenants, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Account Collateral on the date the Trustee shall demand compliance with this Section 13. Section 14. Regulatory Matters. (a) The Company shall take all action that the Trustee may request in the exercise of its rights and remedies hereunder. In furtherance of this right, the Company shall: (i) cooperate fully with the Trustee in obtaining all approvals and consents from each governmental authority that the Trustee may deem necessary or advisable to accomplish any transfer or assignment of any part of the Account Collateral; 8 9 (ii) prepare, execute and file with any government authority any application request for consent, certificate or instrument that the Trustee may deem necessary or advisable to accomplish any such transfer or assignment of any part of the Account Collateral; and (iii) do or cause to be done all such other acts and things as may be necessary to make any sale or sales of all or any part of the Account Collateral valid and binding and in compliance with any and all applicable laws, rules, regulations, orders or decrees, all at the Company's expense. The Company further agrees that a breach of any of the covenants contained in this Section 14 will cause irreparable injury to the Trustee, as secured party, for which the Trustee would have no adequate remedy at law in respect for such breach and, as a consequence, agrees that each and every covenant contained in this Section 14 shall be specifically enforceable against the Company and the Company waives and agrees not to assert any defenses against an action for specific performance of such covenants. (b) To enforce the provisions of this Section 14, the Trustee is authorized to request the consent or approval of any governmental authority to a voluntary or involuntary transfer of control of any of the Account Collateral. In connection with the exercise of its remedies under this Security Agreement, the Trustee may obtain the appointment of a trustee or receiver to assume, upon receipt of all necessary consents and approvals of any judicial or other governmental authority, control of the Account Collateral. Such trustee or receiver shall have all rights and powers provided to it by law or by court order or provided to the Trustee under this Security Agreement. Section 15. Indemnity and Expenses. (a) The Company agrees to indemnify the Trustee from and against any and all claims, losses and liabilities growing out of or resulting from this Security Agreement (including, without limitation, enforcement of the Security Agreement), except (i) valid claims (as determined by a nonappealable order of any court of competent jurisdiction) arising out of a breach by the Trustee of this Agreement or the Disbursement Agreement, or (ii) claims, losses or liabilities resulting from the Trustee's gross negligence, bad faith, recklessness or willful misconduct, as determined by a final judgment of a court of competent jurisdiction. The indemnification of the Trustee set forth in the immediately preceding sentence is cumulative and not exclusive of any indemnity of the Trustee set forth in the Indenture. (b) The Company will pay upon demand to the Trustee the amount of any and all reasonable out-of-pocket expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that the Trustee may incur in connection with (i) the negotiation, execution and enforcement of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Account Collateral, (iii) the exercise or enforcement of any of the rights of the Trustee or the Holders hereunder or (iv) the failure by the Company to perform or observe any of the provisions hereof, and all amounts so incurred by the Trustee shall be entitled to the benefits of Section 7.7 of the Indenture. Section 16. Amendments; Waivers; Etc. No amendment or waiver of any provision of this Security Agreement, and no consent to any departure by the Company herefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Trustee to exercise, and no delay in exercising any right hereunder, shall operate as a waiver thereof or consent thereto, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Section 17. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed as provided in Section 14.2 of the Indenture. Any 9 10 party hereto may by notice to the other party designate such additional or different addresses as shall be furnished in writing by such party. Any notice or communication to any party shall be deemed to have been given or made as of the date so delivered, if personally delivered; when answered back, if telexed; when receipt is acknowledged, if faxed; and five (5) calendar days after mailing, if sent by registered or certified mail (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). The Company may give notice to the Holders at the addresses set forth for them in the register kept by the Registrar under the Indenture or may request that the Trustee notify the Holders at such addresses. Section 18. Continuing Security Interest; Assignment Under the Indenture. This Security Agreement shall create a continuing security interest in the Account Collateral and shall (a) remain in full force and effect until the date on which the Indenture obligations shall have been indefeasibly paid in full and the Indenture shall have been satisfied and discharged in accordance with Article VIII thereof, (b) be binding upon the Company, its successors and assigns and (c) inure, together with the rights and remedies of the Trustee hereunder, to the benefit of the Trustee, the Holders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), any Holder may assign or otherwise transfer all or any portion of its rights and obligations under the Notes held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Holder herein or otherwise, in each case as provided in the Indenture. Section 19. Release and Termination. On the date on which the Indenture obligations shall have been indefeasibly paid and performed in full and the Indenture shall have been satisfied and discharged in accordance with Article VIII thereof, the pledge, assignment and security interest granted hereby shall terminate and all rights to the Account Collateral shall revert to the Company. Upon any such termination, the Trustee, at the Company's expense, will return to the Company such of the Account Collateral in its possession as shall not have been sold, transferred or otherwise applied pursuant to the terms of the Notes, the Indenture and the Security Documents, and will execute and deliver to the Company such documents prepared by the Company and delivered to the Trustee as the Company shall reasonably request to evidence such termination, provided, however, that this Security Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indenture obligations is rescinded or must otherwise be returned upon the insolvency, bankruptcy or reorganization of the Company as if such payment had not been made. Section 20. Governing Law; Terms. This Security Agreement shall be construed in accordance with, and this Security Agreement and the transactions described herein shall be governed by, the laws of the State of New York as to all issues, including, without limitation, issues of validity, interpretation, effect, performance and remedies. Unless otherwise defined herein or in the Indenture, terms used in Article 9 of the New York Uniform Commercial Code are used herein as therein defined. Section 21. Waiver of Claims. Except as otherwise provided in this Security Agreement, THE COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OF JUDICIAL HEARING IN CONNECTION WITH THE TRUSTEE'S TAKING POSSESSION OR THE TRUSTEE'S DISPOSITION OF ANY OF THE ACCOUNT COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICES AND HEARINGS FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT THE COMPANY WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and to the full extent permitted by applicable law, the Company hereby further waives: (a) all damages occasioned by such taking of possession except any damages which are the direct result of the Trustee's gross negligence, bad faith or willful misconduct; (b) all other requirements as to the time, place and terms of sale or other requirements, with respect to the enforcement of the Trustee's rights and powers hereunder; and 10 11 (c) except as provided in Section 12(c) hereof, all rights of redemption, appraisement, valuation, stay, marshalling of assets, extension or moratorium, existing at law or in equity, by statute or otherwise, now or hereafter in force, in order to prevent or delay the enforcement of this Security Agreement or the sale or other disposition of the Account Collateral or any portion thereof, and the Company, for itself and all who may claim under it, insofar as it now or hereafter lawfully may, hereby waives all such rights. Any sale of, or the exercise of any options to purchase, or any other realization upon, any Account Collateral shall operate to divest all right, title, interest, claim and demand, at law or in equity, of the Company therein and thereto, and shall be a perpetual bar, both at law and in equity, against the Company and against any and all persons claiming or attempting to claim the Account Collateral so sold, optioned or realized upon, or any part thereof, through and under the Company. Section 22. Waiver of Jury Trial. THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT, OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. Section 23. Remedies Cumulative; No Waiver. Each right, power and remedy of the Trustee provided for herein, in the Indenture or any Security Document or in another agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder, or now or hereafter existing at law or in equity, by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power or remedy of the Trustee or any Holder provided for herein, in the Indenture or any Security Document or in another agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder, or now or hereafter existing at law or in equity, by statute or otherwise. No failure on the part of the Trustee or any Holder to exercise, and no delay in exercising, any right, power or remedy hereunder, or under the Indenture or any Security Document or under another agreement pursuant to which a Lien is created in favor of the Trustee for the benefit of any Holder, or now or hereafter existing at law or in equity, by statute or otherwise, shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No notice to or demand on the Company hereunder shall, of itself, entitle the Company to any other or further notice or demand in the same, similar or other circumstances. Section 24. Additional Collateral. Without notice or consent of the Company and without impairment of the security interests and rights created by this Security Agreement, the Trustee may accept from any person or persons additional collateral or other security for the Indenture obligations. The creation of the security interests created hereunder and the acceptance of any such additional collateral or security shall not prevent the Trustee from resorting to such additional collateral or security or to the Account Collateral, in any order, and shall not affect the Trustee's rights hereunder. Section 25. Waiver. To the extent permitted by applicable law, the Company hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Indenture obligations and this Security Agreement and any requirement that the Trustee protect, secure, perfect or insure any security interest or any property subject thereto or exhaust any right or take any action against the Company or any other person or entity. Section 26. Severability. In the event that any provision contained in this Security Agreement shall for any reason be held to be illegal or invalid under the laws of any jurisdiction, such illegality or invalidity shall in no way impair the effectiveness of any other provision hereof, or of such provision under the laws of any other jurisdiction; provided, that in the construction and enforcement of such provision under the laws of the jurisdiction in which such holding of illegality or invalidity exists, and to the extent only of such illegality or invalidity, this 11 12 Security Agreement shall be construed and enforced as though such illegal or invalid provision had not been contained herein. Section 27. Headings. Section headings used herein are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Security Agreement. Section 28. Execution in Counterparts. This Security Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. A complete set of counterparts shall be lodged with the Trustee. Section 29. Confidentiality. The parties agree that they and their employees have maintained and will maintain, in confidence, all data, summaries, reports or information of all kinds, whether oral or written, provided pursuant to this Security Agreement or acquired or developed in any manner from the other party's personnel or files (the "Confidential Information"), and that they have not and will not reveal the same to any persons not employed by the other party except: (a) at the written direction of such party; (b) to the extent necessary to comply with the law, reporting requirements imposed by the Securities and Exchange Commission, or the valid order of a court of competent jurisdiction, in which event the disclosing party shall no notify the other party as promptly as practicable (and, if possible, prior to making any disclosure) and shall seek confidential treatment of such information, or in connection with any arbitration proceeding; (c) as part of its normal reporting or review procedure to its parent company, its auditors and its attorneys, and such parent company, auditors and attorneys agree to be bound by the provisions of this Section; (d) in order to enforce any of its rights pursuant to, or in any other dispute with respect to, this Agreement; (e) if, at the time of disclosure to the recipient, the Confidential Information is in the public domain; (f) if, after disclosure to the recipient, the Confidential Information becomes part of the public domain by written publication through no fault of the recipient; or (g) to any one or more Holders and their representatives and agents. 12 13 IN WITNESS WHEREOF, the Company and the Trustee have caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. TRANSAMERICAN REFINING CORPORATION By: /s/ Ed Donahue ------------------------------------ Authorized Signatory FIRST UNION NATIONAL BANK, as Trustee By: /s/ W. Jeffrey Kramer ------------------------------------ Authorized Signatory 13 EX-4.12 6 CASH COLLATERAL & DISBURSEMENT AGREEMENT 1 EXHIBIT 4.12 ================================================================================ TRANSAMERICAN REFINING CORPORATION, FIRST UNION NATIONAL BANK as Trustee, and FIRST UNION NATIONAL BANK as Disbursement Agent, _______________________________ CASH COLLATERAL AND DISBURSEMENT AGREEMENT Dated as of March 14, 1997 _______________________________ $36,000,000 Senior Secured Notes due March 14, 1998 ================================================================================ 2 CASH COLLATERAL AND DISBURSEMENT AGREEMENT, dated as of March 14, 1997 (the "Agreement"), among TransAmerican Refining Corporation, a Texas corporation (the "Company"), First Union National Bank, as trustee for the Holders (in such capacity, together with its successor in trust appointed pursuant to the Indenture, the "Trustee") under an Indenture, dated the date hereof, between the Company and the Trustee (such Indenture, as amended, supplemented or otherwise modified from time to time, the "Indenture"), and First Union National Bank, as Disbursement Agent (the "Disbursement Agent"). WHEREAS, the Company has entered into the Indenture pursuant to which the Company will issue $36,000,000 aggregate principal amount of Senior Secured Notes due March 14, 1998 (the "Notes"); WHEREAS, as security for the prompt and complete payment and performance in full of the Company's obligations under the Indenture, the Company has granted to the Trustee a security interest in, among other things, the Collateral Account (as defined below); and WHEREAS, the Disbursement Agent has agreed to take such action with respect to the Collateral Account as is specified herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. Capitalized terms used but not defined herein and in any schedule and exhibits hereto shall have the meanings set forth in the Indenture. Section 1.2 Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word from means "from and including" and the words "to" and "until" each means "to but excluding." ARTICLE II DISBURSEMENT AGENT Section 2.1 Appointment and Duties. (a) The Company and the Trustee (on behalf of the Holders of Notes) hereby designate and appoint First Union National Bank, as the Disbursement Agent under this Agreement, and authorize the Disbursement Agent to take such actions, exercise such powers and perform such duties as are expressly delegated to the Disbursement Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere herein, the Disbursement Agent shall not have any duties or responsibilities except those expressly set forth herein, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Disbursement Agent. (b) The Disbursement Agent shall give written notice to the Trustee of any action taken by it hereunder (provided that no such notice need be given under circumstances in which the Trustee shall have received such notice by any other Person pursuant to the terms of any such document); such notice shall be given prior 2 3 to the taking of such action unless the Disbursement Agent determines that to do so would be detrimental to the interests of the Holders of Notes, in which event such notice shall be given promptly after the taking of such action. (c) The Disbursement Agent shall maintain appropriate books and records with respect to the Collateral Account in which shall be recorded all deposits and disbursements hereunder and any Investments made by the Disbursement Agent and shall permit the Trustee or any of its agents or representatives to inspect and to make copies of such books and records at the Company's sole cost and expense. (d) The Disbursement Agent shall use its good faith efforts and utilize prudence in performing its duties hereunder consistent with those of similar and prudent institutions disbursing disbursement control funds. Section 2.2 Rights of Disbursement Agent. (a) The Disbursement Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to rely on advice of counsel concerning all matters pertaining to such duties, and protected in respect of any action taken in good faith and in accordance with such advice. (b) Neither the Disbursement Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Holders of Notes for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in any certificate, report, statement or other document referred to or provided for in, or received by the Disbursement Agent under or in connection with, this Agreement. The Disbursement Agent shall not be under any obligation to any Holders of Notes to inspect the properties, books or records of the Company. (c) The Disbursement Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by the Disbursement Agent. The Disbursement Agent shall be fully justified in failing or refusing to take any action hereunder if such action would, in the opinion of the Disbursement Agent, be contrary to law or the terms of this Agreement. (d) If, with respect to a proposed action to be taken by it, the Disbursement Agent shall determine in good faith that the provisions of this Agreement relating to the functions or responsibilities or discretionary powers of the Disbursement Agent are or may be ambiguous or inconsistent, the Disbursement Agent shall notify the Company and the Trustee (identifying the proposed action and the provisions that it considers are or may be ambiguous or inconsistent) and may decline either to perform such function or responsibility or to exercise such discretionary power unless it has received the written confirmation of the Company and the Trustee that it concurs in the circumstance that the action proposed to be taken by the Disbursement Agent is consistent with the terms of this Agreement or is otherwise appropriate. (e) The Disbursement Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default unless the Disbursement Agent has received written notice from the Trustee or the Company, describing such Event of Default and stating that such notice is a "notice of default." The Disbursement Agent shall take such action with respect to such Event of Default as shall be required by this Agreement. No provision of this Agreement shall require the Disbursement Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have 3 4 reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 2.3 Resignation and Removal of Disbursement Agent. (a) Subject to the appointment and acceptance of a successor Disbursement Agent as provided below, the Disbursement Agent may, at any time, give a notice of resignation to the Trustee and the Company. Upon receipt of any such notice of resignation, the Company shall have the right to appoint a successor Disbursement Agent, which shall be a bank or trust company reasonably acceptable to the Trustee. If no successor Disbursement Agent shall have been Appointed by the Company and shall have accepted such appointment within 30 days after the retiring Disbursement Agent's giving of notice of resignation, then the retiring Disbursement Agent may appoint a successor Disbursement Agent, which shall be a bank or trust company reasonably acceptable to the Company and the Trustee. (b) Each of the Trustee and the Company shall have the right, upon the expiration of thirty (30) days following delivery of written notice to the Disbursement Agent and the other party, to cause the Disbursement Agent to be relieved of its duties hereunder and to select a successor Disbursement Agent to serve hereunder, which shall be a bank or trust company reasonably acceptable to the other party. (c) Upon the acceptance of any appointment as Disbursement Agent hereunder by a successor Disbursement Agent, (i) such successor Disbursement Agent, the Trustee and the Company shall enter into an agreement substantially identical to this Agreement, (ii) such agreement shall provide that such successor Disbursement Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Disbursement Agent, and that the retiring Disbursement Agent shall be discharged from its duties and obligations hereunder and (iii) the retiring Disbursement Agent shall promptly transfer all Collateral within its possession or control to the possession or control of the successor Disbursement Agent and shall execute and deliver such notices, instructions and assignments as may be necessary to transfer the rights of the Disbursement Agent with respect to the Collateral to the successor Disbursement Agent. After any retiring Disbursement Agent's resignation or removal hereunder as Disbursement Agent, the provisions of this Article shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Disbursement Agent. ARTICLE III COLLATERAL ACCOUNT Section 3.1 Establishment of Account. There is hereby established with and at the Disbursement Agent a custodial account in the name of the Company, as more fully identified on Schedule I to the Security Agreement (the "Collateral Account"), under the sole dominion and control of the Trustee and the Disbursement Agent. Funds shall be released from the Collateral Account only in accordance with Article IV. Section 3.2 Deposits to Collateral Account. The Company shall initially deposit to the Collateral Account the net proceeds received by it from the issuance and sale of the Notes. Section 3.3 Security Interest. (a) As security for the prompt and complete payment and performance in full of all obligations under the Indenture, the Company has agreed, pursuant to the Security Agreement, to pledge, assign and grant to the Trustee, for the equal and ratable benefit of the Holders, a security interest in all of its right, title and interest in and to the Collateral Account and all funds deposited therein. 4 5 (b) The Disbursement Agent acknowledges notice of, and consents to the terms and provisions of, the Security Agreement and agrees that: (i) notwithstanding anything to the contrary in this or any other agreement relating to the Collateral Account, the Collateral Account is and will be subject to the terms and conditions of the Security Agreement, will be held in trust on behalf of the Trustee for the equal and ratable benefit of the Holders and not commingled with any ordinary deposit or commercial bank account, will be maintained with the corporate trust department of the Disbursement Agent solely for the Trustee for the equal and ratable benefit of the Holders pursuant to the Security Agreement and will be subject to the written instructions of the Trustee given in accordance with the Security Agreement. (ii) in accordance with written instructions received from the Company, the Disbursement Agent shall, unless otherwise instructed by the Trustee, (A) invest amounts on deposit in the Collateral Account in such Cash Equivalents and Marketable Securities in the name of the Trustee as the Company may select, (B) invest interest paid on the Cash Equivalents and Marketable Securities referred to in clause (A) above, and reinvest other proceeds of any such Cash Equivalents or Marketable Securities that may mature or be sold in the name of the Trustee as the Company may select (the Cash Equivalents and Marketable Securities referred to in clauses (A) and (B) above being, collectively, "Collateral Investments" and (C) deposit and hold in the Collateral Account all interest and proceeds that are not invested or reinvested in Collateral Investments; (iii) all disbursements and releases made pursuant to this Agreement shall be made by the Disbursement Agent irrespective of, and without deduction for, any counterclaim, defense, recoupment or set-off and shall be final, and the Disbursement Agent will not seek to recover from the Trustee for any reason any such payment once made; (iv) all service charges and fees with respect to this Agreement or the Collateral Account shall be paid by the Company; and (v) the Trustee shall be entitled to exercise any and all rights of the Company in respect of the Collateral Account in accordance with the terms of the Security Agreement, and the Disbursement Agent shall comply in all respects with such exercise. Section 3.4 Valuation of Collateral Account. For purposes of determining the value of any amount in the Collateral Account, all Collateral Investments shall be valued at the lower of cost or market value. ARTICLE IV DISBURSEMENTS FROM THE COLLATERAL ACCOUNT Section 4.1 Priority Releases. Funds in the Collateral Account shall be released by the Disbursement Agent to any account specified by the Trustee, upon receipt of a Trustee's Certificate substantially in the form of Exhibit A hereto (each a "Trustee's Certificate"), certifying that such amounts will promptly be used for the purpose of making payments to Holders of Notes pursuant to the terms of the Indenture. Section 4.2 Conditions to Disbursement of Funds. Funds in the Collateral Account shall be disbursed for the account of the Company pursuant to Section 4.3(b) only upon satisfaction of the following conditions: (a) The Company shall have delivered to the Disbursement Agent and the Trustee a written notice substantially in the form of Exhibit B attached hereto (the "Disbursement Certificate"), specifying the amount and date of the requested disbursement. The Disbursement Certificate shall be executed by a duly authorized 5 6 officer of the Company and shall be in form and substance reasonably satisfactory to the Disbursement Agent. The Disbursement Certificate shall be completed and certified to be accurate by the Company. (b) Neither a Default nor an Event of Default under the Indenture shall have occurred and be continuing. (c) The Disbursements shall be made on each of March 14, 1997, April 14, 1997, May 14, 1997 and June 14, 1997. (d) (i) The amount of the requested disbursement shall be equal to (A) $12,000,000 or less on March 14, 1997, (B) $9,000,000 or less on April 14, 1997, (C) $7,000,000 or less on May 14, 1997, and (D) the balance in the Collateral Account on June 14, 1997. (ii) In the event that the Company shall not have requested the full amount that may be disbursed to it on any date set forth in subsection 4.2(d)(i), then the Company may request that the amount to be disbursed to it on any subsequent date be the amount set forth in subsection 4.2(d)(i) corresponding to such date, plus the maximum amount the Company was entitled to request for any preceding date and the difference between the amount disbursed to the Company prior to such date. Section 4.3 Disbursements. (a) Subject to the terms and conditions of the Security Agreement, the Disbursement Agent shall sell such portion of the investments held in the Collateral Account (with the investments having the shortest maturities sold first) as shall be necessary to fund the requested disbursement in accordance with written instructions of the Company delivered to the Disbursement Agent at least one Business Day prior to any proposed date of disbursement (as set forth in the Disbursement Certificate or the written notice pursuant to Section 4.3(c)). Notwithstanding the foregoing, if, on any Date of Disbursement, the cash on deposit in the Collateral Account is less than the amount of the disbursement to be made on such date, the Disbursement Agent shall not be required to make any portion of such disbursement. (b) Subject to Section 4.3(a), if the Company has delivered a Disbursement Certificate, the Disbursement Agent shall make the requested disbursement from the Collateral Account by the requested Date of Disbursement. (c) Subject to Section 4.3(a), all disbursements pursuant to Section 4.3(b) shall be made to, or as directed by, the Company. ARTICLE V COVENANTS Section 5.1 Covenants of the Company. The Company shall promptly, but no later than thirty (30) days after its receipt of an invoice, pay the reasonable fees and expenses of the Disbursement Agent in connection with this Agreement. Section 5.2 Covenants of the Trustee. The Trustee shall give prompt written notice to the Disbursement Agent upon (i) the occurrence of an Event of Default under the Indenture known to it and (ii) upon the cure or waiver of any such Event of Default known to it. 6 7 ARTICLE VI MISCELLANEOUS Section 6.1 Amendments, Etc. No amendment, modification or waiver of any provision of this Agreement may be made except by written agreement of the parties hereto and, with respect to the Company and the Trustee, in accordance with Article IX of the Indenture. Section 6.2 Notices, Etc. All notices and other communications required or permitted hereunder shall be in writing and shall be sufficiently given if made by hand delivery, by telex, by facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: To the Disbursement Agent: First Union National Bank 40 Broad Street Suite 550 New York, New York 10004 Attention: Corporate Trust Administration To the Trustee: First Union National Bank 40 Broad Street Suite 550 New York, New York 10004 Attention: Corporate Trust Administration To the Company: TransAmerican Refining Corporation 1300 East North Belt Suite 320 Houston, Texas 77032 Attention: Ed Donahue Any party hereto may by notice to each other party designate such additional or different addresses as shall be furnished in writing by such party. Any notice or communication to any party shall be deemed to have been given or made as of the date so delivered, if personally delivered; when answered back, if telexed; when receipt is acknowledged, if faxed; five calendar days after mailing, if sent by registered or certified mail; and one business day after mailing, if sent by overnight delivery service (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Section 6.3 No Waiver; Remedies. No failure on the part of the Disbursement Agent, the Trustee or any Holder to exercise, and no delay in exercising, any right under any Security Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. 7 8 Section 6.4 Indemnity and Expenses. (a) The Company agrees to indemnify the Trustee, the Holders, the Disbursement Agent and their officers, directors, employees, agents, attorneys-in-fact and affiliates (the "Indemnified Parties"), from and against any and all claims, losses and liabilities directly or indirectly caused by, related to or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from (i) valid claims of the Company against such Indemnified Party arising out of a breach of this Agreement by such Indemnified Party or (ii) such Indemnified Party's bad faith, gross negligence or willful misconduct, in either case, as determined by a final judgment of a court of competent jurisdiction. (b) The Company shall, promptly upon demand, pay to the Disbursement Agent, and the Trustee the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that the Disbursement Agent, or the Trustee may incur in connection with (i) this Agreement, (ii) the exercise or enforcement of any rights hereunder or (iii) the failure by the Company to perform or observe any of the provisions hereof. Section 6.5 Execution in Counterparts. This Agreement may be executed in any number of separate counterparts and by different parties hereto in separate counterparts, each of which, when so executed, shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. A complete set of counterparts shall be lodged with the Trustee. Section 6.6 Relationship of Trustee. The Trustee and the Disbursement Agent shall not be under any responsibility in respect of the validity or sufficiency of this Agreement or the execution and delivery hereof or in respect of the validity or sufficiency of any document or agreement delivered in connection herewith, including, but not limited to, any document or agreement the forms of which are attached hereto as Exhibits to this Agreement. Neither the Trustee nor the Disbursement Agent shall be accountable for the use or application of the funds in the Collateral Account or for disbursements therefrom, except as set forth in the Indenture and this Agreement. Section 6.7 Governing Law. This Agreement shall be construed in accordance with, and this Agreement and the transactions described herein shall be governed by, the laws of the State of New York as to all issues, including (without limitation) issues of validity, interpretation, effect, performance and remedies. Section 6.8 Waiver of Jury Trial. THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. Section 6.9 Certain Rights. Neither the Disbursement Agent, the Trustee, the Company, nor any of the Holders shall have any rights with respect to the Collateral Account except as specifically set forth in the Indenture, the Security Agreement, and this Agreement. Section 6.10 Confidentiality. The parties agree that they and their employees have maintained and will maintain, in confidence, all data, summaries, reports or information of all kinds, whether oral or written, provided pursuant to this Agreement or acquired or developed in any manner from the other party's personnel or files (the "Confidential Information"), and that they have not and will not reveal the same to any persons not employed by the other party except: (a) at the written direction of such party; (b) to the extent necessary to comply with the law, reporting requirements imposed by the Securities and Exchange Commission, or the valid order of a court of competent jurisdiction, in which event the disclosing party shall so notify the other party as promptly as practicable (and, if possible, prior to making any disclosure) and shall seek confidential treatment of such information, or in connection with 8 9 any arbitration proceeding; (c) as part of its normal reporting or review procedure to its parent company, its auditors and its attorneys, and such parent company, auditors and attorneys agree to be bound by the provisions of this Section; (d) in order to enforce any of its rights pursuant to, or in any other dispute with respect to, this Agreement; (e) if, at the time of disclosure to the recipient, the Confidential Information is in the public domain; (f) if, after disclosure to the recipient, the Confidential Information becomes part of the public domain by written publication through no fault of the recipient; or (g) to any one or more Holders and their representatives and agents. Section 6.11 Termination. This Agreement shall terminate automatically thirty (30) days following disbursement of all funds remaining in the Collateral Account. Section 6.12 Invalidity. If, for any reason whatsoever, any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid in a particular case or in all cases, it is the parties intent that such circumstances shall not have the effect of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid, and the inoperative, unenforceable or invalid provision shall be construed as if it were written so as to effectuate to the maximum extent possible, the companies' intent. Section 6.13 Assignment. This Agreement is personal to the companies hereto, and the rights and duties of any party hereunder shall not be assignable except with the prior written consent of the other parties. In any event, this Agreement shall inure to and be binding upon the parties and their successors and permitted assigns. Section 6.14 Entire Agreement. This Agreement contains the entire agreement among the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings and commitments, whether oral or written. This Agreement may only be amended as provided herein. Section 6.15 Captions. Captions in this Agreement are for convenience only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. TRANSAMERICAN REFINING CORPORATION By: /s/ Ed Donahue ---------------------------------- Authorized Signatory FIRST UNION NATIONAL BANK, as Trustee By: /s/ W. Jeffrey Kramer ---------------------------------- Authorized Signatory FIRST UNION NATIONAL BANK, as Disbursement Agent By: /s/ W. Jeffrey Kramer ---------------------------------- Authorized Signatory 10 EX-4.13 7 AMEND. #1 TO CASH COLLATERAL & DISBURSEMENT AGRMT. 1 EXHIBIT 4.13 ================================================================================ TRANSAMERICAN REFINING CORPORATION, FIRST UNION NATIONAL BANK as Trustee, and FIRST UNION NATIONAL BANK as Disbursement Agent, __________________________ FIRST AMENDMENT TO CASH COLLATERAL AND DISBURSEMENT AGREEMENT Dated as of April 3, 1997 __________________________ $36,000,000 Senior Secured Notes due March 14, 1998 ================================================================================ 2 FIRST AMENDMENT TO CASH COLLATERAL AND DISBURSEMENT AGREEMENT, dated as of April 3, 1997 (the "Agreement"), among TransAmerican Refining Corporation, a Texas corporation (the "Company"), First Union National Bank, as trustee for the Holders (in such capacity, together with its successor in trust appointed pursuant to the Indenture, the "Trustee") under an Indenture, dated March 14, 1997, between the Company and the Trustee (such Indenture, as amended, supplemented or otherwise modified from time to time, the "Indenture"), and First Union National Bank, as Disbursement Agent (the "Disbursement Agent"). WHEREAS, the Company has entered into the Indenture pursuant to which the Company issued $36,000,000 aggregate principal amount of Senior Secured Notes due March 14, 1998 (the "Notes"); and WHEREAS, the Company and the Trustee and Disbursement Agent have entered into a Cash Collateral and Disbursement Agreement dated as of March 14, 1997; and WHEREAS, the Company and Trustee and Disbursement Agent, with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes outstanding, desire to amend the Cash Collateral and Disbursement Agreement with respect to the schedule for disbursement of funds in the Collateral Account, all in accordance with the Company's Consent Solicitation Statement dated April 1, 1997. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Sections 4.2(c) and (d) of the Cash Collateral and Disbursement Agreement are hereby amended to read in full as follows: (c) The Disbursements shall be made on each of March 14, 1997, April 1, 1997, May 1, 1997 and June 1, 1997, or as soon thereafter as the Company has delivered a Disbursement Certificate. (d) (i) The amount of the requested disbursement shall be equal to (A) $12,000,000 or less on March 14, 1997, (B) $9,000,000 or less on April 1, 1997, (C) $7,000,000 or less on May 1, 1997, and (D) the balance in the Collateral Account on June 1, 1997. Section 2. The remaining provisions of the Cash Collateral and Disbursement Agreement are unchanged by this Amendment and remain in full force and effect. 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. TRANSAMERICAN REFINING CORPORATION By: /s/ R. Glenn McGinnis -------------------------------- Authorized Signatory FIRST UNION NATIONAL BANK, as Trustee By: /s/ W. Jeffrey Kramer -------------------------------- Authorized Signatory FIRST UNION NATIONAL BANK, as Disbursement Agent By: /s/ W. Jeffrey Kramer -------------------------------- Authorized Signatory 3 EX-11.1 8 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 TRANSAMERICAN REFINING CORPORATION COMPUTATION OF NET INCOME (LOSS) PER SHARE (DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JANUARY 31, JANUARY 31, JULY 31, --------------------- ---------------------- ------------------- 1997 1996 1996 1995 1995 1994 ------- ----------- -------- ----------- -------- -------- (UNAUDITED) (UNAUDITED) Primary: Weighted average shares outstanding..... 30,000 30,000 30,000 30,000 30,000 30,000 Common equivalent shares related to: Common stock purchase Warrants.......... 7,458 -- -- -- -- -- ------- -------- -------- -------- -------- -------- Weighted average shares and common stock equivalents........................... 37,458 30,000 30,000 30,000 30,000 30,000 ------- -------- -------- -------- -------- -------- Net Income (Loss)....................... $ 9,406 $(67,258) $(26,071) $(23,150) $(64,337) $(17,353) ------- -------- -------- -------- -------- -------- Net Income (Loss) per share............. $ 0.25 $ (2.24) $ (0.87) $ (0.77) $ (2.14) $ (0.58) ======= ======== ======== ======== ======== ========
EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT JANUARY 31, 1997 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-31-1997 FEB-01-1996 JAN-31-1997 613 0 22 0 0 1,289 555,816 16,930 564,241 408,307 0 300 0 0 81,063 564,241 10,857 10,857 11,544 65,852 0 0 4,663 9,406 0 9,406 0 0 0 9,406 0.25 0
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