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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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NEWPORT NEWS SHIPBUILDING INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1541566
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR REORGANIZATION)
4101 WASHINGTON AVENUE 23607
NEWPORT NEWS, VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(757) 380-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAMES OF EACH EXCHANGE
ON
TITLE OF CLASS TO WHICH CLASS IS TO BE
BE SO REGISTERED REGISTERED
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Common Stock ($.01 Par Value)
(and associated Preferred Stock Purchase Rights) New York Stock Exchange
(Regular Way and When Issued)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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NEWPORT NEWS SHIPBUILDING INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
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ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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1. Business.................... Summary of Certain Information; Risk
Factors; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Defense Industry Overview;
and Business.
2. Financial Information....... Summary of Certain Information; Unaudited
Pro Forma Combined Financial Statements;
Combined Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; and Exhibits.
3. Properties.................. Management's Discussion and Analysis of
Financial Condition and Results of
Operations; and Business.
4. Security Ownership of
Certain Beneficial Owners Management--Stock Ownership of Management;
and Management............. and Management--Change-in-Control
Arrangements.
5. Directors and Executive Management.
Officers...................
6. Executive Compensation...... Management.
7. Certain Relationships and Summary of Certain Information; The
Related Transactions....... Shipbuilding Distribution; and Management.
8. Legal Proceedings........... Business--Investigations and Legal
Proceedings.
9. Market Price of and
Dividends on the
Registrant's Common Equity Summary of Certain Information; The
and Related Stockholder Shipbuilding Distribution; Financing; and
Matters.................... Description of Capital Stock.
10. Recent Sales of Unregistered Not Applicable.
Securities.................
11. Description of Registrant's
Securities to be Summary of Certain Information; and
Registered................. Description of Capital Stock.
12. Indemnification of Directors Liability and Indemnification of Directors
and Officers............... and Officers.
13. Financial Statements and Summary of Certain Information; Unaudited
Supplementary Data......... Pro Forma Combined Financial Statements;
Combined Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; and Combined Financial
Statements and Schedule.
14. Changes in and Disagreements
with Accountants and Not Applicable.
Accounting and Financial
Disclosure.................
15. Financial Statements and Combined Financial Statements and Schedule;
Exhibits................... and Exhibits.
</TABLE>
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INFORMATION STATEMENT
NEWPORT NEWS SHIPBUILDING INC.
COMMON STOCK
LOGO (PAR VALUE $.01 PER SHARE)
[LOGO OF NEWPORT NEWS SHIPBUILDING APPEARS HERE]
This Information Statement is being furnished to stockholders of Tenneco
Inc., a Delaware corporation ("Tenneco"), in connection with the distribution
(the "Shipbuilding Distribution") by Tenneco to holders of its Common Stock,
par value $5.00 per share ("Tenneco Common Stock"), of all the outstanding
shares of Common Stock, $.01 par value per share ("NNS Common Stock"), of its
wholly owned subsidiary, Newport News Shipbuilding Inc., a Delaware
corporation. Concurrently with the Shipbuilding Distribution, Tenneco will
also distribute to holders of Tenneco Common Stock (individually, the
"Industrial Distribution" and together with the Shipbuilding Distribution, the
"Distributions") all of the outstanding shares of Common Stock, $.01 par value
per share ("New Tenneco Common Stock"), of New Tenneco Inc., a Delaware
corporation ("New Tenneco"). The Distributions will occur immediately prior to
the effective time (the "Merger Effective Time") of the proposed merger (the
"Merger"), pursuant to an Agreement and Plan of Merger dated as of June 19,
1996, as amended (the "Merger Agreement"), of a wholly-owned subsidiary of El
Paso Natural Gas Company, a Delaware corporation ("El Paso"), with and into
Tenneco (which will be renamed El Paso Tennessee Pipeline Co.). Pursuant to
the Merger, holders of Tenneco Common Stock will receive Common Stock, $3.00
par value per share, of El Paso ("El Paso Common Stock") and, under certain
circumstances, depositary shares each representing a 1/25th fractional
interest in a share of Preferred Stock of El Paso (the "El Paso Preferred
Depositary Shares"). The Distributions, the Merger and the other transactions
contemplated thereby are collectively referred to herein as the "Transaction."
Unless the context otherwise requires, as used herein the term "Company"
refers: (i) for periods prior to the Shipbuilding Distribution, to Newport
News Shipbuilding and Dry Dock Company ("Newport News") and the other
consolidated subsidiaries through which Tenneco conducted its shipbuilding
business (the "Shipbuilding Business") during such periods, and (ii) for
periods after the Shipbuilding Distribution, to Newport News Shipbuilding Inc.
("NNS," formerly known as Tenneco InterAmerica Inc.) and its consolidated
subsidiaries, including Newport News.
The consummation of the Transaction is conditioned upon, among other things,
approval thereof by Tenneco stockholders. The consummation of the
Distributions is subject to the satisfaction or waiver of a number of other
conditions as described under "The Shipbuilding Distribution--Conditions to
Consummation of the Shipbuilding Distribution" in this Information Statement.
It is expected that the Shipbuilding Distribution will be made on or about
December 11, 1996, to holders of record of Tenneco Common Stock on such date
on the basis of one share of NNS Common Stock, for every five shares of
Tenneco Common Stock held of record. In addition, the Board of Directors of
NNS (the "NNS Board") will adopt a stockholder rights plan and cause to be
issued, with each share of NNS Common Stock to be distributed in the
Shipbuilding Distribution, one Right (as defined herein), entitling the holder
thereof to, among other things, purchase under certain circumstances, and as
described more fully herein, one one-hundredth of a share of NNS Junior
Preferred Stock (as defined herein). No consideration will be required to be
paid by holders of Tenneco Common Stock for the shares of NNS Common Stock to
be distributed in the Shipbuilding Distribution or the Rights associated
therewith, nor will holders of Tenneco Common Stock be required to surrender
or exchange their shares of Tenneco Common Stock in order to receive such
shares of NNS Common Stock and the Rights associated therewith.
There is no current public market for NNS Common Stock, although a "when
issued" market is expected to develop prior to the effective date of the
Shipbuilding Distribution (the "Distribution Date"). The New York Stock
Exchange (the "NYSE") has approved the listing of the NNS Common Stock upon
notice of issuance.
RECIPIENTS OF NNS COMMON STOCK SHOULD NOTE THE FACTORS DISCUSSED IN "RISK
FACTORS" BEGINNING ON PAGE 29.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS INFORMATION STATEMENT IS NOVEMBER 4, 1996.
<PAGE>
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION..................................................... 1
SUMMARY OF CERTAIN INFORMATION............................................ 3
INTRODUCTION.............................................................. 15
THE SHIPBUILDING DISTRIBUTION............................................. 16
Manner of Distribution.................................................. 16
Corporate Restructuring Transactions.................................... 16
Debt and Cash Realignment............................................... 18
Relationships Among the Company, Tenneco and New Tenneco after the
Distributions.......................................................... 18
Reasons for the Distributions........................................... 23
Conditions to Consummation of the Shipbuilding Distribution............. 23
Amendment or Termination of the Distributions........................... 24
Trading of NNS Common Stock............................................. 24
Certain Federal Income Tax Aspects of the Shipbuilding Distribution..... 24
Reasons for Furnishing the Information Statement........................ 28
RISK FACTORS.............................................................. 29
Reliance on Major Customer and Uncertainty of Future Work............... 29
Profit Recognition; Government Contracting.............................. 30
Competition and Regulation.............................................. 32
Substantial Leverage.................................................... 33
Potential Liabilities Due to Fraudulent Transfer Considerations and
Legal Dividend Requirements............................................ 34
Government Claims and Investigations.................................... 35
Potential Federal Income Tax Liabilities................................ 35
No Current Public Market for NNS Common Stock........................... 36
Uncertainty Regarding Trading Prices of Stock Following the Transaction. 36
Uncertainty Regarding Future Dividends.................................. 36
Collective Bargaining Agreements........................................ 37
Environmental Matters................................................... 37
Certain Antitakeover Features........................................... 37
FINANCING................................................................. 38
CAPITALIZATION............................................................ 39
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS......................... 40
COMBINED SELECTED FINANCIAL DATA.......................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 46
Business Overview....................................................... 46
Results of Operations--Overview......................................... 47
Results of Operations for the Six Months Ended June 30, 1996 and 1995... 47
Results of Operations for the Years Ended December 31, 1995, 1994, and
1993................................................................... 48
Liquidity and Capital Resources......................................... 50
Debt and Interest Allocation............................................ 52
Income Taxes............................................................ 52
Changes in Accounting Principles........................................ 53
Backlog................................................................. 53
Business Outlook........................................................ 54
Other................................................................... 56
</TABLE>
i
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PAGE
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DEFENSE INDUSTRY OVERVIEW................................................. 58
BUSINESS.................................................................. 61
Company Overview........................................................ 61
Business Strategy....................................................... 62
General................................................................. 63
Construction............................................................ 63
Repair and Overhauls.................................................... 66
Engineering and Design.................................................. 67
Other................................................................... 67
Materials and Supplies.................................................. 67
Health, Safety and Environmental........................................ 68
Properties.............................................................. 68
Investigations and Legal Proceedings.................................... 69
MANAGEMENT................................................................ 71
Board of Directors...................................................... 71
Executive Officers...................................................... 72
Stock Ownership of Management........................................... 73
Committees of the Board of Directors.................................... 74
Executive Compensation.................................................. 75
Change-in-Control Arrangements.......................................... 79
Compensation of Directors............................................... 79
Benefit Plans Following the Shipbuilding Distribution................... 80
DESCRIPTION OF CAPITAL STOCK.............................................. 81
Authorized Capital Stock................................................ 81
NNS Common Stock........................................................ 81
NNS Preferred Stock..................................................... 82
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS................................ 82
Classified Board of Directors........................................... 82
Number of Directors; Removal; Filling Vacancies......................... 83
Special Meetings........................................................ 83
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals.............................................................. 83
Record Date Procedure for Stockholder Action by Written Consent......... 84
Stockholder Meetings.................................................... 85
NNS Preferred Stock..................................................... 85
Rights.................................................................. 85
Antitakeover Legislation................................................ 88
Comparison with Rights of Holders of Tenneco Common Stock............... 88
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 93
Elimination of Liability of Directors................................... 93
Indemnification of Directors and Officers............................... 93
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE....................... F-1
INDEX TO EXHIBITS......................................................... E-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Tenneco is (and, following the Shipbuilding Distribution, the Company will
be) subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
(and the Company will file) reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by Tenneco (and to be filed by
the Company) with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Commission"s Regional
Offices, including the following: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information may be obtained by
mail at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W. Street, N.W., Washington, D.C. 20549 or accessed
electronically on the Commission's Web Site at (http:/www.sec.gov).
The Company intends to furnish holders of NNS Common Stock with annual
reports containing consolidated financial statements prepared in accordance
with United States generally accepted accounting principles and audited and
reported on, with an opinion expressed, by an independent public accounting
firm, as well as quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information.
The Company has filed with the Commission a Registration Statement on Form
10 (as amended, the "Registration Statement") under the Exchange Act covering
NNS Common Stock and the associated Rights.
This Information Statement does not contain all of the information in the
Registration Statement and the related exhibits and schedules. Statements in
this Information Statement as to the contents of any contract, agreement or
other document are summaries only and are not necessarily complete. For
complete information as to these matters, refer to the applicable exhibit or
schedule to the Registration Statement. The Registration Statement and the
related exhibits filed by the Company with the Commission may be inspected at
the public reference facilities of the Commission listed above.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR TENNECO.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR CONSUMMATION OF THE
SHIPBUILDING DISTRIBUTION CONTEMPLATED HEREBY SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR TENNECO SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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The Company's principal executive offices are located at 4101 Washington
Avenue, Newport News, Virginia 23607; telephone: (757) 380-2000.
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CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, all of which are subject to risks and
uncertainties. These forward-looking statements are identified by their use of
such terms and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
in many cases are followed by a cross reference to "Risk Factors."
<PAGE>
When a forward-looking statement includes a statement of the assumptions or
basis underlying the forward-looking statement, the Company cautions that,
while it believes such assumptions or basis to be reasonable and makes them in
good faith, assumed facts or basis almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include (i) the factors discussed under "Risk Factors" and
particularly, in cases where the forward-looking statement is followed by a
cross reference to "Risk Factors," the factors discussed in the section or
sections under "Risk Factors" that are referred to in the cross reference,
(ii) the factors discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Outlook" and
"Business" and (iii) the following factors: (a) the general political,
economic and competitive conditions in the United States and other markets
where the Company operates; (b) initiatives to reduce the federal budget
deficit and reductions in defense spending; (c) reductions in the volume of
U.S. Navy contracts awarded to the Company; (d) unanticipated events affecting
designs and manufacturing processes thus impairing the Company's efforts to
reduce production costs and cycle time; (e) changes in capital availability or
costs, such as changes in interest rates, market perceptions of the industry
in which the Company operates, or security ratings; (f) employee workforce
factors, including issues relating to collective bargaining agreements or work
stoppages; and (g) authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Commission.
2
<PAGE>
SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed and other information and
financial statements set forth elsewhere in this Information Statement, which
should be read in its entirety. Capitalized terms used but not defined in this
Summary are defined elsewhere in this Information Statement. Unless the context
otherwise requires, the term "Company" refers (i) for periods prior to the
Shipbuilding Distribution, to Newport News Shipbuilding and Dry Dock Company
("Newport News") and the other consolidated subsidiaries through which Tenneco
conducted its Shipbuilding Business during such periods, and (ii) for periods
after the Shipbuilding Distribution, to Newport News Shipbuilding Inc. ("NNS")
and its consolidated subsidiaries, including Newport News.
THE COMPANY
The Company is the largest non-government-owned shipyard in the United
States. Its primary business is the design, construction, repair, overhaul and
refueling of nuclear-powered aircraft carriers and submarines for the United
States Navy. The Company believes it currently is: (i) the only shipyard
capable of building the Navy's nuclear-powered aircraft carriers, (ii) the only
non-government-owned shipyard capable of refueling and overhauling the Navy's
nuclear-powered aircraft carriers, and (iii) one of only two shipyards capable
of building nuclear-powered submarines. Since its inception in 1886, the
Company has developed a preeminent reputation through the construction of 264
naval ships and 542 commercial vessels. For the year ended December 31, 1995
and the six months ended June 30, 1996, the Company had net sales of $1,756
million and $915 million, respectively, and EBITDA (as defined) of $227 million
and $113 million, respectively. In addition, at June 30, 1996 the Company had
$4.1 billion of estimated backlog.
Aircraft carrier and submarine construction contracts with the U.S. Navy have
generated the majority of the Company's net sales. Newport News has built nine
of the 12 active aircraft carriers in the U.S. fleet, including all eight
nuclear-powered aircraft carriers. For the last 35 years, Newport News has been
the sole designer and builder of the U.S. Navy's aircraft carriers. Newport
News currently holds contracts to build two Nimitz-class nuclear-powered
carriers, each representing approximately $2-3 billion in initial contract
revenue: the Harry S Truman, scheduled for delivery in 1998, and the Ronald
Reagan, scheduled for delivery in 2002. Based on current U.S. Navy projections,
the Company anticipates the award in or before 2002 of a contract for the
construction of the last Nimitz-class aircraft carrier for delivery in 2009.
Under contract to the Navy, Newport News is currently performing design concept
studies for the next generation of aircraft carriers. In addition, Newport
News, as one of only two manufacturers of nuclear-powered submarines, has
constructed 53 nuclear-powered submarines comprised of seven different classes.
Newport News has recently been designated by legislation to build two of the
first four of the next generation of the Navy's new nuclear attack submarines
("NSSNs") commencing in late 1998.
As Newport News has built all the active Nimitz-class aircraft carriers and
believes it currently is the only non-government-owned shipyard capable of
refueling and overhauling nuclear-powered aircraft carriers, the Company has
had the leading share of the refueling and overhaul market for aircraft
carriers. A Nimitz-class aircraft carrier must be refueled at approximately the
midpoint of its estimated 50-year life. The Navy often commissions a major
overhaul of each carrier to coincide with a refueling. It normally takes two
years to complete a refueling and overhauling. Currently the Company is
overhauling the USS Dwight D. Eisenhower (an approximate $400 million
contract), and it holds planning contracts to overhaul the USS Theodore
Roosevelt in 1997 and to refuel and overhaul the USS Nimitz beginning in 1998.
The Company believes that, if awarded, the contracts for the Roosevelt and the
Nimitz will be for approximately $230 million and approximately $1 billion,
respectively. In addition, the Navy has announced its schedule to begin the
refueling of the Eisenhower in 2001, the USS Carl Vinson in 2006 and the
Roosevelt in 2009 at an estimated cost of approximately $1 billion each.
Supported by its new Carrier Refueling Complex, the Company believes it is
well-positioned to be awarded future refueling contracts.
3
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Newport News' management is highly regarded in the defense and shipbuilding
industry and has been successful in creating a motivated and experienced
management team and enhancing its position as the premier U.S. shipyard. Led by
William P. Fricks, the Chief Executive Officer of Newport News, who has 30
years of experience, the Company's senior executives average 10 years of
shipbuilding experience. Newport News is a separate operating entity with its
own corporate headquarters, management team and separate financial reporting
systems. Management, therefore, expects an orderly transition to an
independent, publicly-traded company.
BUSINESS STRATEGY
To broaden and strengthen its competitive position, the Company has developed
strategies with the following key elements: (i) maintain a leadership position
in its core business, (ii) further reduce its cost structure, (iii) continue to
reduce cycle time; and (iv) broaden and expand products and markets.
MAINTAIN A LEADERSHIP POSITION IN ITS CORE BUSINESS. Aircraft carriers and
submarines remain vital components of the Navy's strategy for protecting U.S.
global interests. The Navy has stated that it needs to maintain a minimum of 12
aircraft carriers to respond quickly to overseas crises and command a credible
presence around the world. As the aircraft carrier and submarine fleets
continue to age, the Company believes there will be a steady long-term demand
for new construction and for refueling and overhauling services, which it
intends to aggressively pursue.
FURTHER REDUCE ITS COST STRUCTURE. In 1991, the Company embarked on a program
to reduce its cost structure and increase productivity in order to remain a
market leader in its core business as well as to facilitate entry into related
commercial markets. Management initiatives to reduce the overall cost structure
of the Company have included workforce reductions of 38% (from approximately
29,000 employees in 1991 to approximately 18,000 employees in 1996), overhead
and other cost reductions, the successful negotiation of a long-term labor
agreement that stabilizes wages through April 1999, and the closing of certain
facilities. As a second step in its cost reduction program, Newport News has
begun outsourcing low value-added production activities and has been investing
in programs to upgrade and automate its operations. Since 1993, the Company has
spent $177 million on a variety of discretionary capital programs designed to
lower costs and improve efficiency. Recent and ongoing expenditures include new
computing technology ($85 million), an automated steel factory ($71 million),
the extension of a dry dock to accommodate multi-ship construction ($30
million), and the construction of the Carrier Refueling Complex ($19 million).
CONTINUE TO REDUCE CYCLE TIME. The Company plans to continue to reduce the
cycle times for product development and ship delivery by re-engineering key
production processes including design, production planning, materials
management, steel fabrication and outfitting. Process innovation teams have
been assigned to each key production process to implement this strategy. In
connection with these initiatives, the Company delivered the USS John C.
Stennis in November 1995, 7.5 months ahead of schedule and at a savings of over
1,000,000 man-hours compared to the previously delivered aircraft carrier.
BROADEN AND EXPAND PRODUCTS AND MARKETS. The Company has begun to seek to
leverage its existing expertise by expanding its commercial and other
shipbuilding projects. The Company believes that this expansion effort should
create additional growth opportunities. In addition, by allowing for increased
economies of scale, the Company believes its expansion initiatives should help
it reduce per ship costs and thereby make it more competitive in its core U.S.
Navy business, which currently accounts for over 90% of the Company's net
sales. As part of this expansion effort, the Company secured long-term, fixed
price contracts with two purchasers for a total of nine "Double Eagle" product
tankers. The initial ships under contract are being built at a loss, for which
the Company has created a reserve. This new line of double-hulled product
tankers is designed to meet all of the stringent domestic and international
shipping specifications. Additionally, drawing on its nearly four
4
<PAGE>
decades of safe fuel handling and reactor services for the U.S. Navy, the
Company won a contract from the Department of Energy in 1995 to construct a
facility to store damaged fuel from Three Mile Island. The Company is pursuing
bids on additional projects from the Department of Energy.
In order to further strengthen its position as a leading U.S. Navy
contractor, the Company is attempting to broaden its naval portfolio to include
non-nuclear ships by bidding with others in an alliance on the design and
construction of the LPD-17 non-nuclear amphibious assault ship. The Company has
also joined an alliance to develop design concepts for the Navy's new "Arsenal
Ship," a floating missile platform that utilizes a commercially available
double-hulled design, and pursue awards in the construction of such ships.
International military sales are also a key growth opportunity. The Company is
pursuing orders for several versions of its international frigate, the FF-21,
from foreign navies and is currently focusing on naval modernization programs
presently underway in the United Arab Emirates, the Philippines, Norway and
Kuwait.
5
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF THE COMPANY
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of the Company. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of the Company. In the opinion of the Company's
management, the summary combined financial data of the Company as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991, and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect the Transaction, including: (i) the issuance of
$400 million aggregate principal amount of Notes (as defined herein); (ii)
borrowings of $214 million under the Senior Credit Facility (as defined
herein); (iii) the cash dividend of $600 million to be paid by the Company to
Tenneco or one or more of its subsidiaries pursuant to the Debt Realignment (as
defined herein); (iv) the payment of $14 million of certain fees and expenses
incurred in connection with the Notes and the Senior Credit Facility; and (v)
the issuance of the NNS Common Stock pursuant to the Shipbuilding Distribution.
The unaudited pro forma combined Statements of Earnings Data have been prepared
as if the various components of the Transaction occurred on January 1, 1995;
the unaudited pro forma combined Balance Sheet Data have been prepared as if
the various components of the Transaction occurred on June 30, 1996. The
summary pro forma combined financial data are not necessarily indicative of the
results of operations of the Company had the transactions reflected therein
actually been consummated on the dates assumed and are not necessarily
indicative of the results of operations for any future period.
This information should be read in conjunction with the "Unaudited Pro Forma
Combined Financial Statements," "Combined Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- ------- ------- ------- ------ ------
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(MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF EARNINGS DATA:
Net sales.......................... $ 915 $ 915 $ 845 $1,756 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ====== ====== ======
Operating earnings................. $ 80 $ 81 $ 90 $ 155 $ 157 $ 201 $ 210 $ 249 $ 224
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings before cumulative effect
of changes in accounting
principles........................ $ 29 $ 37 $ 41 $ 54 $ 73 $ 95 $ 111 (b) $ 143 $ 135
Cumulative effect of changes in
accounting principles, net of
tax............................... -- -- -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings....................... $ 29 $ 37 $ 41 $ 54 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per share................. $ .85 $ 1.55
====== ======
BALANCE SHEET DATA:
Working capital.................... $ 185 $ 41 $ 4 N/A $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets....................... 1,461 1,452 1,337 N/A 1,380 1,263 1,235 1,450 1,412
Short-term debt(d)................. 28 95 54 N/A 68 30 34 83 36
Long-term debt(d).................. 586 282 326 N/A 292 287 423 761 364
Combined equity.................... 194 349 236 N/A 272 199 105 (173) (30)
STATEMENT OF CASH FLOWS DATA:
Net cash provided (used) by operat-
ing
activities........................ N/A $ (1) $ (18) N/A $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided (used) by invest-
ing
activities........................ N/A (45) (29) N/A (87) (29) 21 6 (99)
Net cash provided (used) by financ-
ing
activities........................ N/A 45 47 N/A 25 (154) (241) 181 (246)
OTHER DATA:
EBITDA (e)......................... $ 113 $ 113 $ 123 $ 227 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
(continued on next page)
6
<PAGE>
(continued from previous page)
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Information Statement.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits." In
1992, the Company adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(d) Historical amounts represent debt allocated to the Company from Tenneco
based on the portion of Tenneco's investment in the Company which is deemed
to be debt, generally based upon the ratio of the Company's net assets to
Tenneco's consolidated net assets plus debt. Tenneco's historical practice
has been to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Management believes that the historical allocation of corporate debt and
interest expense is reasonable; however, it is not necessarily indicative
of the Company's debt upon completion of the Debt Realignment, nor debt and
interest that may be incurred by the Company as a separate public entity.
See the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon generally accepted
accounting principles ("GAAP"); however, the amounts included in the EBITDA
calculation are derived from amounts included in the combined historical or
pro forma Statements of Earnings. In addition, EBITDA shall not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of the Company or as an alternative
to operating cash flows as a measure of liquidity.
7
<PAGE>
THE SHIPBUILDING DISTRIBUTION
Distributing Company........ Tenneco Inc. (which will be renamed El Paso
Tennessee Pipeline Co. upon consummation of the
Merger).
Distributed Company......... Newport News Shipbuilding Inc. ("NNS," a wholly-
owned subsidiary of Tenneco and formerly known as
Tenneco InterAmerica Inc.) which will, upon
consummation of the Shipbuilding Distribution,
directly and indirectly through its consolidated
subsidiaries (including Newport News), own and
operate substantially all of the Shipbuilding
Business. Immediately following consummation of
the Shipbuilding Distribution, Tenneco will not
have an ownership interest in the Company.
Distribution Ratio.......... One share of NNS Common Stock for every five
shares of Tenneco Common Stock held of record on
the Distribution Record Date (as defined herein).
Securities to be
Distributed................ Based on 170,755,576 shares of Tenneco Common
Stock outstanding on September 30, 1996,
approximately 34,151,115 shares of NNS Common
Stock (and Rights associated therewith) will be
distributed. NNS Common Stock to be distributed
in the Shipbuilding Distribution will constitute
all of the outstanding NNS Common Stock
immediately following the Shipbuilding
Distribution. See "Description of Capital Stock--
NNS Common Stock" and "Antitakeover Effects of
Certain Provisions--Rights."
Fractional Share Interests..
Fractional shares of NNS Common Stock will not be
distributed. Fractional shares of NNS Common
Stock will be aggregated and sold in the public
market by the Distribution Agent (as defined
herein) and the aggregate net cash proceeds
(without interest) will be distributed ratably to
those stockholders entitled to fractional
interests. See "The Shipbuilding Distribution--
Manner of Distribution."
Distribution Record Date....
December 11, 1996.
Distribution Date...........
December 11, 1996.
Distribution Agent and
Transfer Agent for the
Shares..................... First Chicago Trust Company of New York (the
"Distribution Agent").
Mailing Date................ Certificates representing the shares of NNS
Common Stock to be distributed pursuant to the
Shipbuilding Distribution will be delivered to
the Distribution Agent on the Distribution Date.
The Distribution Agent will mail certificates
representing the shares of NNS Common Stock to
holders of Tenneco Common Stock as soon as
practicable thereafter. Holders of Tenneco Common
Stock should not send stock certificates to
Tenneco, the Company or the Distribution Agent in
connection with the Shipbuilding Distribution
(however, holders of Tenneco Common Stock will
receive instructions from the Distribution Agent
with respect to the disposition of their
certificates in connection with the Merger). See
"The Shipbuilding Distribution--Manner of
Distribution."
Conditions to the
Shipbuilding Distribution..
The Transaction (and accordingly, the
Shipbuilding Distribution) is conditioned upon,
among other things, declaration of the special
8
<PAGE>
distributions by the Board of Directors of
Tenneco (the "Tenneco Board") authorizing the
Distributions and approval by the stockholders of
Tenneco of the Transaction. The Transaction is
also conditioned upon receipt of a private letter
ruling (the "IRS Ruling Letter") from the
Internal Revenue Service (the "IRS") in form and
substance satisfactory to the Tenneco Board (see
"The Shipbuilding Distribution--Certain Federal
Income Tax Aspects of the Shipbuilding
Distribution"), which IRS Ruling Letter was
issued on October 30, 1996. The Distributions and
the Merger are part of a unified transaction and
will not be effected separately (although Tenneco
may elect subsequently to proceed with one or
more of the transactions included in the
Transaction which do not require stockholder
approval if the Transaction is not approved by
Tenneco stockholders). See "Introduction," "The
Shipbuilding Distribution--Conditions to
Consummation of the Shipbuilding Distribution"
and "The Shipbuilding Distribution--Amendment or
Termination of the Distributions."
Reasons for the
Distributions.............. The Distributions and the Merger are designed to
separate three types of businesses, namely the
Shipbuilding Business, the Industrial Business
(as defined below) and the Energy Business (as
defined below), which have distinct financial,
investment and operating characteristics, so that
each can adopt strategies and pursue objectives
appropriate to its specific needs. The
Distributions will (i) enable the management of
each company to concentrate its attention and
financial resources on the core businesses of
such company, (ii) permit investors to make more
focused investment decisions based on the
specific attributes of each of the three
businesses, (iii) facilitate employee
compensation programs custom-tailored to the
operations of each business, including stock-
based and other incentive programs, which will
more directly reward employees of each business
based on the success of that business and (iv)
tailor the assets of Tenneco to facilitate
acquisition of the Energy Business by El Paso.
Upon consummation of the Shipbuilding
Distribution, NNS will, primarily through its
consolidated subsidiaries (including Newport
News), own and operate substantially all of the
Shipbuilding Business. New Tenneco will,
primarily through its consolidated subsidiaries,
own and operate the Tenneco Automotive, Tenneco
Packaging and Tenneco Business Services
businesses of Tenneco (collectively, the
"Industrial Business"). Immediately following
consummation of the Distributions, a subsidiary
of El Paso will be merged with and into Tenneco,
and thereafter the energy and other remaining
businesses and operations of Tenneco, including
liabilities and assets relating to discontinued
Tenneco operations not related to the
Shipbuilding Business and the Industrial Business
(collectively, the "Energy Business"), will be
owned and operated by El Paso. See "The
Shipbuilding Distribution--Reasons for the
Distributions."
Federal Income Tax
Consequences............... The Tenneco Board has conditioned the
Shipbuilding Distribution on receipt of the IRS
Ruling Letter substantially to the effect, among
other things, that the Shipbuilding Distribution
and the receipt of shares of NNS Common Stock by
holders of Tenneco Common Stock will be tax-free
to Tenneco and its stockholders (except with
9
<PAGE>
respect to cash received for fractional shares as
discussed above), respectively, for federal
income tax purposes. The IRS Ruling Letter
received on October 30, 1996 satisfies the
foregoing condition. Tenneco also requested a
ruling from the IRS as to the tax-free treatment
of certain transactions to be effected as part of
the Corporate Restructuring Transactions (as
defined herein) and the Merger which was received
as part of the IRS Ruling Letter. See "The
Shipbuilding Distribution--Certain Federal Income
Tax Aspects of the Shipbuilding Distribution,"
and "Risk Factors--Potential Federal Income Tax
Liabilities."
Trading Market..............
There is currently no public market for NNS
Common Stock, although a "when issued" market is
expected to develop prior to the Distribution
Date. The NYSE has approved the listing of NNS
Common Stock upon notice of issuance. Holders of
Tenneco Common Stock should be aware that there
can be no assurance that the combined market
value/trading prices of (i) El Paso Common Stock
and, under certain circumstances, El Paso
Preferred Depositary Shares, (ii) New Tenneco
Common Stock and (iii) NNS Common Stock (plus any
cash received in lieu of fractional shares or any
fractional El Paso Preferred Depositary Shares)
received in respect of their shares of Tenneco
Common Stock pursuant to the Transaction will be
equal to or greater than the market value/trading
prices of their shares of Tenneco Common Stock
immediately prior to the Transaction. See "The
Shipbuilding Distribution--Trading of NNS Common
Stock" and "Risk Factors--No Current Public
Market for NNS Common Stock."
Dividends................... NNS' dividend policy will be established by the
NNS Board from time to time based on the results
of operations and financial condition of the
Company and such other business considerations as
the NNS Board considers relevant. In addition,
the Senior Credit Facility and the indentures for
the Notes place restrictions, subject to certain
exceptions, upon the right of NNS to declare and
pay dividends. There can be no assurance that the
combined annual dividends on (i) El Paso Common
Stock and, if issued in connection with the
Merger, El Paso Preferred Depositary Shares, (ii)
New Tenneco Common Stock and (iii) NNS Common
Stock after the Transaction will be equal to the
annual dividends on Tenneco Common Stock prior to
the Transaction (and it is unlikely that the
dividends would be greater than the annual
dividends on Tenneco Common Stock prior to the
Transaction). See "Risk Factors--Uncertainty
Regarding Future Dividends," "Description of
Capital Stock--NNS Common Stock" and "Financing."
Antitakeover Provisions..... The Restated Certificate of Incorporation and the
Amended and Restated By-laws of the Company (both
of which will be adopted prior to the
Distribution Date), as well as the Company's
stockholder rights plan (which will expire on
June 10, 1998 unless extended with stockholder
approval) and Delaware statutory law, contain
provisions that may have the effect of
discouraging an acquisition of control of the
Company in a transaction not approved by the NNS
Board. These provisions should better enable the
10
<PAGE>
Company to develop its business and foster its
long-term growth without the disruptions that can
be caused by the threat of certain types of
takeovers not deemed by the NNS Board to be in
the best interests of the Company and its
stockholders. Such provisions may also have the
effect of discouraging third parties from making
proposals involving an acquisition or change of
control of the Company, although such proposals,
if made, might be considered desirable by a
majority of the Company's stockholders. Such
provisions could further have the effect of
making it more difficult for third parties to
cause the immediate removal and replacement of
the members of the then current NNS Board or the
then current management of the Company without
the concurrence of the NNS Board. See "Risk
Factors--Certain Antitakeover Features,"
"Description of Capital Stock," and "Antitakeover
Effects of Certain Provisions."
Risk Factors................ Stockholders of Tenneco should be aware that the
Shipbuilding Distribution and ownership of NNS
Common Stock involve certain risk factors
including those described under "Risk Factors,"
and elsewhere in this Information Statement. Such
matters include, among others, the Company's
reliance on the U.S. Navy for over 90% of its net
sales; the uncertainty of securing future work;
the Company's competitive environment; the
Company's substantial leverage after the
Shipbuilding Distribution; the lack of a current
public market for the NNS Common Stock; the
absence of assurance that the combined market
value/trading prices of and dividends on El Paso
Common Stock and any El Paso Depositary Shares,
NNS Common Stock and New Tenneco Common Stock
held by stockholders after the Transaction will
be equal to or greater than the market
value/trading price of or dividends on Tenneco
Common Stock prior to the Transaction; the risk
that the Transaction may not qualify as a tax-
free distribution under Section 355 of the Code
(as defined herein); certain antitakeover effects
of certain provisions of the Company's Restated
Certificate of Incorporation, its Amended and
Restated By-laws, its stockholder rights plan and
the Delaware statutory law; the fact that the
Transaction is subject to review under federal
and state fraudulent conveyance laws; and other
matters. See "Risk Factors."
Corporate Restructuring
Transactions............... Prior to the consummation of the Shipbuilding
Distribution, Tenneco and its subsidiaries will
undertake various intercompany transfers and
distributions designed to restructure Tenneco's
existing businesses, assets and liabilities so
that substantially all of the assets, liabilities
and operations of (i) the Shipbuilding Business
will be directly and indirectly owned and
operated by the Company, (ii) the Industrial
Business will be directly and indirectly owned
and operated by New Tenneco and (iii) the Energy
Business will be directly and indirectly owned by
Tenneco which will, upon consummation of the
Merger, be a subsidiary of El Paso and be renamed
El Paso Tennessee Pipeline Co. (the "Corporate
Restructuring Transactions"). See "The
Shipbuilding Distribution--Corporate
Restructuring Transactions." In connection with
the Transaction, Newport News Industrial
Corporation, a Virginia corporation and
subsidiary of Newport News, will transfer all of
its assets and trade accounts payable to NNS.
Newport News Shipbuilding Inc. will acquire all
of the assets and liabilities of Newport News
Industrial Corporation as part of the Corporate
Restructuring Transactions.
11
<PAGE>
Debt and Cash Realignment;
Credit/Financing...........
The Merger Agreement, the Distribution Agreement
to be entered into pursuant to the Merger
Agreement (the "Distribution Agreement") and
certain of the other agreements and documents
attached as exhibits to the Merger Agreement or
the Distribution Agreement (the "Ancillary
Agreements") provide for (i) the restructuring
(through debt tender and exchange offers,
defeasances, prepayments, refinancings and the
like), immediately prior to the Distributions, of
the outstanding indebtedness for money borrowed
(the "Tenneco Consolidated Debt") of Tenneco and
certain of its consolidated subsidiaries (the
"Debt Realignment") and (ii) the allocation of
cash and cash equivalents of Tenneco and its
consolidated subsidiaries (the "Cash
Realignment"). See "The Shipbuilding
Distribution--Debt and Cash Realignment."
In connection with the Transaction and to provide
for working capital needs, NNS intends to issue
(the "Offering") $200 million of Senior Notes due
2006 (the "Senior Notes") and $200 million of
Senior Subordinated Notes due 2006 (the "Senior
Subordinated Notes," and together with the Senior
Notes, the "Notes") and enter into a $415 million
senior secured credit facility (the "Senior
Credit Facility") comprised of a $200 million
six-year amortizing term loan (the "Term Loan")
and a $215 million six-year revolving credit
facility (the "Revolving Credit Facility"), of
which $125 million may be used for advances and
letters of credit and $90 million may be used for
standby letters of credit. The Company expects to
utilize the proceeds of the Notes and Term Loan
and borrowings of $14 million under the Revolving
Credit Facility to distribute (i) $600 million as
a dividend to Tenneco or one or more of its
subsidiaries for use in retiring certain Tenneco
Consolidated Debt and (ii) $14 million in payment
of certain fees and expenses incurred in
connection with the Notes and the Senior Credit
Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources",
"Risk Factors--Substantial Leverage" and "The
Shipbuilding Distribution--Debt and Cash
Realignment."
Pursuant to the Cash Realignment, the Company
will be allocated $5 million of cash and cash
equivalents, Tenneco will be allocated $25
million (subject to certain adjustments) of cash
and cash equivalents and New Tenneco will be
allocated all remaining cash and cash equivalents
on hand as of the Merger Effective Time which
would total approximately $200 million if the
Transaction had been consummated as of June 30,
1996. A post-Distribution audit will be conducted
and following such audit, New Tenneco will be
required to pay to each of the Company or
Tenneco, as the case may be, the amount by which
such company's total cash and cash equivalents on
hand as of the Merger Effective Time is less than
its above-described allocation to such company.
Likewise, Tenneco and the Company will each be
required to pay to New Tenneco the amount of any
excess as of the Merger Effective Time from the
above-described allocation. See "The Shipbuilding
Distribution--Debt and Cash Realignment."
12
<PAGE>
Relationships with Tenneco
and New Tenneco after the
Shipbuilding Distribution..
Tenneco will have no stock ownership in the
Company upon consummation of the Shipbuilding
Distribution. The Company, New Tenneco and
Tenneco will enter into the Distribution
Agreement prior to the Shipbuilding Distribution,
for the purposes of governing certain ongoing
relationships among the Company, New Tenneco and
Tenneco after the Shipbuilding Distribution and
to provide for an orderly transition in the
disaffiliation of the Shipbuilding Business, the
Energy Business and the Industrial Business. The
Distribution Agreement provides for, among other
things, the Distributions and the allocation
among the Company, Tenneco and New Tenneco of
assets and liabilities. The parties will also
enter into the Ancillary Agreements, including:
(i) the Benefits Agreement (defined herein),
providing for allocations of responsibilities
with respect to employee compensation, benefit
and labor matters; (ii) the Tax Sharing Agreement
(defined herein) pursuant to which the Company,
New Tenneco and Tenneco will allocate liabilities
for taxes arising prior to, as a result of, and
subsequent to the Distribution Date; (iii) the
Debt Realignment plan pursuant to which the
Tenneco Consolidated Debt will be restructured,
paid and/or refinanced by the Company, New
Tenneco and Tenneco; (iv) the Debt and Cash
Allocation Agreement (defined herein) providing
for, among other things, the allocation of cash
among, and the restructuring and refinancing of
certain of the debt of Tenneco existing prior to
the Distributions by (or with funds provided by),
the Company, New Tenneco and Tenneco; (v) the TBS
Services Agreement (defined herein) pursuant to
which Tenneco Business Services Inc. ("TBS"), a
wholly-owned subsidiary of New Tenneco, will
continue to provide certain administrative and
other services to the Company until December 31,
1998; (vi) the Shipbuilding Trademark Transition
License Agreement (defined herein) allowing the
Company to use the trademarks and tradenames of
New Tenneco for certain specified periods of time
for certain purposes; and (vii) the Insurance
Agreement (defined herein), providing for, among
other things, coverage arrangements for Tenneco,
the Company and New Tenneco in respect of various
insurance policies.
In addition, the Company and New Tenneco will
share one common director, Dana G. Mead. The
Company and New Tenneco will adopt policies and
procedures to be followed by the Board of
Directors of each company to limit the
involvement of Mr. Mead in situations that could
give rise to potential conflicts of interest,
including requesting him to abstain from voting
as a director of either the Company or New
Tenneco on certain matters which present a
conflict of interest between the two companies.
The Company believes that such conflict
situations will be minimal.
See "The Shipbuilding Distribution--Debt and Cash
Realignment" and "The Shipbuilding Distribution--
Relationships Among Tenneco, the Company, and New
Tenneco after the Distributions."
13
<PAGE>
RECENT DEVELOPMENTS
On October 22, 1996, Tenneco announced consolidated earnings for the nine
months ended September 30, 1996. The Company's earnings for the nine months
ended September 30, 1996 and 1995 are summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net Sales.................................................... $ 1,437 $ 1,290
======== ========
Operating earnings........................................... $ 117 $ 125
Interest expense............................................. 25 26
Provision for income taxes................................... 40 41
-------- --------
Net earnings................................................. $ 52 $ 58
======== ========
</TABLE>
The Company's net sales increase in 1996 was due primarily to higher carrier
construction activity and activity on the Eisenhower overhaul, which offset
revenue declines from the August completion of the Los Angeles-class submarine
construction program and lower activity on conversion work. Operating earnings
for the Company were down due to $57 million of contract losses on commercial
product tankers (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Business Outlook," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Other--Significant Estimates," "Business--Construction--Commercial" and Note 13
to the Combined Financial Statements of the Company) and lower margins on
conversion work, offset by productivity improvements and higher activity on the
Eisenhower overhaul.
14
<PAGE>
INTRODUCTION
This Information Statement is being furnished to stockholders of Tenneco in
connection with the Shipbuilding Distribution, pursuant to which Tenneco
intends to distribute to holders of Tenneco Common Stock all the outstanding
shares of Common Stock, $.01 par value per share ("NNS Common Stock"), of the
Company. Concurrently with the Shipbuilding Distribution, Tenneco will also
distribute to holders of Tenneco Common Stock (individually, the "Industrial
Distribution" and together with the Shipbuilding Distribution, the
"Distributions") all of the outstanding shares of Common Stock, $.01 par value
per share ("New Tenneco Common Stock"), of New Tenneco. The Distributions will
occur prior to the effective time of the proposed merger (the "Merger") of a
subsidiary of El Paso Natural Gas Company, a Delaware corporation ("El Paso"),
with and into Tenneco (which will, upon consummation of the Merger, be renamed
El Paso Tennessee Pipeline Co.) whereby Tenneco will become a subsidiary of El
Paso. Pursuant to the Merger, holders of Tenneco Common Stock will receive El
Paso Common Stock and, under certain circumstances, El Paso Preferred
Depositary Shares. The Distributions, the Merger and the other transactions
contemplated thereby are collectively referred to herein as the "Transaction."
It is expected that the Shipbuilding Distribution will be made on or about
December 11, 1996 (the "Distribution Date"), to holders of record of Tenneco
Common Stock on December 11, 1996 (the "Distribution Record Date"), on the
basis of one share of NNS Common Stock for every five shares of Tenneco Common
Stock. In addition, the NNS Board will adopt a stockholder rights plan and
cause to be issued, with each share of NNS Common Stock to be distributed in
the Shipbuilding Distribution, one Right, entitling the holder thereof to,
among other things, purchase under certain circumstances, and as described
more fully herein, one one-hundredth of a share of NNS Junior Preferred Stock.
No consideration will be required to be paid by holders of Tenneco Common
Stock for the shares of NNS Common Stock to be distributed in the Shipbuilding
Distribution or the Rights associated therewith, nor will holders of Tenneco
Common Stock be required to surrender or exchange their shares of Tenneco
Common Stock in order to receive such shares of NNS Common Stock and the
Rights associated therewith.
Upon consummation of the Distributions and the Merger (i) holders of Tenneco
Common Stock as of the Distribution Record Date and Merger Effective Time will
receive the securities of three publicly held companies--the Company, New
Tenneco and El Paso and (ii) holders of Tenneco Preferred Stock (as defined
herein) as of the Merger Effective Time will receive El Paso Common Stock.
Immediately thereafter, the Company will own and operate substantially all of
the Shipbuilding Business, New Tenneco will own and operate the Industrial
Business, and El Paso will own and operate the Energy Business.
The Shipbuilding Distribution, the Industrial Distribution and the Merger
are separate components of the Transaction. The Shipbuilding Distribution, the
Industrial Distribution and the Merger, however, as described herein will not
be consummated unless the Transaction as a whole is approved at a special
meeting of the Tenneco stockholders (although Tenneco may elect subsequently
to proceed with one or more of the transactions included in the Transaction
which do not require stockholder approval if the Transaction is not approved
by Tenneco stockholders). Furthermore, the Shipbuilding Distribution will not
be consummated until all other conditions to the Merger have been satisfied
(or can be contemporaneously satisfied) other than the filing of a Certificate
of Merger with the Secretary of State of Delaware. See "The Shipbuilding
Distribution--Conditions to Consummation at the Shipbuilding Distribution" and
"The Shipbuilding Distribution--Amendment or Termination of the
Distributions."
Stockholders of Tenneco with inquiries relating to the Shipbuilding
Distribution or the other components of the Transaction should contact the
Distribution Agent at (800) 446-2617, or Tenneco Inc., Shareholders Services,
1275 King Street, Greenwich, Connecticut 06831, telephone number (203) 863-
1170. After the Distribution Date, stockholders of the Company with inquiries
relating to their investment in NNS should contact Newport News Shipbuilding
Inc., Shareholder Services, 4101 Washington Avenue, Newport News, Virginia
23607; telephone: (757) 380-2000.
15
<PAGE>
THE SHIPBUILDING DISTRIBUTION
The following descriptions of certain provisions of the Distribution
Agreement and certain of the Ancillary Agreements are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and the
Ancillary Agreements. A copy of the Distribution Agreement and each of the
Ancillary Agreements as currently agreed to is included as an exhibit to the
Company's Registration Statement on Form 10 under the Exchange Act, relating
to NNS Common Stock, and the following discussion with respect to such
agreements is qualified in its entirety by reference to the subject agreement
as filed.
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board will declare the
special distribution necessary to effect the Shipbuilding Distribution and
will set the Distribution Record Date and the Distribution Date (which will be
prior to the Merger Effective Time). Subject to the conditions summarized
below, on the Distribution Date Tenneco will distribute pro rata to all
holders of record of Tenneco Common Stock as of the Distribution Record Date,
one share of NNS Common Stock (including the Rights associated therewith) for
every five shares of Tenneco Common Stock so held. Pursuant to the
Distribution Agreement, as soon as practicable on or after the Distribution
Date, Tenneco will deliver to the Distribution Agent, as agent for holders of
Tenneco Common Stock as of the Distribution Record Date, certificates
representing such shares of NNS Common Stock as are required for the
Shipbuilding Distribution.
Beneficial holders of Tenneco Common Stock who would be entitled to receive
fractional shares of NNS Common Stock will receive cash (without interest) in
the Shipbuilding Distribution, in lieu of such fractional shares. To
accomplish this, the Distribution Agreement requires that the Distribution
Agent determine the number of whole and fractional shares of NNS Common Stock
to which each beneficial holder of Tenneco Common Stock as of the Distribution
Record Date is entitled immediately following the Shipbuilding Distribution.
Next, the Distribution Agent will aggregate these fractional share interests
and sell them on the open market at then-prevailing prices. The Distribution
Agent will distribute to each holder of Tenneco Common Stock its ratable share
of such proceeds (without interest) after deducting appropriate amounts for
federal income tax withholding purposes and any applicable transfer taxes. All
brokers' fees and commissions incurred in connection with such sales shall be
paid by Tenneco.
If any shares of NNS Common Stock are returned to the Distribution Agent as
unclaimed or cannot be distributed by the Distribution Agent, any post-
Distribution dividends or distributions thereon will be paid to the
Distribution Agent (or set aside and retained by the Company). On the 180th
day following the Distribution Date, the Distribution Agent will return to
Tenneco all unclaimed shares of NNS Common Stock, cash in lieu of fractional
shares and dividends or other distributions with respect thereto. Thereafter,
holders of Tenneco Common Stock as of the Distribution Date will be entitled
to look only to Tenneco for such amounts to which they are entitled, subject
to applicable escheat or other abandoned property laws.
NO HOLDER OF TENNECO COMMON STOCK WILL BE REQUIRED TO PAY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF NNS COMMON STOCK (OR THE CASH IN LIEU OF
FRACTIONAL SHARES) TO BE RECEIVED IN THE SHIPBUILDING DISTRIBUTION, OR TO
SURRENDER OR EXCHANGE SHARES OF TENNECO COMMON STOCK IN ORDER TO RECEIVE NNS
COMMON STOCK (OR THE CASH IN LIEU OF FRACTIONAL SHARES).
CORPORATE RESTRUCTURING TRANSACTIONS
Prior to consummation of the Distributions (and pursuant to the Distribution
Agreement), Tenneco will effect the Corporate Restructuring Transactions. Upon
completion of the Corporate Restructuring Transactions, Tenneco's existing
businesses and assets will be restructured so that, in general, substantially
all of the assets, liabilities and operations of (i) the Shipbuilding Business
will be owned and operated, directly and indirectly, by the Company and (ii)
the Industrial Business will be owned and operated, directly and indirectly,
by New Tenneco. The remaining assets, liabilities and operations of Tenneco
and its remaining subsidiaries will then consist solely of
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those related to the Energy Business, which includes liabilities and limited
assets relating to discontinued Tenneco operations not related to the
Industrial Business or the Shipbuilding Business. In connection with the
Transaction, NNS will transfer its interest (the "HVO Interest") in certain
entities affiliated with Van Ommeren International BV to New Tenneco. As of
September 30, 1996, NNS had invested $11.8 million in the HVO Interest, which
was funded by Tenneco. A further $7.9 million is scheduled to be invested, of
which $4 million is due in November, 1996 and $3.9 million is due in March,
1997. Entities affiliated with Van Ommeren International BV have agreed to
purchase five of the Company's Double Eagle product tankers (the Company has
contracts for a total of nine Double Eagle product tankers).
The assets which will be owned by the Company upon consummation of the
Corporate Restructuring Transactions (the "Shipbuilding Assets") are generally
those related to the conduct of the past and current Shipbuilding Business, as
reflected on the Unaudited Pro Forma Combined Balance Sheet of the Company as
of June 30, 1996 included herein under "Unaudited Pro Forma Combined Financial
Statements" which is also attached as an exhibit to the Distribution Agreement
(the "Pro Forma Balance Sheet"), to the extent still held on the Distribution
Date (plus any subsequently acquired asset which is of a nature or type that
would have resulted in such asset being included on the Pro Forma Balance
Sheet had it been acquired prior to the date thereof), plus all rights
expressly allocated to the Company and its subsidiaries under the Distribution
Agreement or any of the Ancillary Agreements. The assets which will be owned
by New Tenneco upon consummation of the Corporate Restructuring Transactions
(the "Industrial Assets") are generally those related to the conduct of the
past and current Industrial Business, as reflected on the New Tenneco pro
forma balance sheet, to the extent still held on the Distribution Date (plus
any subsequently acquired asset which is of a nature or type that would have
resulted in such asset being included on the New Tenneco pro forma balance
sheet had it been acquired prior to the date thereof), plus all rights
expressly allocated to New Tenneco and its subsidiaries under the Distribution
Agreement or any Ancillary Agreement. As part of the Corporate Restructuring
Transactions, New Tenneco will acquire various corporate assets of Tenneco
such as the "Tenneco" trademark and associated rights. The remaining assets
(the "Energy Assets") will continue to be owned and operated by Tenneco (as a
subsidiary of El Paso) following the Corporate Restructuring Transactions and
the Distributions.
The liabilities to be assumed by the Company and for which the Company will
be responsible pursuant to the Distribution Agreement (the "Shipbuilding
Liabilities") generally include (i) those liabilities related to the
Shipbuilding Assets and the current and past conduct of the Shipbuilding
Business, including liabilities reflected on the Pro Forma Balance Sheet which
remain outstanding as of the Distribution Date (plus liabilities that were
subsequently incurred or accrued, determined on a basis consistent with the
determination of liabilities thereon), (ii) certain liabilities for any
violations or alleged violations of securities or other laws arising out of
documents relating to, or filed by or on behalf of, the Company in connection
with the Transaction or the Company's financing arrangements, and (iii) those
liabilities expressly allocated to the Company or its subsidiaries under the
Distribution Agreement or any Ancillary Agreement.
The liabilities to be assumed by New Tenneco and for which New Tenneco will
be responsible pursuant to the Distribution Agreement (the "Industrial
Liabilities") generally include (i) those liabilities related to the
Industrial Assets and the current and past conduct of the Industrial Business,
including liabilities reflected on the New Tenneco pro forma balance sheet
which remain outstanding as of the Distribution Date (plus liabilities that
were subsequently incurred or accrued, determined on a basis consistent with
the determination of liabilities thereon) (ii) certain liabilities for any
violations or alleged violations of securities or other laws arising out of
documents relating to, or filed by or on behalf of, New Tenneco in connection
with the Transaction, and (iii) those liabilities expressly allocated to New
Tenneco or its subsidiaries under the Distribution Agreement or any Ancillary
Agreement.
The liabilities to be retained or assumed by Tenneco and for which Tenneco
will be responsible pursuant to the Distribution Agreement (the "Energy
Liabilities") generally include (i) those liabilities related to the Energy
Assets and the current and past conduct of the Energy Business, including
liabilities reflected on the Tenneco pro forma balance sheet attached as an
exhibit to the Distribution Agreement which remain outstanding as of the
Distribution Date (plus subsequently incurred or accrued liabilities
determined on a basis consistent with the determination of liabilities
thereon), (ii) those liabilities expressly allocated to Tenneco or its
subsidiaries under the Distribution Agreement or any Ancillary Agreement, and
(iii) all other liabilities of Tenneco or any other member of the Energy Group
which do not constitute Industrial Liabilities or Shipbuilding Liabilities.
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For a description of certain liabilities that will be expressly allocated
among Tenneco, the Company and New Tenneco by the Distribution Agreement and
Ancillary Agreements, including liability for the Tenneco Consolidated Debt,
taxes and certain employee benefits, see "--Debt and Cash Realignment" and "--
Relationships Among Tenneco, the Company and New Tenneco After the
Distributions."
DEBT AND CASH REALIGNMENT
From and after the Distributions, each of the Company, Tenneco and New
Tenneco will, in general, be responsible for the debts, liabilities and
obligations related to the business or businesses that its owns and operates
following consummation of the Corporate Restructuring Transactions. See "--
Corporate Restructuring Transactions." Tenneco's historical practice, however,
has been to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Accordingly, the Distribution Agreement, the Merger Agreement and the
Ancillary Agreements provide for (i) the pre-Distribution restructuring of the
Tenneco Consolidated Debt pursuant to the Debt Realignment, (ii) the
allocation among each of Tenneco, the Company and New Tenneco of the total
amount of cash and cash equivalents on hand as of the Merger Effective Time
pursuant to the Cash Realignment and (iii) settlement payments with respect to
certain capital expenditures related to the Energy Business, all as described
below.
The Merger Agreement contemplates that Tenneco, in its discretion, will, or
will cause its relevant subsidiaries to, tender for, defease, mature, redeem,
exchange or prepay the Tenneco Consolidated Debt prior to the Distributions
(the "Tenneco Debt Tender Offers"). As of June 30, 1996, there was outstanding
approximately $4,443 million of Tenneco Consolidated Debt.
In connection with the Transaction and to provide for working capital needs,
NNS intends to issue the Notes, comprised of $200 million of the Senior Notes
due 2006 and $200 million of the Senior Subordinated Notes due 2006, and enter
into a $415 million secured Senior Credit Facility, comprised of the $200
million six-year amortizing Term Loan and the $215 million six-year Revolving
Credit Facility, of which $125 million may be used for advances and letters of
credit and $90 million may be used for standby letters of credit. The Company
expects to utilize the proceeds of the Notes and Term Loan and borrowings of
$14 million under the Revolving Credit Facility to distribute (i) $600 million
as a dividend to Tenneco or one or more of its subsidiaries for use in
retiring certain Tenneco Consolidated Debt and (ii) $14 million in payment of
certain fees and expenses incurred in connection with the Notes and the Senior
Credit Facility. See "Risk Factors--Substantial Leverage" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Pursuant to the Cash Realignment, as of the Merger Effective Time the
Company will be allocated $5 million of cash and cash equivalents. Tenneco
will be allocated $25 million (subject to certain adjustments) of cash and
cash equivalents and New Tenneco will be allocated all remaining cash and cash
equivalents on hand (which would total approximately $200 million if the
Transaction had been consummated as of June 30, 1996). A post-Distribution
audit will be conducted and following the post-Distribution audit, New Tenneco
will be required to pay to each of Tenneco or the Company, as the case may be,
the amount by which such company's total cash and cash equivalents on hand as
of the Merger Effective Time is less than the above-described allocation.
Likewise, Tenneco and the Company will each be required to pay to New Tenneco
any excess cash and cash equivalents as of the Merger Effective Time from the
above-described allocation determined pursuant to such audit.
RELATIONSHIPS AMONG THE COMPANY, TENNECO AND NEW TENNECO AFTER THE
DISTRIBUTIONS
The Shipbuilding Business to be owned and operated by the Company has
historically been included in Tenneco's consolidated financial results. After
the Transaction, neither Tenneco nor New Tenneco will have an ownership
interest in the Shipbuilding Business owned and operated by the Company and
the Company will not have an ownership interest in either the Energy Business
or the Industrial Business. The Company and New Tenneco will be independent,
publicly-held companies, and Tenneco will become a subsidiary of El Paso.
The Company, Tenneco and New Tenneco have entered into the Distribution
Agreement which governs certain aspects of their relationships both prior to
and following the Distributions. In addition, Tenneco and/or New Tenneco
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(and their appropriate subsidiaries) have entered into, or will prior to the
Distributions enter into, the Ancillary Agreements which are intended to
further effect the disaffiliation of the Shipbuilding Business, the Energy
Business and the Industrial Business and to govern certain additional aspects
of their ongoing relationships.
Terms of the Distribution Agreement
In addition to providing for the terms of the Distributions and the various
actions to be taken prior to the Distributions, the Distribution Agreement
contains other provisions governing the relationship among the Company, Tenneco
and New Tenneco prior to and following the Distributions.
The Distribution Agreement provides that from and after the Distribution
Date: (i) Tenneco will, and will cause its affiliates engaged in the Energy
Business (collectively with Tenneco, the "Energy Group") to, assume, pay,
perform and discharge all Energy Liabilities, (ii) the Company will assume,
pay, perform and discharge all Shipbuilding Liabilities except as described
below, and (iii) New Tenneco will, and will cause its affiliates engaged in the
Industrial Business (collectively with New Tenneco, the "Industrial Group") to
assume, pay, perform and discharge all Industrial Liabilities. See "The
Shipbuilding Distribution--Corporate Restructuring Transactions."
In addition, the Distribution Agreement provides for cross-indemnities under
which (i) Tenneco must indemnify the Company and New Tenneco (and their
respective subsidiaries, directors, officers, employees and agents, and certain
other related parties) against all losses arising out of or in connection with
the Energy Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by Tenneco, (ii) the Company must indemnify Tenneco and New
Tenneco (and their respective subsidiaries, their directors, officers,
employees and agents, and certain other related parties) against all losses
except as described below arising out of or in connection with the Shipbuilding
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by the Company, and (iii) New Tenneco must indemnify Tenneco and the
Company (and their respective subsidiaries, their directors, officers,
employees and agents, and certain other related parties) against all losses
arising out of or in connection with the Industrial Liabilities or the breach
of the Distribution Agreement or any Ancillary Agreement by New Tenneco, and
for contribution in certain circumstances. Additionally, Tenneco and the
Company have received letters from the Defense Contract Audit Agency (the
"DCAA"), inquiring about certain aspects of the Distributions, including the
disposition of the Tenneco Inc. Retirement Plan (the "TRP"), which covers
salaried employees of the Company and other Tenneco divisions. The Company and
New Tenneco have agreed to certain indemnities regarding such inquiries. See
"Business--Investigations and Legal Proceedings--Retirement Plan."
Pursuant to the Distribution Agreement, each of the parties has agreed to use
all reasonable efforts to take or cause to be taken all action, and do or cause
to be done all things, reasonably necessary, proper or advisable to consummate
the transactions contemplated by, and carry out the purposes of, the
Distribution Agreement. As such, the Distribution Agreement provides that if
any contemplated pre-Distribution transfers and assignments have not been
effected on or prior to the Distribution Date, the parties will cooperate to
effect such transfers as quickly thereafter as practicable. The entity
retaining any asset or liability which should have been transferred
prior to the Distribution Date will continue to hold that asset for the benefit
of the party entitled thereto or that liability for the account of the party
required to assume it, and must take such other action as may be reasonably
requested by the party to whom such asset was to be transferred or by whom such
liability was to be assumed in order to place such party, insofar as reasonably
possible, in the same position as would have existed had such asset or
liability been transferred or assumed as contemplated by the Distribution
Agreement.
The Distribution Agreement provides for the transfer of books and records
among Tenneco, the Company and New Tenneco and their respective subsidiaries
and grants to each party access to certain information in the possession of the
others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent of
the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements
Below are descriptions of the principal Ancillary Agreements which have been,
or prior to the Distributions will be, entered into by Tenneco, the Company,
New Tenneco and/or El Paso (and, in certain circumstances,
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their appropriate subsidiaries). The Ancillary Agreements are intended to
further effectuate the disaffiliation of the Shipbuilding Business and the
Industrial Business from the Energy Business and to facilitate the operation of
each of the Company and New Tenneco as a separate entity.
Benefits Agreement. The Benefits Agreement to be entered into by and among
the Company, Tenneco and New Tenneco (the "Benefits Agreement") will define
certain labor, employment, compensation and benefit matters in connection with
the Distributions and the transactions contemplated thereby. Pursuant to the
Benefits Agreement, from and after the Distribution Date, each of the Company,
Tenneco and New Tenneco will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor all
related existing collective bargaining agreements, recognize related incumbent
labor organizations and continue sponsorship of hourly employee benefit plans.
New Tenneco will become the sole sponsor of the TRP and of the Tenneco Inc.
Thrift Plan (the "Tenneco Thrift Plan") from and after the Distribution Date,
and the Company and Tenneco will establish defined contribution plans for the
benefit of each of their respective employees to which the account balances of
retained and former employees of the Company and Tenneco in the Tenneco Thrift
Plan will be transferred. The benefits accrued by the Company and Tenneco
employees in the TRP will be frozen as of the last day of the calendar month
including the Distribution Date, and New Tenneco will amend the TRP to provide
that all benefits accrued through that day by Company and Tenneco employees are
fully vested and non-forfeitable. Tenneco will retain and assume employment
contracts with certain individuals. All liabilities under the Tenneco Inc.
Benefit Equalization Plan and the Tenneco Inc. Supplemental Executive
Retirement Plan will be assumed by New Tenneco pursuant to the Benefits
Agreement; however, New Tenneco is entitled to reimbursement for certain
payments thereunder from the Company and Tenneco. Generally, each of the
Company, Tenneco and New Tenneco will retain liabilities with respect to the
welfare benefits of its current and former employees and their dependents, but
Tenneco will assume all liabilities for retiree medical benefits of the
employees of discontinued operations and their dependents. In addition, as of
the Distribution Date, participation by retained and former employees of the
Company and Tenneco in the Tenneco Inc. Deferred Compensation Plan and the
Tenneco Inc. 1993 Deferred Compensation Plan will be discontinued.
Debt and Cash Allocation Agreement. The Debt and Cash Allocation Agreement
will govern the allocation among the parties of the cash and cash equivalents
of Tenneco and its subsidiaries on hand as of the Merger Effective Time, the
Tenneco Consolidated Debt and responsibility for certain capital expenditures
related to the Energy Business pursuant to the Cash Realignment and the Debt
Realignment, as described above (the "Debt and Cash Allocation Agreement"). See
"--Debt and Cash Realignment."
Insurance Agreement. Tenneco has historically maintained at the parent-
company level various insurance policies for the benefit or protection of
itself and its subsidiaries. The Insurance Agreement to be entered into among
Tenneco, the Company and New Tenneco (the "Insurance Agreement") will provide
for the respective continuing rights and obligations from and after the
Distributions of the parties with respect to these insurance policies (other
than directors' and officers' liability insurance policies which are addressed
by the Merger Agreement).
In general, following consummation of the Transaction, policies which relate
exclusively to the Shipbuilding Business will be retained by the Company,
policies which relate exclusively to the Energy Business or a member of the
Energy Group will be retained by Tenneco, and policies which relate exclusively
to the Industrial Business or a member of the Industrial Group will be retained
by New Tenneco.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies which
are in effect as of the Distribution Date (other than those which are cost
plus, fronting, high deductible or retrospective premium programs, as described
below) will either be transferred into the name of New Tenneco or cancelled, at
New Tenneco's option. In general, "go-forward" coverage under these policies
for the Energy Business and Shipbuilding Business (and certain related persons)
will be terminated as follows: (i) coverage under "claims-made" policies (i.e.,
those policies which provide coverage for claims made during a specified
period) will be terminated on the Distribution Date for any claims not made
prior thereto and (ii) coverage under "occurrence-based" policies (i.e., those
policies which provide coverage for acts or omissions occurring during a
specified
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period) will be terminated on the Distribution Date for acts or omissions
occurring thereafter. However, the Energy Business, Shipbuilding Business and
Industrial Business (and certain related persons) will all continue to have
access to these policies ("go-backward" coverage) and for claims made prior to
the Distribution Date, in the case of claims-made policies, and for acts or
omissions which occurred prior to the Distribution Date, in the case of
occurrence-based policies (subject to certain obligations to replace any policy
limits exhausted by it). Each respective group will be liable for premiums,
costs and charges under these policies that relate to its coverage thereunder
(and will likewise get the benefit of any refunded amounts).
Pursuant to the Insurance Agreement, policies which are cost plus, fronting,
high deductible or retrospective premium programs will be retained by the
Energy Business following the Distributions and will provide no go-forward
coverage to the Shipbuilding Business or Industrial Business. However, go-
backward coverage will continue to be available to these groups, subject to an
obligation to reimburse Tenneco for premiums, costs and charges under these
policies related to their respective coverages following the Distributions.
Following the Transaction, Tenneco will be required to maintain in place
certain letters of credit and surety bonds securing obligations under these
policies.
Tax Sharing Agreement. The Tax Sharing Agreement to be entered into among the
Company, Tenneco, New Tenneco and El Paso (the "Tax Sharing Agreement") will
provide for the allocation of tax liabilities among the parties arising prior
to, as a result of, and subsequent to the Distributions. As a general rule,
Tenneco will be liable for all taxes not specifically allocated to the Company
or New Tenneco under the specific terms of the Tax Sharing Agreement.
Generally, the Company will be liable for taxes imposed exclusively on the
Company (including for pre-distribution periods, taxes imposed on the Company)
and New Tenneco will be liable for taxes imposed exclusively on the Industrial
Group. In the case of federal income taxes imposed on the combined activities
of Tenneco, the Industrial Group and the Company, the Company and New Tenneco
will be liable to Tenneco for federal income taxes attributable to their
activities, and each will be allotted an agreed-upon share of estimated tax
payments made by the Tenneco consolidated group, except that (i) tax benefits
attributable to the Debt Realignment ("Debt Discharge Items"), presently
anticipated to total approximately $120 million, will be specifically allocated
to the Industrial Group and Tenneco will make a cash payment to New Tenneco
equal to the amount of such tax benefits when and to the extent realized by
Tenneco, and (ii) tax benefits attributable to certain items included in the
computation of the Base Amount (as defined in the Merger Agreement) ("Base
Amount Adjustment Items") will be specifically allocated to Tenneco. New
Tenneco will also be responsible for tax items attributable to certain
discontinued operations of Tenneco to the extent that such items exceed
forecasted amounts by more than a specified amount. In the case of state income
taxes imposed on the combined activities of the Company and the other business
groups, Tenneco will be responsible for payment of the combined tax to the
state tax authority, and the Company and New Tenneco will pay Tenneco a deemed
tax equal to the tax that would be imposed if the Company and the Industrial
Group had filed combined returns for their respective groups, except that Debt
Discharge Items and Base Amount Adjustment Items will be specifically allocated
to New Tenneco and Tenneco, respectively.
In general and, except as provided below, Tenneco will be responsible for any
taxes imposed on or resulting from the Transaction ("Transaction Taxes"). New
Tenneco will be responsible for any Transaction Taxes resulting from any
inaccuracy in factual statements or representations in connection with the IRS
Ruling Letter or the opinion of counsel contemplated by the Merger Agreement
(the "Tax Opinion") to the extent attributable to facts in existence prior to
the Merger, but excluding facts relating to the Company or El Paso. The Company
and El Paso will each be responsible for the accuracy of any factual statements
or representations relating to them or their respective affiliates. Each of the
Company, New Tenneco and El Paso will be responsible for any Transaction Tax to
the extent such tax is attributable to action taken by that entity which is
inconsistent with the tax treatment contemplated in the IRS Ruling Letter
received in the Transaction or the Tax Opinion. If between the date of the
Merger Agreement and the Merger Effective Time, there is a change in law (as
defined in the Tax Sharing Agreement) and as a result of such change in law
Tenneco is required to restore certain deferred gains to income, then any
resulting tax will be shared equally between New Tenneco and Tenneco.
TBS Services Agreement. Tenneco Business Services Inc. ("TBS") has entered,
or will enter, into a series of separate services agreements (the "Service
Agreements"), as described below, with the Company, New
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Tenneco (and its subsidiaries other than TBS) and Tenneco (and its
subsidiaries) which, together, constitute the "TBS Services Agreement" which
is to be delivered as an Ancillary Agreement under the Distribution Agreement.
One of the Service Agreements between TBS and the Company is for mainframe
data processing services (the "NNS Processing Services Agreement"). Under the
NNS Processing Services Agreement, TBS will supply, as a vendor, mainframe
data processing services to the Company for a period from the Merger Effective
Time through December 31, 1998, and thereafter only by mutual agreement. The
rate of compensation to TBS for services will be $9.1 million in 1997 and $9.6
million in 1998, payable in monthly installments, subject to adjustment if the
Company requests a change in the scope of services. TBS will lease the space
currently used by it at the Company's headquarters in Newport News, Virginia
for the period from the Merger Effective Time through December 31, 1998, with
an option for TBS to extend for one month periods for up to 12 months per
continued use by TBS as its mainframe data processing facility. The rent under
such lease will be approximately $1.2 million per year, plus pass-throughs of
certain occupancy-related costs.
TBS has also entered into a Supplier Participation Agreement (the "NNS
Supplier Participation Agreement") with the Company to govern the procedures
under which the Company will continue to participate with New Tenneco in
vendor purchase agreements between TBS and various suppliers of goods and
services. The NNS Supplier Participation Agreement provides for continued
participation of the Company in various purchase programs, absent a
termination for cause, for the duration of the agreements with each such
vendor. Under this Agreement, as is the case currently, purchases of goods and
services will be made directly by the Company at prices negotiated by TBS
which are applicable to all participating purchasers. TBS will charge the
Company a fixed fee of $5,000 per month for contract administration services
including data collection, negotiations, progress reporting, benefits
reporting, follow-up and consulting in connection with the vendor agreements.
Trademark Transition License Agreements. Upon consummation of the Corporate
Restructuring Transactions New Tenneco will hold the rights to various
trademarks, servicemarks, tradenames and similar intellectual property,
including rights in the marks "Tenneco", "Ten" and "Tenn" (but not
"Tennessee"), alone and in combination with other terms and/or symbols and
variations thereof (collectively, the "Trademarks"), in the United States and
elsewhere throughout the world. In connection with the Distributions,
Trademark Transition License Agreements will be entered into as of the
Distribution Date between both (i) New Tenneco and the Company (the
"Shipbuilding Trademark Transition License Agreement") and (ii) New Tenneco
and Tenneco (the "Industrial Trademark Transition License Agreement," and
together with the Shipbuilding Trademark Transition License Agreement, the
"Trademark Transition License Agreements"). Pursuant to these agreements, New
Tenneco will grant to each of the Company and Tenneco a limited, non-
exclusive, royalty-free license to use the Trademarks with respect to
specified goods and services as follows: (a) Tenneco and the Company will be
permitted to use the Trademarks in their corporate names for 30 days after the
date of the agreements (and, pursuant to the Distribution Agreement, each have
agreed to remove the Trademarks from such corporate names within 30 days after
the Distribution Date), (b) Tenneco and the Company will be permitted to use
their existing supplies and documents which have the Trademarks imprinted on
them for six months after the date of the agreements and (c) Tenneco and the
Company will be permitted to use the Trademarks on existing signs, displays or
other identifications for a period (after the date of the agreements) of two
years (in the case of Tenneco) and one year (in the case of the Company).
However, so long as Tenneco or the Company continues to use the Trademarks, it
must maintain certain quality standards prescribed by New Tenneco in the
conduct of business operations in which the Trademarks are used. In addition,
under these agreements each of Tenneco and the Company will agree to indemnify
New Tenneco from any claims that arise as a result of its use of the
Trademarks or any breach of its agreement and neither Tenneco nor the Company
may adopt or use at any time a word or mark likely to be similar to or
confused with the Trademarks. Each Trademark Transition License Agreement will
be immediately terminable by New Tenneco upon a material breach of the
agreement by Tenneco or the Company, as the case may be.
Directors
After the Distribution Date, the Company and New Tenneco will share one
common director, Dana G. Mead. The Company and New Tenneco will adopt policies
and procedures to be followed by the Board of
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Directors of each company to limit the involvement of Mr. Mead in situations
that could give rise to potential conflicts of interest, including requesting
him to abstain from voting as a director of either the Company or New Tenneco
on certain matters which present a conflict of interest between the Company
and New Tenneco. The Company believes that such conflict situations will be
minimal. See "Management."
Expenses
In general, and except for certain environmental costs and expenses, Tenneco
is responsible for all fees and expenses incurred by Tenneco in connection
with the Transaction for periods prior to the Distribution Date. Any such fees
and expenses which are unpaid as of the Merger Effective Time will be
allocated to and remain the responsibility of Tenneco pursuant to the Debt
Realignment and El Paso has agreed to pay or cause to be paid all such
amounts. However, because the aggregate amount of debt to be allocated upon
consummation of the Merger to Tenneco is limited to $2.65 billion (subject to
certain adjustments) the amount of unpaid Tenneco transaction fees and
expenses as of the Merger Effective Time may impact the amount of debt
allocated to the Company in connection with the Transaction. See "--Debt and
Cash Realignment." Each party has agreed to bear its own respective fees and
expenses incurred after consummation of the Transaction.
Settlement of Intercompany Accounts
Pursuant to the Merger Agreement and the Distribution Agreement, all
intercompany receivables, payables and loans (unless specifically provided for
in any Ancillary Agreement) among the Energy Business, the Industrial Business
and the Shipbuilding Business will be settled, capitalized or converted into
ordinary trade accounts as of the close of business on the Distribution Date.
Further, all intercompany agreements among such businesses (other than those
contemplated by the Transaction) will be terminated.
REASONS FOR THE DISTRIBUTIONS
The Distributions and the Merger are designed to separate three types of
businesses, namely the Shipbuilding Business, the Industrial Business and the
Energy Business, which have distinct financial, investment and operating
characteristics, so that each can adopt strategies and pursue objectives
appropriate to its specific needs. The Distributions will (i) enable the
management of each company to concentrate its attention and financial
resources on the core business of such company, (ii) permit investors to make
more focused investment decisions based on the specific attributes of each of
the three businesses, (iii) facilitate employee compensation programs custom-
tailored to the operations of each business, including stock-based and other
incentive programs, which will more directly reward employees of each business
based on the success of that business and (iv) tailor the assets of Tenneco to
facilitate acquisition of the Energy Business by El Paso. Upon consummation of
the Shipbuilding Distribution, NNS will, primarily through its consolidated
subsidiaries (including Newport News), own and operate substantially all of
the Shipbuilding Business. New Tenneco will, primarily through its
consolidated subsidiaries, own and operate the Industrial Business.
Immediately following consummation of the Distributions, a subsidiary of El
Paso will be merged with and into Tenneco, and thereafter the Energy Business,
including liabilities and assets relating to discontinued Tenneco operations
not related to the Shipbuilding Business and the Industrial Business, will be
owned and operated by El Paso.
CONDITIONS TO CONSUMMATION OF THE SHIPBUILDING DISTRIBUTION
The Shipbuilding Distribution is conditioned on, among other things,
stockholder approval of the Distributions and formal declaration of the
Distributions by the Tenneco Board. Other conditions to the Shipbuilding
Distribution include (i) execution and delivery of certain of the Ancillary
Agreements and consummation of the various pre-distribution transactions (such
as the Corporate Restructuring Transactions, the Debt Realignment and the Cash
Realignment), (ii) receipt of the IRS Ruling Letter to the effect that for
federal income tax purposes the Distributions qualify as tax-free
distributions to Tenneco and its stockholders under Section 355 of the Code
and that certain internal spin-off transactions included in the Corporate
Restructuring
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Transactions will also be tax-free, (iii) approval for listing on the NYSE of
the NNS Common Stock and the New Tenneco Common Stock, (iv) registration of
NNS Common Stock and New Tenneco Common Stock under the Exchange Act, (v)
receipt of all material consents to the Corporate Restructuring Transactions,
the Distributions and transactions contemplated in the Distribution Agreement,
(vi) performance of the various covenants required to be performed prior to
the Distribution Date (see "--Corporate Restructuring Transactions", "--Debt
and Cash Realignment" and "--Relationships Among Tenneco, the Company and New
Tenneco After the Distributions"), and (vii) lack of prohibition of the
Distributions by any law or governmental authority. The IRS Ruling Letter was
issued on October 30, 1996 and covered the matters referred to in clause (ii)
above. On November 1, 1996 the NYSE approved the listing of the NNS Common
Stock and New Tenneco Common Stock upon notice of issuance. Even if all the
conditions to the Distributions are satisfied, Tenneco has reserved the right,
under certain circumstances, to amend or terminate the Distribution Agreement
and to modify or abandon the transactions contemplated thereby. The Tenneco
Board has not attempted to identify or establish objective criteria for
evaluating the particular types of events or conditions that would cause the
Tenneco Board to consider amending or terminating the Distributions. See "--
Amendment or Termination of the Distributions." Although the foregoing
conditions (other than declaration of the Distributions) may be waived by
Tenneco (to the extent permitted by law), the Tenneco Board presently has no
intention to proceed with either of the Distributions unless each of these
conditions is satisfied. See "Introduction."
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS
Prior to the Distributions, the Distribution Agreement may be amended or
terminated and the Distributions may be amended, modified or abandoned by
Tenneco without the approval of its stockholders, the Company or New Tenneco,
subject to the consent of El Paso as described below. Any amendment or
modification prior to the termination of the Merger Agreement or consummation
of the Merger which adversely affects the Energy Business (other than to a de
minimis extent) or materially delays or prevents the consummation of the
Merger can be effectuated only with the prior consent of El Paso. Termination
of the Distribution Agreement prior to the termination of the Merger Agreement
or consummation of the Merger can be effectuated only with the prior written
consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, the
Company and New Tenneco. Certain amendments or terminations after the
Distributions also require the consent of third party beneficiaries to the
extent that the Distribution Agreement has expressly granted them rights.
TRADING OF NNS COMMON STOCK
See "Risk Factors--No Current Market for NNS Common Stock" and "Risk
Factors--Uncertainty Regarding Changes in Trading Price of Stock Following the
Transaction" for a discussion of certain considerations relating to the market
for and trading prices of NNS Common Stock following the Distribution.
Shares of NNS Common Stock received by shareholders of Tenneco pursuant to
the Shipbuilding Distribution will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of the Company under
the Securities Act of 1933, as amended (the "Securities Act"). Persons who are
affiliates of the Company will be permitted to sell their shares of NNS Common
Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act. There would not, however, be any 90-day waiting period before
sales could be made by affiliates under Rule 144 of the Securities Act, as
long as the other provisions of Rule 144 are met.
CERTAIN FEDERAL INCOME TAX ASPECTS OF THE SHIPBUILDING DISTRIBUTION
General
The following is a summary description of the material federal income tax
aspects of the Shipbuilding Distribution. This summary is for general
informational purposes only and is not intended as a complete description of
all the tax consequences of the Shipbuilding Distribution, the Industrial
Distribution, the Merger
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or the other transactions contemplated as part of the Transaction and does not
discuss tax consequences under the laws of state or local governments or any
other jurisdiction. Moreover, the tax treatment of a stockholder may vary
depending upon his, her or its particular situation. In this regard, certain
stockholders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, persons who are not citizens or
residents of the United States or who are foreign corporations, foreign
partnerships or foreign trusts or estates, as defined for United States federal
income tax purposes, stockholders that hold shares as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for United
States federal income tax purposes and stockholders with a "functional
currency" other than the United States dollar) may be subject to special rules
not discussed below. In addition, this summary applies only to shares which are
held as capital assets. The following discussion may not be applicable to a
stockholder who acquired his, her or its shares pursuant to the exercise of
stock options or otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), EXISTING, PROPOSED AND
TEMPORARY TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE, WHICH MAY OR
MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE VALIDITY OF THE
FOLLOWING DISCUSSION. SEE "--POSSIBLE FUTURE LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
Tax Rulings
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that:
(i) the Shipbuilding Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and the
stockholders of Tenneco under Section 355(a) of the Code;
(ii) the Industrial Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and the
stockholders of Tenneco under Section 355(a) of the Code; and
(iii) the following distributions to be effected as part of the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes
to the respective transferor corporations under Section 355(c)(1) or 361
(c) of the Code and to the respective stockholders of the transferor
corporations under Section 355(a) of the Code: (a) the distribution by the
Company of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation; (b) the distribution by Tenneco Corporation of the capital
stock of the Company and New Tenneco to Tennessee Gas Pipeline Company
("TGP"); and (c) the distribution by TGP of the capital stock of the
Company and New Tenneco to Tenneco.
Receipt of the IRS Ruling Letter satisfied a condition to consummation of the
Shipbuilding Distribution.
A ruling from the IRS, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The rulings
obtained from the IRS will be based on certain facts and representations, some
of which will have been made by El Paso. Generally, the IRS Ruling Letter would
not be revoked or modified retroactively provided that (i) there has been no
misstatement or omission of material facts, (ii) the facts at the time of the
Transaction are not materially different from the facts upon which the IRS
private letter ruling was based and (iii) there has been no change in the
applicable law.
The Distributions
It is expected that the Distributions will qualify as tax-free distributions
under Section 355 of the Code. Assuming that the Distributions so qualify, (i)
the holders of Tenneco Common Stock will not recognize gain or loss upon
receipt of shares of NNS Common Stock or shares of New Tenneco Common Stock,
(ii) each holder
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of Tenneco Common Stock will allocate his, her or its aggregate tax basis in
the Tenneco Common Stock immediately before the Distributions among Tenneco
Common Stock, NNS Common Stock and New Tenneco Common Stock in proportion to
their respective fair market values, (iii) the holding period of each holder
of Tenneco Common Stock for NNS Common Stock and New Tenneco Common Stock will
include the holding period for his, her or its Tenneco Common Stock, provided
that Tenneco Common Stock is held as a capital asset at the time of the
Distributions and (iv) Tenneco will not recognize any gain or loss on its
distribution of NNS Common Stock or New Tenneco Common Stock to its
stockholders.
No fractional shares of NNS Common Stock or New Tenneco Common Stock will be
distributed in the Distributions. A holder of Tenneco Common Stock who,
pursuant to the Distributions, receives cash in lieu of fractional shares of
NNS Common Stock will be treated as having received such fractional shares of
NNS Common Stock pursuant to the Distributions and then as having received
such cash in a sale of such fractional shares of NNS Common Stock. Such
holders will generally recognize capital gain or loss pursuant to such deemed
sale equal to the difference between the amount of cash received and such
holders' adjusted tax basis in the fractional share of NNS Common Stock
received. Such gain or loss will be capital (provided the Tenneco Common Stock
is held as a capital asset at the time of the Distributions) and will be
treated as a long-term capital gain or loss if the holding period for the
fractional shares of NNS Common Stock deemed to be received and then sold is
more than one year.
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its shareholders in the Transaction. The corporate level
federal income tax would be payable by Tenneco. Under the terms of the Tax
Sharing Agreement, the Company will not be liable to indemnify Tenneco for any
additional taxes incurred by reason of the Distributions being taxable, unless
the Distributions fail to qualify for tax-free treatment under Section 355 of
the Code as a result of the inaccuracy of certain factual statements or
representations made by the Company in connection with the requests for the
IRS private letter ruling or Tax Opinion or the Company takes any action which
is inconsistent with any factual statements or representations or the tax
treatment of the Transaction as contemplated in the IRS private letter ruling
request or the Tax Opinion. See the discussion of the Tax Sharing Agreement
under "--Relationships among Tenneco, the Company and New Tenneco After the
Distributions."
Furthermore, if the Distributions do not qualify as tax-free distributions
under Section 355 of the Code then each holder of Tenneco Common Stock who
receives shares of NNS Common Stock and New Tenneco Common Stock in the
Distributions would be treated as if such stockholder received taxable
distributions in an amount equal to the fair market value of NNS Common Stock
and New Tenneco Common Stock received which would result in: (i) a dividend to
the extent paid out of Tenneco's current and accumulated earnings and profits;
then (ii) a reduction in such stockholder's basis in Tenneco Common Stock to
the extent the amount received exceeds the amount referenced in clause (i);
and then (iii) gain from the sale or exchange of Tenneco Common Stock to the
extent the amount received exceeds the sum of the amounts referenced in
clauses (i) and (ii). Each stockholder's basis in his, her or its NNS Common
Stock and New Tenneco Common Stock would be equal to the fair market value of
such stock at the time of the Distributions.
Possible Future Legislation
The Administration's Budget Proposal issued March 19, 1996 (the "Budget
Proposal") contains several revenue proposals, including a proposal (the
"Anti-Morris Trust Proposal") which would require a distributing corporation
in a transaction otherwise qualifying as a tax-free distribution under Section
355 of the Code to recognize gain on the distribution of the stock of the
controlled corporation unless the direct and indirect stockholders of the
distributing corporation own more than 50% of the distributing corporation and
controlled corporations at all times during the four-year period commencing
two years prior to the distribution. The Anti-
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Morris Trust Proposal would apply to any distributions occurring after March
19, 1996, unless such distribution was (i) pursuant to a binding contract on
such date, (ii) described in a ruling request submitted to the IRS on or before
such date, or (iii) described in a public announcement or SEC filing on or
before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways and Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the effect
that should certain of the revenue proposals included in the Administration's
Budget Proposal, including the Anti-Morris Trust Proposal, be enacted, the
effective date will be no earlier than the date of "appropriate Congressional
action." As of the date of this Information Statement, no legislation has been
introduced relating to the Anti-Morris Trust Proposal. On June 27, 1996,
Tenneco submitted its request for rulings (including rulings on the tax-free
treatment of the Distributions) to the IRS. Accordingly, in view of the Roth-
Archer Statement, any future Anti-Morris Trust legislation should not apply to
the Distributions assuming that the effective date of such legislation contains
a grandfather clause for transactions for which a ruling request has been filed
with the IRS prior to the date of "appropriate Congressional action."
Nevertheless, there can be no assurances that Congress will not adopt Anti-
Morris Trust legislation which would apply retroactively to the Distributions.
In the event such legislation is announced or introduced prior to the
consummation of the Transaction, under the terms of the Merger Agreement El
Paso may elect not to proceed with the Merger if it reasonably determines that
there exists a reasonable likelihood that the Distributions or the Merger would
not be tax-free for federal income tax purposes. If El Paso elects to proceed
with the Merger notwithstanding the announcement or introduction of Anti-Morris
Trust legislation, the Distributions, if ultimately subject to such
legislation, may result in significant taxable gain to the Tenneco consolidated
group under Section 355(c) of the Code. Although Tenneco stockholders would not
recognize taxable gain or loss on the receipt of the stock of the Company and
New Tenneco under the current Anti-Morris Trust Proposal, the taxable gain
required to be recognized by the Tenneco consolidated group under Code Section
355(c) would significantly reduce the value of the El Paso Common Stock and any
El Paso Preferred Depositary Shares received by the Tenneco stockholders in the
Merger.
The Budget Proposal also contains a proposal (the "Nonqualified Preferred
Stock Proposal") that would, among other things, treat certain preferred stock
received in a reorganization as "other property" (boot) resulting in gain (but
not loss) recognition to the recipient of such stock. The Nonqualified
Preferred Stock Proposal would apply to transactions entered into after
December 7, 1995, with certain exceptions, including an exception for stock
issued pursuant to a written agreement binding (subject to customary
conditions) on such date.
The Roth-Archer Statement provides that should certain revenue proposals
included in the Budget Proposal (including the Nonqualified Preferred Stock
Proposal) be enacted, their effective date will be no earlier than the date of
"appropriate congressional action." As of the date of this Joint Proxy
Statement-Prospectus, no legislation has been introduced relating to the
Nonqualified Preferred Stock Proposal. The Merger Agreement which provides for
the issuance of the El Paso Preferred Stock, was entered into on June 19, 1996
and amended and restated on November 1, 1996 (effective as of June 19, 1996).
Accordingly, in view of the Roth-Archer Statement, any future legislation
including the Nonqualified Preferred Stock Proposal should not apply to the El
Paso Preferred Stock, if issued, assuming the effective date of such
legislation contains a grandfather clause for stock issued pursuant to a
binding agreement (subject to customary conditions) entered into on or before
the date of such Congressional action.
Nevertheless, there can be no assurances that Congress will not adopt
legislation containing the Nonqualified Preferred Stock Proposal that would
apply retroactively to the issuance of the preferred stock of El Paso ("El Paso
Preferred Stock"). In the event such legislation is announced or introduced
prior to the consummation of the Transaction, if either Tenneco or El Paso
determines that there exists a reasonable likelihood that issuance of the El
Paso Preferred Stock would cause the Merger to be taxable to holders of Tenneco
stock, El Paso is obligated, under the terms of the Merger Agreement, at its
own cost, to amend the terms of the El Paso Preferred Stock in a manner so as
not to cause the Merger to be taxable to holders of Tenneco stock. If, however,
legislation containing the Nonqualified Preferred Stock Proposal were enacted
following the Transaction, and such legislation applied retroactively to the
issuance of the El Paso Preferred
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Stock, it is possible that the Merger would not qualify as a reorganization
within the meaning of Section 368(a)(1)(B) of the Code and holders of Tenneco
stock receiving El Paso Common Stock or El Paso Preferred Stock in the Merger
would recognize gain on the exchange. Even if the issuance of El Paso
Preferred Stock did not prevent qualification of the Merger as a tax-free
reorganization, holders of Tenneco stock receiving El Paso Preferred
Depository Shares would recognize gain on the exchange that might be taxable
as ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Code Section 368(a)(1)(B) of the Code or the recognition of gain by
shareholders as a result of the receipt of El Paso Preferred Depository Shares
may also cause the Shipbuilding Distribution to not qualify as a tax-free
distribution under Section 355 of the Code.
Back-up Withholding Requirements
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of NNS Common Stock, unless
the stockholder (i) is a corporation or comes within certain other exempt
categories, and, when required, demonstrates these facts or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply the Company
with his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
creditable against the stockholder's federal income tax liability.
Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Tenneco and the Company
solely to provide information to Tenneco stockholders who will receive NNS
Common Stock in the Shipbuilding Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
Tenneco or the Company. The information contained in this Information
Statement is believed by Tenneco and the Company to be accurate as of the date
set forth on its cover. Changes may occur after that date, and neither the
Company nor Tenneco will update the information except in the normal course of
their respective public disclosure practices.
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RISK FACTORS
Stockholders of Tenneco should be aware that the Shipbuilding Distribution
and ownership of NNS Common Stock involve certain risk factors, including
those described below and elsewhere in this Information Statement, which could
adversely affect the value of their holdings. Neither the Company nor Tenneco
makes, nor is any other person authorized to make, any representation as to
the future market value of NNS Common Stock.
RELIANCE ON MAJOR CUSTOMER AND UNCERTAINTY OF FUTURE WORK
Reliance on Major Customer. The Company's business is primarily dependent
upon the design, construction, repair, overhaul and refueling of nuclear-
powered aircraft carriers and submarines for the U.S. Navy. The Navy accounted
for approximately 97% and 94% of the Company's net sales for the year ended
December 31, 1995 and for the six months ended June 30, 1996, respectively.
Approximately 85% of its backlog consisted of contracts to build, repair or
overhaul nuclear-powered aircraft carriers as of June 30, 1996.
Uncertainty of Future Work. Although U.S. Government cuts in naval
shipbuilding have continued to put pressure on the Company's backlog, the
Company was successful in adding $1.0 billion in new work during 1995 and $443
million during the first six months of 1996. The Company's total backlog,
however, decreased from $5.6 billion at December 31, 1994 to $4.6 billion at
December 31, 1995 and, as of June 30, 1996, was $4.1 billion. The Company's
total backlog anticipated at December 31, 1996 is $3.4 billion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Backlog." Because much of the Company's business consists of
constructing aircraft carriers, which historically have been purchased by the
Navy every four to six years, the Company's backlog has typically declined
following each carrier contract, and peaked again when the Navy orders a new
aircraft carrier. For example, the Company's backlog dropped well below $3
billion in late 1994, then peaked at $5.6 billion with the signing of the CVN-
76 contract later in that year. The continuing effort of the U.S. Government
to reduce the federal budget deficit and the restructuring of U.S. Naval
forces in the post Cold War environment, however, will affect the level of
funding for shipbuilding programs, which can be revised at any time. The
Report on the Bottom-Up Review by the U.S. Department of Defense in 1993
stated a need for a fleet of 12 aircraft carriers (down from 15 in 1992),
creating demand for a new aircraft carrier every four to six years. Re-
evaluation of this need will continue by both the Department of Defense and
the Congress. Current Navy plans call for the award of a contract for the
construction of a new nuclear-powered aircraft carrier (CVN-77) beginning in
or before 2002 for delivery in 2009. The Navy has not determined whether
subsequent aircraft carriers will be nuclear-powered. If there is an eventual
shift towards building smaller, non-nuclear-powered aircraft carriers, it is
possible that the Company may have to compete with other shipyards in the
future to build such aircraft carriers. Furthermore, in response to the need
for cheaper alternatives and the proliferation of "smart weapons," it is also
possible that future strategy reassessments by the Department of Defense may
result in the need for fewer aircraft carriers. The Company is currently
performing design concept studies for the next generation of aircraft
carriers, which is expected to help the Company in maintaining its role as the
Navy's only aircraft carrier builder. For the year ended December 31, 1995 and
for the first six months of 1996, aircraft carrier construction accounted for
approximately 40.5% and 41% of the Company's revenues, respectively. In
addition, aircraft carrier programs and other government projects can be
delayed, and such delays typically cause loss of income during the period of
delay and retraining costs when work resumes. Any significant reduction in the
level of government appropriations for aircraft carrier or other shipbuilding
programs, or a significant delay of such appropriations, would have a material
adverse effect on the Company's financial condition and results of operations.
The prospects of U.S. shipyards, including the Company, can be materially
affected by their success in securing significant U.S. Navy contract awards.
In 1987, the Company was awarded the lead design contract for the Seawolf
submarine. However, the collapse of the former Soviet Union Navy, with its
several hundred submarines, has greatly reduced the underwater threat to U.S.
and allied vessels. As a result, there was a dramatic cutback in the Seawolf
program (to three submarines), and the Company did not construct any Seawolf
submarines. Construction of the three Seawolf submarines was awarded to
Electric Boat Corporation ("Electric
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Boat"), a competitor of the Company and wholly-owned subsidiary of General
Dynamics Corporation ("General Dynamics"). More recently, Congress
preliminarily approved authorization legislation to have the Company construct
one of the Navy's new nuclear attack submarines ("NSSNs," the class of
submarines following the Seawolf) beginning in late 1998, and another NSSN
beginning in late 2000, although there can be no assurance that the NSSN
program will continue to be funded or proceed on schedule. Two NSSNs were also
authorized to be built by Electric Boat. Electric Boat has also been
designated as the lead design yard for NSSN submarines. Future contract awards
(after the fourth ship) for the construction of NSSNs, if made, are expected
to be determined by competitive bidding.
The Company, Ingalls Shipbuilding, Inc. ("Ingalls Shipbuilding") (the prime
contractor), Lockheed Martin Corporation ("Lockheed Martin") and National
Steel and Shipbuilding Co. ("National Steel") have entered into an alliance to
bid on the LPD-17 non-nuclear amphibious assault ship program, for which
approximately $974 million was recently appropriated for construction of the
first vessel. The U.S. Navy currently anticipates that 12 vessels will be
built for the LPD-17 program. The Navy has stated that it currently expects
that the LPD-17 vessels will be a mainstay of the Navy over the next two
decades, replacing a number of vessels nearing the end of their useful lives.
Funds for the construction of the first LPD-17 vessel have been appropriated
as part of the overall Department of Defense appropriations for 1996. However,
there can be no assurance that the Department of Defense and Congress will
fund the 12 vessels. Furthermore, there can be no assurance that the Company's
alliance will be awarded, assuming the appropriated funds are released, the
LPD-17 contract or that Congress will appropriate funds for any additional
LPD-17 vessels. It is possible that the U.S. Navy may award the program to a
competing bidder or it may allocate the vessels between competing bidders. It
could also delay implementation of the LPD-17 program. Even if the LPD-17
project is awarded to the Company's alliance, the U.S. Navy may decide to
award other work to competitors in order to sustain some level of work at
various shipyards.
An alliance consisting of the Company, Ingalls Shipbuilding and Lockheed
Martin was recently awarded a contract to develop design concepts for the U.S.
Navy's "Arsenal Ship." The Company's alliance was one of five alliances to
receive such an award. Current U.S. Navy plans call for a downselect to two
alliances following evaluation of submitted concepts. Ultimately, one alliance
is expected to prevail in the award of a construction contract. The members of
the Company's alliance initially designated Lockheed Martin as the prime
contractor. Although the Company's alliance was selected to develop design
concepts, there can be no assurance that it will be awarded the construction
work or other aspects of the project. The allocation of responsibilities among
members of the Company's LPD-17 alliance and the Company's Arsenal Ship
alliance is subject to future negotiation among such members, and thus there
has not been a determination of the level of work which may ultimately be
assigned to the Company if its alliances are awarded these projects.
As part of its expansion strategy, the Company has also been pursuing orders
for commercial ships. It has also submitted bids on the fast frigate (FF-21)
military ships to the United Arab Emirates and Kuwait, and is in the process
of developing bids for the Philippines and Norway. With respect to the
commercial nuclear market, the Company is preparing to bid (also with others
in an alliance) on several U.S. Department of Energy site management
contracts. Competition for these contracts and projects is intense and there
can be no assurance that the Company will be successful with its initiatives
in these areas.
With a substantial portion of the Company's current firm backlog scheduled
for completion in 1998 and 2002, the failure of the Company to receive the
contract for the construction of the CVN-77 on a timely basis and other
significant naval work would have a material adverse affect on the Company's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
PROFIT RECOGNITION; GOVERNMENT CONTRACTING
Similar to other companies principally engaged in long-term construction
projects, the Company recognizes profits under the percentage of completion
method of accounting, with profit recognition commencing when progress under
the contract is sufficient to estimate final results with reasonable accuracy,
and loss recognition
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commencing immediately upon identification of such loss without regard to
percentage of completion. Because contract profit recognition is dependent
upon reliable estimates of the costs to complete the contract, profits
recognized upon completion of the contract may be significantly less than
anticipated, or the Company may incur a loss with respect to the contract, if
it proves necessary to revise cost estimates.
Moreover, the Company's principal U.S. Government business is currently
being performed under fixed price ("FP"), fixed price plus incentive fee
("FPIF"), cost plus incentive fee ("CPIF"), and cost plus fixed fee ("CPFF")
contracts. The risk to the Company of not being reimbursed for its costs
varies with the type of contract. Under FP contracts, the contractor retains
all costs savings on completed contracts but is liable for the full amount of
all expenditures in excess of the contract price. FPIF contracts, on the other
hand, provide for cost sharing between the U.S. Government and the contractor.
The contractor's fee is increased or decreased according to a formula set
forth in the contract which generally compares the amount of costs incurred to
the contract target cost. The Government is liable for all allowable costs up
to a ceiling price. However, the contractor is responsible for all costs
incurred in excess of such contract ceiling price. In addition, FPIF contracts
generally provide for the U.S. Government to pay escalation based on published
indices relating to the shipbuilding industry in order to shift the primary
risk of inflation to the Government. Under both CPIF and CPFF contracts,
generally the contractor is only required to perform the contract to the
extent the Government makes funds available. Under the former, the
contractor's profit is determined by a contractually specified formula which
essentially compares allowable incurred costs to the contract target cost.
Under the latter, with few exceptions, the fee is the same without regard to
the amount of cost incurred.
The Company currently constructs aircraft carriers pursuant to FPIF
contracts but it performs work for the U.S. Government under all of the types
of contracts described above. For example, most of its contracts for ship
design are of the cost type and some of its ship repair contracts are of the
fixed price type.
The costs of performing all such types of contracts include those for labor,
material and overhead. Therefore, unanticipated increases in any such costs as
well as delays in product delivery, poor workmanship requiring correction, and
all other factors which affect the cost of performing contracts, many of which
are long term in nature, affect the profitability of most contracts held or
anticipated by the Company.
In certain circumstances, the Company may submit Requests for Equitable
Adjustment ("REAs") to the U.S. Navy seeking adjustments to contract prices to
compensate the Company when it incurs costs for which it believes the U.S.
Government is responsible. For example, in June, 1996, the Company settled
REAs relating to U.S. Government initiated changes in the requirements for
renovating the container "roll-on, roll-off" heavy armored vehicle Sealift
transportation ships. As part of the settlement, the Sealift contract was
converted from a fixed price incentive contract to a fixed price contract and
the contract price was increased. See Note 13 to the Combined Financial
Statements of the Company. Although the Company pursues REAs and all other
contractual disputes vigorously, there is no assurance that the U.S. Navy will
resolve the REAs or any of these disputes in a manner favorable to the
Company. Under U.S. Government regulations, certain costs, including certain
financing costs and marketing expenses, are not allowable contract costs.
These costs can be substantial. The Government also regulates the methods by
which all costs, including overhead, are allocated to government contracts.
In cases where there are multiple suppliers, contracts for the construction
and conversion of U.S. Navy ships and submarines are subject to competitive
bidding. As a safeguard to anti-competitive bidding practices, the U.S. Navy
sometimes employs the concept of "cost realism," which requires that each
bidder submit information on pricing, estimated costs of completion and
anticipated profit margins. The U.S. Navy uses this and other data to
determine an estimated cost for each bidder. The U.S. Navy then re-evaluates
the bids by using the higher of the bidder's and the U.S. Navy's cost
estimates.
The U.S. Government has the right to suspend or debar a contractor from
government contracting for violations of certain statutes or government
procurement regulations. See "--Government Claims and Investigations." The
U.S. Government may also unilaterally terminate contracts at its convenience
with compensation for work completed.
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COMPETITION AND REGULATION
In the Company's opinion, programs currently planned by the U.S. Navy over
the next several years will not be sufficient to support all the U.S.
shipyards presently engaged in ship construction. The reduced level of
shipbuilding activity by the U.S. Navy during the past decade has resulted in
significant workforce reductions in the industry, but almost no other
significant consolidation. The general result has been fewer contracts awarded
to the same fixed number of large shipyards. The Company believes it currently
is (i) the only shipyard capable of building the Navy's nuclear-powered
aircraft carriers, (ii) the only non-government-owned shipyard capable of
refueling and overhauling the Navy's nuclear-powered aircraft carriers and
(iii) one of only two U.S. shipyards capable of building nuclear-powered
submarines. However, with respect to the market for U.S. military contracts
for other types of vessels, there are principally five major private U.S.
shipyards, including the Company, that compete for contracts to construct,
overhaul or convert other types of surface combatant vessels. Competition for
these vessels, including the LPD-17 and the Arsenal Ship, is extremely
intense. Additionally the Company's products, such as aircraft carriers,
submarines and other ships, compete with each other for defense monies.
With respect to the domestic commercial shipbuilding market, currently the
Jones Act requires that all vessels transporting products between U.S. ports
be constructed by U.S. shipyards. There are approximately 16 private U.S.
shipyards that can accommodate the construction of vessels up to 400 feet in
length, five of which the Company considers to be its direct competitors for
commercial contracts. Potential competitors include Alabama Shipyard, Inc.,
Avondale Industries, Inc. ("Avondale"), National Steel, Ingalls Shipbuilding
and Trinity Industries, Inc. Although the commercial market is growing, a
current overcapacity of suppliers has favored buyers and hindered the
profitability of shipyards. With respect to the international commercial
shipbuilding market, the Company competes with numerous shipyards in several
countries. Overseas firms control almost all of the international commercial
shipbuilding market. In 1995, Japanese, South Korean and European yards each
controlled approximately 30% of this market. Chinese firms held approximately
four percent and the shipyards in the remaining countries held the remaining
six percent. Many foreign shipyards are heavily subsidized by their
governments, and a number of overseas shipyards presently construct ships at a
cost and over a period which is substantially less than the cost and period
applicable to the Company. Although there can be no guarantees, the Company
has undertaken major initiatives to reduce its cost structure and cycle times
for product development and ship delivery in an effort to develop commercial
business. To date the Company has experienced substantial losses in connection
with its first major commercial construction contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook" and "Business--Construction--Commercial." While the
percentage of the Company's total business for commercial shipbuilding could
increase, the U.S. Navy has historically been and for the foreseeable future
is expected to continue to be the Company's primary customer. See "Business."
The termination of the U.S. construction-differential subsidy program in
1981 significantly curtailed the ability of U.S. shipyards to compete
successfully for international commercial shipbuilding contracts with foreign
shipyards. Currently, the Company's future commercial shipbuilding
opportunities are dependent in part on certain U.S. laws and regulations,
including (i) the Jones Act, which, as noted above, currently requires that
all vessels transporting products between U.S. ports be constructed by U.S.
shipyards, (ii) the Oil Pollution Act of 1990, which beginning January 1,
1995, requires the phased-in transition of single-hulled tankers and product
carriers to double-hulled vessels by 2015 and (iii) the 1993 amendments to the
loan guarantee program under Title XI of the Merchant Marine Act of 1936,
which permit the U.S. Government to guarantee loan obligations of foreign
vessel owners for foreign-flagged vessels built in U.S. shipyards. In
connection with U.S. efforts to implement a 1994 multilateral agreement
designed in part to eliminate foreign government subsidies to overseas
commercial shipbuilders, Congress is currently considering legislation that
would eliminate the competitive advantage afforded to U.S. shipyards under the
1993 amendments to the Title XI loan guarantee program. In addition,
legislative bills seeking to rescind or substantially modify the provisions of
the Jones Act mandating the use of U.S.-built ships for coastwide trade are
introduced from time to time, and are expected to be introduced in the future.
Changes in these laws could have a material adverse effect on the Company's
financial condition and results of operations. See "Business."
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The Company faces competition in the engineering, planning and design market
from other companies which provide lower cost engineering support services and
are located closer to the Washington D.C. area. The Company has established a
new Carrier Innovation Center for the development of the Navy's next generation
of aircraft carriers. The Company believes the Carrier Innovation Center will
offset the geographic and cost advantage of its competitors. There can be no
assurance, however, that the Company will be the successful bidder on future
U.S. Navy engineering work, including new aircraft carrier research and
development funding.
The Company is also directly dependent upon allocation of defense monies to
the U.S. Navy. In addition to competition from other shipyards, the Company
competes with firms providing other defense products and services, such as
tanks and aircraft, to other branches of the armed forces, and with other, non-
defense demands on the U.S. budget.
SUBSTANTIAL LEVERAGE
The Company has historically relied upon Tenneco for working capital
requirements on a short-term basis and for other financial support functions.
After the Shipbuilding Distribution, the Company will not be able to rely on
the earnings, assets or cash flow of Tenneco and the Company will be
responsible for paying dividends, servicing its own debt and obtaining and
maintaining sufficient working capital. The Company will have substantial new
indebtedness upon the consummation of the Transaction. The Company's debt upon
consummation of the Transaction will include (on a pro forma basis at June 30,
1996): (i) the Notes in the aggregate amount of $400 million, and (ii) secured
borrowings of $214 million under the Senior Credit Facility. As of June 30,
1996, on a pro forma basis after giving effect to the Transaction, the Company
would have had outstanding $614 million of total indebtedness and stockholders'
equity of $194 million, with an additional $201 million available for borrowing
under the Senior Credit Facility, consisting of $111 million for advances and
letters of credit and $90 million for standby letters of credit.
The degree to which the Company will be leveraged following the Transaction
could have important consequences to holders of the NNS Common Stock, including
the following: (i) the Company's ability to pay dividends and obtain financing
in the future for working capital, capital expenditures and general corporate
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness; and (iii) the high degree of leverage may limit the Company's
ability to react to changes in the industry, make the Company more vulnerable
to economic downturns and limit its ability to withstand competitive pressures.
The Company's ability to pay dividends on the NNS Common Stock and service
its debt obligations will depend upon its future operating performance, which
will be affected by prevailing economic conditions and financial and business
factors, many of which are beyond the Company's control. If the Company cannot
generate sufficient cash flow from operations to meet its obligations, then the
Company's ability to pay dividends will be impaired and it may be required to
attempt to restructure or refinance its debt, raise additional capital or take
other actions such as selling assets or reducing or delaying capital
expenditures. There can be no assurance, however, that any of such actions
could be effected on satisfactory terms, if at all, or would be permitted by
the terms of the Senior Credit Facility, the trust indentures governing the
Notes (the "Indentures") or the Company's other credit and contractual
arrangements.
The Senior Credit Facility and the Indentures will contain restrictive
covenants that, among other things, limit the Company's ability to pay
dividends on the NNS Common Stock, incur additional indebtedness, create liens
and make investments and capital expenditures. The Senior Credit Facility will
require the Company to comply with certain financial ratios and tests, under
which the Company is required to achieve certain financial and operating
results. The Company's ability to meet these financial ratios and tests may be
affected by events beyond its control, and there can be no assurance that they
will be met. In the event of a default under the Senior Credit Facility, the
lenders thereunder may terminate their lending commitments and declare the
indebtedness immediately due and payable, resulting in a default under the
Notes. There can be no assurance that the Company would have sufficient assets
to pay indebtedness then outstanding thereunder and under the Notes.
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POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL
DIVIDEND REQUIREMENTS
The Transaction, including the Shipbuilding Distribution, is subject to
review under various state and federal fraudulent conveyance laws. Under these
laws, if a court in a lawsuit by an unpaid creditor or a representative of
creditors (including a trustee or debtor-in-possession in a bankruptcy by
Tenneco, NNS or any of their subsidiaries) were to determine that Tenneco or
any of its subsidiaries did not receive fair consideration or reasonably
equivalent value for distributing the NNS Common Stock or taking other action
as part of the Transaction, or NNS or any of its subsidiaries did not receive
fair consideration or reasonably equivalent value for making the distribution
to Tenneco, incurring indebtedness, including the Notes and the Senior Credit
Facility, transferring assets or taking other action as part of the Transaction
and, at the time of such action, Tenneco, NNS or any of their subsidiaries (i)
was insolvent or would be rendered insolvent, (ii) had reasonably small capital
with which to carry on its business and all business in which it intended to
engage, or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could
order the holders of the NNS Common Stock to return the value of the stock and
any dividends paid thereon, bar future dividend and redemption payments on the
stock, and invalidate, in whole or in part, the Transaction, as a fraudulent
conveyance.
The measure of insolvency for purposes of the fraudulent conveyance laws will
vary depending on which jurisdiction's law is applied. Generally, however, an
entity would be considered insolvent if the present fair saleable value of its
assets is less than (i) the amount of its liabilities (including contingent
liabilities), or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No
assurance can be given as to what standard a court would apply in determining
insolvency or that a court would not determine that Tenneco, NNS or any of
their subsidiaries was "insolvent" at the time of or after giving effect to the
Transaction, including the distribution of the NNS Common Stock.
NNS' payment of the dividend to Tenneco and dividends to the holders of NNS
Common Stock is also subject to review under state corporate distribution
statutes. Under the General Corporation Law of the State of Delaware (the
"DGCL"), a corporation may only pay dividends to its stockholders either (i)
out of its surplus (net assets minus capital), or (ii) if there is no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Although NNS intends to make the
distribution to Tenneco and pay dividends to the holders of the NNS Common
Stock entirely from surplus, no assurance can be given that a court will not
later determine that some or all of the distribution to Tenneco or a dividend
to the holders of the NNS Common Stock was unlawful.
Prior to the Shipbuilding Distribution, the Tenneco Board expects to obtain
an opinion regarding the solvency of Tenneco and NNS and the permissibility of
the Shipbuilding Distribution and the dividend to be paid by NNS to Tenneco
under Section 170 of the DGCL. The Tenneco Board and management believe that,
in accordance with this opinion which is expected to be rendered in connection
with the Shipbuilding Distribution and the dividend to be paid by NNS to
Tenneco, (i) Tenneco and NNS each will be solvent at the time of the
Transaction (including after the payment of such dividend and the Shipbuilding
Distribution), will be able to repay its debts as they mature following the
Transaction and will have sufficient capital to carry on its businesses and
(ii) the Shipbuilding Distribution and such dividend will be made entirely out
of surplus in accordance with Section 170 of the DGCL. There is no certainty,
however, that a court would find this solvency opinion to be binding on
creditors of Tenneco or NNS or that a court would reach the same conclusions
set forth in such opinion in determining Tenneco or NNS was insolvent at the
time of, or after giving effect to, the Transaction, or whether lawful funds
were available for the Shipbuilding Distribution and the distribution to
Tenneco.
Pursuant to the Distribution Agreement, from and after the Distributions,
each of Tenneco, the Company and New Tenneco will be responsible for the debts,
liabilities and other obligations related to the business or businesses which
it owns and operates following the consummation of the Transaction. Although
the Company does not expect to be liable for any such obligations not expressly
assumed by it pursuant to the Distribution Agreement, it is possible that a
court would disregard the allocation agreed to among the parties, and require
the Company to assume responsibility for obligations allocated to Tenneco or
New Tenneco (for example, tax and/or environmental liabilities), particularly
if one of such other parties were to refuse or were to be unable to pay or
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perform the subject allocated obligations. See "The Shipbuilding
Distribution--Relationships Among Tenneco, the Company and New Tenneco After
the Distributions."
GOVERNMENT CLAIMS AND INVESTIGATIONS
More than 90% of the Company's sales involve contracts entered into with the
U.S. Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases in which it believes such adjustments are appropriate. In addition,
various governmental agencies may at any time be conducting various other
investigations or making specific inquiries concerning the Company. Management
is of the opinion that the ultimate resolution of these matters will not have
a material adverse effect on the Company's financial condition or results of
operations. In May 1996, the Company was subpoenaed by the Inspector General
of the Department of Defense as part of a joint inquiry conducted by the
Department of Defense, the Department of Justice, the U.S. Attorney's Office
for the Eastern District of Virginia and the Naval Criminal Investigation
Service. See "Business--Investigations and Legal Proceedings" and Note 13 of
the Combined Financial Statements.
POTENTIAL FEDERAL INCOME TAX LIABILITIES
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that the Shipbuilding Distribution will qualify as a tax-
free distribution under Section 355 of the Code. Receipt of the IRS Ruling
Letter satisfied a condition to consummation of the Shipbuilding Distribution.
See "The Shipbuilding Distribution--Certain Federal Income Tax Aspects of the
Shipbuilding Distribution." Such a ruling, while generally binding upon the
IRS, is based upon certain factual representations and assumptions. If any
such factual representations and assumptions were incomplete or untrue in a
material respect, or the facts upon which such ruling was based are materially
different from the facts at the time of the Distributions, the IRS could
modify or revoke such ruling retroactively. Tenneco is not aware of any facts
or circumstances which would cause any of such representations and assumptions
to be incomplete or untrue. The Company, Tenneco, New Tenneco and El Paso have
each agreed to certain covenants on its future actions to provide further
assurances that the Shipbuilding Distribution will be tax-free for federal
income tax purposes. See "The Shipbuilding Distribution--Relationships among
Tenneco, the Company and New Tenneco After the Distributions."
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its stockholders in the Transaction. In this regard, the
failure of the Merger to qualify as a reorganization within the meaning of
Code Section 368(a)(1)(B) could cause the Shipbuilding Distribution to be
taxable to Tenneco and its stockholders. The corporate level federal income
tax would be payable by Tenneco. Under certain limited circumstances, however,
the Company has agreed to indemnify Tenneco for a defined portion of such tax
liabilities. See "The Shipbuilding Distribution--Relationships Among Tenneco,
the Company and New Tenneco After the Distributions--Terms of the Ancillary
Agreements--Tax Sharing Agreement." In addition, under IRS regulations, each
member of the consolidated group (including the Company) is severally liable
for such tax liability.
The Budget Proposal contains a provision that would require a distributing
corporation in a transaction otherwise qualifying as a tax-free distribution
under Section 355 of the Code to recognize gain on the distribution of the
stock of one or more controlled corporations under certain circumstances. If
such legislation were enacted, the Shipbuilding Distribution, if ultimately
subject to such legislation, may result in significant taxable gain to
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Tenneco under Section 355(c) of the Code. The Budget Proposal also contains a
provision under which the receipt by a stockholder of certain preferred stock
in an otherwise tax-free reorganization would result in gain recognition to
the stockholder. If such legislation were enacted, it is possible that the
receipt of the El Paso Preferred Depositary Shares would cause the Merger to
fail to qualify as a reorganization within the meaning of Section 368(a)(1)(B)
of the Code resulting in the recognition of gain by Tenneco stockholders as
described below. Even if the issuance of El Paso Preferred Stock and El Paso
Preferred Depositary Shares did not prevent qualification of the Merger as a
tax-free reorganization, holders of Tenneco stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange that might be taxable
as ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code or the recognition of gain by shareholders as
a result of the receipt of El Paso Preferred Depositary Shares, may also cause
the Shipbuilding Distribution to not qualify as a tax-free distribution under
Section 355 of the Code. See "Certain Federal Income Tax Consequences--
Possible Future Legislation."
Furthermore, if the Shipbuilding Distribution were not to qualify as a tax-
free distribution under Section 355 of the Code, then each holder of Tenneco
Common Stock who receives shares of NNS Common Stock and New Tenneco Common
Stock in the Distributions would be treated as if such stockholder received a
taxable distribution in an amount equal to the fair market value of NNS Common
Stock and New Tenneco Common Stock received, which would result in: (i) a
dividend to the extent paid out of Tenneco's current and accumulated earnings
and profits; then (ii) a reduction in such stockholder's basis in Tenneco
Common Stock to the extent the amount received exceeds the amount referenced
in clause (i); and then (iii) gain from the sale or exchange of Tenneco Common
Stock to the extent the amount received exceeds the sum of the amounts
referenced in clauses (i) and (ii). See "The Shipbuilding Distribution--
Certain Federal Income Tax Aspects of the Shipbuilding Distribution."
NO CURRENT PUBLIC MARKET FOR NNS COMMON STOCK
There is not currently a public market for NNS Common Stock, although a
"when issued" market is expected to develop prior to the Distribution Date.
There can be no assurance as to the prices at which trading in NNS Common
Stock will occur after the Shipbuilding Distribution. Until NNS Common Stock
is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The NYSE has
approved the listing of NNS Common Stock upon notice of issuance. See "The
Shipbuilding Distribution--Trading of NNS Common Stock."
UNCERTAINTY REGARDING TRADING PRICES OF STOCK FOLLOWING THE TRANSACTION
Upon consummation of the Transaction, (i) in connection with the Merger, the
then outstanding shares of Tenneco Common Stock will be cancelled and holders
of Tenneco Common Stock will receive shares of El Paso Common Stock and, under
certain circumstances, El Paso Preferred Depositary Shares and (ii) in
connection with the Distributions, New Tenneco Common Stock and NNS Common
Stock. Tenneco Common Stock is currently listed and traded, and following the
Distributions, New Tenneco Common Stock is expected to be listed and traded,
on the New York, Chicago, Pacific and London Stock Exchanges. El Paso Common
Stock, El Paso Preferred Depositary Shares, if any, and NNS Common Stock will
be listed and traded on the NYSE. There can be no assurance that the combined
market value/trading prices of (i) El Paso Common Stock and any El Paso
Preferred Depositary Shares, (ii) New Tenneco Common Stock and (iii) NNS
Common Stock (plus any cash received in lieu of fractional shares or any
fractional El Paso Preferred Depositary Shares) received in respect of shares
of Tenneco Common Stock pursuant to the Transaction will be equal to or
greater than the market value/trading prices of shares of Tenneco Common Stock
immediately prior to the Transaction. See "The Shipbuilding Distribution--
Trading of NNS Common Stock."
UNCERTAINTY REGARDING FUTURE DIVIDENDS
NNS' dividend policy will be established by the NNS Board from time to time
based on the results of operations and financial condition of the Company and
such other business considerations as the NNS Board considers relevant.
Additionally, NNS and certain of its subsidiaries are subject to certain
restrictions on the
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payment of dividends pursuant to its financing and similar arrangements. There
can be no assurance that the combined annual dividends on El Paso Common Stock
and any El Paso Preferred Depositary Shares, New Tenneco Common Stock and NNS
Common Stock after the Transaction will be equal to the annual dividends on
Tenneco Common Stock prior to the Transaction (and it is unlikely that the
dividends would be greater than the annual dividends on Tenneco Common Stock
prior to the Transaction). For certain restrictions on payment of dividends,
see "Financing."
COLLECTIVE BARGAINING AGREEMENTS
The Company has entered into four collective bargaining agreements covering
all of the Company's approximately 10,780 hourly employees. The agreement with
the United Steelworkers of America covers approximately 10,520 employees and
expires April 4, 1999. The agreement with the United Plant Guard Workers of
America and its Amalgamated Local No. 451 covers approximately 100 employees
and expires February 11, 2001. The agreement with the International Association
of Fire Fighters, Local I-45 covers approximately 30 employees and expires
September 24, 2000. The Idaho General President's Project Maintenance Agreement
(a master agreement with approximately twelve craft unions) covers
approximately 130 employees of Newport News Reactor Services, Inc., a
subsidiary of Newport News, working in Idaho. This agreement expires upon
completion of the project. Although the Company believes that its relationships
with these unions are good, there can be no assurance that the Company will not
experience labor disruptions associated with these collective bargaining
agreements. See "Business."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental laws
and regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the transportation, storage and
disposal of toxic and hazardous wastes. Stringent fines and penalties may be
imposed for non-compliance and certain environmental laws impose joint and
several "strict liability" for remediation of spills and releases of oil and
hazardous substances rendering a person liable for environmental damage,
without regard to negligence or fault on the part of such person. Such laws and
regulations may expose the Company to liability for the conduct of or
conditions caused by others, including, without limitation, Tenneco and New
Tenneco, or for acts of the Company which are or were in compliance with all
applicable laws at the time such acts were performed.
The nature of shipbuilding operations requires the use of hazardous
materials. The Company's shipyard also generates significant quantities of
wastewater which it treats before discharging pursuant to various permits. In
order to handle these materials, the shipyard has an extensive network of
above-ground and underground storage tanks, some of which have leaked and
required remediation in the past. In addition, the extensive handling of these
materials sometimes results in spills on the shipyard and occasionally in the
adjacent James River. The shipyard also has extensive waste handling programs
which it maintains and, periodically, must close in accordance with applicable
regulations. The cumulative cost of these normal operations are not expected to
have a material adverse effect on the Company's financial condition or results
of operations. See "Business--Health, Safety and Environmental."
CERTAIN ANTITAKEOVER FEATURES
Upon consummation of the Shipbuilding Distribution, certain provisions of the
NNS' Restated Certificate of Incorporation (the "Certificate") and its Amended
and Restated By-laws ("By-laws") (both the Certificate and the By-laws will be
adopted prior to the Distribution Date), along with the Company's stockholder
rights plan and Delaware statutory law, could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions could diminish the opportunities for a stockholder to participate in
tender offers, including tender offers at a price above the then current market
value of NNS Common Stock. Such provisions may also inhibit fluctuations in the
market price of NNS Common Stock that could result from takeover attempts. The
provisions could also have the effect of making it more difficult for third
parties to cause the immediate removal and replacement of the members of the
then current NNS Board or the then current management of NNS without the
concurrence of the NNS Board. See "Antitakeover Effects of Certain Provisions."
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FINANCING
In connection with the Transaction and to provide for working capital needs,
NNS intends to (i) issue Notes in the amount of $400 million and (ii) enter
into the $415 million secured Senior Credit Facility comprised of the $200
million six-year amortizing Term Loan and the $215 million six-year Revolving
Credit Facility, of which $125 million may be used for advances and letters of
credit and $90 million may be used for standby letters of credit.
The Company expects to utilize the proceeds of the Notes and Term Loan and
borrowings of $14 million under the Revolving Credit Facility to distribute
(i) $600 million as a dividend to Tenneco or one or more of its subsidiaries
for use in retiring certain Tenneco Consolidated Debt and (ii) $14 million in
payment of certain fees and expenses incurred in connection with the Senior
Credit Facility and the Notes.
It is expected that the Term Loan will amortize in 24 quarterly
installments, commencing March 31, 1997, with an annual aggregate payment
amount of $27.5 million in each of 1997 through 2001, and $62.5 million in
2002. Borrowings under the Senior Credit Facility are to be secured by
perfected liens on substantially all of the Company's assets. After January 1,
1998, the security interest in the collateral will be released if the Company
meets certain specific financial and other conditions.
Interest on borrowings under the Senior Credit Facility accrues at a
floating rate based on either LIBOR or a base rate. The Senior Credit Facility
will contain customary representations and warranties and financial and other
standard covenants, including minimum net worth, total debt to EBITDA and
EBITDA less capital expenditures to interest expense. The Senior Credit
Facility will also provide for limitations on debt and dividend levels and
specify mandatory prepayments (with certain agreed-upon exceptions), including
100% of the net proceeds from debt issuance, 50% of the net proceeds from
equity issuance and 100% of the net proceeds from asset sales.
The Notes will consist of $200 million of Senior Notes due 2006 and $200
million of Senior Subordinated Notes due 2006. Interest on the Notes is
payable semiannually. The Notes will be redeemable under certain
circumstances. The Senior Credit Facility places restrictions, subject to
certain exceptions, upon the right of NNS to declare and pay dividends and
make certain similar or related kinds of payments, including a cap of (i)
$10,000,000 plus (ii) 10% of consolidated net income (or minus 100% of
consolidated net loss) calculated for the period from the closing date under
the Senior Credit Facility through the end of the most recent fiscal quarter
for NNS and its subsidiaries (which for purposes of this calculation is
treated as a single accounting period). Additionally, the indentures for the
Notes, subject to certain exceptions, generally restrict the right of NNS and
its subsidiaries to declare and pay dividends and certain similar or related
kinds of payments. These restrictions may materially limit the right of NNS to
declare and pay dividends on the NNS Common Stock.
NNS' obligations under the Notes and Senior Credit Facility are guaranteed
by Newport News. Certain other subsidiaries of NNS are excluded as guarantors
pursuant to the indentures for the Notes and the agreements for the Senior
Credit Facility. Separate financial statements of the guarantors are not
included herein because the guarantors are jointly and severally liable for
the Notes and the aggregate assets, earnings and equity of such guarantors are
substantially equivalent to the assets, earnings and equity of NNS and its
combined subsidiaries.
38
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
the Company as of June 30, 1996, and unaudited pro forma capitalization as of
June 30, 1996, after giving effect to the Transaction described in the
"Unaudited Pro Forma Combined Financial Statements." The capitalization of the
Company should be read in conjunction with the Combined Financial Statements,
and the notes thereto, "Selected Combined Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
each contained elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Allocated from Tenneco............................ $ 95(a) $--
Term Loan......................................... -- 28(b)
Long-term debt:
Allocated from Tenneco............................ 282(a) --
Revolving Credit Facility......................... -- 14(c)
Term Loan......................................... -- 172
Senior Notes due 2006............................. -- 200
Senior Subordinated Notes due 2006................ -- 200
---- ----
Total debt...................................... 377 614
---- ----
Equity:
Common stock...................................... -- 1
Paid-in capital................................... -- 193
Retained earnings................................. -- --
Combined equity................................... 349 --
---- ----
Total equity.................................... 349 194
---- ----
Total capitalization................................ $726 $808
==== ====
</TABLE>
--------
(a) Represents debt allocated to the Company from Tenneco. Tenneco's
historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited
number of subsidiaries, rather than at the operating company
level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and
interest expense is reasonable; however, it is not necessarily
indicative of the Company's debt upon completion of the Debt
Realignment, nor debt and interest that may be incurred by the
Company as a separate public entity.
(b) Approximately $28 million of borrowings under the Term Loan will
mature within one year from the consummation of the Transaction,
and such amount is reflected as short-term debt.
(c) On a pro forma basis on June 30, 1996, $201 million of aggregate
principal amount will be unused and available for borrowing as
follows: $111 million for advances and letters of credit and $90
million for standby letters of credit.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Balance Sheet of the Company as
of June 30, 1996 and Unaudited Pro Forma Combined Statements of Earnings for
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been prepared to reflect the Transaction, including: (i) the issuance of $400
million aggregate principal amount of Notes; (ii) borrowings of $214 million
under the Senior Credit Facility; (iii) the cash dividend of $600 million to
be paid by the Company to Tenneco or one or more of its subsidiaries pursuant
to the Debt Realignment; (iv) the payment of $14 million of certain fees and
expenses incurred in connection with the Notes and the Senior Credit Facility;
and (v) the issuance of the NNS Common Stock pursuant to the Shipbuilding
Distribution.
The historical Combined Financial Statements reflect the financial position
and results of operations of the Shipbuilding Business whose net assets will
be transferred to the Company pursuant to the Corporate Restructuring
Transactions. The accounting for such transfer of assets and liabilities
pursuant to the Corporate Restructuring Transactions represents a
reorganization of companies under common control and, accordingly, all assets
and liabilities are reflected at their historical cost in the Combined
Financial Statements.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if the
various components of the Transaction occurred on June 30, 1996; the Unaudited
Pro Forma Combined Statements of Earnings have been prepared as if the various
components of the Transaction occurred as of January 1, 1995. The Unaudited
Pro Forma Combined Financial Statements set forth on the following pages are
not necessarily indicative of the results that would have actually occurred if
the Transaction had been consummated as of June 30, 1996, or January 1, 1995,
or results which may be attained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the Combined Financial Statements, and notes thereto,
included elsewhere in this Information Statement.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
ASSETS HISTORICAL ADJUSTMENTS COMBINED
------ ---------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................... $ 1 $ 4 (a) $ 5
614 (b)
(614)(d)
Contracts in process........................ 282 282
Other current assets........................ 190 190
------ ----- ------
Total current assets...................... 473 4 477
------ ----- ------
NONCURRENT ASSETS
Property, plant and equipment, net.......... 824 824
Other assets................................ 155 (9)(c) 160
14 (d)
------ ----- ------
Total noncurrent assets................... 979 5 984
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable............................ $ 177 $ (73)(c) $ 104
Short-term debt............................. 95 28 (b) 28
(95)(e)
Other accrued liabilities................... 160 160
------ ----- ------
Total current liabilities................. 432 (140) 292
------ ----- ------
NONCURRENT LIABILITIES
Long-term debt.............................. 282 586 (b) 586
(282)(e)
Deferred income taxes....................... 140 140
Other long-term liabilities................. 249 249
------ ----- ------
Total noncurrent liabilities.............. 671 304 975
------ ----- ------
EQUITY
Common stock................................ 1 (f) 1
Paid-in capital............................. 193 (f) 193
Retained earnings........................... -- (f) --
Combined equity............................. 349 4 (a) --
64 (c)
(600)(d)
377 (e)
(194)(f)
------ ----- ------
Total equity.............................. 349 (155) 194
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
</TABLE>
See the accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $ 915 $ $ 915
Operating costs and expenses............... 834 1 (g) 835
------ ---- -----------
Operating earnings......................... 81 (1) 80
Interest expense........................... 17 (17)(e) 28
28 (g)
------ ---- -----------
Earnings before income taxes............... 64 (12) 52
Provision for income taxes................. 27 6 (e) 23
(10)(g)
------ ---- -----------
Net earnings............................... $ 37 $ (8) $ 29
====== ==== ===========
Average number of common shares
outstanding............................... 34,070,348
===========
Earnings per share......................... $ .85
===========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $1,756 $ $ 1,756
Operating costs and expenses............... 1,599 2 (g) 1,601
------ ---- -----------
Operating earnings......................... 157 (2) 155
Interest expense........................... 29 (29)(e) 56
56 (g)
Other (income), net........................ (3) (3)
------ ---- -----------
Earnings before income taxes............... 131 (29) 102
Provision for income taxes................. 58 10 (e) 48
(20)(g)
------ ---- -----------
Net earnings............................... $ 73 $(19) $ 54
====== ==== ===========
Average number of common shares
outstanding............................... 34,799,188
===========
Earnings per share......................... $ 1.55
===========
</TABLE>
See the accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect a cash contribution from Tenneco to the Company pursuant to the
Cash Realignment provisions in the Distribution Agreement covering the
Shipbuilding Distribution.
(b) To reflect $614 million in total borrowings under various credit
facilities which borrowings will consist of (i) a $200 million six-year
amortizing Term Loan with an estimated annual interest rate of 8%, (ii)
$200 million Senior Notes due 2006 with an estimated annual interest rate
of 9.25%, (iii) $200 million Senior Subordinated Notes due 2006 with an
estimated annual interest rate of 9.75%, and (iv) $14 million in
borrowings under a $215 million six-year Revolving Credit Facility, with
an estimated annual interest rate of 8% and commitment fees due on the
unused portion of the facility, for payment of certain fees and expenses
described in (d) below. Approximately $28 million of the assumed Term Loan
borrowings will mature within one year from the consummation of the
Transaction, and such amount is reflected as short-term debt in the
accompanying Pro Forma Combined Balance Sheet.
(c) To reflect the settlement or capitalization of intercompany accounts
payable with Tenneco affiliates and the transfer of certain assets prior
to the Shipbuilding Distribution pursuant to certain Corporate
Restructuring Transactions.
(d) To reflect: (i) a cash dividend of $600 million to be paid by the Company
to Tenneco or one or more of its subsidiaries, principally using
borrowings under the Senior Credit Facility and the Notes and (ii) a
payment of $14 million for certain fees and expenses in connection with
the Senior Credit Facility and Notes.
(e) To reflect the elimination of corporate debt and related interest expense
allocated by Tenneco to the Company. See the Combined Financial
Statements, and notes thereto, included elsewhere in this Information
Statement.
(f) To reflect the distribution of NNS Common Stock to holders of Tenneco
Common Stock at an exchange ratio of one share of NNS Common Stock for
five shares of Tenneco Common Stock.
(g) To reflect: (i) interest expense related to the borrowings assumed
outstanding under the Senior Credit Facility and the Notes at the assumed
annual interest rates discussed in (b), (ii) the cost of commitment fees
on the unused borrowing capacity under the Revolving Credit Facility, and
(iii) the amortization of deferred debt financing costs incurred in
connection with the Senior Credit Facility and the Notes, as well as the
related tax effects of these items at an assumed statutory rate of 35%. A
1/8% change in these assumed annual interest rates would change pro forma
annual interest expense by $0.8 million, before the effect of income
taxes.
(h) EBITDA, on a pro forma basis, was $113 million and $227 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents earnings before cumulative effect of
changes in accounting principles, income taxes, interest expense and
depreciation and amortization. EBITDA is not a calculation based upon
GAAP; however, the amounts included in the EBITDA calculation are derived
from amounts included in the combined pro forma Statements of Earnings. In
addition, EBITDA shall not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of the
Company or as an alternative to operating cash flows as a measure of
liquidity.
43
<PAGE>
COMBINED SELECTED FINANCIAL DATA
The following combined selected financial data as of December 31, 1995 and
1994 and for the years ended December 31, 1995, 1994 and 1993 were derived
from the audited Combined Financial Statements of the Company. The combined
selected financial data as of December 31, 1993, 1992 and 1991 and for the
years ended December 31, 1992 and 1991 are unaudited and were derived from the
accounting records of Tenneco. The combined selected financial data as of and
for each of the six-month periods ended June 30, 1996 and 1995 were derived
from the unaudited Combined Financial Statements of the Company. In the
opinion of the Company's management, the combined selected financial data of
the Company as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991, and as of and for the six months ended June 30,
1996 and 1995 include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Combined Financial Statements, and notes thereto, included elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(MILLIONS)
STATEMENTS OF EARNINGS
DATA:
Net sales.............. $ 915 $ 845 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ======
Operating earnings..... $ 81 $ 90 $ 157 $ 201 $ 210 $ 249 $ 224
Interest expense (net
of interest
capitalized).......... 17 20 29 30 36 42 23
Other.................. -- -- (3) 1 (15)(b) -- (2)
Provision for income
taxes................. 27 29 58 75 78 64 68
------ ------ ------ ------ ------ ------ ------
Earnings before
cumulative effect of
changes in accounting
principles............ 37 41 73 95 111 143 135
Cumulative effect of
changes in accounting
principles, net of
tax................... -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------
Net earnings........... $ 37 $ 41 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital........ $ 41 $ 4 $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets........... 1,452 1,337 1,380 1,263 1,235 1,450 1,412
Short-term debt(d)..... 95 54 68 30 34 83 36
Long-term debt(d)...... 282 326 292 287 423 761 364
Combined equity........ 349 236 272 199 105 (173) (30)
STATEMENTS OF CASH FLOW
DATA:
Net cash provided
(used) by operating
activities............ $ (1) $ (18) $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided
(used) by investing
activities............ (45) (29) (87) (29) 21 6 (99)
Net cash provided
(used) by financing
activities............ 45 47 25 (154) (241) 181 (246)
Capital expenditures... 36 29 77 29 35 35 64
OTHER DATA:
EBITDA(e).............. $ 113 $ 123 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
(Continued on next page)
44
<PAGE>
(Continued from previous page)
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Information Statement.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, the Company adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, the Company adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(d) Historical amounts represent debt allocated to the Company from Tenneco
based on the portion of Tenneco's investment in the Company which is
deemed to be debt, generally based upon the ratio of the Company's net
assets to Tenneco's consolidated net assets plus debt. Tenneco's
historical practice has been to incur indebtedness for its consolidated
group at the parent company level or at a limited number of subsidiaries,
rather than at the operating company level, and to centrally manage
various cash functions. Management believes that the historical allocation
of corporate debt and interest expense is reasonable; however, it is not
necessarily indicative of the Company's debt upon completion of the Debt
Realignment, nor debt and interest that may be incurred by the Company as
a separate public entity. See the Combined Financial Statements, and notes
thereto, included elsewhere in this Information Statement.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the Statements of Earnings. In addition, EBITDA shall not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of the Company or as an alternative
to operating cash flows as a measure of liquidity.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Combined Selected
Financial Data and Combined Financial Statements, and notes thereto, presented
on pages F-1 to F-21. Reference is made to the "Basis of Presentation and
Description of Business" section of Note 1 to such Combined Financial
Statements for the definition of the "Company" as utilized herein.
BUSINESS OVERVIEW
Newport News Shipbuilding Inc. ("NNS") is the parent of Newport News
Shipbuilding and Dry Dock Company ("Newport News"). Newport News was acquired
by Tenneco in 1968 and since that time has represented the Shipbuilding
Business segment of Tenneco's diversified businesses. As a result of the
Shipbuilding Distribution, the Company will become a separate, publicly-held
corporation. See "The Shipbuilding Distribution" and Note 1 to the Combined
Financial Statements for further discussion.
The Company's primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the U.S.
Navy. The Company also provides ongoing maintenance for other U.S. Navy
vessels through work in overhauling, lifecycle engineering and repair. The
U.S. Navy accounted for approximately 97% and 94% of the Company's net sales
for the year ended December 31, 1995 and for the six months ended June 30,
1996, respectively. The following table summarizes the percentage of net sales
by contract type.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -----------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed-Price-Type........................ 67% 78% 75% 75% 67%
Cost-Type............................... 33% 22% 25% 25% 33%
------- ------- ------- ------- -------
Total................................. 100% 100% 100% 100% 100%
======= ======= ======= ======= =======
</TABLE>
The Company's primary activity is constructing ships. Similar to other
companies principally engaged in long-term construction projects, the Company
recognizes profits under the percentage of completion method of accounting,
with profit recognition commencing when costs are incurred under the contract,
and loss recognition commencing immediately upon identification of such loss
without regard to percentage of completion. Because contract profit
recognition is dependent upon reliable estimates of the costs to complete the
contract, profits recognized upon completion of the contract may be
significantly less than anticipated, or the Company may incur a loss with
respect to the contract, if it proves necessary to revise cost estimates.
Moreover, the Company's principal U.S. Government business is currently being
performed under fixed-price or fixed-price incentive contracts, which wholly
or partially shift the risk of construction costs that exceed the contract
target cost to the Company. See "Risk Factors--Profit Recognition; Government
Contracting." In addition to ship construction, the Company also provides
repair and overhaul services and engineering and design services. During 1993,
the "Other" captions presented herein included the Sperry Marine business
("Sperry"), which was involved in the domestic and international design and
manufacture of advanced electronics for maritime and other applications, prior
to the sale of such business. See "--Other--Divestiture" below.
46
<PAGE>
RESULTS OF OPERATIONS -- OVERVIEW
The following tables reflect the net sales, operating earnings and margins
of the Company by activity type for the years ended December 31, 1995, 1994
and 1993 and the six months ended June 30, 1996 and 1995.
NET SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------- --------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- ------------ ------------ ------------
NET % OF NET % OF NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL
(MILLIONS) ------ ------ ------ ------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............ $ 536 59 $ 545 65 $1,107 63 $1,144 65 $1,046 57
Repair and Overhaul..... 281 31 187 22 414 24 383 22 471 25
Engineering............. 86 9 97 11 202 11 204 12 225 12
Other................... 12 1 16 2 33 2 22 1 119 6
------ ----- ------ ----- ------ --- ------ --- ------ ---
Net sales............. $ 915 100 $ 845 100 $1,756 100 $1,753 100 $1,861 100
====== ===== ====== ===== ====== === ====== === ====== ===
</TABLE>
OPERATING EARNINGS AND MARGINS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------------- -----------------------------------------------------------
1996 1995 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING
EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN %
(MILLIONS) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction....... $38 7 $64 12 $ 95 9 $181 16 $135 13
Repair and
Overhaul.......... 37 13 18 10 45 11 13 3 51 11
Engineering........ 5 6 6 6 13 6 11 5 8 4
Other.............. 1 N.M. 2 N.M. 4 N.M. (4) N.M. 16 N.M.
--- ---- --- ---- ---- ---- ---- ---- ---- ----
Operating earnings. $81 9 $90 11 $157 9 $201 11 $210 11
=== ==== === ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
N.M.=Not meaningful
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES
Construction. The $9 million decrease in construction revenues is due to the
delivery of the aircraft carrier Stennis in late 1995 which decreased revenues
by $161 million, the continued decline in Los Angeles-class submarine
production resulting in decreased revenues of $32 million and lower levels of
revenue on the Sealift conversions in 1996 which decreased revenues by $55
million. These decreases are partially offset by a $43 million increase due to
production on Double Eagle product tankers and an increase in revenue of $112
million and $79 million on the aircraft carriers Reagan and Truman,
respectively.
Repair and Overhaul. The $94 million increase in repair and overhaul
revenues relates primarily to the aircraft carrier Eisenhower in 1996. There
was minimal aircraft carrier overhaul work performed in the first half of 1995
as a result of the delivery of the Enterprise in 1994, with the Eisenhower not
arriving until mid-1995.
Engineering. Engineering revenues decreased by $11 million as a result of
less work on the Seawolf- and Los Angeles-class submarine design programs as
the production of those submarine classes nears an end.
Other. Other revenues decreased by $4 million primarily as a result of lower
industrial products revenue.
47
<PAGE>
OPERATING EARNINGS
Construction. The $26 million decrease in operating earnings and 5% decrease
in operating margin on construction work relates to (i) the delivery of the
Stennis in late 1995 which decreased earnings by $29 million, (ii) additional
costs of $18 million associated with the Sealift conversion contract that were
not recoverable from the U.S. Government, and (iii) $26 million higher than
expected costs associated with the production of commercial product tankers.
Decreases in operating earnings for the period are partially offset by (i)
increased activity and productivity improvements on the aircraft carriers
Reagan and Truman, resulting in $28 million of additional earnings, and (ii)
the recognition of certain change orders related to previously delivered
submarines.
Repair and Overhaul. The $19 million increase in operating earnings and 3%
increase in operating margin for repair and overhaul work is a result of $14
million in work performed on the Eisenhower in 1996 and increased margins on
submarine repair and overhaul work. See "--Net Sales--Repair and Overhaul"
above.
Engineering. The decline in operating earnings for engineering is primarily
the result of less activity related to the Seawolf- and Los Angeles-class
submarine design programs.
Other. Other operating earnings were not significant to either period
presented.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
NET SALES
Construction. The $37 million decrease in construction revenues in 1995 from
1994 is due to a $96 million decrease in submarine construction work as two of
the remaining four Los Angeles-class submarines were delivered during 1995.
The decrease in submarine work is partially offset by increased aircraft
carrier construction activity of $14 million as work on the Reagan replaced
construction of the Stennis which was delivered in the fourth quarter of 1995.
Additionally, work on the Truman continued during 1995 at a level consistent
with 1994. Increased construction activity on the Sealift conversion program
of $28 million and the commercial shipbuilding program also contributed to
offsetting the decrease in submarine construction work. The level of
construction activity on commercial work increased by $18 million during 1995
as the Company began work on the Double Eagle product tankers under contract.
Reference is made to "--Business Outlook" below for a discussion of
construction activity.
The $98 million increase in construction revenues in 1994 from 1993 is due
to several factors, some offsetting. First, there were increased production
efforts in the amount of $106 million on two aircraft carriers (Stennis and
Truman) for 1994 as the keel of the Truman was laid in November 1993. Second,
construction efforts on the Sealift conversions began late in 1993, doubling
in 1994 increasing revenues by $77 million. These increases were offset
primarily by decreased submarine construction work of $71 million with the
delivery of the USS Montpelier and USS Hampton in 1993, and the USS Charlotte
in 1994.
Repair and Overhaul. The $31 million increase in repair and overhaul
revenues in 1995 from 1994 relates primarily to the $32 million repair and
overhaul of the USS Thorn during 1995. There were additional increases of $29
million in other miscellaneous U.S. Navy repairs, partially offset by a $22
million reduction in work as the USS Independence cruise ship repair was
completed in 1994. Aircraft carrier overhauls and related post-shakedown
repairs remained stable with the completion of the overhaul work for the
Enterprise in 1994 replaced by the overhaul work on the Eisenhower in 1995.
The $88 million decrease in repair and overhaul revenues in 1994 from 1993 is
attributable to a decrease of $113 million in aircraft carrier overhaul work
on the Enterprise, partially offset by $22 million in repair work on the
Independence cruise ship in 1994.
Engineering. Engineering revenues declined $2 million in 1995 from 1994 due
primarily to less work on the Seawolf-class submarine design program.
Engineering revenues declined $21 million in 1994 from 1993 due primarily to
$32 million less work on the Seawolf-class submarine design, offset by the
initiation of engineering planning work related to the NSSN program.
48
<PAGE>
Other. Other revenues increased $11 million in 1995 from 1994 as a result of
a variety of nonrecurring jobs for miscellaneous services. The decline in
other revenues in 1994 from 1993 is principally due to the revenues of
approximately $113 million from Sperry recorded prior to its sale in November
1993 (see "--Other--Divestiture" below), offset in part by other miscellaneous
items.
OPERATING EARNINGS
Construction. The $86 million decrease in operating earnings and 7% decrease
in operating margin on construction work in 1995 from 1994 relates to (i)
additional costs of $25 million incurred as a result of the Company's re-entry
into the highly competitive commercial shipbuilding market, (ii) $11 million
less in contributions from aircraft carrier work in 1995 as a result of
productivity gains realized and reflected in 1994, and (iii) additional costs
incurred on the Sealift conversion work which management expects to be
substantially complete in the first quarter of 1997.
The $46 million increase in operating earnings and 3% increase in operating
margin on construction work in 1994 from 1993 relates to productivity gains
realized and reflected in 1994, as well as an increase of $34 million in
overall aircraft carrier production, principally involving the Truman.
Additional gains in profitability were realized on submarine contracts
resulting from productivity gains on the Los Angeles-class program. The
productivity gains realized on both the aircraft carrier and submarine
programs reflect the decreasing operating risks as these programs mature or
near completion.
Repair and Overhaul. The $32 million increase in operating earnings and 8%
increase in operating margin for repair and overhaul work in 1995 from 1994 is
due primarily to $12 million of work performed on the USS Long Beach
deactivation in 1995 coupled with the fact the Company experienced additional
costs of $20 million on certain U.S. Navy and commercial repair jobs in 1994.
Operating earnings from carrier overhauls and related post-shakedown repairs
remained stable with the completion of the overhaul work for the Enterprise in
1994 replaced by the overhaul work on the Eisenhower during 1995. Repair and
overhaul operating earnings and operating margin decreased $38 million and 8%,
respectively, in 1994 from 1993, due primarily to a $14 million decrease in
the level of aircraft carrier overhaul work on the Enterprise and $20 million
of additional costs experienced on certain U.S. Naval and commercial repair
jobs during 1994.
Engineering. The operating earnings for engineering work have remained
relatively stable in all years presented with the exception of higher than
anticipated costs to design a propulsion plant trainer in 1993.
Other. The increase in other operating earnings in 1995 from 1994 is
primarily the result of lower expenses related to pensions and other employee
benefits not currently allocable to contracts, but which are expected to be
allocable once funded. The decrease in other operating earnings in 1994 from
1993 is primarily the result of the 1993 operating earnings of $6 million of
Sperry prior to its sale (see "--Other--Divestiture" below), a 1993 benefit of
$14 million from recovering a portion of previously recorded postretirement
benefit costs and higher 1994 expense related to pensions and other employee
benefits not currently allocable to contracts.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table reflects the summarized components of the Company's cash
flow for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ -------------------
1996 1995 1995 1994 1993
-------- -------- ----- ----- -----
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities........................... $ (1) $ (18) $ 63 $ 182 $ 215
Capital expenditures.................. (36) (29) (77) (29) (35)
Other investing cash flows............ (9) -- (10) -- 56
-------- -------- ----- ----- -----
Subtotal.............................. (46) (47) (24) 153 236
Cash transfers (to) from Tenneco...... 45 47 25 (154) (241)
-------- -------- ----- ----- -----
Net cash flow after transactions with
Tenneco.............................. $ (1) $ -- $ 1 $ (1) $ (5)
======== ======== ===== ===== =====
</TABLE>
OPERATING CASH FLOWS
The $119 million decrease in net cash flow from operating activities from
1994 to 1995 is due to several factors, including lower operating earnings,
increased levels of contracts in process and a higher level of payments to
Tenneco for federal and state income taxes. The lower operating earnings is
attributable to the factors discussed in "--Results of Operations for the
Years 1995, 1994, and 1993--Operating Earnings" above. The additional costs
accumulated in contracts in process is due principally to higher levels of
costs on the Sealift conversion work and commencement of the commercial
shipbuilding projects. The higher level of income tax payments to Tenneco
during 1995 is attributable to the Company paying its allocation of 1994
income taxes from Tenneco (see "--Income Taxes" below) during 1995. The
payment of a significant portion of taxes allocated to the Company from
Tenneco has historically occurred in the year subsequent to when such taxes
are incurred and billed. Thus, the higher level of 1994 current income taxes,
due to higher 1994 pretax earnings, is reflected as a 1995 cash outflow. The
higher level of current income tax liability included in "Accounts Payable to
Tenneco" at December 31, 1994, was the principal reason that the Company was
in a working capital deficit position at that date. However, during 1995, the
Company was able to pay the December 31, 1994 current tax liability and other
current liabilities with its cash flows from operations. In addition, the
Company was in a positive working capital position at June 30, 1996.
The $33 million decrease in net cash flow from operating activities from
1993 to 1994 is principally attributable to a lower level of operating
earnings, and offsetting amounts related to higher costs in contracts in
process and lower tax payments in 1994 compared to 1993. The higher unbilled
costs in contracts in process inventory was principally due to the continuing
progression of the Sealift conversion work, which began in late 1993, and the
repair work related to the Independence cruise ship, which began in 1994. The
low tax payments in 1994 compared to 1993 is attributable to a large state tax
payment made in 1993 to Tenneco and lower federal tax payments in 1994
compared to 1993.
The $17 million increase in comparative cash flows from operating activities
for the six month periods ended June 30, 1996 and 1995 is due to several
factors, some offsetting. These factors include less contracts in process
build-up and a lower level of payments to Tenneco, offset by increased levels
of accounts receivable and lower operating earnings. The lower contracts in
process build-up coupled with the increase of accounts receivable is
essentially offsetting and is a result of normal timing differences in the
submission of billings, as well as the settlement and billing of a request for
equitable adjustment in 1996. The lower level of payments to Tenneco in 1996
is due to the higher payments for taxes in 1995 as described above.
Significant changes in accounts receivable, inventory, trade accounts
payable and other accrued liabilities not described above relate to normal
timing differences in the billing cycle, receipt and use of inventory, and
receipt and payment of invoices.
50
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures increased to $77 million in 1995 from $29 million in
1994 due to the initiation of a strategic capital improvement program. The
capital improvement program consists principally of three separate projects:
(i) the development of a state-of-the-art automated steel cutting and
fabrication facility; (ii) the extension of a dry dock facility; and (iii) the
construction of the Carrier Refueling Complex. The automated steel cutting and
fabrication facility should directly support the Company's goals of reducing
the manufacturing cycle time on ship construction projects and reducing the
production cost structure. Portions of this facility are currently functional
and the entire facility is expected to be fully functional in 1997. The
extension of the dry dock facility was completed in June 1996 and allows for
concurrent, multiple-ship construction within the same dry dock. This
improvement is expected to enable construction resources to be utilized on
multiple projects. Lastly, the Carrier Refueling Complex includes a cost-
efficient facility strategically located next to the dry docks used to
overhaul nuclear-powered ships. Management estimates that approximately $39
million and $20 million will be expended in 1996 and 1997, respectively, to
complete the three capital improvement projects which are currently in
process. The Company expects to fund its planned capital expenditures with
cash flows generated from its operations. The 1994 and 1993 capital
expenditures of $29 million and $35 million, respectively, consisted
principally of normal capital improvements and purchases required to maintain
the Company's facilities. Since 1993, the Company has invested approximately
$177 million in modernizing its facilities. The $7 million increase in capital
expenditures for the six month period ended June 30, 1996 compared to the six
month period ended June 30, 1995 is attributable to the ongoing capital
improvement program described above.
OTHER INVESTING CASH FLOWS
Other investing cash flow activities consisted of a $9.6 million investment
as partial payment towards the Company's 40% equity interest in the Abu Dhabi
Ship Building Company joint venture during 1995 (see
"--Business Outlook" below) and $56 million in cash proceeds of the total $61
million in cash proceeds from the sale of Sperry in 1993. See "--Other--
Divestiture" below. The 1996 investing activity relates to a $9 million
investment for a 49% ownership interest in a limited partnership. The Company
is obligated to complete its subscription for the 40% equity interest by
paying an additional $9.6 million to Abu Dhabi Ship Building Company on
December 17, 1996. It expects that this additional payment will be funded with
cash flow from operations in 1996.
NET CASH FLOW
The Company's excess net cash flows from operating and investing activities
have historically been used by its parent to meet other Tenneco obligations.
During 1995, the Company received, on a net basis, $25 million from its
parent, primarily to cover costs of the capital improvement program discussed
above. Management of the Company believes that cash flows from operations will
generally be sufficient to meet its future capital requirements. However,
depending on market and other conditions, the Company may also utilize
external sources of capital to meet specific funding requirements. See "--
Capital Requirements and Resources--Sources of Capital Subsequent to the
Shipbuilding Distribution."
CAPITAL REQUIREMENTS AND RESOURCES
Requirements and Commitments. The Company's Shipbuilding Business requires
that adequate working capital be available at all times. Since an appreciable
portion of the Company's work is "negotiated" or in the form of "extras," the
price of the work must be negotiated, sometimes over a long period of time.
During this period of negotiation, the expended funds are not available for
other current work. Further, while construction and conversion contracts
provide for progress payments, they generally require extensive investment in
work in progress principally because of contract progress payment retentions.
Retainages, generally due upon completion or acceptance of the contracted
work, amounted to $64 million as of June 30, 1996. If the Company is the
successful bidder for the first LPD-17 contract, in order to satisfy the terms
of the contract, it will be required to make capital investments to provide
for, among others, the enhancement of its computer-aided design capabilities
51
<PAGE>
and installation of sophisticated computer-based data systems, which are
necessary for completing the LPD-17, a substantial portion of which
expenditures are expected to be reimbursed by the Navy.
In addition, the Company estimates that expenditures aggregating
approximately $90 million will be required after December 31, 1995, to
complete facilities and projects authorized at such date, and substantial
commitments have been made in connection therewith. Based on current
conditions, the Company also believes it will be required to make significant
tax payments in 1998 upon completion of the Stennis-Truman aircraft carrier
contract with the delivery of the Truman, which payments could be as high as
$124 million.
Sources of Capital Subsequent to the Shipbuilding Distribution. To provide
for working capital needs, the Company intends to enter into a $215 million
six-year Revolving Credit Facility as part of the secured Senior Credit
Facility, of which $125 million may be used for advances and letters of credit
and $90 million may be used for standby letters of credit. The Company expects
to utilize the borrowings of $14 million under the Revolving Credit Facility
to pay certain fees and expenses incurred in connection with the Notes and the
Senior Credit Facility. See "Risk Factors--Substantial Leverage" and "The
Shipbuilding Distribution--Debt and Cash Realignment."
Management believes that capital requirements after the Shipbuilding
Distribution and as described above for overall operations, capital
expenditures, payment of dividends, taxes and debt service can be met by
existing cash, internally generated funds and the Revolving Credit Facility
described above.
DEBT AND INTEREST ALLOCATION
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and centrally manage
various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $28 million, $26
million and $34 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's combined equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity. Further, management believes that the Company's interest rate and,
therefore, interest expense as a separate entity will be higher initially.
INCOME TAXES
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have historically entered into an
agreement to file a consolidated U.S. federal income tax return. Additionally,
the Company has historically filed consolidated income tax returns with other
Tenneco businesses for applicable state and foreign jurisdictions. The income
tax amounts reflected in the Combined Financial Statements under the
provisions of these tax sharing arrangements are not materially different from
the income taxes which would have been provided had the Company filed separate
tax returns. Income tax payments to Tenneco were higher in 1995 compared to
1994. See "--Liquidity and Capital Resources--Operating Cash Flows" above.
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<PAGE>
The effective tax rate for 1995, 1994 and 1993 was approximately 44%, 44%
and 41%, respectively. The difference between the Company's effective tax rate
in all periods compared to the U.S. federal statutory rate of 35% is
principally due to state income taxes associated with ship deliveries.
In connection with the Distributions, the current tax sharing agreement will
be cancelled and the Company will enter into a new tax sharing agreement with
Tenneco, New Tenneco and El Paso. The new tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, the Company will be liable for taxes imposed on the
Company and its affiliates engaged in the shipbuilding business. In the case
of federal income taxes imposed on the combined activities of the Tenneco
consolidated group, the Company and New Tenneco will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-
lived assets. The adoption of this new standard did not have any impact on the
Company's combined financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued FAS No.
123, "Accounting for Stock-Based Compensation." This statement defines a fair
value based method of accounting for stock-based awards issued to employees
and others but also allows companies to choose to continue to measure
compensation cost for such plans as it is measured currently. The Company has
elected to continue to use the current method of accounting for stock-based
awards issued to employees. Consequently, FAS No. 123 will have no impact on
the Company's combined financial position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual versus cash
basis of accounting. The Company recorded an after-tax charge of $4 million,
which was reported as a cumulative effect of change in accounting principle.
BACKLOG
The following table depicts the approximate firm backlog of the Company at
December 31, 1994 and 1995 and June 30, 1996, and the portion of the June 30,
1996 backlog which is anticipated to remain at December 31, 1996:
<TABLE>
<CAPTION>
(BILLIONS) ANTICIPATED DECEMBER 31,
---------- DECEMBER 31, JUNE 30, -------------
1996 1996 1995 1994
------------ -------- ------ ------
<S> <C> <C> <C> <C>
Construction.......................... $3.2 $3.6 $ 4.0 $ 5.2
Repair and Overhaul................... .1 .3 .3 .2
Engineering........................... .1 .2 .3 .2
---- ---- ------ ------
Total backlog....................... $3.4 $4.1 $ 4.6 $ 5.6
==== ==== ====== ======
</TABLE>
Backlog represents the total estimated remaining sales value of work under
contract. Because much of the Company's business consists of constructing
aircraft carriers, which historically have been purchased by the U.S. Navy
every four to six years, the Company's backlog has typically declined
following each carrier contract, and peaked again when the U.S. Navy orders a
new carrier. For example, the Company's backlog dropped well below $3 billion
in late 1994, then peaked at $5.6 billion with the signing of the CVN-76
(Reagan) contract later in that year. Backlog levels can change and U.S.
Government contracts can be unilaterally terminated at the
53
<PAGE>
convenience of the U.S. Government at any time with compensation for work
completed. See "Risk Factors--Reliance on Major Customer and Uncertainty of
Future Work."
More than 90% of the Company's backlog is U.S. Navy-related. The December
31, 1995 construction backlog included two Los Angeles-class submarines, two
Nimitz-class aircraft carriers (Truman and Reagan), the two ship Sealift
conversion contract, as well as contracts to construct four Double Eagle
product tankers. The majority of the June 30, 1996 backlog continued to be
U.S. Navy-related. Construction backlog at June 30, 1996 included one Los
Angeles-class submarine (Cheyenne), two Nimitz-class aircraft carriers (Truman
and Reagan), the two ship Sealift conversion contract and nine Double Eagle
product tankers. Repair and overhaul backlog at June 30, 1996 consisted of
overhauling the aircraft carrier Eisenhower, and repairs to several other
naval and commercial ships. The engineering backlog at June 30, 1996 was
consistent with that of December 31, 1995. The Company delivered its last Los
Angeles-class submarine in August, 1996. Although the Company was not awarded
construction contracts for the Seawolf-class submarine it was awarded the lead
design contract for the Seawolf submarine. Other engineering work is also
being performed related to the NSSNs and the next generation of aircraft
carrier ("CVX"). As of June 30, 1996, the Company had approximately $4.1
billion of backlog which is expected to run through 2002. See "--Business
Outlook" below.
BUSINESS OUTLOOK
The Company believes it is currently the only shipyard in the United States
capable of building nuclear-powered aircraft carriers. There are currently two
Nimitz-class carriers under construction which are scheduled to be delivered
in 1998 and 2002. Based on current U.S. Navy projections, the Company
anticipates the award in or before 2002 of a contract for the construction of
the last Nimitz-class aircraft carrier (CVN-77) for delivery in 2009. The
Company is currently performing design concept studies for the generation of
aircraft carriers to follow the Nimitz-class. The Company anticipates the
demand for a new carrier every four to six years; however, re-evaluation of
this need will continue by both the Department of Defense and the Congress.
See "Risk Factors--Reliance on Major Customer and Uncertainty of Future Work."
The final Los Angeles-class submarine was delivered on August 15, 1996. In
1987, the Company was awarded the lead design contract for the Seawolf
submarine. However, due to the end of the Cold War there was a dramatic
cutback in the Seawolf program (to three submarines), and the Company did not
construct any Seawolf submarines. Construction of the three Seawolf submarines
was awarded to Electric Boat, a competitor of the Company and wholly-owned
subsidiary of General Dynamics. More recently, directives from the U.S.
Congress call for the first four new nuclear attack submarines ("NSSNs," the
class of submarines following the Seawolf) to be equally allocated between the
Company and Electric Boat, with competition on subsequent NSSNs. The Company's
bid to be one of two suppliers for the U.S. Navy's $71 billion NSSN business
was affirmed during the first quarter of 1996 when legislation directing the
second NSSN to the Company became law. See "Risk Factors--Reliance on Major
Customer and Uncertainty of Future Work."
To broaden its base from nuclear-powered carriers and submarines, the
Company is currently marketing a number of new products and services to both
the U.S. and foreign governments and commercial customers. These products
include a new class of amphibious assault ships (LPD-17), surface combatant
ships like the "Arsenal Ship" and the Company's fast frigate (FF-21) and the
Double Eagle product tankers. Although the Company is currently pursuing
opportunities with respect to both LPD-17 and FF-21 sales, there can be no
assurance that the Company will be successful in these pursuits. See "Risk
Factors--Reliance on Major Customer and Uncertainty of Future Work." To better
position itself for international sales of these products, the Company
subscribed to purchase a 40% equity interest in the Abu Dhabi Ship Building
Company ("ADSB"), located in the United Arab Emirates in 1995. The Company is
obligated to complete its payment for its subscription in 1996. See
"--Liquidity and Capital Resources--Other Investing Cash Flows." ADSB is
currently renovating an existing shipyard and designing a new shipyard which
it plans to construct to replace the existing one. Each is intended to service
shipbuilding and repair demands of the United Arab Emirates military and
regional maritime fleets. The Company believes that its interest in ADSB will
provide the Company with a presence in the heavily navigated Persian Gulf. The
Company believes that its equity investment in ADSB may also serve as a means
54
<PAGE>
for the Company to satisfy offset obligations to the United Arab Emirates, if
any, arising from any contracts for sales of FF-21s or other ships it may be
able to secure. Typically, offset obligations, when applicable, require an
investment, capital expenditure, training commitment or other benefit for the
country making the purchase. Under the terms of the agreement relating to the
Company's investment, the Government of the Emirate of Abu Dhabi (the "Abu
Dhabi Government") will have an option to purchase the Company's interest upon
consummation of the Shipbuilding Distribution. The right of the Abu Dhabi
Government to exercise its purchase option in relation to a particular event
is deemed to be waived if not exercised within 90 days of the date the Abu
Dhabi Government becomes aware of such event. See "Business--Construction--
Foreign Military."
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation ("Eletson") at a price of $36 million per ship.
Construction of the first tanker is substantially complete; construction has
begun on the second tanker; and a substantial portion of the materials needed
for the construction of the three uncompleted tankers has been ordered. The
Company presently estimates that these ships will be constructed over the
period ending in February, 1998. In connection with the construction of these
four tankers, the Company has incurred or estimates it will incur costs of
approximately $90 million in excess of the fixed contract prices. As of
September 30, 1996, the full amount of these excess costs has been reserved
for by a charge against income. Disagreements have arisen with the purchasers
during the course of construction as to whether the first and second ships
were and are being constructed in compliance with the specifications set forth
in the contracts, and the purchasers sent letters to the Company purporting to
invoke the procedures set forth in the contracts for resolution of this
situation and requested that the Company in the interim stop construction on
the ships. The Company saw no reason to stop construction on the ships because
of its confidence that the ships will be in compliance with all contract and
classification society requirements. The purchasers have withdrawn both their
invocation of the dispute resolution procedures under the contracts and their
request that the Company cease further construction of the ships. Discussions
between the Company and the purchasers to date have resulted in the resolution
of a significant number of these disagreements, although some remain
unresolved and are the subject of further discussions. No assurances can be
given as to the effect the resolution of these remaining disagreements will
have on the Company (although the Company does not believe such resolution
will materially and adversely affect it) or the extent to which the remaining
work on these contracts can be completed without further disagreements with
the purchasers or the incurrence of additional losses in excess of current
estimates. These estimates are based on the use of new robotic technology and
the utilization of a different building strategy going forward. The Company
believes that these factors, as well as the experience gained in the
construction of the first ship, will result in a very significant reduction in
the man-hours necessary to construct each of the remaining vessels. There can
be no assurance that these factors will produce this result. The Company
intends to review this situation at the end of each quarter and, accordingly,
there can be no assurance that the estimate of costs to be incurred on these
contracts will not be revised at that time based on the facts then known to
the Company. See Note 13 to the Combined Financial Statements of the Company.
In 1995, the Company entered into fixed price contracts with limited
liability companies ("HVO") comprised principally of Hvide Partners, L.P. and
an affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per
ship. The Company is in the process of completing its design work on these
ships and expects to begin construction in the first half of 1997. These ships
are scheduled for delivery in 1998. The Company presently estimates that it
will break even on these ships on an aggregate basis, but there can be no
assurance that the costs incurred in constructing these ships will not exceed
the contract prices for them for the reasons described in the immediately
preceding paragraph.
These double-hull tankers are intended to serve the market currently served
by single-hull product carriers whose retirement is mandated by the Oil
Pollution Act of 1990 ("OPA 90"). The OPA 90 requires, among other things,
that existing single-hull ships must be retired from domestic transportation
of petroleum products between 1995 and 2015 unless retrofitted with double
hulls.
Additional services being developed by the Company include the management
and operation of Department of Energy nuclear sites in the U.S. The Company
hopes to capitalize on its nearly four decades of experience in
55
<PAGE>
handling nuclear materials and is teaming with other companies with
complementary experiences to bid on these site management contracts.
Management has undertaken a number of initiatives to reduce the overall cost
structure at the Company. These initiatives have included a 38% workforce
reduction (from approximately 29,000 employees in 1991 to 18,000 employees in
1996), overhead and other cost reductions, monetizing assets, the successful
negotiation of a labor agreement that stabilizes wages from February 1995
through April 4, 1999 and closing of several facilities. Management has also
made long-term investments in infrastructure and automation which are expected
to impact favorably the future results of operations. In connection with these
initiatives, the Company delivered the aircraft carrier Stennis in November
1995, 7.5 months ahead of schedule and at a savings of over 1,000,000 man-hours
compared to the previously delivered aircraft carrier (despite accommodating
over 1,200 significant U.S. Navy ordered design improvements). The remaining
initiatives relate primarily to projects to reduce cycle times for product
development and ship delivery by reengineering key production and design
processes. Process innovation teams have been assigned to each key process.
Management continues to reevaluate its strategy and consider additional
opportunities to enhance the value of the Company. The future results of
operations and financial position of the Company are dependent on several
factors including the allocation of defense budget funds to new ship
construction for the U.S. Navy, the successful award and completion of new
shipbuilding contracts from the U.S. Government, and the successful
diversification into the highly competitive commercial shipbuilding and foreign
military markets. Management believes that the Company is well positioned to
receive future U.S. Navy contract awards. However, there are no guarantees as
to the timing or level of future U.S. Navy contract awards to the Company.
Additionally, the level of profitability on such future contracts will be
dependent on the cost structure of the Company. The diversification of the
Company's business into the commercial market creates a heightened level of
risks and rewards. Thus, the future profitability of the proposed commercial
programs is subject to the successful management of such risks. Additionally,
there are no certainties as to the level of future commercial business which
will be secured by the Company.
The information included in this "Business Outlook" section is forward-
looking and involves risks and uncertainties that could significantly impact
expected results. The Company's outlook is based predominantly on its
interpretation of what it considers key economic and market assumptions, many
of which have already been discussed above. Factors that could cause actual
results to differ materially from current expectations include: changes in the
U.S. Navy's budgets; a reevaluation of ship requirements by the U.S. Navy; the
inability to successfully market and sell the new products and services
discussed; the award of contracts to the Company's competitors; the inability
to produce the new products or provide the new services at the costs
anticipated as a result of failure to meet productivity or learning curve
assumptions or increased cost of materials; or the inability to meet production
schedules and productivity improvement goals for contracts currently being
performed.
OTHER
GOVERNMENT CLAIMS AND INVESTIGATIONS
More than 90% of the Company's sales involve contracts entered into with the
U.S. Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases in which it believes such adjustments are appropriate. In addition,
various governmental agencies may at any time be conducting various other
investigations or making specific inquiries concerning the Company. Management
is of the opinion that the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial condition or results of
operations. In May 1996, the Company was subpoenaed by the Inspector General of
the Department of Defense as part of a joint inquiry
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<PAGE>
conducted by the Department of Defense, the Department of Justice, the U.S.
Attorney's Office for the Eastern District of Virginia and the Naval Criminal
Investigation Service. See "Risk Factors--Government Claims and
Investigations," "Business--Investigations and Legal Proceedings" and Note 13
of the Combined Financial Statements.
REVENUE RECOGNITION
The Company reports profits on its long-term contracts using the percentage-
of-completion method of accounting, determined on the basis of total costs
incurred to date to estimated final total costs. Losses on contracts, including
allocable general and administrative expenses, are reported when first
estimated. The performance of contracts usually extends over several years,
requiring periodic reviews and revisions of estimated final contract prices and
costs during the term of the contracts. The effect of these revisions to
estimates is included in earnings in the period the revisions are made. Revenue
arising from the claims process is neither recognized as income nor as an
offset against a potential loss until it can be reliably estimated and its
realization is probable.
SIGNIFICANT ESTIMATES
In 1994 and 1995, the Company entered into fixed price contracts with Eletson
and HVO to construct a total of nine of its Double Eagle product tankers. The
Company has recorded losses of approximately $90 million related to its
contracts with Eletson for four of these product tankers. The Company presently
estimates that it will break even on its contracts for the five tankers from
HVO. The Company believes it can complete construction of these ships based on
its current estimate of costs. These estimates are based on the use of new
robotic technology and the utilization of a different building strategy going
forward. The Company believes that these factors, as well as the experience
gained in the construction of the first ship, will result in a very significant
reduction in the man-hours necessary to construct each of the remaining
vessels. There can be no assurance that these factors will produce this result.
The Company intends to review this situation at the end of each quarter and,
accordingly, there can be no assurance that the estimate of costs to be
incurred on these contracts will not be revised at that time based on the facts
then known to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Outlook."
Contracting with the U.S. Government can also result in the Company filing a
Request for Equitable Adjustment ("REA") in connection with a contract. REAs
represent claims against the U.S. Government for changes in the original
contract specifications and resulting delays and disruption in contract
performance. All major REAs filed by the Company in connection with its
contracts have been settled as of June 1996 for approximately the same amount
recorded previously by the Company. Through 1995, costs of $18 million had been
recognized on the Sealift REA in excess of the adjudicated REA price. Cost
growth of $36 million that was not recoverable through that REA has been
recognized in the first half of 1996. Due to uncertainties inherent in the
estimation process these contract completion costs could be increased in the
future by $0 to $10 million. The first of two Sealift ships was delivered in
August 1996. Management expects this contract to be substantially complete by
the end of the first quarter of 1997.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operating costs and expenses as
incurred. The amounts charged during the years ended December 31, 1995, 1994
and 1993 are $20 million, $14 million and $15 million, respectively. Research
and development costs for the six months ended June 30, 1996 were $20 million.
Research and development costs for the year ending December 31, 1996 are
expected to be between $40 million and $50 million. Under current regulations,
research and development costs can be passed through to the U.S. Government as
allowable overhead spread across all of the Company's contracts. The actual
amount of research and development costs allowed to pass through the Navy
contracts is reviewed annually. Research and development costs can also be
directly funded by the U.S. Government through specific contracts. These
contracts produce quantifiable deliverables for the U.S. Navy, for example,
certain research and development projects on aircraft carriers.
57
<PAGE>
DIVESTITURE
During November 1993, the Company sold Sperry, which was part of its
Shipbuilding Business. Sperry was involved in the domestic and international
design and manufacture of advanced electronics for maritime and other
applications and contributed $113 million of net sales and $6 million of
operating earnings to the Company's 1993 results of operations. In accordance
with the sale agreement, the Company received $56 million of the total cash
proceeds of $61 million from the sale of Sperry. The remaining portion of the
cash proceeds was realized by other Tenneco entities. In addition to the cash
proceeds, the Company received $17 million in preferred stock of the purchaser.
A pre-tax gain on the total sale of $15 million was recognized by the Company
in 1993. An agreement was reached to sell the preferred stock of the purchaser
in late 1995 for $18 million. See Note 5 to the Combined Financial Statements.
UNION AGREEMENT
During 1995, the Company executed a collective bargaining agreement which
covers approximately 60% of its work force and 98% of its hourly employees. The
collective bargaining agreement is effective to April 1999, and generally
provides for static pay rates, promotion of multi-skilling, work teams, joint
cooperation on quality programs, a new managed health care program, reduction
in paid time off and contains "no strike, no lockout" provisions. This
agreement will assist the Company in managing its cost structure and
maintaining its skilled labor force.
ENVIRONMENTAL MATTERS
The Company is subject to stringent environmental laws and regulations in all
jurisdictions in which it operates. Management of the Company believes that the
Company is in substantial compliance with all applicable environmental
regulations, and the historical environmental compliance costs incurred by the
Company have not been significant. Although there can be no certainties,
management does not believe that any future environmental compliance costs will
have a material adverse effect on the Company's combined financial position,
results of operations or cash flows.
INFLATION
The Company's materials costs are impacted by inflation. However, the
majority of the Company's U.S. Government shipbuilding contracts allow recovery
of costs which are escalated due to inflation. Thus, the Company's net exposure
to inflation is minimal.
DEFENSE INDUSTRY OVERVIEW
The end of the Cold War has led to a reduction of the U.S. armed forces. As a
result, the federal defense budget for procurement has been reduced in real
terms by approximately 70% since 1985. The U.S. Navy budget has declined over
the same period of time. However, the Company believes that the U.S. Congress,
which has resisted additional defense budget cuts, and a continued uncertain
geopolitical environment will favor an end of the long decline in military
outlays. Additionally, President Clinton's 1996 Budget establishes the
following defense goals as the basis for recapitalizing the Department of
Defense budget: (i) projecting a presence overseas; (ii) maintaining an
acceptable level of training and readiness; (iii) ability to participate
effectively in two nearly simultaneous regional conflicts; and (iv) providing a
level of demand for equipment and services which will preserve the defense
industrial base.
A shift in military strategy has prompted the U.S. Navy to redefine its role.
Since the collapse of the former Soviet Union, there has been a dramatic change
in the primary global threat to the security of the U.S. As a result, U.S.
defense strategy, which was predicated on defending against a single major
threat, is evolving as well. A policy of protecting against a major nuclear
assault and securing containment of the Soviet Union is evolving to a strategy
requiring the need to address potential regional conflicts, perform
peacekeeping and aid activities in multiple unstable areas, and deter
international terrorism. This shift in U.S. military strategy, together with
the declining number of U.S. bases overseas, has prompted the Navy to emphasize
its role in projecting
58
<PAGE>
American military power from ship to shore. In September 1992, the Navy
released a new naval strategy entitled ". . . From The Sea; Preparing the Naval
Service for the 21st Century," Department of the Navy, Washington, D.C., which
stated that: (i) naval forces will be used in a wide range of responses to
crises around the globe; (ii) should the presence of these forces fail to deter
aggression, the Navy must be able to prevent the U.S. from losing the conflict
until the full combat power of the Army and Air Force can arrive; and (iii)
naval forces must also be able to conduct a full-scale naval campaign in
support of a land force.
AIRCRAFT CARRIERS
Aircraft carriers have played a major role in the Navy's strategy of
protecting U.S. global interests. From the early strikes in the Gulf War to the
recent American involvement in Bosnia, Haiti, Somalia, the China/Taiwan crisis
as well as to renewed Iraqi aggression, U.S. political and military leaders
have responded to overseas crises by deploying the nearest aircraft carrier.
Not only do aircraft carriers allow the naval forces to project military power
from the safety of the open ocean in times of war, but they also serve as
mobile naval bases that reassure allies and intimidate potential aggressors by
maintaining peacetime military presence in regions critically important to the
U.S.
The Navy currently plans to maintain a minimum of 12 aircraft carriers (down
from 15 in 1992) to respond quickly to overseas crises and command a credible
presence around the globe. The Company believes that even with 12 aircraft
carriers, the Navy is still prone to gaps in peacetime requirements and may not
be able to fulfill the need to confront two simultaneous major conflicts as
envisioned by President Clinton's 1996 Department of Defense budget. Admiral
Jay Johnson, the newly appointed Chief of Naval Operations, has publicly stated
his desire for 15 active carriers to ensure adequate on-station presence in
critical mission areas. As shown in the table below, the Navy currently
operates 12 carriers, seven of which are Nimitz-class carriers built by Newport
News.
CURRENT LIST OF AIRCRAFT CARRIERS
<TABLE>
<CAPTION>
LAUNCH COMMISSION
NUMBER NAME CLASS DATE DATE SHIPYARD
- ------ ---- ----- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
CV-62................... Independence Forrestal 06/06/58 01/10/59 New York Naval Shipyard
CV-63................... Kitty Hawk Kitty Hawk 05/21/60 04/29/61 New York Shipbuilding
CV-64................... Constellation Kitty Hawk 10/08/60 10/27/61 New York Naval Shipyard
CVN-65.................. Enterprise Enterprise 09/24/60 11/25/61 Newport News Shipbuilding
CV-67................... John F. Kennedy JFK 05/27/67 09/07/68 Newport News Shipbuilding
CVN-68.................. Nimitz Nimitz 05/13/72 05/03/75 Newport News Shipbuilding
CVN-69.................. Dwight D. Eisenhower Nimitz 10/11/75 10/18/77 Newport News Shipbuilding
CVN-70.................. Carl Vinson Nimitz 03/15/80 03/18/82 Newport News Shipbuilding
CVN-71.................. Theodore Roosevelt Nimitz 10/27/84 10/25/86 Newport News Shipbuilding
CVN-72.................. Abraham Lincoln Nimitz 02/13/88 11/11/89 Newport News Shipbuilding
CVN-73.................. George Washington Nimitz 07/21/90 07/04/92 Newport News Shipbuilding
CVN-74.................. John C. Stennis Nimitz 11/13/93 12/09/95 Newport News Shipbuilding
CVN-75.................. Harry S Truman Nimitz 09/07/96 07/98 Newport News Shipbuilding
CVN-76.................. Ronald Reagan Nimitz 03/18/00 01/03 Newport News Shipbuilding
</TABLE>
- --------
Source: Jane's Fighting Ships 1996-1997, 98th Edition
At present, the Navy has contracted for two more Nimitz-class aircraft
carriers: the CVN-75 to be delivered in June 1998 and the CVN-76 to be
delivered in December 2002. The Navy also intends to build another Nimitz-class
aircraft carrier, the CVN-77. The Navy's plans to maintain a fleet of 12
carriers translates into an optimal building rate of one carrier every four to
six years to gradually replace the existing Nimitz-class carriers (each has
approximately a 50-year service life and refueling age of approximately 25
years). The Navy is currently planning a next-generation aircraft carrier
("CVX") to follow the nuclear-powered Nimitz-class, the first of which is
expected to begin production in 2006. Newport News is currently developing
concepts for this new class of aircraft carriers. See "Risk Factors--Reliance
on Major Customer and Uncertainty of Future Work."
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<PAGE>
U.S. NAVY FUTURE CARRIER FLEET
LOGO
As shown in the chart above, there are 12 carriers in 1996 in the Navy's
fleet. These ships range from the newest, Stennis, to the oldest,
Independence. In the year 2000, the Independence will be retired and be
replaced by the Truman. Beyond 2000, the USS Kitty Hawk is scheduled to be
replaced by the Reagan; the USS Constellation by CVN-77; and the Enterprise by
CVX-78.
SUBMARINES
The collapse of the former Soviet Union Navy, with its several hundred
submarines, has dramatically reduced the underwater threat to U.S. and allied
vessels. Currently, most of the U.S. Navy's submarines are Los Angeles-class
vessels which were first commissioned in 1976, and will begin to reach the end
of their service lives starting in 2000. The Los Angeles-class is a high
speed, nuclear-powered fast attack submarine used to locate and destroy
hostile submarines and surface ships. Newport News is the lead design yard for
the Los Angeles-class and has built 28 out of a total of the 61 currently
active submarines in this class. This program reached the end of its
production run when the last submarine, Cheyenne, was completed by Newport
News in 1996.
In the 1980s, the Navy, with the Company as the lead design yard, developed
the Seawolf-class submarine to augment and ultimately replace the Los Angeles-
class. However, the Company did not build any Seawolf submarines. Seawolf's
high unit cost (roughly $2 billion), coupled with the end of the Cold War, led
to calls for a new type of submarine and a truncation of the Seawolf program
after three ships. Consequently, the Navy plans to develop the new nuclear
attack submarine ("NSSN"), a smaller, more cost-effective, nuclear-powered
submarine beginning in 1998. Congress has approved legislation to have Newport
News construct one NSSN beginning in late 1998 and another NSSN beginning in
late 2000. Two contracts were also designated for Electric Boat, a wholly-
owned subsidiary of General Dynamics. Beyond 2001, NSSN contract awards are
expected to be determined by competitive bidding. See "Risk Factors--Reliance
on Major Customer and Uncertainty of Future Work."
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<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the largest non-government-owned shipyard in the United
States, as measured by each of net sales, size of facilities and number of
employees. Its primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the
United States Navy. The Company believes it currently is: (i) the only
shipyard capable of building the Navy's nuclear-powered aircraft carriers,
(ii) the only non-government-owned shipyard capable of refueling and
overhauling the Navy's nuclear-powered aircraft carriers, and (iii) one of
only two shipyards capable of building nuclear-powered submarines. Since its
inception in 1886, the Company has developed a preeminent reputation through
the construction of 264 naval ships and 542 commercial vessels. For the year
ended December 31, 1995 and the six months ended June 30, 1996, the Company
had net sales of $1,756 million and $915 million, respectively, and EBITDA (as
defined) of $227 million and $113 million, respectively. In addition, at June
30, 1996 the Company had $4.1 billion of estimated backlog.
Aircraft carrier and submarine construction contracts with the U.S. Navy
have generated the majority of the Company's net sales. Newport News has built
nine of the 12 active aircraft carriers in the U.S. fleet, including all eight
nuclear-powered aircraft carriers. For the last 35 years, Newport News has
been the sole designer and builder of the U.S. Navy's aircraft carriers.
Newport News currently holds contracts to build two nuclear-powered Nimitz-
class carriers, each representing approximately $2-3 billion in initial
contract revenue: the Truman, scheduled for delivery in 1998, and the Reagan,
scheduled for delivery in 2002. Based on current U.S. Navy projections, the
Company anticipates the award in or before 2002 of a contract for the
construction of the last Nimitz-class aircraft carrier for delivery in 2009.
Under contract to the Navy, Newport News is currently performing design
concept studies for the next generation of aircraft carriers. In addition,
Newport News, as one of only two manufacturers of nuclear-powered submarines,
has constructed 53 nuclear-powered submarines comprised of seven different
classes. Newport News has recently been designated by legislation to build two
of the first four of the next generation of the Navy's new nuclear attack
submarines ("NSSNs") commencing in late 1998.
The Company built all the active Nimitz-class aircraft carriers. The Company
also believes it currently is the only non-government-owned shipyard currently
capable of refueling nuclear-powered aircraft carriers. Puget Sound, a
government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, the Company has had the leading share of the refueling and overhaul
market for aircraft carriers. A Nimitz-class aircraft carrier must be refueled
at approximately the midpoint of its estimated 50-year life. The Navy often
commissions a major overhaul of each carrier to coincide with a refueling. It
normally takes two years to complete a refueling and overhauling. Currently
the Company is overhauling the Eisenhower (an approximate $400 million
contract), and it holds planning contracts to overhaul the Roosevelt in 1997
and to refuel and overhaul the Nimitz beginning in 1998. The Company believes
that, if awarded, the contracts for the Roosevelt and the Nimitz will be for
approximately $230 million and approximately $1 billion, respectively. In
addition, the Navy has announced its schedule to begin the refueling of the
Eisenhower in 2001, the Vinson in 2006 and the Roosevelt in 2009 at an
estimated cost of approximately $1 billion each. Supported by its new Carrier
Refueling Complex, the Company believes it is well-positioned to be awarded
future refueling contracts.
Newport News' management is highly regarded in the defense and shipbuilding
industry and has been successful in creating a motivated and experienced
management team and enhancing its position as the premier U.S. shipyard. Led
by William P. Fricks, the Chief Executive Officer of Newport News, who has 30
years of experience, the Company's senior executives average 10 years of
shipbuilding experience. Newport News is a separate operating entity with its
own corporate headquarters, management team and separate financial reporting
systems. Management therefore expects an orderly transition to an independent,
publicly-traded company.
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<PAGE>
BUSINESS STRATEGY
To broaden and strengthen its competitive position, the Company has
developed strategies with the following key elements: (i) maintain a
leadership position in its core business; (ii) further reduce its cost
structure; (iii) continue to reduce cycle time; and (iv) broaden and expand
products and markets.
MAINTAIN A LEADERSHIP POSITION IN ITS CORE BUSINESS. Aircraft carriers and
submarines remain vital components of the Navy's strategy for protecting U.S.
global interests. The Navy has stated that it needs to maintain a minimum of
12 aircraft carriers to respond quickly to overseas crises and command a
credible presence around the world. As the aircraft carrier and submarine
fleets continue to age, the Company believes there will be a steady long-term
demand for new construction and refueling and overhauling services, which it
intends to aggressively pursue.
FURTHER REDUCE ITS COST STRUCTURE. In 1991, the Company embarked on a
program to reduce its cost structure and increase productivity in order to
remain a market leader in its core business as well as to facilitate entry
into related commercial markets. Management initiatives to reduce the overall
cost structure of the Company have included workforce reductions of 38% (from
approximately 29,000 employees in 1991 to approximately 18,000 employees in
1996), overhead and other cost reductions, the successful negotiation of a
long-term labor agreement that stabilizes wages through April 1999, and the
closing of certain facilities. As a second step in its cost reduction program,
Newport News has begun outsourcing low value-added production activities and
has been investing in programs to upgrade and automate its operations. Since
1993, the Company has spent $177 million on a variety of discretionary capital
programs designed to lower costs and improve efficiency. Recent and ongoing
expenditures include new computing technology ($85 million), an automated
steel factory ($71 million), the extension of a drydock to accommodate multi-
ship construction ($30 million), and the construction of the Carrier Refueling
Complex ($19 million).
CONTINUE TO REDUCE CYCLE TIME. The Company plans to continue to reduce the
cycle times for product development and ship delivery by re-engineering key
production processes, including design, production planning, materials
management, steel fabrication and outfitting. Process innovation teams have
been assigned to each key production process to implement this strategy. In
connection with these initiatives, the Company delivered the Stennis in
November 1995, 7.5 months ahead of schedule and at a savings of over 1,000,000
man-hours compared to the previously delivered aircraft carrier.
BROADEN AND EXPAND PRODUCTS AND MARKETS. The Company has begun to seek to
leverage its existing expertise by expanding its commercial and other
shipbuilding projects. The Company believes that this expansion effort should
create additional growth opportunities. In addition, by allowing for increased
economies of scale, the Company believes its expansion initiatives should help
it reduce per ship costs and thereby make it more competitive in its core U.S.
Navy business, which currently accounts for over 90% of the Company's net
sales. As part of this expansion effort, the Company secured long-term, fixed
price contracts with two purchasers for a total of nine "Double Eagle" product
tankers. The initial ships under contract are being built at a loss, for which
the Company has created a reserve. This new line of double-hulled product
tankers is designed to meet all of the stringent domestic and international
shipping specifications. Additionally, drawing on its nearly four decades of
safe fuel handling and reactor services for the U.S. Navy, the Company won a
contract from the Department of Energy in 1995 to construct a facility to
store damaged fuel from Three Mile Island. The Company is pursuing bids on
additional projects from the Department of Energy.
In order to further strengthen its position as a leading U.S. Navy
contractor, the Company is attempting to broaden its naval portfolio to
include non-nuclear ships by bidding with others in an alliance on the design
and construction of the LPD-17 non-nuclear amphibious assault ship. The
Company has also joined an alliance to develop design concepts for the Navy's
new "Arsenal Ship," a floating missile platform that utilizes a commercially
available double-hulled design, and pursue awards in the construction of such
ships. International
62
<PAGE>
military sales are also a key growth opportunity. The Company is pursuing
orders for several versions of its international frigate, the FF-21, from
foreign navies and is currently focusing on naval modernization programs
presently underway in the United Arab Emirates, the Philippines, Norway and
Kuwait.
GENERAL
Currently, the Company's business centers primarily on three areas involving
U.S. Naval and commercial ships: (i) construction; (ii) repair and overhaul;
and (iii) engineering and design. The Company also engages in certain other
related businesses. In 1993, the Company divested its maritime electronics
manufacturing business.
The following table sets forth information on the percentage of total net
sales contributed by the Company's various classes of products and services:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------
JUNE 30, 1996 1995 1994 1993
--------------- ------------ ------------ ------------
NET % OF NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL
------- ------ ------ ----- ------ ----- ------ -----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............ $536 59 $1,107 63 $1,144 65 $1,046 57
Repair and Overhaul..... 281 31 414 24 383 22 471 25
Engineering and Design.. 86 9 202 11 204 12 225 12
Other................... 12 1 33 2 22 1 119 6
------- ------ ------ --- ------ --- ------ ---
Net sales............. $915 100 $1,756 100 $1,753 100 $1,861 100
======= ====== ====== === ====== === ====== ===
</TABLE>
CONSTRUCTION
The Company's primary activity is constructing ships, with approximately 63%
of net sales for the year ended December 31, 1995 and 59% of net sales for the
six months ended June 30, 1996 being generated from construction work. In
recent history, the Company has relied on major carrier and submarine
contracts with the U.S. Navy, but the Company's current objective is to
selectively add to its core business with contracts for other Naval segments
(e.g. LPD-17 and Arsenal Ship), and in the commercial and foreign military
markets.
The following chart shows the number of naval and commercial ships, and
other vessels built by the Company, including ships currently under
construction.
<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. NAVY SHIPS:
Aircraft Carriers................... -- -- 3 14 3 9 29
Submarines.......................... -- 8 -- -- 29 24 61
Amphibious Cargo; Attack Cargo;
Amphibious Flagship; Ammunition.... -- -- -- 53 5 -- 58
Battleships......................... -- 11 2 1 -- -- 14
Cruisers............................ -- 5 4 9 5 1 24
Destroyers.......................... -- 17 14 -- -- -- 31
Miscellaneous; including Coast Guard
Cutters, Landing Ships (Dock) and
Landing Ships (Tank)............... 3 10 1 31 2 -- 47
--- --- --- --- --- --- ---
Total U.S. Navy Ships............... 3 51 24 108 44 34 264
--- --- --- --- --- --- ---
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL SHIPS:
Cargo Vessels....................... 8 35 4 13 14 -- 74
Freighters.......................... -- -- -- 190 -- -- 190
Passenger Liners.................... 2 17 33 11 -- -- 63
Tankers............................. -- 22 11 42 11 4 90
Miscellaneous, including Dredges,
Ferry Boats, Steamers, (Bay and
River), Tugs and Yachts............ 8 20 22 2 -- -- 52
--- --- --- --- --- --- ---
Total Commercial Ships.............. 18 94 70 258 25 4 469
--- --- --- --- --- --- ---
OTHER VESSELS (Barges, Caissons, Car
Floats, Pilot Boats)................. -- -- -- -- -- -- 73
--- --- --- --- --- --- ---
TOTAL U.S. NAVY, COMMERCIAL AND OTHER
SHIPS................................ 21 145 94 366 69 38 806
=== === === === === === ===
</TABLE>
U.S. Navy
The Company believes it currently is the only manufacturer in the U.S.
capable of constructing nuclear-powered aircraft carriers. Currently, the
Company is constructing two Nimitz-class nuclear-powered aircraft carriers,
the Truman and the Reagan, which are scheduled for delivery in 1998 and 2002,
respectively. A contract for an additional Nimitz-class aircraft carrier is
currently anticipated to be awarded in or before 2002. The first ship in a new
class of aircraft carrier, the CVX-78, is anticipated to be awarded in 2006.
Because of its past experience in manufacturing aircraft carriers, and the
lack of direct competitors, the Company believes it is in a strong competitive
position to be awarded these contracts, although no assurances can be made
that it will be awarded these contracts, that these projects will not be
delayed, or that these contracts will be funded by Congress.
The Company is also one of two producers of nuclear-powered submarines.
Currently, the only other competitor is Electric Boat, a wholly-owned
subsidiary of General Dynamics. The Company delivered its last Los Angeles-
class submarine on August 15, 1996. In 1987, the Company was awarded the lead
design contract for the Seawolf submarine. However, due to the end of the Cold
War, there was a dramatic cutback in the Seawolf program to three submarines
which are being constructed by Electric Boat. More recently the Company was
designated by legislation to build two of the next generation of attack
submarines known as the new nuclear attack submarines or NSSN program. The
Company anticipates that it will construct the second and the fourth NSSN
submarines, and that Electric Boat will construct the first and third NSSN
submarines. After the fourth NSSN submarine, the Company and Electric Boat are
expected to compete against each other for additional NSSN construction
contracts by competitive bidding. The Company has constructed 53 nuclear-
powered submarines, including 39 attack submarines and 14 of the larger, fleet
ballistic missile submarines.
The Company has formed an alliance with Ingalls Shipbuilding (the prime
contractor), Lockheed Martin and National Steel to submit a bid for the LPD-17
program. The LPD-17 is a program for the design and construction of non-
nuclear amphibious assault ships. According to current U.S. Navy estimates,
twelve ships are expected to be built in the LPD-17 program. The U.S. Navy has
stated that it currently expects that the LPD-17 vessels will be a mainstay of
the U.S. Navy over the next two decades, replacing a number of vessels nearing
the end of their useful lives. The Company (with its alliance) submitted its
bid for the LPD-17 program on June 28, 1996. The contract for the LPD-17
program is expected to be awarded prior to the end of 1996. Competing firms
have also formed an alliance and submitted a bid.
An alliance consisting of the Company, Ingalls Shipbuilding and Lockheed
Martin, was recently awarded a contract to develop design concepts for the
Arsenal Ship. The Company's alliance was one of five alliances to receive such
an award. Current U.S. Navy plans call for a downselect to two alliances
following evaluation of submitted concepts. Ultimately, one alliance is
expected to prevail in the award of a construction contract.
The Company is also completing conversion of two container ships to "roll-
on, roll-off" heavy armored vehicle Sealift transportation ships for the U.S.
Navy. The first ship was delivered in August 1996 and the second ship is
scheduled to be delivered in March 1997.
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<PAGE>
Commercial
As part of its expansion strategy, the Company has also been pursuing orders
for products and services from commercial customers.
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson at a price of $36 million per ship. Construction of the first tanker
is substantially complete; construction has begun on the second tanker; and a
substantial portion of the materials needed for the construction of the three
uncompleted tankers has been ordered. The Company presently estimates that
these ships will be constructed over the period ending in February, 1998. In
connection with the construction of these four tankers, the Company has
incurred or estimates it will incur costs of approximately $90 million in
excess of the fixed contract prices. As of September 30, 1996, the full amount
of these excess costs has been reserved for by a charge against income.
Disagreements have arisen with the purchasers during the course of
construction as to whether the first and second ships were and are being
constructed in compliance with the specifications set forth in the contracts,
and the purchasers sent letters to the Company purporting to invoke the
procedures set forth in the contracts for resolution of this situation and
requested that the Company in the interim stop construction on the ships. The
Company saw no reason to stop construction on the ships because of its
confidence that the ships will be in compliance with all contract and
classification society requirements. The purchasers have withdrawn both their
invocation of the dispute resolution procedures under the contracts and their
request that the Company cease further construction of the ships. Discussions
between the Company and the purchasers to date have resulted in the resolution
of a significant number of these disagreements, although some remain
unresolved and are the subject of further discussions. No assurances can be
given as to the effect the resolution of these remaining disagreements will
have on the Company (although the Company does not believe such resolution
will materially and adversely affect it) or the extent to which the remaining
work on these contracts can be completed without further disagreements with
the purchasers or the incurrence of additional losses in excess of current
estimates. These estimates are based on the use of new robotic technology and
the utilization of a different building strategy going forward. The Company
believes that these factors, as well as the experience gained in the
construction of the first ship, will result in a very significant reduction in
the man-hours necessary to construct each of the remaining vessels. There can
be no assurance that these factors will produce this result. The Company
intends to review this situation at the end of each quarter and, accordingly,
there can be no assurance that the estimate of costs to be incurred on these
contracts will not be revised at that time based on the facts then known to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Business Outlook" and Note 13 to the Combined
Financial Statements of the Company.
In 1995, the Company entered into fixed price contracts with HVO to
construct an additional five Double Eagle product tankers having a somewhat
different design for the domestic Jones Act market at a current average price
of $43.4 million per ship. The Company is in the process of completing its
design work on these ships and expects to begin construction in the first half
of 1997. These ships are scheduled for delivery in 1998. The Company presently
estimates that it will break even on these ships on an aggregate basis, but
there can be no assurance that the costs incurred in constructing these ships
will not exceed the contract prices for them for the reasons described in the
immediately preceding paragraph.
These double-hull tankers are intended to serve the market currently served
by single-hull product carriers whose retirement is mandated by the OPA 90.
The OPA 90 requires, among other things, that existing single-hull ships must
be retired from domestic transportation of petroleum products between 1995 and
2015 unless retrofitted with double hulls.
On October 8, 1996, the President signed into law, H.R. 1350--the Maritime
Security Act of 1996 (the "Maritime Act"), amending Title XI of the Merchant
Marine Act, 1936. The Maritime Act, among other things, (i) authorizes a $1
billion, 50-ship ten-year subsidy program for ship owners who agree to make
their ships available to the Department of Defense during national
emergencies, (ii) gives the U.S. Maritime Administration greater flexibility
in assigning risk factors to guaranteed loans and (iii) modifies several
aspects of the assessment and payment of loan guarantee fees. The primary
purpose of this Act is to assist ship operators and U.S. seamen,
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but the legislation also has provisions which can indirectly assist U.S.
shipbuilders. The effect of these legislative changes is uncertain, but
generally more Title XI loan guarantee authority should be available (assuming
Title XI funds continue to be appropriated), on a facilitated basis, for
potential purchasers of U.S.-built ships. It is unclear whether any of the new
ships would be purchased from the Company, and further whether the Company
would be in a position to build any such ships at a significant profit.
Accordingly, at this time the Company is unable to determine that it reasonably
expects this development to have a material impact on its business.
Although the commercial market is growing, a current overcapacity of
suppliers has favored buyers and hindered the profitability of shipyards.
Additionally, overseas firms control almost all of the international commercial
shipbuilding market. Many of the Company's global competitors enjoy government
and/or corporate subsidies. The Company is exploring various possibilities to
penetrate this market; however, there can be no assurance that the Company's
efforts in this market will be successful. See "Risk Factors--Competition and
Regulation."
Foreign Military
Several U.S. allies overseas have or plan to embark on navy modernization
programs. Most of these programs anticipate the purchase of one or more frigate
size ships. The Company has developed a flexible, multi-mission design frigate
called the FF-21 and has submitted bids for the construction of these ships to
the United Arab Emirates and Kuwait, and is in the process of developing bids
for Norway and the Philippines. A number of international companies compete for
these sales, and this market would represent a new market for the Company. To
better position itself for the United Arab Emirates market, the Company
subscribed to purchase a 40% interest in the Abu Dhabi Ship Building Company
("ADSB") in 1995. ADSB is currently renovating an existing shipyard and
designing a new shipyard which it plans to construct to replace the existing
one. Each is to service shipbuilding and repair demands of the United Arab
Emirates military and regional maritime fleets. The Company believes that its
equity investment in ADSB may also serve as a means for the Company to satisfy
offset obligations to the United Arab Emirates, if any, arising from contracts
for sales of FF-21s or other ships. Typically, offset obligations, when
applicable, require an investment, capital expenditure, training commitment or
other benefit for the country making the purchase. The Company is obligated to
make an additional payment of $9.6 million with respect to its 40% equity
interest in ADSB on December 17, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Other Investing Cash Flows." If there is a change in control
of Newport News, the Abu Dhabi Government has the right to require the Company
to sell all of its shares to the Abu Dhabi Government or such other person(s)
as the Abu Dhabi Government may nominate at a price determined as set forth in
the Founder's Agreement relating to the Company's investment in ADSB (the
"Founder's Agreement"). The right of the Abu Dhabi Government to exercise its
purchase option in relation to a particular event is deemed to be waived if not
exercised within 90 days of the date the Abu Dhabi Government becomes aware of
such event. The Shipbuilding Distribution will cause a change in control of
Newport News under the Founder's Agreement. The Founder's Agreement reflects
the oral agreement of these matters between the parties thereto but has not yet
been executed.
REPAIR AND OVERHAULS
U.S. Navy Nuclear Refueling, Overhaul and Conversion
The Company provides ongoing maintenance for the U.S. Navy's vessels through
overhauling, refueling and
repair work. The Company possesses unique expertise in servicing nuclear naval
systems, and believes it currently is the only non-government-owned shipyard
capable of refueling nuclear-powered aircraft carriers. Puget Sound, a
government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, the Company has had a leading share of the market in aircraft carrier
refueling and overhauls.
Since aircraft carrier work is generally assigned by the U.S. Navy based on
the type of work, location and cost, the Company intends to maintain its
leadership in this area of business by, among other things, positioning the
Company as a low-cost refueling center, and providing unique competencies such
as nuclear fuel handling.
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The Company completed the overhaul work for the Enterprise in 1994, and is
currently overhauling the Eisenhower. The Company also completes "Post Shake-
Down Availabilities" on submarines. This process involves making repairs and
performing maintenance after sea trials of the completed submarine.
Naval Non-Nuclear Surface Ship Repair
The Company was able to diversify its overhaul work by winning its first
contract to overhaul a guided missile cruiser, the Thorn. In 1995, the Company
experienced a $31 million increase from 1994 in repair and overhaul revenues as
a result of the repair and overhaul of the Thorn, together with increases in
other miscellaneous U.S. Navy repairs. Subsequently, it overhauled its first
Aegis radar-equipped ship, the USS Monterey. The Company has a number of
competitors bidding for a substantial share of U.S. Navy non-nuclear repair and
overhaul contracts, such as Norfolk Shipbuilding and Dry Dock Corporation and
Metro Machine.
Commercial Vessels
From February, 1992 through December, 1995, the Company completed over 100
ship repair or overhauls of commercial vessels. The Company believes that the
world's commercial fleet, on average, is approximately 15 years old; repair of
this fleet is undertaken on an ongoing basis. Furthermore, the Company expects
seaborne trade to exhibit steady growth over the next 10 years in all major
segments--oil, dry cargo and general cargo. While some customers are primarily
concerned with price, other customers also give substantial weight to other
factors such as geographic location, dock availability, manpower supply and the
amount of time spent in dock. The Company believes it has successfully
differentiated itself from its competitors as a premium quality repair
shipyard, with specialized facilities and an extensive workforce. The Company
also believes that by engaging in the commercial ship repair market, it should
be able to transfer its experience to new construction of commercial vessels,
as well as to its core U.S. Navy business.
ENGINEERING AND DESIGN
The Company provides engineering planning and design services to both U.S.
Government and commercial customers. The Company maintains a stable level of
funded engineering support for the U.S. Navy. Support services provided by the
Company include new aircraft carrier research and development, aircraft carrier
non-nuclear overhaul planning, the reactor plant planning yard, aircraft
carrier engineering support, and training and logistics. The Company is a
leader in aircraft carrier design, accounting for the majority of ship
integration and related design development for the Naval Sea Systems Command
("NAVSEA"). The Navy's Puget Sound and Norfolk Naval Shipyards, however, are
typically assigned the design contracts for the non-nuclear portions of the
aircraft carriers. The Company has been able to apply its engineering
capabilities in a variety of projects for the U.S. Navy, including being the
lead design yard for the Los Angeles and Seawolf-class submarines. See "Risk
Factors--Competition and Regulation."
The Company also employs its engineering capabilities to successfully secure
and complete commercial and frigate construction contracts. In this respect,
the Company is developing generic class designs and plans to minimize new
product costs, dramatically reduce cycle times for design and production, and
develop commercial ship engineering expertise through selective international
recruiting and strategic alliances.
OTHER
As part of its expansion strategy, the Company also intends to actively
pursue opportunities in the management and operation of U.S. Department of
Energy nuclear sites. The Company believes that, among other things, its
ability to effectively conduct radiological control operations and manage large
integrated sites, its world-class health, safety and environmental practices,
and its experienced personnel in the areas of Spent Nuclear Energy ("SNE")
would provide for a strong foundation in pursuing such opportunities. The
Company is also forming alliances with other companies with complementary
experiences to bid on some of these site management contracts.
MATERIALS AND SUPPLIES
The principal materials used by the Company in its shipbuilding, conversion
and repair business are standard steel shapes, steel plate and paint. Other
materials used in large quantities include aluminum, copper-nickel and steel
pipe, electrical cable and fittings. The Company also purchases component parts
such as
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propulsion systems, boilers, generators and other equipment. All of these
materials and parts are currently available in adequate supply from domestic
and foreign sources. Generally, for all its long-term contracts, the Company
obtains price quotations for its materials requirements from multiple suppliers
to ensure competitive pricing. In addition, through the cost escalation
provisions contained in its U.S. Government contracts, the Company is generally
protected from increases in its materials costs to the extent that the
increases in the Company's costs are in line with industry indices.
In connection with its government contracts, the Company is required to
procure certain materials and component parts from supply sources approved by
the U.S. Government. The Company has not generally been dependent upon any one
supply source; however, due largely to the consolidation of the defense
industry, there are currently several components for which there is only one
supplier. The Company believes that these sole source suppliers as well as its
overall supplier base are adequate to meet its future needs.
HEALTH, SAFETY AND ENVIRONMENTAL
In 1995, the Company became the only shipyard to be awarded the Star Award
from the Occupational Safety and Health Administration's Voluntary Protection
Program. To earn this award, the Company and its unions joined efforts and
supported the participation in the Voluntary Protection Program in which all
parties help each other to make the Company's shipyard a safer place to work.
The Company is the only shipyard and the largest single site (of any type) in
the United States to earn the Star Award; the next largest facility to earn
this award was approximately one-half the size of the Company.
The Company has also been recognized by its Local Sanitation District
(Hampton Roads Sanitation District) as a Gold Award Winner for its management
of wastes going to the local water treatment system.
The Company is subject to stringent environmental laws and regulations in all
jurisdictions in which it operates. Management of the Company believes that the
Company is in general compliance with all applicable environmental regulations,
and historical environmental compliance costs incurred by the Company have not
been significant. Like all of its competitor shipbuilders, the Company will be
required to upgrade its air emission control facilities pursuant to recently
drafted regulations under the Clean Air Act Amendments of 1990. These
regulations call for a phased-in compliance program so that the Company will
incur its expenditures during the years from 1997 through 2000. The Company's
preliminary estimate of the cost of these upgrades is between $10 million and
$15 million. Although there can be no certainties, management does not believe
that future environmental compliance costs for the Company will have a material
adverse effect on the Company's financial condition or results of operations.
The Nuclear Regulatory Commission, the Department of Energy and the Department
of Defense regulate and control various matters relating to nuclear materials
handled by the Company. Subject to certain requirements and limitations, the
Company's government contracts generally provide for indemnity by the U.S.
Government for any loss arising out of or resulting from certain nuclear risks.
PROPERTIES
The Company's facilities are located in Newport News, Virginia on
approximately 550 acres owned by the Company at the mouth of the James River,
which is part of Chesapeake Bay, the premier deep water harbor on the east
coast of the United States. The Company's shipyard is one of the most
technically advanced in the world. Its facilities include seven graving docks,
a floating dry dock, two outfitting berths and five outfitting piers. Dry Dock
12 is the largest in the Western Hemisphere, and has recently been extended to
662 meters. Dry Dock 12 is serviced by a 900 metric ton capacity gantry crane
that spans the dry dock and work platen.
The Company's shipyard also has a wide variety of other facilities including
an 11-acre all weather on-site steel fabrication shop, accessible by both rail
and transporter, a module outfitting facility which enables the Company to
assemble a ship's basic structural modules indoors and on land, machine shops
totaling 300,000 square feet, and its own school which provides a four-year
accredited apprenticeship program that trains shipbuilders.
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The Company believes that substantially all of its plants and equipment are,
in general, well maintained and in good operating condition. They are
considered adequate for present needs and, as supplemented by planned
construction, are expected to remain adequate for the near future. The
Company's shipbuilding facilities were originally built on dredged fill
material beginning at the southern end of the site. Over the last 100 years,
the facilities expanded northward by sequential filling. A large portion of
the fill material consists of waste generated on-site by shipbuilding
activities.
INVESTIGATIONS AND LEGAL PROCEEDINGS
Retirement Plan
Tenneco and the Company have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the
Distributions, including the disposition of the Tenneco Inc. Retirement Plan
(the "TRP"), which covers salaried employees of the Company and other Tenneco
divisions. The DCAA has been advised that (i) the TRP will retain the
liability for all benefits accrued by the Company's employees through the
Distribution Date, (ii) the Company's employees will not accrue additional
benefits under the TRP after the Distribution Date and (iii) no liabilities or
assets of the TRP will be transferred from the TRP to any plan maintained by
the Company. A determination of the ratio of assets to liabilities of the TRP
attributable to the Company will be based on facts, assumptions and legal
issues which are complicated and uncertain; however, it is likely that the
Government will assert a claim against the Company with respect to the amount,
if any, by which the assets of the TRP attributable to the Company's employees
are alleged to exceed the liabilities. New Tenneco, with the full cooperation
of the Company, will defend against any claim by the Government, and in the
event there is a determination that an amount is due to the Government, New
Tenneco and the Company will share its obligation for such amount plus the
amount of related defense expenses, in the ratio of 80% and 20%, respectively.
Pending a final determination of any such claim, the Government may, absent an
agreement with the Company to defer the payment of the amounts claimed,
withhold all or a portion of all future progress payments due the Company
under its government contracts until it has recovered its alleged share of the
claimed amount plus interest. In the event of a claim by the Government, the
Company will diligently seek a deferral agreement with the Government;
however, there can be no assurance that the Company will be able to arrange
such an agreement and thus avoid an offset against future progress payments
pending a final determination. At this preliminary stage, it is impossible to
predict with certainty any eventual outcome regarding this matter; however,
the Company does not believe that this matter will have a material adverse
effect on its financial condition or results of operations.
CVN-76 Cost and Pricing Data Submission
In March 1995, the DCAA informed the Company that it would conduct a post-
award audit of the contract to build the aircraft carrier Reagan (CVN-76),
pursuant to federal regulations relating to defective cost and pricing data.
The audit concerns the Company's submission to the U.S. Navy of data relating
to labor and overhead costs in connection with the proposals and negotiations
relating to the CVN-76 contract. The audit is ongoing and the DCAA has not
issued its audit report. In informal discussions with DCAA auditors, however,
the DCAA auditors indicated that the $2.5 billion CVN-76 contract price should
be reduced by approximately $122 million based on an alleged submission of
defective cost and pricing data.
In addition, in May 1996, the Company received a subpoena from the Inspector
General of the Department of Defense requesting documents in connection with a
joint inquiry being conducted by the Department of Defense, the Department of
Justice, the U.S. Attorney's Office for the Eastern District of Virginia, and
the Naval Criminal Investigative Service. Like the DCAA audit, the
investigation appears to focus on whether data relating to labor and overhead
costs that the Company supplied in connection with the proposals and
negotiations relating to the CVN-76 contract were current, accurate, and
complete. In 1995, Inspector General subpoenas were also served on at least
two of the Company's consultants. The Company believes that these subpoenas
are part of this same inquiry.
The Government has not asserted any formal claims against the Company
relating to these CVN-76 contract matters. Based on the Company's present
understanding of the focus of the inquiries, it is the Company's opinion that
it has substantial defenses to claims that the Government might potentially
assert that the Company
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submitted cost or pricing data relating to its labor and overhead costs that
were not current, accurate, and complete in its proposals or during the
negotiations for the CVN-76 contract. It is the Company's intention to
vigorously assert these defenses in the event that the Government should
assert such claims. Based on the Company's present understanding of the claims
the Government might assert concerning the CVN-76 contract, the Company is of
the opinion that the ultimate resolution of such claims will not have a
material adverse effect on the financial condition or results of operations of
the Company.
However, the early stage of the investigation and audit relating to the CVN-
76 contract, and the uncertainties and vagaries attendant to such
investigations and audits and any litigation which may ultimately arise with
respect to these potential claims make it impossible to predict with certainty
any eventual outcome. Construction of the Reagan (CVN-76) is scheduled for
completion in 2002 and the contract represents a substantial portion of the
Company's current backlog of business. Depending on the outcome of the audit
and investigation, the Company could be subject, under various civil and
criminal statutes, to a reduction to the CVN-76 contract price and to fines
and other penalties, including the suspension or debarment from government
contracting work. Any of these in substantial amounts could have a material
adverse effect on the Company's financial condition and results of operations.
Pending the ultimate resolution of the investigation and audit relating to
the CVN-76 contract and to reduce the consequences of an adverse outcome, the
Company has taken steps to adjust its future progress billings on the CVN-76
contract. Although these steps will reduce the Company's cash flow pending a
final resolution, management believes these steps will not have a material
adverse effect on the Company's financial condition or results of operations.
See "Risk Factors--Profit Recognition; Government Contracting."
Other
As a general practice within the defense industry, the DCAA continually
reviews the cost accounting practices of government contractors. In the course
of those reviews, cost accounting issues are identified, discussed and
settled, or resolved through legal proceedings. In addition, various
government agencies may at any time be conducting various other investigations
or making specific inquiries. The Company is currently engaged in discussions
on several cost accounting and other matters in addition to those described
above. The Company is also a party to numerous other legal proceedings
relating to its business and operations. The Company believes that the outcome
of these cost accounting or other matters and proceedings will not have a
material adverse effect on the Company's financial condition or results of
operations.
Additionally, the Kirby Corporation ("Kirby"), an owner and operator of
several tankers with which the Company's Hvide Van Ommeren tankers (the "Van
Ommeren Tankers") will compete, has instituted three legal proceedings
effectively seeking to have construction of the Van Ommeren Tankers stopped
(the "Kirby Proceedings"). The Company is not a party to the Kirby
Proceedings. The first Kirby Proceeding, brought in the United States District
Court for the District of Columbia, was voluntarily dismissed. Kirby
Corporation v. The Honorable Frederico Pena (No. CA 96-0019). The other two
Kirby Proceedings have been consolidated and are currently pending in the
United States Court of Appeals for the Fifth Circuit. Kirby Corporation v. The
Honorable Frederico F. Pena, et al. (No. 96-20582); Kirby Corporation v. The
United States of America, et al. (No. 96-60154). Kirby alleges that the U.S.
Maritime Administration acted unlawfully in guaranteeing, pursuant to Title XI
of the Merchant Marine Act, 1936, as amended ("Title XI"), the $215 million of
ship financing bonds issued to finance the construction of the Van Ommeren
Tankers. Kirby asserts that the U.S. Maritime Administration erroneously
determined that the project is economically sound and that the entities that
will own the vessels are U.S. citizens qualified to operate the vessels in the
coastwide trade. Certain of the entities that will own the vessels have
intervened in the Kirby Proceedings to support the U.S. Department of Justice
in having the first Kirby Proceeding dismissed and in defending and seeking
the dismissal of the remaining Kirby
Proceedings. The Company believes that the Kirby Proceedings are without
merit. Based on discussions with counsel, the Company believes that, even in
the event that Kirby ultimately prevails in the Kirby Proceedings, the matter
is not likely to have a material adverse effect on the Company because the
Kirby Proceedings are expected to extend beyond the delivery dates for some or
all of the Van Ommeren Tankers and the project would be completed or near
completion.
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MANAGEMENT
BOARD OF DIRECTORS
Upon consummation of the Shipbuilding Distribution, the NNS Board will
consist of three members. Each director will serve for a term expiring at the
annual meeting of stockholders in the year indicated below and until his
successor shall have been elected and qualified. Pursuant to the Certificate
(as defined herein), the NNS Board is divided into three classes. Information
concerning the individuals who will serve as directors of NNS as of the
Distribution Date is set forth below.
Term Expiring at the 1997 Annual Meeting of Stockholders (Class I)
WILLIAM P. FRICKS has served as the President of Newport News since
September, 1994, and as its Chief Executive Officer since November, 1995. Mr.
Fricks first joined Newport News in the Industrial Engineering Department
after graduating from college in 1966. He was then appointed Controller and
Treasurer of Newport News in 1979, Vice President-Finance in 1980, Vice
President in charge of various business functions (Marketing, Human Resources
and Technical) from 1983 to 1988, Senior Vice President in 1988, Executive
Vice President in 1992, and President and Chief Operating Officer in 1994. Mr.
Fricks is 52 years old. Mr. Fricks is currently the Vice Chairman of the Board
of Directors of the American Shipbuilding Association and is on the Board of
Directors of the Virginia Manufacturers Association. On July 1, 1996, Mr.
Fricks was appointed to the Board of Visitors of the College of William and
Mary.
Term Expiring at the 1998 Annual Meeting of Stockholders (Class II)
JOSEPH J. SISCO has been a partner of Sisco Associates, a management
consulting firm, since January 1980. From 1976 until January 1980, he served
as President of The American University, and, until February 1981 he was
Chancellor of that University. Prior to 1976, Dr. Sisco was employed by the
United States Department of State for 25 years, last serving as Under
Secretary of State for Political Affairs. He is also a director of The
Interpublic Group of Companies, Inc., Raytheon Company, and Braun AG. Dr.
Sisco is 76 years old and served as a Director of Tenneco from 1977 until his
retirement from the Tenneco Board in May 1996. Prior to his retirement, he
also served as a member of the Executive Committee, the Nominating and
Management Development Committee, and as a member and the Chairman of the
Compensation and Benefits Committee of Tenneco.
Term Expiring at the 1999 Annual Meeting of Stockholders (Class III)
DANA G. MEAD has served as an executive officer of Tenneco since April 1992,
when he joined Tenneco as Chief Operating Officer. Prior to joining Tenneco,
Mr. Mead served as an Executive Vice President of International Paper Company,
a manufacturer of paper, pulp and wood products, from 1988, and served as
Senior Vice President of that company from 1981. He is also a director of Alco
Standard Corporation, Baker Hughes Incorporated, Case Corporation and Textron
Inc. Mr. Mead is 60 years old and has been a director of Tenneco since April
1992. He has served as a member and Chairman of the Executive Committee and an
ex officio member of the Audit, and Nominating and Management Development
Committees of Tenneco.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons
who will serve as executive officers of the Company after the Shipbuilding
Distribution. Each such person will be elected to the indicated office with
the Company in anticipation of the Shipbuilding Distribution and will serve at
the direction of the NNS Board and the Board of Directors of Newport News.
<TABLE>
<CAPTION>
NAME (AND AGE AT JULY EFFECTIVE
31, 1996) OFFICES HELD* DATE OF TERM
--------------------- ------------- --------------
<S> <C> <C>
William P. Fricks(52)... President and Chief Executive Officer November 1995
President and Chief Operating Officer January 1995
Executive Vice President January 1992
Senior Vice President September 1988
Thomas C.
Schievelbein(43)....... Executive Vice President--Operations October 1995
Vice President--Human Resources and Administration January 1995
Vice President--Strategy and Naval Program Development January 1994
Vice President--Naval Marketing March 1993
Director--Naval Marketing March 1992
Director--Marketing Field Office January 1990
David J. Anderson(47)... Senior Vice President and Chief Financial Officer July 1996
Thomas J. Bradburn(53).. Vice President--Finance and Corporate Controller September 1996
Vice President--Finance September 1986
Stephen B. Clarkson(59). Vice President, General Counsel and Secretary January 1991
Whylen G. Cooper(46).... Vice President--Sourcing November 1995
William G. Cridlin,
Jr.(50)................ Vice President--Marketing January 1995
Vice President--Commercial Shipbuilding April 1992
Vice President--Manufacturing September 1988
T. Michael Hatfield(49). Vice President--Communications October 1995
Director--Public Relations November 1993
Robert C. Hoard(57)..... Vice President--Trades Management and Manufacturing October 1995
Director--Trades and Manufacturing January 1994
Director--Trades August 1993
Director--Steel Fabrication April 1991
Director--Machine Shop and Foundry June 1989
Alfred Little, Jr.(49).. Vice President--Human Resources July 1996
James A. Palmer(59)..... Vice President--Commercial Nuclear October 1995
Vice President--Engineering January 1995
Vice President--Aircraft Carriers April 1992
Director--Engineering Administration January 1991
Marc Y. E. Pelaez(50)... Vice President--Engineering August 1996
John E. Shephard,
Jr.(40)................ Vice President--Strategy and Process Innovation October 1995
Director--Strategic Planning August 1993
Patrick A. Tucker(49)... Vice President--Government Relations December 1996
George A. Wade(52)...... Vice President--Submarine and Refueling Program October 1995
Vice President--Construction January 1995
Vice President--Submarines March 1993
Director--Submarine Construction April 1992
Director--Construction Engineering January 1990
D. R. Wyatt(38)......... Treasurer September 1996
Assistant Treasurer August 1995
Manager of Finance April 1989
</TABLE>
- --------
*Unless otherwise indicated, all offices held are with the Company.
Each of the executive officers of the Company has been continuously engaged
in the business of the Company, its affiliates or predecessor companies during
the past five years except that: (i) from 1991 to 1996, David J. Anderson was
employed by RJ Reynolds Corporation, last serving in the capacity of Executive
Vice President and Chief Financial Officer; from 1987 to 1991, he was employed
by The Quaker Oats Co., last serving
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in the capacity of Senior Vice President--Finance and Customer Service; (ii)
from 1991 to 1995, Wylen G. Cooper was employed by GE Power Systems, last
serving in the capacity of Manager of Sourcing; (iii) from 1989 to 1993, T.
Michael Hatfield was employed by Lockheed Co., last serving in the capacity of
Director of Communications; (iv) from 1992 to 1996, Alfred Little, Jr. was
employed by Sun Co., last serving in the capacity of Vice President--Human
Resources and from 1988 to 1992 in the capacity of Director--Human Resources;
(v) from 1993 to 1996, Marc E. Pelaez was employed by the United States Navy,
last serving in the capacity of Chief of Naval Research; and from 1990 to 1993
in the capacity of Assistant Executive Secretary to the Assistant Secretary of
the Navy; (vi) from 1977 to 1991, John E. Shephard, Jr. was employed as an
Infantry Officer by the United States Army, last serving as Assistant G3,
Operations of the 101st Airborne Division; and from 1991 to 1993 was employed
by the U.S. Army Reserves as an Individual Mobilization Augmentee assigned to
the U.S. Military Academy faculty and to the 157th IMA Detachment in
Washington, D.C.; and (vii) from January 1996 to December 1996, Patrick A.
Tucker was and will continue to be employed by Tenneco, last serving in the
capacity of Executive Director--Government Relations, and from 1994 to 1996,
he was employed by Tenneco, serving as Director--Federal Relations; in 1993,
he was Counsel to Senator John Warner; and from 1983 to 1993 he was the
Minority Staff Director and Counsel to the U.S. Senate Armed Services
Committee.
STOCK OWNERSHIP OF MANAGEMENT
Set forth below is the ownership as of September 30, 1996 (without giving
effect to the Transaction) of the number of shares and percentage of Tenneco
Common Stock beneficially owned by (i) each director of NNS, (ii) each of the
executive officers of the Company whose names are set forth on the Summary
Compensation Table and (iii) all executive officers of the Company and
directors of NNS as a group. Pursuant to the Shipbuilding Distribution, NNS
Common Stock will be distributed to holders of Tenneco Common Stock on the
basis of one share of NNS Common Stock for every five shares of Tenneco Common
Stock. See "Summary of Certain Information--The Shipbuilding Distribution."
<TABLE>
<CAPTION>
SHARES OF TENNECO % OF TENNECO
DIRECTORS COMMON STOCK OWNED(A)(B) COMMON STOCK OUTSTANDING
--------- ------------------------ ------------------------
<S> <C> <C>
William P. Fricks 29,350 (c)
Dana G. Mead 199,310 (c)
Joseph J. Sisco 4,185 (c)
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
Thomas C. Schievelbein 11,598 (c)
Stephen B. Clarkson 8,921 (c)
James A. Palmer, Jr. 13,806 (c)
George A. Wade 11,073 (c)
All directors and
executive officers as a
group: 330,564(d) (c)
</TABLE>
- --------
(a) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
set forth in note (b) below) as set forth in this column, except for (i)
shares that are held in trust for each director and executive officer
under the Tenneco restricted stock plans, and (ii) shares that executive
officers of the Company have the right to acquire pursuant to the Tenneco
stock option plans. The restricted stock and stock options were granted by
Tenneco. It is anticipated that the restricted stock held by employees
(including executive officers) will be vested prior to the Distributions.
As described in footnote (e) to the Option Grant Table, it is anticipated
that Tenneco stock options held by Company employees will be replaced by
options to purchase NNS Common Stock upon consummation of the Shipbuilding
Distribution.
(b) Includes shares that are: (i) held in trust under the Company's restricted
stock plans (at September 30, 1996, Messrs. Mead, Fricks, Schievelbein,
Clarkson, Palmer and Wade held 24,500; 6,000; 9,100; 6,800; 8,800; and
8,340 restricted shares, respectively, under the Tenneco restricted stock
plans); and (ii) subject to options, which were granted under Tenneco's
stock option plans, and are exercisable at September 30, 1996
73
<PAGE>
or within 60 days after said date, for Messrs. Mead, Fricks and Wade to
purchase 133,335; 213; and 100 shares, respectively.
(c) The percent of the class of Tenneco Common Stock owned by each director
and by all executive officers and directors as a group was less than one
percent.
(d) Includes 134,749 shares of Tenneco Common Stock that are subject to
options that are exercisable at September 30, 1996 or within 60 days after
said date by all directors and executive officers of the Company as a
group, and includes 94,505 shares that are held in trust under the Tenneco
restricted stock plans, for all directors and executive officers of the
Company as a group.
COMMITTEES OF THE BOARD OF DIRECTORS
The NNS Board will establish four standing committees as permitted by the
By-laws, which will have the following described responsibilities and
authority:
Audit Committee. The NNS Board will establish an Audit Committee which will
have the responsibility, among other things, to (i) recommend the selection of
the Company's independent public accountants, (ii) review and approve the
scope of the independent public accountants' audit activity and extent of non-
audit services, (iii) review with management and such independent public
accountants the adequacy of the Company's basic accounting system and the
effectiveness of the Company's internal audit plan and activities, (iv) review
with management and the independent public accountants the Company's certified
financial statements and exercise general oversight of the Company's financial
reporting process and (v) review with the Company litigation and other legal
matters that may affect the Company's financial condition and monitor
compliance with the Company's business ethics and other policies.
Compensation and Benefits Committee. The NNS Board will establish a
Compensation and Benefits Committee which will have the responsibility, among
other things, to (i) establish the salary rate of officers and employees of
the Company, (ii) examine periodically the compensation structure of the
Company and (iii) supervise the welfare and pension plans and compensation
plans of the Company.
Nominating and Management Development Committee. The NNS Board will
establish a Nominating and Management Development Committee which will have
the responsibility, among other things, to (i) review possible candidates for
election to the NNS Board and recommend a slate of nominees for election as
directors at NNS' annual stockholders' meeting, (ii) review the function and
composition of the other committees of the NNS Board and recommend membership
on such committees and (iii) review the qualifications and recommend
candidates for election as officers of the Company.
Executive Committee. The NNS Board will establish an Executive Committee.
Other than matters assigned to the Compensation and Benefits Committee, the
Executive Committee will have, during the interval between the meetings of the
NNS Board, the authority to exercise all the powers of the NNS Board that may
be delegated legally to it by the NNS Board in the management and direction of
the business and affairs of the Company.
74
<PAGE>
EXECUTIVE COMPENSATION
Prior to the Shipbuilding Distribution, the Shipbuilding Business was owned
and operated by Tenneco through its direct and indirect subsidiaries and as
such, the management of the Company has been employed by Tenneco and its
direct and indirect subsidiaries. The following table sets forth the
remuneration paid by Tenneco and/or its direct and indirect subsidiaries (i)
to the President and Chief Executive Officer of the Company and (ii) to each
of the four key executive officers expected to be the most highly compensated
executive officers of the Company, other than the Chief Executive Officer,
whose salary and bonus exceeded $100,000, for the years indicated in
connection with his position with the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
RESTRICTED
NAME AND OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION(A)(B) YEAR SALARY(C) BONUS COMPENSATION(D) AWARDS(E) OPTIONS COMPENSATION(F)
- ------------------------ ---- --------- -------- --------------- ---------- ------- --------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William P. Fricks(g) 1995 $323,759 $195,000 $29,591 -- 12,000 $34,680
President and Chief 1994 $276,960 $145,000 $14,156 $161,814 7,000 $35,226
Executive Officer 1993 $265,326 $125,000 $ 2,823 $139,875 0 $31,782
Thomas C. Schievelbein 1995 $188,202 $ 90,000 $ 7,188 $ 90,038 3,300 $ 9,810
Executive Vice President 1994 $125,000 $ 75,000 $ 7,829 $107,876 3,000 $ 8,288
1993 $115,000 $ 55,000 $ 2,109 $ 69,938 0 $ 6,946
David J. Anderson -- -- -- -- -- -- --
Senior Vice President
and Chief Financial
Officer(h)
Stephen B. Clarkson 1995 $200,400 $ 75,000 $ 6,664 $ 85,750 3,000 $13,287
Vice President, General 1994 $199,920 $ 84,000 $ 7,203 $ 80,907 3,000 $11,767
Counsel and Secretary 1993 $190,000 $ 60,000 $ 2,142 $ 69,938 -- $11,431
James A. Palmer, Jr. 1995 $206,760 $ 95,000 $ 6,735 $ 98,613 3,500 $31,735
Vice President 1994 $189,480 $ 95,000 $ 7,732 $107,876 3,150 $30,752
1993 $183,246 $ 80,000 $ 2,434 $102,575 -- $29,902
George A. Wade 1995 $195,960 $ 90,000 $ 6,664 $ 98,613 3,500 $24,299
Vice President 1994 $139,800 $ 95,000 $ 7,227 $107,876 3,150 $22,252
1993 $131,406 $ 80,000 $ 973 $ 95,l15 -- $ 9,946
</TABLE>
- --------
(a) William R. Phillips served as Chairman and Chief Executive Officer of
Newport News from September 13, 1994 until his retirement effective
October 31, 1995. Mr. Phillips will not serve as an executive officer of
the Company.
(b) Dana G. Mead received compensation from Tenneco for services rendered to
Newport News. Mr. Mead will continue to serve as a director of the Company
but will not serve as an executive officer of the Company.
(c) Includes base salary plus amounts paid in lieu of Company matching
contributions to the Tenneco Inc. Thrift Plan.
(d) Includes amounts attributable to (i) the value of personal benefits
provided by the Company to its executive officers, which have an aggregate
value in excess of $50,000, such as the personal use of Company owned
property, membership dues, assistance provided to such persons with regard
to financial, tax and estate planning, (ii) reimbursement for taxes and
(iii) amounts paid as dividend equivalents on performance share equivalent
units under the Company's Stock Ownership Plan ("Dividend Equivalents").
The amount of each such personal benefit that exceeds 25% of the estimated
value of the total personal benefits provided by the Company,
reimbursement for taxes and amounts paid as Dividend Equivalents to the
individuals
75
<PAGE>
named in the table was as follows: During 1995: $15,191 for reimbursement
for taxes, and $14,400 in Dividend Equivalents paid to Mr. Fricks; $7,188,
$6,664, $6,735, and $6,664, for reimbursement for taxes for Messrs.
Schievelbein, Clarkson, Palmer and Wade, respectively; During 1994: $6,130,
$2,938, $2,312, $2,841, and $2,337, for reimbursement for taxes for Messrs.
Fricks, Schievelbein, Clarkson, Palmer and Wade, respectively; During 1993:
$2,823, $2,109, $2,142, $2,434, and $973, for reimbursement for taxes for
Messrs. Fricks, Schievelbein, Clarkson, Palmer and Wade, respectively.
(e) Includes the dollar value of grants of restricted stock made pursuant to
Tenneco restricted stock plans based on the price of the Tenneco Common
Stock on the date of grant. At December 31, 1995, Messrs. Fricks,
Schievelbein, Clarkson, Palmer and Wade, held 20,000; 6,435; 6,330; 8,390;
and 7,450 restricted shares and/or performance share equivalent units,
respectively, under such plans. The value at December 31, 1995, (based on
per equivalent units held) was $992,500 for Mr. Fricks; $319,337 for Mr.
Schievelbein; $314,126 for Mr. Clarkson; $416,354 for Mr. Palmer; and
$369,706 for Mr. Wade. Dividends/Dividend Equivalents will be paid on the
restricted shares and performance share equivalent units held by each
individual.
(f) Includes amounts attributable during 1995 to benefit plans of the Company
as follows:
(1) The amounts contributed pursuant to the Tenneco Inc. Thrift Plan for
the accounts of Messrs. Fricks, Schievelbein, Clarkson, Palmer and Wade
were $9,240, $8,656, $7,500, $9,240, and $9,240 respectively.
(2) The amounts accrued under the Tenneco Inc. Deferred Compensation Plan,
together with adjustments based upon changes in the Consumer Price Index
for All Urban Households, as computed by the Bureau of Labor Statistics,
for Messrs., Fricks, Wade and Palmer were $19,662; $11,566; and $11,566,
respectively.
(3) Amounts imputed as income for federal income tax purposes under the
Company's group life insurance plan for Messrs. Fricks, Schievelbein,
Clarkson, Palmer and Wade were $5,779; $1,154; $5,787; $9,402; and
$3,493, respectively.
(g) William P. Fricks has served as President and Chief Executive Officer of
Newport News since November 1, 1995, prior to which he served as President
and Chief Operating Officer from January 24, 1995. Prior to that time, Mr.
Fricks also served as an Executive Vice President of Newport News from
January 1, 1992 and prior to which he served as a Senior Vice President
from September 1, 1988.
(h) David J. Anderson became the Company's Senior Vice President and Chief
Financial Officer on July 22, 1996 at an annual base salary of $260,000.
76
<PAGE>
OPTION GRANTS IN 1995
The following table sets forth the number of stock options to acquire
Tenneco Company Stock that were granted by Tenneco during 1995 to the persons
named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(D)
--------------------------------------------------------- -----------------
% OF TOTAL EXERCISE
OPTIONS OR BASE
OPTIONS GRANTED GRANTED TO PRICE
(NO. OF EMPLOYEES PER
NAME SHARES)(A)(B)(E) IN FISCAL YEAR SHARE(C) EXPIRATION DATE 5% 10%
---- ---------------- -------------- -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William P. Fricks 12,000 0.8% $42.88 January 10, 2005 $323,520 $819,960
Thomas C. Schievelbein 3,300 0.2% $42.88 January 10, 2005 $ 88,968 $225,489
Stephen B. Clarkson 3,000 0.2% $42.88 January 10, 2005 $ 80,880 $204,990
James A. Palmer, Jr. 3,500 0.2% $42.88 January 10, 2005 $ 94,360 $239,155
George A. Wade 3,500 0.2% $42.88 January 10, 2005 $ 94,360 $239,155
</TABLE>
- --------
(a) The options reported in this column and in the Summary Compensation Table
consist of non-qualified options. The options become exercisable at the
rate of one-third per year on January 10, of 1996, 1997 and 1998,
respectively. As described in footnote (e) below it is anticipated that
Tenneco options held by Company employees will be replaced by options to
acquire NNS Common Stock upon consummation of the Shipbuilding
Distribution.
(b) These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by Tenneco, an additional option to purchase
the number of shares so delivered. These "reload" options are granted at
100% of the fair market value (as defined in the plan) on the date they
are granted become exercisable six months from that date and expire
coincident with the options they replace. Grantees are limited to 10
reload options and the automatic grant of such reload options is limited
to twice during any one calendar year.
(c) All options were granted by Tenneco at 100% of the fair market value on
the date of grant.
(d) The dollar amounts under these columns are the result of calculations for
the period from the date of grant to the expiration of the option at the
5% and 10% annual appreciation rates set by the Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of Tenneco Common Stock. No gain to the optionee is possible without
an increase in price of the underlying stock. In order to realize the
potential values set forth in the 5% and 10% columns of this table, the
per share price of Tenneco Common Stock would be $69.84 and $111.21,
respectively, or 63% and 160%, respectively, above the exercise or base
price. As described in footnote (e) below, however, it is anticipated that
options to acquire Tenneco Common Stock held by Company employees will be
replaced by options to acquire NNS Common Stock upon Consummation of the
Shipbuilding Distribution.
(e) All Tenneco stock options held by employees of the Company will be
cancelled as of the Shipbuilding Distribution. The Company will adopt a
plan (the "Company Stock Ownership Plan") which is substantially similar
to the 1994 Tenneco Inc. Stock Ownership Plan. Prior to the Shipbuilding
Distribution, Tenneco will have approved the Company Stock Ownership Plan
as the sole stockholder of NNS. Options will be granted under the Company
Stock Ownership Plan as of the Shipbuilding Distribution to all employees
of the Company who formerly held Tenneco options. Each such employee will
receive options of the Company under which the excess of the fair market
value of the shares subject to the options immediately after the grant
over the aggregate option price is not more than the excess of the
aggregate fair market value of all Tenneco shares subject to his or her
Tenneco stock options immediately before such cancellation over the
aggregate option price under such Tenneco options. The terms of the
Company options will be the same as if the Tenneco options had remained
outstanding except to the extent that the Company Stock Ownership Plan
reflects legal changes adopted after the Tenneco options were granted.
These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by the Company, an additional option to
purchase the number of shares so delivered. These "reload" options are
granted at 100% of the fair market value (as defined in the Company Stock
Ownership Plan) on the date they are granted, become exercisable six
months from that date and expire at the same time as the options they
replace. Grantees are limited to 10 reload options and automatic grant of
such reload options is limited to twice during any one calendar year.
77
<PAGE>
OPTIONS EXERCISED IN 1995 AND 1995 YEAR-END VALUES
The following table sets forth the number of options to acquire Tenneco
Common Stock held, as of December 31, 1995, by the persons named in the
Summary Compensation Table. No options to acquire shares of Tenneco Common
Stock were exercised during 1995.
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
AT DECEMBER 31, 1995(A) AT DECEMBER 31, 1995(A)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William P. Fricks 2,546 16,667 $1,811 $81,000
Thomas C. Schievelbein 1,000 5,300 $ -- $22,275
Stephen B. Clarkson 1,000 5,000 $ -- $20,250
James A. Palmer, Jr. 1,050 5,600 $ -- $23,625
George A. Wade 1,150 5,600 $ 850 $23,625
</TABLE>
- --------
(a) As described in footnote (e) to the Option Grant Table, the options to
acquire Tenneco Common Stock will be replaced by options to acquire NNS
Common Stock.
The following table sets forth information concerning performance based
awards made to the persons named in the Summary Compensation Table during 1995
by Tenneco.
LONG-TERM INCENTIVE PLANS
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE
SHARES, OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR PERIOD UNTIL NON-STOCK PRICE BASED PLANS(A)
OTHER MATURATION OR ---------------------------------
NAME RIGHTS(B) PAYOUT(C) THRESHOLD(D) TARGET(D) MAXIMUM(D)
---- --------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
William P. Fricks 9,000 4 Years -- 4,500 9,000
</TABLE>
- --------
(a) Estimated Future Payouts are based on earnings per share ("EPS") from
continuing operations as shown in the record of progress included in the
published financial statements of the Company. Earnings per share for 1995
were $4.16 and represents achievement of 25% of the performance goal
applicable to this award. Mr. Fricks was provisionally credited with 100%
of his performance goal for 1995 and 2,250 shares were credited to his
Plan account, subject to adjustment, for payout at the end of the
performance cycle.
(b) Each performance share equivalent unit represents one share of Tenneco
Common Stock that may be earned under this award and the number of
performance share equivalent units listed in this column represents the
maximum number of performance share equivalent units that may be earned
under this award.
(c) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals. However, it is anticipated that
prior to the consummation of the Shipbuilding Distribution the conditions
to issuance of all shares of Tenneco Common Stock underlying the
performance share unit equivalent awards will be waived and the maximum
number of shares of Tenneco Common Stock subject thereto will be issued.
(d) Represents maximum performance share equivalent units earned where the
goals were consistently within the indicated performance range on an
individual year and accumulated four-year basis.
78
<PAGE>
The following table sets forth the aggregate estimated annual benefits
payable upon normal retirement pursuant to the Company's Retirement Plan (the
"Retirement Plan"), the TRP and certain non-qualified structures. The Company
has not yet adopted or made a final decision on the design of its Retirement
Plan; however, it is anticipated that its Retirement Plan will be virtually
identical to the TRP and will count service with Tenneco for benefit accrual
purposes but with an offset for benefits accrued under the TRP. It is
anticipated that the Company will adopt one or more non-qualified structures
to provide employees with the benefits that would be provided under the
Retirement Plan but for applicable legal limits. The numbers set forth in the
following table assume that plans are adopted accordingly.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
--------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 350,000 $ 82,500 $110,000 $137,500 $165,000 $192,500
400,000 94,300 125,700 157,100 188,600 220,000
450,000 106,100 141,400 176,800 212,100 247,500
500,000 117,900 157,100 196,400 235,700 275,000
550,000 129,600 172,900 216,100 259,300 302,500
600,000 141,400 188,600 235,700 282,900 330,000
650,000 153,200 204,300 255,400 306,400 357,000
700,000 165,000 220,000 275,000 330,000 365,000
750,000 176,800 235,700 294,600 353,600 412,500
800,000 188,600 251,400 314,300 377,100 440,000
850,000 200,400 267,100 333,900 400,700 467,500
900,000 212,100 282,900 353,600 424,300 495,000
950,000 223,900 298,600 373,200 447,900 522,500
1,000,000 235,700 314,300 392,900 471,400 550,000
</TABLE>
The benefits set forth above are computed as a straight life annuity and are
based on years of credited participation in the Retirement Plan and the
employee's average base salary during the final five years of credited
participation in the Plan; such benefits are not subject to any deduction for
Social Security or other offset amounts.
CHANGE-IN-CONTROL ARRANGEMENTS
The Company has established a severance plan for the benefit of certain
employees and officers whose position is terminated under certain
circumstances following a change in control of the Company. Under the
severance plan, key executives of the rank of Senior Vice President and above
would receive three times their annual compensation and the average of their
incentive and special awards over the last three years if they are terminated
within two years of a change in control. Certain other key employees would
receive two times their annual salaries and the average of their incentive and
special awards over the last three years if they are terminated within two
years of a change in control. The Transaction is not deemed to constitute a
"change in control" for purposes of the plan.
COMPENSATION OF DIRECTORS
Following the Shipbuilding Distribution, all directors who are not also
officers of the Company will each be paid a director's fee of $25,000 per
annum, one-half in cash and one-half in restricted shares of NNS Common Stock,
and each will be paid an attendance fee of $1,000 plus expenses for each
meeting of the NNS Board and each meeting of a committee of the NNS Board
attended. Each director who serves as chairman of a committee of the NNS Board
will be paid an additional fee of $3,000 per chairmanship. Payment of all or a
portion of such fees, as adjusted by hypothetical investment performance, may
be deferred at the election of the director.
79
<PAGE>
Directors who are not also officers of the Company will each receive an
initial grant of 2,000 stock options and 1,000 stock options annually.
Directors who are not also officers of the Company will each receive a one-
time grant of 1,000 shares of restricted stock.
BENEFIT PLANS FOLLOWING THE SHIPBUILDING DISTRIBUTION
The Company will adopt two plans qualified under Section 401(a) of the Code:
a defined benefit pension plan and an employee stock ownership plan which will
also provide for 401(k) salary reduction contributions. It is anticipated that
the Company will adopt non-qualified plans designed to provide covered
individuals with benefits which they would receive under the qualified defined
benefit pension absent legal limitations.
Prior to the consummation of the Shipbuilding Distribution, the Company will
adopt the Company Stock Ownership Plan, which will be approved by Tenneco as
the sole stockholder of the Company. The Company Stock Ownership Plan will be
substantially similar to the Tenneco Inc. 1994 Stock Ownership Plan and will
provide for the grant of stock options, restricted stock, performance shares
and other forms of awards. The Company will adopt, and Tenneco will approve as
its sole stockholder, an employee stock purchase plan which will be
substantially similar to the Tenneco employee stock purchase plan.
80
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution Date, the NNS Board and Tenneco, as sole
stockholder of NNS, will approve and adopt the Restated Certificate of
Incorporation ("Certificate"), and Tenneco, as sole stockholder of NNS, will
approve and adopt the Amended and Restated By-laws ("By-laws"). Under the
Certificate, NNS' authorized capital stock will consist of 70,000,000 shares of
NNS Common Stock, and 10,000,000 shares of Preferred Stock, par value $.01 per
share ("NNS Preferred Stock"). In addition, it is anticipated that the NNS
Board will adopt resolutions pursuant to the Certificate designating 700,000
shares of NNS Preferred Stock as Series A Participating Junior Preferred Stock,
par value $.01 per share, of NNS ("NNS Junior Preferred Stock") and reserving
shares of NNS Junior Preferred Stock for issuance in connection with the Rights
to be issued in connection with the Shipbuilding Distribution. No NNS Preferred
Stock will be issued in the Shipbuilding Distribution. Based on the number of
shares of Tenneco outstanding on September 30, 1996 up to approximately
34,151,115 shares of the NNS Common Stock will be issued in the Shipbuilding
Distribution.
NNS COMMON STOCK
The holders of NNS Common Stock will be entitled to one vote for each share
on all matters on which stockholders generally are entitled to vote, and except
as otherwise required by law or provided in any resolution adopted by the NNS
Board with respect to any series of Preferred Stock, the holders of the NNS
Common Stock will possess 100% of the voting power. The Certificate does not
provide for cumulative voting.
Subject to the preferential rights of any outstanding NNS Preferred Stock
which may be created by the NNS Board under the Certificate, the holders of NNS
Common Stock will be entitled to such dividends as may be declared from time to
time by the NNS Board and paid from funds legally available therefor, and the
holders of NNS Common Stock will be entitled to receive pro rata all assets of
NNS available for distribution upon liquidation. All shares of NNS Common Stock
received in the Shipbuilding Distribution will be fully paid and nonassessable,
and the holders thereof will not have any preemptive rights.
There is no established public trading market for NNS Common Stock, although
a "when issued" market is expected to develop prior to the Distribution Date.
The NYSE has approved the listing of NNS Common Stock upon notice of issuance.
The declaration of dividends on NNS Common Stock will be at the discretion of
the NNS Board. The NNS Board has not adopted a dividend policy as such. Subject
to legal and contractual restrictions, its decisions regarding dividends will
be based on all considerations that in its business judgment are relevant at
the time, including past and projected earnings, cash flows, economic, business
and securities market conditions and anticipated developments concerning the
Company's business and operations. For additional information concerning the
payment of dividends by NNS, see "Risk Factors -- Dividends" and "Financing."
NNS' cash flow and the consequent ability of NNS to pay any dividends on NNS
Common Stock will be substantially dependent upon the earnings and cash flow of
NNS' subsidiaries available after its debt service and the availability of such
earnings to NNS by way of dividends, distributions, loans and other advances.
The agreements relating to Senior Credit Facility and Notes contain provisions
that limit the amount of dividends that may be paid on NNS Common Stock. See
"Financing."
Under the DGCL, dividends may be paid by NNS out of "surplus" (as defined
under Section 154 of the DGCL) or, if there is no surplus, out of net profits
for the fiscal year in which the dividends are declared and/or the preceding
fiscal year. On a pro forma basis, at June 30, 1996, the Company had surplus of
81
<PAGE>
approximately $194 million (on a book value basis) for the payment of
dividends, and NNS will also be able to pay dividends out of any net profits
for the current and/or prior fiscal year, if any.
NNS PREFERRED STOCK
Under the Certificate, the NNS Board is authorized to issue NNS Preferred
Stock, in one or more series, and to fix the number of shares constituting
such series and the designation of such series, the voting powers (if any) of
the shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications, limitations
or restrictions thereof, of the shares of such series. See "Antitakeover
Effects of Certain Provisions."
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Certificate, the By-laws, the Rights and Delaware statutory law contain
certain provisions that could make the acquisition of the Company by means of
a tender offer, a proxy contest or otherwise more difficult. The description
set forth below is intended as a summary only and is qualified in its entirety
by reference to the Certificate, the By-laws and the Rights Agreement which
are attached as exhibits to NNS's Registration Statement on Form 10 under the
Exchange Act relating to NNS Common Stock.
CLASSIFIED BOARD OF DIRECTORS
The Certificate provides that the NNS Board will be divided into three
classes of directors, with the classes to be as nearly equal in number as
possible. The NNS Board consists of the persons referred to in "Management--
Board of Directors" above. The Certificate provides that, of the initial
directors of NNS, approximately one-third will continue to serve until the
first succeeding annual meeting of NNS' stockholders, approximately one-third
will continue to serve until the second succeeding annual meeting of NNS's
stockholders and approximately one-third will continue to serve until the
third succeeding annual meeting of NNS' stockholders. Of the initial
directors, Mr. Fricks will serve until the first succeeding annual meeting of
NNS' stockholders, Mr. Sisco will serve until the second succeeding annual
meeting of NNS' stockholders and Mr. Mead will serve until the third
succeeding annual meeting of NNS' stockholders. At each annual meeting of NNS'
stockholders, one class of directors will be elected for a term expiring at
the third succeeding annual meeting of stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the NNS Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the members of the NNS Board.
Such a delay may help ensure that NNS' directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer,
or an extraordinary corporate transaction, would have sufficient time to
review the proposal as well as any available alternatives to the proposal and
to act in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the NNS Board would be
beneficial to NNS and its stockholders and whether or not a majority of NNS'
stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of NNS, even though such an attempt
might be beneficial to NNS and its stockholders. The classification of the NNS
Board could thus increase the likelihood that incumbent directors will retain
their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of NNS' stock by purchasers whose
objective is to take control of the Company and remove a majority of the
members of the NNS Board, the classification of the NNS Board could tend to
reduce the likelihood of fluctuations in the market price of NNS Common Stock
that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain
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opportunities to sell their shares of NNS Common Stock at a higher market
price than might otherwise be the case.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of NNS Preferred Stock have the right,
voting separately as a class or series, to elect directors, such directors
will not be classified, unless expressly provided by the terms of such series
of NNS Preferred Stock.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate provides that the business and affairs of the Company will
be managed by or under the direction of a Board of Directors, consisting of
not less than three nor more than sixteen directors, the exact number thereof
to be determined from time to time by affirmative vote of a majority of the
entire Board of Directors. In addition, the Certificate provides that any
vacancy on the NNS Board that results from an increase in the number of
directors may be filled by a majority of the NNS Board then in office,
provided that a quorum is present, and any other vacancy occurring in the NNS
Board may be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director.
Under the DGCL, unless otherwise provided in the Certificate, directors
serving on a classified board may only be removed by the stockholders for
cause. The Certificate does not provide that directors may be removed without
cause.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of NNS Preferred Stock have the right,
voting separately as a class or series, to elect directors, the election,
removal, term of office, filling of vacancies and other features of such
directorships will be governed by the terms of the Certificate applicable
thereto.
SPECIAL MEETINGS
The By-laws provide that special meetings of stockholders will be called by
the NNS Board. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the purposes specified in the notice of
meeting given by NNS.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The By-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election of directors, or to bring other
business before an annual meeting of stockholders of NNS (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the NNS Board, or by a stockholder who
has given timely written notice to the Secretary of NNS prior to the meeting
at which directors are to be elected, will be eligible for election as
directors of NNS. The Stockholder Notice Procedure provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the NNS Board or by a stockholder who has
given timely written notice to the Secretary of NNS of such stockholder's
intention to bring such business before such meeting. Under the Stockholder
Notice Procedure, for stockholder notice in respect of the annual meeting of
NNS' stockholders to be timely, such notice must be delivered to the Secretary
of the NNS not less than 50 days nor more than 75 days prior to the annual
meeting; provided, however, that in the event that less than 65 days' notice
or prior public announcement of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 15th day following the day on which
such notice of the date of the annual meeting was mailed or such public
announcement was made, whichever first occurs.
Under the Stockholder Notice Procedure, a stockholder's notice to NNS
proposing to nominate a person for election as a director must contain certain
information, including, without limitation, the identity and
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address of the nominating stockholder, the class and number of shares of stock
of NNS which are beneficially owned by such stockholder, and as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence of the person,
(ii) the principal occupation or employment of the person, (iii) the class and
number of shares of capital stock of
NNS which are beneficially owned by the person and (iv) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Rule 14A under the Exchange Act.
Under the Stockholder Notice Procedure, a stockholder's notice relating to the
conduct of business other than the nomination of directors must contain
certain information about such business and about the proposing stockholder,
including, without limitation, a brief description of the business the
stockholder proposes to bring before the meeting, the reasons for conducting
such business at such meeting, the name and address of such stockholder, the
class and number of shares of stock of NNS beneficially owned by such
stockholder, and any material interest of such stockholder in the business so
proposed. If the Chairman of the meeting determines that a person was not
nominated, or other business was not brought before the meeting, in accordance
with the Stockholder Notice Procedure, such person will not be eligible for
election as a director, or such business will not be conducted at any such
meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the NNS Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the NNS Board, to inform stockholders about such qualifications.
By requiring advance notice of other proposed business, the Stockholder Notice
Procedure will also provide a more orderly procedure for conducting annual
meetings of stockholders and, to the extent deemed necessary or desirable by
the NNS Board, will provide the NNS Board with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the NNS Board's
position regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the By-laws do not give the NNS Board any power to approve or
disapprove stockholder nominations for the election of directors or proper
stockholder proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to
whether consideration of such nominees or proposals might be harmful or
beneficial to NNS and its stockholders.
RECORD DATE PROCEDURE FOR STOCKHOLDER ACTION BY WRITTEN CONSENT
The By-laws establish a procedure for the fixing of a record date in respect
of action proposed to be taken by NNS' stockholders by written consent in lieu
of a meeting. The By-laws provide that any person seeking to have the
stockholders authorize or take corporate action by written consent without a
meeting shall by written notice addressed to the Secretary and delivered to
NNS, request that a record date be fixed for such purpose. The By-laws state
that the NNS Board may fix a record date for such purpose which shall be no
more than 10 days after the date upon which the resolution fixing the record
date is adopted by the NNS Board and shall not precede the date such
resolution is adopted. If the NNS Board fails within 10 days after NNS
receives such notice to fix a record date for such purpose, the By-laws
provide that the record date shall be the day on which the first written
consent is delivered to NNS unless prior action by the NNS Board is required
under the DGCL, in which event the record date shall be at the close of
business on the day on which the NNS Board adopts the resolution taking such
prior action. The By-laws also provide that the Secretary of NNS or, under
certain circumstances, two inspectors designated by the Secretary shall
promptly conduct such ministerial review of the sufficiency of any written
consents of stockholders duly delivered to NNS and of the validity of the
action to be taken by stockholder consent as he deems necessary or
appropriate, including, without limitation, whether the holders of a number of
shares having the requisite voting power to authorize or take the action
specified in the written consents have given consent.
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STOCKHOLDER MEETINGS
The By-laws provide that the NNS Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
NNS PREFERRED STOCK
The Certificate authorizes the NNS Board to provide for series of NNS
Preferred Stock and, with respect to each such series, to fix the number of
shares constituting such series and the designation of such series, the voting
powers (if any) of the shares of such series, and the preferences and
relative, participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series.
Tenneco and the Company believe that the ability of the NNS Board to issue
one or more series of NNS Preferred Stock will provide the Company with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of NNS
Preferred Stock, as well as shares of NNS Common Stock, will be available for
issuance without further action by NNS' stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
The NYSE currently requires stockholder approval as a prerequisite to listing
shares in several instances, including where the present or potential issuance
of shares could result in a 20% increase in the number of shares of common
stock outstanding or in the amount of voting securities outstanding. If the
approval of NNS' stockholders is not required for the issuance of shares of
NNS Preferred Stock or NNS Common Stock, the NNS Board may determine not to
seek stockholder approval.
Although the NNS Board has no intention at the present time of doing so, it
could issue a series of NNS Preferred Stock that could, depending on the terms
of such series, impede the completion of a merger, tender offer or other
takeover attempt. The NNS Board will make any determination to issue such
shares based on its judgment as to the best interests of NNS and its
stockholders. The NNS Board, in so acting, could issue NNS Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the NNS Board, including a
tender offer or other transaction that some, or a majority, of NNS'
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
RIGHTS
The NNS Board will adopt a stockholder rights plan and cause to be issued,
with each share of NNS Common Stock to be distributed in the Shipbuilding
Distribution, one preferred share purchase right (a "Right"). Each Right will
entitle the registered holder to purchase from NNS a unit consisting of one
one-hundredth of a share (a "Unit") of NNS Junior Preferred Stock, at a price
of $50 per Unit (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement"), between NNS and First Chicago Trust Company of New York, as
Rights Agent (the "Rights Agent").
Initially, the Rights will be represented by NNS Common Stock certificates,
and no separate certificates representing the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the NNS Common Stock and a
distribution date (a "Rights Distribution Date") will occur upon the earlier
of (i) 10 business days following the first date of public announcement (the
"Stock Acquisition Date") that a person or group of affiliated or associated
persons (an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of NNS
Common Stock, (ii) 10 business days (or such later date as may be determined
by the NNS Board) following the commencement of a tender offer or
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exchange offer that would result in a person or group beneficially owning 20%
or more of such outstanding shares of NNS Common Stock or (iii) 10 business
days after the NNS Board determines that any person, alone or together with
its affiliates and associates, has become the Beneficial Owner of an amount of
NNS Common Stock which the NNS Board determines to be substantial (which
amount shall in no event be less than 10% of the shares of NNS Common Stock
outstanding) and at least a majority of the NNS Board who are not officers of
the Company, after reasonable inquiry and investigation, including
consultation with such persons as such directors shall deem appropriate, shall
determine that (a) such beneficial ownership by such person is intended to
cause NNS to repurchase the NNS Common Stock beneficially owned by such person
or to cause pressure on NNS to take action or enter into a transaction or
series of transactions intended to provide such person with short-term
financial gain under circumstances where the NNS Board determines that the
best long-term interests of NNS and its stockholders would not be served by
taking such action or entering into such transactions or series of
transactions at that time or (b) such beneficial ownership is causing or is
reasonably likely to cause a material adverse impact (including, but not
limited to, impairment of relationships with customers or impairment of the
Company's ability to maintain its competitive position) on the business or
prospects of the Company (any such person being referred to herein and in the
Rights Agreement as an "Adverse Person").
Until the Rights Distribution Date, (i) the Rights will be evidenced by NNS
Common Stock certificates and will be transferred with and only with such NNS
Common Stock certificates, (ii) NNS Common Stock certificates will contain a
notation incorporating the Rights Agreement by reference and (iii) the
surrender for transfer of any certificates for NNS Common Stock outstanding
will also constitute the transfer of the Rights associated with NNS Common
Stock represented by such certificate.
The Rights will not be exercisable until the Rights Distribution Date and
will expire at the close of business on June 10, 1998 (the "Final Expiration
Date"), unless (i) earlier redeemed by NNS as described below or (ii) the
Rights Agreement is extended (with stockholder approval) as discussed below.
The Final Expiration Date is the same date on which the stockholder rights
issued under the current Tenneco's stockholder's rights plan would have
terminated, but for the Merger.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to holders of record of the NNS Common Stock as of
the close of business on the Rights Distribution Date and, thereafter, the
separate Rights Certificates alone will represent the Rights. Except as
otherwise determined by the NNS Board, only shares of NNS Common Stock issued
prior to the Rights Distribution Date will be issued with Rights.
In the event that (i) any person becomes an Acquiring Person (except
pursuant to an offer for all outstanding shares of NNS Common Stock that the
independent directors determine to be fair to and otherwise in the best
interests of NNS and its stockholders) or (ii) the NNS Board determines that a
person is an Adverse Person, each holder of a Right will thereafter have the
right to receive, upon exercise, NNS Common Stock (or, in certain
circumstances, cash, property or other securities of NNS) having a value equal
to two times the exercise price of the Right. Upon the occurrence of either of
the events set forth in the preceding sentence, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by the Acquiring Person or Adverse Person (or certain related parties)
will be null and void. Rights will not be exercisable following the occurrence
of either of such events until such time as the Rights are no longer
redeemable by NNS as set forth below.
For example, at an exercise price of $50 per Right, each Right not owned by
an Acquiring Person or by an Adverse Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $100 worth of NNS Common Stock (or other consideration, as
noted above) for $50. Assuming that NNS Common Stock had a per share value of
$20 at such time, the holder of each valid Right would be entitled to purchase
5.0 shares of NNS Common Stock for $50.
In the event that, at any time following the Stock Acquisition Date, (i) NNS
is acquired in a merger or other business combination transaction (other than
a merger meeting prescribed terms and conditions that
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follows an offer described in the second preceding paragraph) or (ii) more
than 50% of NNS' assets or earning power is sold or transferred, each holder
of a Right (except Rights that previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
The Purchase Price payable, and the number of Units of NNS Junior Preferred
Stock or other securities or property issuable, upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i) in the
event of a stock dividend on, or a subdivision, combination or
reclassification of, NNS Junior Preferred Stock, (ii) if holders of NNS Junior
Preferred Stock are granted certain rights or warrants to subscribe for NNS
Junior Preferred Stock or convertible securities at less than the current
market price of NNS Junior Preferred Stock or (iii) upon the distribution to
holders of the NNS Junior Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment
in cash will be made based on the market price of NNS Junior Preferred Stock
on the last trading date prior to the date of exercise.
In general, at any time until 10 business days following the Stock
Acquisition Date, NNS may redeem the Rights in whole, but not in part, at a
price of $.02 per Right. NNS may not redeem the Rights if the NNS Board has
previously declared a person to be an Adverse Person. Immediately upon the
action of the NNS Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.02 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of NNS, including, without limitation, the right to vote or
to receive dividends. While the distribution of the Rights will not be taxable
to stockholders or to NNS, stockholders may, depending upon the circumstances,
recognize taxable income in the event that the Rights became exercisable for
NNS Common Stock (or other consideration) of NNS or for common stock of the
acquiring company as set forth above.
Other than those provisions relating to the duration of the Rights Agreement
and the principal economic terms of the Rights, any of the provisions of the
Rights Agreement may be amended by the NNS Board prior to the Rights
Distribution Date. After the Rights Distribution Date, the provisions of the
Rights Agreement may be amended by the NNS Board in order to cure any
ambiguity, to make changes that do not adversely affect the interests of
holders of Rights, or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable. Notwithstanding the foregoing, unless approved by a vote of the
stockholders of NNS, the Rights Agreement may not be supplemented or amended
to alter the redemption price, the Final Expiration Date, the Purchase Price
or the number of Units for which a Right is exercisable.
The Rights Agreement is designed to protect the stockholders of NNS in the
event of unsolicited offers to acquire NNS and other coercive takeover tactics
which, in the opinion of the NNS Board, could impair its ability to represent
stockholder interests. The provisions of the Rights Agreement may render an
unsolicited takeover of NNS more difficult or less likely to occur, even
though such takeover may offer NNS' stockholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by a
majority of NNS' stockholders.
THE FOREGOING SUMMARY OF THE TERMS OF THE RIGHTS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE RIGHTS AGREEMENT, A COPY OF WHICH HAS BEEN FILED
AS AN EXHIBIT TO NNS' REGISTRATION STATEMENT ON FORM 10 UNDER THE EXCHANGE ACT
RELATING TO NNS COMMON STOCK. THE RIGHTS ARE BEING REGISTERED UNDER THE
EXCHANGE ACT, TOGETHER WITH NNS COMMON STOCK, PURSUANT TO SUCH REGISTRATION
STATEMENT. IN THE EVENT
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THAT THE RIGHTS BECOME EXERCISABLE, NNS WILL REGISTER THE SHARES OF NNS JUNIOR
PREFERRED STOCK FOR WHICH THE RIGHTS MAY BE EXERCISED, IN ACCORDANCE WITH
APPLICABLE LAW.
ANTITAKEOVER LEGISLATION
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any "business
combination" with any "interested stockholder" for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding certain shares) or (iii) on or subsequent to such time, the
business combination is approved by the board of directors of the corporation
and by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. Section 203 of the
DGCL generally defines an "interested stockholder" to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. Section 203 of the DGCL
generally defines a "business combination" to include (1) mergers and sales or
other dispositions of 10% or more of the assets of the corporation with or to
an interested stockholder, (2) certain transactions resulting in the issuance
or transfer to the interested stockholder of any stock of the corporation or
its subsidiaries, (3) certain transactions which would result in increasing
the proportionate share of the stock of the corporation or its subsidiaries
owned by the interested stockholder and (4) receipt by the interested
stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges, or other financial benefits.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted by-laws may exclude a
corporation from the restrictions imposed thereunder. Neither the Certificate
nor the By-laws exclude NNS from the restrictions imposed under Section 203 of
the DGCL. It is anticipated that the provisions of Section 203 of the DGCL may
encourage companies interested in acquiring NNS to negotiate in advance with
the NNS Board since the stockholder approval requirement would be avoided if
the NNS Board approves, prior to the time the stockholder becomes an
interested stockholder, either the business combination or the transaction
which results in the stockholder becoming an interested stockholder.
COMPARISON WITH RIGHTS OF HOLDERS OF TENNECO COMMON STOCK
Except as otherwise described herein, the provisions of the Certificate and
the By-laws (including the provisions thereof relating to the classification
of directors, the calling of special meetings of stockholders, the advance
notice requirements for stockholder nominations and proposals and the setting
of a record date for actions by written consent of stockholders in lieu of a
meeting) are substantially identical to the provisions of the Tenneco
Certificate of Incorporation (the "Tenneco Certificate") and the Tenneco By-
laws (the "Tenneco By-laws").
Capitalization
Tenneco's authorized capital stock consists of 350,000,000 shares of Tenneco
Common Stock, 15,000,000 shares of Preferred Stock, without par value
("Tenneco Preferred Stock"), and 50,000,000 shares of Junior Preferred Stock,
without par value ("Tenneco Junior Preferred Stock"). NNS's authorized capital
stock consists of 70,000,000 shares of NNS Common Stock and 10,000,000 shares
of NNS Preferred Stock.
The Tenneco Board is generally authorized to issue Tenneco Preferred Stock
and Tenneco Junior Preferred Stock in series and to fix the terms of such
series, but such authority is subject to numerous requirements and/or
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limitations relating to, among other things, the voting rights of such series
and the ability of Tenneco to pay dividends and acquire its capital stock. The
NNS Board is authorized to issue NNS Preferred Stock in series and to fix the
terms of such series, without limitation (other than as provided in the DGCL).
All series of Tenneco Preferred Stock (but not Tenneco Junior Preferred
Stock) must rank on a parity with respect to the payment of dividends. Any of
the terms of a series of NNS Preferred Stock may differ from those of any
other series.
Business Combinations
The Tenneco Certificate prohibits certain "Business Combinations" with
"Interested Stockholders" without supermajority stockholder approval unless
(i) approved by a majority of the "Continuing Directors," or (ii) certain
detailed requirements as to, among other things, the value and type of
consideration to be paid to the Tenneco stockholders, the maintenance of
Tenneco's dividend policy, the public disclosure of the Business Combination
and the absence of any major change in Tenneco's business or equity capital
structure without the approval of a majority of Continuing Directors, have
been satisfied. The Certificate contains no such restrictions on Business
Combinations.
Charter Amendments
Under the Tenneco Certificate, a majority in voting power of the outstanding
shares of voting stock is generally required to effect a charter amendment,
other than an amendment of the provisions relating to Business Combinations.
Under the Certificate, a majority in voting power of the outstanding shares of
voting stock is generally required to effect a charter amendment.
Class Voting
Under the Tenneco Certificate, approval of 66 2/3% of the outstanding shares
of Tenneco Preferred Stock or Tenneco Junior Preferred Stock, or of a series
thereof, is required for any charter amendment which adversely
affects the rights, powers or preferences of the Tenneco Preferred Stock or
Tenneco Junior Preferred Stock, or of a series thereof, as the case may be.
Under the Certificate, there is no such two-thirds approval requirement;
however, the DGCL generally requires any charter amendment that so adversely
affects a particular class or series of stock be approved by a majority of the
outstanding shares of such class or series, as the case may be.
The Tenneco Certificate requires separate class votes of Tenneco Preferred
Stock and of Tenneco Junior Preferred Stock (i) to create a class of stock
ranking senior thereto, (ii) to sell, lease, transfer or convey all or
substantially all of Tenneco's assets or (iii) to merge with another
corporation (unless Tenneco survives). No such class votes are required under
the Certificate.
Stockholder Meetings
The By-laws provide that the NNS Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
Such issues are not expressly addressed by the Tenneco By-laws.
Number of Directors
Under the Tenneco By-laws, the number of directors constituting the whole
Tenneco Board is required to be not less than 8, nor more than 16, and
determined from time to time, within such limits, by the Tenneco Board. The
Certificate provides for the number of directors to be not less than 3, nor
more than 16, and
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determined from time to time, within such limits, by the NNS Board. The NNS
Board currently consists of 3 directors.
Stockholder Rights Plans
Tenneco adopted a stockholder rights plan on May 24, 1988, which was amended
and restated on October 1, 1989 (the "Tenneco Rights Plan"). Pursuant to and
in accordance with such plan, one preferred share purchase right (a "Tenneco
Right") is attached to each share of Tenneco Common Stock. Each Tenneco Right
entitles the registered holder thereof to, among other things, purchase, under
certain circumstances, from Tenneco a unit consisting of one one-hundredth of
a share of Tenneco Series A Junior Preferred Stock. Tenneco has amended the
Tenneco Rights Plan to exempt El Paso and El Paso Merger Company from becoming
an "acquiring person" thereunder, or otherwise triggering the Tenneco Rights,
solely by reason of the execution of the Merger Agreement and consummation of
the transactions contemplated thereby, and to cause the Tenneco Rights to
expire at the Merger Effective Time.
The Company will adopt the Rights Agreement. The Rights Agreement is, in all
material respects, the same as the Tenneco Rights Plan except that the
Redemption Price (as defined therein), the Final Expiration Date, the Purchase
Price and the number of one one-hundredths of a share of NNS Junior Preferred
Stock for which a Right is exercisable (which under the Tenneco Rights Plan
may not be supplemented or amended) may be supplemented or amended with
stockholder approval.
Indemnification
The Tenneco By-laws provide for mandatory indemnification for directors and
officers of Tenneco and for directors and officers of Tenneco serving as
directors and officers of other entities at the request of Tenneco to the
fullest extent permitted by the DGCL. The By-laws provide similar mandatory
indemnification except (i) such indemnification includes directors and
officers of NNS serving as directors, officers, employees or agents of another
entity at the request of NNS and (ii) suits (or parts thereof) instituted by
any such indemnitee without NNS Board approval are excluded from such
mandatory indemnification.
The By-laws also provide for mandatory advancement of expenses in defending
any proceeding for which mandatory indemnification may be available. The
Tenneco By-laws do not provide for such mandatory advancement of expenses.
Under the By-laws, persons claiming indemnification or advancement may file
suit in respect thereof if NNS does not pay such a claim within 30 days after
receipt of a written claim therefor and, if successful in whole or in part,
are entitled to be paid the expense of prosecuting such claim. The By-laws
provide that in any such action, NNS has the burden of proving that the
indemnitee is not entitled to the requested indemnification or advancement.
Such issues are not expressly addressed by the Tenneco By-laws.
Director Exculpation
Pursuant to Section 102(b)(7) of the DGCL, the Tenneco Certificate provides
that a director thereof shall not be liable to Tenneco or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Tenneco or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
The Certificate provides that a director of NNS shall not be liable to NNS
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may thereafter
be amended. The Certificate, therefore, affords directors of NNS the benefit
of any subsequent broadening of director exculpation permitted by the DGCL
without the need for a further charter amendment.
90
<PAGE>
Ratification
The Tenneco Certificate provides that a director of Tenneco shall not be
disqualified by his or her office from dealing or contracting with Tenneco
either as a vendor, purchaser or otherwise, nor shall any transaction or
contract of Tenneco be void or voidable by reason of the fact that any
director or any firm of which any director is a member, or any corporation of
which any director is a shareholder, officer or director, is in any way
interested in such transaction or contract, provided that such transaction or
contract is or shall be authorized, ratified or approved either (i) by a vote
of a majority of a quorum of the Tenneco Board or of the Executive Committee
of Tenneco, without counting in such majority or quorum any director so
interested or a member of a firm so interested, or a stockholder, officer or
director of a corporation so interested, or (ii) by the written consent, or by
the vote at any stockholders' meeting, of the holders of record of a majority
of all the outstanding shares of stock of Tenneco entitled to vote, nor shall
any director be liable to account to Tenneco for any profits realized by or
from or through any such transaction or contract of Tenneco authorized,
ratified or approved as aforesaid by reason of the fact that he, or any firm
of which he is a member or any corporation of which he or she is a
stockholder, officer or director was interested in such transaction or
contract.
The Tenneco By-laws provide that any transaction questioned in any
stockholders derivative suit on the ground of lack of authority, defective or
irregular execution, adverse interest of director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified before or after judgment, by the
Tenneco Board or by Tenneco's stockholders. The Tenneco By-laws also provide
that, if so ratified, the transaction shall have the same force and effect as
if it had been originally duly authorized, and said ratification shall be
binding upon Tenneco and shall continue as a bar to any claim or execution of
any judgment in respect of such questioned transaction.
Such issues are not expressly addressed by either the Certificate or the By-
laws. However, Section 144 of the DGCL provides, in relevant part, that no
contract or transaction between a corporation and one or more of its directors
or officers, or between a corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer
is present at or participates in the meeting of the board or committee which
authorized the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if: (i) the material facts as to his or
her relationship or interest and as to the contract or transaction are
disclosed or are known to the board of directors or the committee, and the
board or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his or her relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the board of directors, a committee or the stockholders.
Contracts
The By-laws provide that, except as otherwise required by law, the
Certificate or the By-laws, any contracts or other instruments may be executed
and delivered in the name and on the behalf of the Company by such officer or
officers of the Company as the NNS Board may from time to time direct. The By-
laws state that such authority may be general or confined to specific
instances as the NNS Board may determine. The By-laws also provide that (i)
the Chairman of the NNS Board, the President or any Vice President may execute
bonds, contracts, deeds, leases and other instruments to be made or executed
for or on behalf of the Company, and (ii) subject to any restrictions imposed
by the Board, the Chairman of the NNS Board, the President or any Vice
President of NNS may delegate contractual powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise
of such delegated power. Such issues are not expressly addressed by the
Tenneco By-laws.
91
<PAGE>
Proxies
The By-laws provide that unless otherwise provided by resolution adopted by
the NNS Board, the Chairman of the NNS Board, the President or any Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of NNS, in the name and on behalf of NNS, to cast the votes which NNS
may be entitled to cast as the holders of stock or other securities in any
other corporation or other entity, any of whose stock or other securities may
be held by NNS, at meetings of the holders of the stock or other securities of
such other corporation or other entity, or to consent in writing, in the name
of NNS as such holder, to any action by such other corporation or other
entity, and may instruct the person or persons so appointed as to the manner
of casting such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of NNS and under its corporate seal or
otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises. Such issues are not expressly addressed
by the Tenneco By-laws.
92
<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
ELIMINATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director of NNS will not be liable to NNS or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may thereafter
be amended. Based on the DGCL as presently in effect, a director of NNS will
not be personally liable to NNS or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to NNS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, which
concerns unlawful payments of dividends, stock purchases or redemptions, or
(iv) for any transactions from which the director derived an improper personal
benefit.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate
such duty. Accordingly, the Certificate will have no effect on the
availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions of the
Certificate described above apply to an officer of NNS only if he or she is a
director of NNS and is acting in his or her capacity as director, and do not
apply to officers of NNS who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-laws provide that NNS will indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
thereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, she, or a person for whom he or
she is the legal representative, is or was a director or officer of NNS or,
while a director or officer of NNS, is or was serving at the request of NNS as
a director, officer, employee or agent of another company or of a partnership,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses (including attorneys' fees) reasonably incurred by such Indemnitee.
The By-laws also provide that, notwithstanding the foregoing, but except as
described in the second following paragraph, NNS will be required to indemnify
an Indemnitee in connection with a proceeding (or part thereof) commenced by
such Indemnitee only if the commencement of such proceeding (or past thereof)
by the Indemnitee was authorized by the NNS Board.
The By-laws further provide that NNS will pay the expenses (including
attorneys' fees) incurred by an Indemnitee in defending any proceeding in
advance of its final disposition, provided however, that, to the extent
required by law, such payment of expenses in advance of the final disposition
of the proceeding will be made only upon receipt of an undertaking by the
Indemnitee to repay all amounts advanced if it should be ultimately determined
that the Indemnitee is not entitled to be indemnified under the relevant
section of the By-laws or otherwise.
Pursuant to the By-laws, if a claim for indemnification or payment of
expenses thereunder is not paid in full within 30 days after a written claim
therefor by the Indemnitee has been received by NNS, the Indemnitee may file
suit to recover the unpaid amount of such claim and, if successful in whole or
in part, will be entitled to be paid the expense of prosecuting such claim.
The By-laws provide that, in any such action, NNS will have the burden of
proving that the Indemnitee is not entitled to the requested indemnification
or payment of expenses under applicable law.
The By-laws also provide (i) that the rights conferred on any Indemnitee
thereby are not exclusive of any other rights which such Indemnitee may have
or thereafter acquire under any statute, provision of the Certificate, the By-
laws, agreement, vote of stockholders or disinterested directors or otherwise,
(ii) that NNS' obligation,
93
<PAGE>
if any, to indemnify or to advance expenses to any Indemnitee who was or is
serving at its request as a director, officer, employee or agent of another
company, partnership, joint venture, trust, enterprise or nonprofit entity
will be reduced by any amount such Indemnitee may collect as indemnification
or advancement of expenses from such other company, partnership, joint
venture, trust, enterprise or nonprofit enterprise, and (iii) that any repeal
or modification of the relevant provisions of the By-laws will not adversely
affect any right or protection thereunder of any Indemnitee in respect of any
act or omission occurring prior to the time of such repeal or modification.
The By-laws also expressly state that the provisions thereof will not limit
the right of NNS, to the extent and in the manner permitted by law, to
indemnify and to advance expenses to persons other than Indemnitees when and
as authorized by appropriate corporate action.
94
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF NEWPORT NEWS
Report of Independent Public Accountants................................ F-2
Combined Statements of Earnings for each of the three years in the
period ended December 31, 1995 and the six months ended June 30, 1996
and 1995............................................................... F-3
Combined Balance Sheets--December 31, 1995 and 1994 and June 30, 1996... F-4
Combined Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 and the six months ended June 30, 1996
and 1995............................................................... F-5
Statements of Changes in Combined Equity for each of the three years in
the period ended December 31, 1995 and the six months ended June 30,
1996 and 1995.......................................................... F-6
Notes to Combined Financial Statements.................................. F-7
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts....................................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses of
Newport News (see Note 1) as of December 31, 1995 and 1994, and the related
combined statements of earnings, cash flows and changes in combined equity for
each of the three years in the period ended December 31, 1995. These combined
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and schedule 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of Newport News as of December 31, 1995 and 1994, and the results
of its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the combined financial statements, effective January
1, 1994, the businesses of Newport News changed its method of accounting for
postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of Newport News taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
October 1, 1996
F-2
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER ENDED
31, JUNE 30,
---------------------- ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................ $1,756 $1,753 $1,861 $ 915 $ 845
OPERATING COSTS AND EXPENSES............. 1,599 1,552 1,651 834 755
------ ------ ------ ----- -----
OPERATING EARNINGS....................... 157 201 210 81 90
Interest Expense, net of interest
capitalized............................. (29) (30) (36) (17) (20)
Gain on Sale of Business................. -- -- 15 -- --
Other Income (Expense), net.............. 3 (1) -- -- --
------ ------ ------ ----- -----
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................... 131 170 189 64 70
Provision for Income Taxes............... 58 75 78 27 29
------ ------ ------ ----- -----
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.......... 73 95 111 37 41
Cumulative Effect of Change in Accounting
Principle, net of tax.................... -- (4) -- -- --
------ ------ ------ ----- -----
NET EARNINGS............................. $ 73 $ 91 $ 111 $ 37 $ 41
====== ====== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
earnings.
F-3
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents............................. $ 2 $ 1 $ 1
Accounts Receivable, net.............................. 67 89 125
Contracts in Process.................................. 263 184 282
Inventory............................................. 54 45 49
Notes Receivable...................................... 18 -- --
Other Current Assets.................................. 15 11 16
------ ------ ------
Total Current Assets.................................. 419 330 473
------ ------ ------
NONCURRENT ASSETS
Property, Plant and Equipment, net.................... 820 796 824
Other Assets.......................................... 141 137 155
------ ------ ------
Total Noncurrent Assets............................... 961 933 979
------ ------ ------
$1,380 $1,263 $1,452
====== ====== ======
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES
Trade Accounts Payable................................ $ 99 $ 63 $ 104
Accounts Payable to Tenneco........................... 67 117 73
Short-Term Debt....................................... 68 30 95
Deferred Income Taxes................................. 39 38 5
Other Accrued Liabilities............................. 165 157 155
------ ------ ------
Total Current Liabilities............................. 438 405 432
------ ------ ------
NONCURRENT LIABILITIES
Long-Term Debt........................................ 292 287 282
Postretirement Benefits............................... 101 104 103
Deferred Income Taxes................................. 138 141 140
Other Long-Term Liabilities........................... 139 127 146
Commitments and Contingencies (See Note 13)
------ ------ ------
Total Noncurrent Liabilities.......................... 670 659 671
------ ------ ------
COMBINED EQUITY (SEE NOTE 4).......................... 272 199 349
------ ------ ------
$1,380 $1,263 $1,452
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-4
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- -------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings................................. $ 73 $ 91 $111 $ 37 $ 41
Cumulative Effect of Change in Accounting
Principle................................... -- (4) -- -- --
Adjustments to Reconcile Net Earnings Before
Accounting Changes to Net Cash (Used)
Provided by Operating Activities--
Depreciation............................... 67 70 72 32 33
Deferred Income Taxes...................... (2) (46) 30 (32) --
Gain on Sale of Business................... -- -- (15) -- --
Allocated Corporate Interest, net of tax... 18 17 22 12 12
Changes in Components of Working Capital--
Decrease(Increase) in--
Accounts Receivable, net................. 22 (15) (22) (58) 18
Contracts in Process..................... (95) (20) 76 (19) (94)
Inventory................................ (9) (1) -- 5 (12)
Other Current Assets..................... (4) (6) -- (1) (2)
Increase(Decrease) in--
Trade Accounts Payable................... 36 (1) (17) 5 4
Accounts Payable to Tenneco.............. (50) 58 (69) 6 (70)
Other Accrued Liabilities................ 8 29 15 (10) 36
Other, net................................. (1) 10 12 22 16
---- ---- ---- ----- -----
Net Cash (Used) Provided by Operating
Activities.................................. 63 182 215 (1) (18)
---- ---- ---- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Business............... -- -- 56 -- --
Capital Expenditures......................... (77) (29) (35) (36) (29)
Other........................................ (10) -- -- (9) --
---- ---- ---- ----- -----
Net Cash (Used) Provided by Investing
Activities.................................. (87) (29) 21 (45) (29)
---- ---- ---- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Transfers (to) from Tenneco............. 25 (154) (241) 45 47
---- ---- ---- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 1 (1) (5) (1) --
Effect of Exchange Rate Changes on Cash and
Cash Equivalents............................ -- -- -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 1 2 7 2 1
---- ---- ---- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 2 $ 1 $ 2 $ 1 $ 1
==== ==== ==== ===== =====
CASH PAID DURING THE PERIOD FOR INCOME TAXES
(SEE NOTE 3)................................ $122 $ 53 $120 $ 9 $ 16
==== ==== ==== ===== =====
CASH PAID DURING THE PERIOD FOR INTEREST (SEE
NOTE 4)...................................... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
cash flows.
F-5
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
STATEMENTS OF CHANGES IN COMBINED EQUITY
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------
1995 1994 1993 1996 1995
---- ----- ------ ----- -----
(MILLIONS)
- ---------- (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Combined Equity, beginning of period......... $199 $ 105 $ (173) $ 272 $ 199
Net Earnings................................. 73 91 111 37 41
Net Cash Transfers (To) From Tenneco......... 25 (154) (241) 45 47
Non-Cash Transactions With Tenneco
Net Change in Allocated Corporate Debt..... (43) 140 386 (17) (63)
Allocated Corporate Interest, net of tax... 18 17 22 12 12
---- ----- ------ ----- -----
Combined Equity, end of period............... $272 $ 199 $ 105 $ 349 $ 236
==== ===== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
changes in combined equity.
F-6
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying combined financial statements represent the financial
position, results of operations and cash flows for all shipbuilding operations
owned directly or indirectly by Tenneco Inc. ("Tenneco") and its subsidiaries
(see "Control" below).
Unless the context otherwise requires, as used herein, the term "Company"
refers: (i) for periods prior to the Shipbuilding Distribution (as defined
below), to Newport News Shipbuilding and Dry Dock Company ("Newport News") and
certain other consolidated subsidiaries through which Tenneco conducted its
shipbuilding business (the "Shipbuilding Business") during such period, and
(ii) for periods after the Shipbuilding Distribution, to Newport News
Shipbuilding Inc. ("NNS," formerly Tenneco InterAmerica Inc.) and its
consolidated subsidiaries, including Newport News.
Investments in 20% to 50% owned companies where the Company has the ability
to exert significant influence over operating and financial policies are
carried at cost plus equity in undistributed earnings since the date of
acquisition. Earnings recognized and distributions received from equity method
investees was not significant during any of the periods presented in the
accompanying combined financial statements. All significant transactions and
balances among combined businesses have been eliminated.
Description of Business
The Company is in the business of designing, constructing, repairing,
overhauling and refueling ships, primarily for the United States Government.
Prior to November 1993, the Company was also involved in the manufacture of
advanced electronics for maritime and other applications (see Note 5).
Except with respect to its interest in Abu Dhabi Ship Building Company, the
Company does not have significant operations or assets outside the U.S. The
largest single customer of the Company is the U.S. Government. Contract
revenues from the U.S. Government were $1,697 million (97%), $1,700 million
(97%) and $1,771 million (95%) in 1995, 1994, and 1993, respectively.
2. THE SHIPBUILDING DISTRIBUTION
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged into Tenneco (the "Merger"). The Merger is part of a larger Tenneco
reorganization (the "Transaction") which includes the distribution of the
common stock of the Company (the "Shipbuilding Distribution") and New Tenneco
Inc. ("New Tenneco"), a newly formed subsidiary of Tenneco which will hold
substantially all of the assets, liabilities and operations of Tenneco's
current automotive and packaging businesses and its administrative services
business (the "Industrial Distribution") (collectively the "Distributions"),
to the holders of Tenneco common stock. Upon completion of the Transaction,
holders of Tenneco common stock will receive equity securities of the Company,
New Tenneco and El Paso.
Prior to the Transaction, Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
debt will be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for other Tenneco debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, New Tenneco (which may declare
and pay a dividend to Tenneco) and the Company (which will declare and pay a
dividend of approximately $600 million to Tenneco). Upon completion of the
debt realignment, Tenneco will have responsibility for $2.65 billion of debt,
subject to certain adjustments, the Company will have responsibility for the
borrowings under its credit lines, and New Tenneco will have responsibility
for the remaining debt.
F-7
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco stockholders.
In order to assist in the orderly transition of the Company into a separate,
publicly held company, Tenneco intends to modify, amend or enter into certain
contractual agreements with the Company. Such agreements include a tax sharing
agreement between Tenneco and its subsidiaries (see "Income taxes" in Note 3),
an employee benefits agreement, an insurance agreement, an administrative
services agreement and other ancillary agreements. These agreements will
provide, among other things, that (i) New Tenneco will become the sole sponsor
of the Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco welfare plans, while the Company will establish new plans for its
employees subsequent to the Shipbuilding Distribution, (ii) the Company will
retain specific insurance policies which relate to its businesses and will
retain continuing rights and obligations for certain parent-company insurance
policies of Tenneco, and (iii) the Company will receive certain corporate
services, such as mainframe data processing and product purchasing services,
from New Tenneco for a specified period of time.
3. SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of the Company is owned directly or
indirectly by Tenneco. Thus, the Company is under the control of Tenneco.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results are not necessarily
indicative of operating results for an entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Revenue
Recognition" section of this footnote and Notes 11, 12 and 13 for additional
information on certain estimates included in the Company's combined financial
statements.
Revenue Recognition
The Company reports profits on its long-term contracts using the percentage-
of-completion method of accounting, determined on the basis of total costs
incurred to date to estimated final total costs. Losses on contracts,
including allocable general and administrative expenses, are reported when
first estimated. The performance of contracts usually extends over several
years, requiring periodic reviews and revisions of estimated final contract
prices and costs during the term of the contracts. The effect of these
revisions to estimates is included in earnings in the period the revisions are
made. Revenue arising from the claims process is not recognized either as
income or as an offset against a potential loss until it can be reliably
estimated and its realization is probable.
General and Administrative Expenses
General and administrative expenses of $254 million, $271 million and $249
million in 1995, 1994, and 1993, respectively, are included in the "Operating
Costs and Expenses" caption in the Combined Statements of
F-8
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Earnings. Of the total general and administrative expenses for 1995, 1994, and
1993, $12 million, $13 million and $13 million, respectively, represent the
Company's share of Tenneco's corporate general and administrative costs for
legal, financial, communication and other administrative services. The
allocation of Tenneco's corporate general and administrative expenses to the
Company has been based on estimated levels of effort devoted to the Company's
operations and the relative size of the Company based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable and
that the general and administrative expenses reflected in the accompanying
combined financial statements are generally representative of the total
general and administrative costs the Company would have incurred as a separate
public entity.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. No deferred tax
valuation allowances were recorded by the Company as of December 31, 1995 and
1994.
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to
file a consolidated U.S. federal income tax return. Such agreement provides,
among other things, that (i) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis and (ii) each company in a tax loss position will
be reimbursed currently to the extent its deductions, including general
business credits, are utilized in the consolidated return. The income tax
amounts reflected in the combined financial statements of the Company under
the provisions of the tax sharing arrangement are not materially different
from the income taxes which would have been provided had the Company filed a
separate tax return. Under the tax sharing agreement, Tenneco pays all federal
taxes directly and bills or refunds, as applicable, its subsidiaries,
including the Company, for the applicable portion of the total tax payments.
Thus, the majority of payments made by the Company for taxes included in the
Combined Statements of Cash Flows represent payments to Tenneco.
In connection with the Distributions the current tax sharing agreement will
be cancelled and the Company will enter into a new tax sharing agreement with
Tenneco, New Tenneco and El Paso. The new tax sharing agreement will provide,
among other things, for the allocation of tax liabilities arising prior to, as
a result of, and subsequent to the Distributions. Generally, the Company will
be liable for taxes imposed on the Company and its affiliates engaged in the
shipbuilding business. In the case of federal income taxes imposed on the
combined activities of the Tenneco consolidated group, the Company and New
Tenneco will be liable to Tenneco for federal income taxes attributable to
their activities, and each will be allocated an agreed-upon share of estimated
tax payments made by the Tenneco consolidated group.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Accounts Receivable, net and Contracts In Process
Only amounts billed and currently due from customers are included in the
"Accounts Receivable, net" caption in the accompanying Combined Balance
Sheets. Recoverable costs and accrued earnings related to long-term contracts
on which revenue has been recognized, but billings have not been made to the
customer, are included in the "Contracts in Process" caption (See Note 6).
Accounts receivable are presented net of an allowance for doubtful accounts.
As of December 31, 1995 and 1994, the allowance for doubtful accounts
receivable was none and $8 million, respectively.
F-9
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Inventory
Inventory principally consists of raw materials and supplies which have not
been allocated to specific contracts. Inventory is stated at the lower of cost
or market. Substantially all inventory is costed using the "last-in, first-
out" method. If the first-in, first-out or average cost method of inventory
accounting had been used by the Company for all inventory, inventory would
have been approximately $8 million higher at both December 31, 1995 and 1994.
Property, Plant and Equipment, net
Property, plant and equipment is carried at cost, net of accumulated
depreciation. The Company provides for depreciation on a straight-line basis
in amounts which, in the opinion of management, are adequate to allocate the
cost of depreciable assets over their estimated useful lives. Estimated useful
lives for significant classes of assets are as follows.
<TABLE>
<S> <C>
Buildings................................................ 30 to 60 years
Machinery and equipment.................................. 8 to 45 years
</TABLE>
Total depreciation expense was $67 million, $70 million and $72 million, for
1995, 1994 and 1993, respectively. Depreciation expense is included as a
component of "Operating Costs and Expenses" in the Combined Statements of
Earnings.
Interest capitalized on constructed assets during the years ended December
31, 1995, 1994 and 1993 was $2 million, $1 million and $1 million,
respectively.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-
lived assets. The adoption of this new standard did not have any impact on the
Company's combined financial position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees, after employment but before retirement, on the accrual versus cash
basis of accounting. The Company recorded an after-tax charge of $4 million,
which was reported as a cumulative effect of change in accounting principle.
Research and Development Costs
Research and development costs are charged to "Operating Costs and Expenses"
as incurred. The amounts charged to operations during the years ended December
31, 1995, 1994 and 1993 were $20 million, $14 million and $15 million,
respectively.
Risk Management Activities
The Company periodically utilizes foreign currency contracts to hedge its
exposure to changes in foreign currency exchange rates for firm purchase
commitments. Net gains and losses on these contracts are deferred and
recognized when the offsetting gains or losses are recognized on the hedged
items. In the Combined Statements of Cash Flows, cash receipts or payments
related to these financial instruments are classified consistent with the cash
flows from the transactions being hedged.
F-10
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
Financial statements of equity investments in international entities are
translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities and the weighted-average exchange rate for
each applicable period for amounts included in the Combined Statements of
Earnings. The amount of cumulative translation adjustments is not significant
and is included in the balance sheet caption "Combined Equity."
Classification
The Company's contracts range in duration up to a period of 8 years from the
signing of the contract until delivery. Because of the varying nature of the
Company's operating cycle, and consistent with industry practice, assets and
liabilities relating to long-term contracts are classified as current,
although a portion of these amounts is not expected to be realized or paid
within one year (see Note 6).
4. TRANSACTIONS WITH TENNECO
Combined Equity
The "Combined Equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative net investment in the combined
businesses of the Company. Changes in the "Combined Equity" caption represent
the net earnings of the Company, net cash transfers (to) from Tenneco,
cumulative translation adjustments, changes in allocated corporate debt, and
allocated corporate interest, net of tax. Reference is made to the Statements
of Changes in Combined Equity for an analysis of the activity in the "Combined
Equity" caption for the three years ended December 31, 1995 and six months
ended June 30, 1996 and 1995.
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $28 million, $26
million and $34 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's Combined Equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity.
Notes and Advances Receivable from Tenneco
"Cash transfers (to) from Tenneco" in the Statements of Changes in Combined
Equity consist of net cash changes in notes and advances receivable with
Tenneco which have been included in Combined Equity. Historically, Tenneco has
utilized notes and advances to centrally manage cash funding requirements for
its consolidated group.
F-11
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the Company had a non-interest bearing note
receivable from Tenneco totaling $965 million and $991 million, respectively,
which is payable on demand and is included as a component of the Company's
Combined Equity.
Accounts Payable to Tenneco
Certain costs are incurred by Tenneco and allocated to the Company. The
Accounts Payable to Tenneco balance consists of unpaid billings for these
allocated costs and other services. Reference is made to Note 3 for a
discussion of the types of such costs allocated to the Company.
Employee Benefits
Certain employees of the Company participate in the Tenneco employee stock
option and employee stock purchase plans. The Tenneco employee stock option
plan provides for the grant of Tenneco common stock options and other stock
awards at a price not greater than market value at the date of grant. The
Tenneco employee stock purchase plan allows employees to purchase Tenneco
common stock at a 15% discount subject to certain thresholds. The Company
expects to establish similar plans for its employees after the Shipbuilding
Distribution. In connection with the Shipbuilding Distribution, outstanding
options on Tenneco common stock held by Company employees will be converted
into options of the Company so as to preserve the aggregate value of the
options held prior to the Shipbuilding Distribution.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made in Notes 11 and 12 for a further
discussion of these plans.
5. DISPOSITION OF SPERRY MARINE BUSINESS
During November 1993, the Company disposed of its Sperry Marine business
("Sperry"), which was part of its shipbuilding segment. Sperry was involved in
the domestic and international design and manufacture of advanced electronics
for maritime and other applications. The financial amounts related to Sperry
are included in the accompanying Combined Financial Statements through the
date of disposition. The accompanying Combined Financial Statements for the
year ended December 31, 1993, also include $56 million of the total cash
proceeds of $61 million from the sale of Sperry. The remaining portion of the
cash proceeds was realized by other Tenneco entities. In addition to the cash
proceeds from the sale of Sperry, the Company received $17 million in
preferred stock of the purchaser and recognized a pre-tax gain on the total
sale of $15 million. The preferred stock of the purchaser received in the
Sperry sale was subsequently sold in late 1995 for proceeds of $18 million,
which was reflected as a short-term note receivable at December 31, 1995. The
short-term note receivable was collected in 1996.
6. CONTRACTS IN PROCESS
Contracts in process include production costs and related overhead,
including allocable general and administrative expenses, net of progress
payments of $3,023 million and $5,053 million as of December 31, 1995 and
1994, respectively. Approximately $24 million and $79 million of retainages
included in contracts in process, as of December 31, 1995 and 1994,
respectively, are not expected to be billed and collected within one year.
Under the contractual arrangements by which progress payments are received,
the U.S. Government asserts that it has a security interest in the contracts
in process identified with the related contracts.
F-12
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT, NET
The major classes of property, plant and equipment (at cost) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 (MILLIONS) 1995 1994
---------------------- ------ ------
<S> <C> <C>
Land and improvements..................................... $ 26 $ 26
Buildings and improvements................................ 1,150 1,081
Machinery and equipment................................... 376 387
------ ------
1,552 1,494
Less accumulated depreciation............................. (732) (698)
------ ------
$ 820 $ 796
====== ======
</TABLE>
8. DETAIL OF OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
DECEMBER 31 (MILLIONS)
----------------------
<S> <C> <C>
Accrued vacation............................................... $ 43 $ 48
Employee payroll and benefits.................................. 40 34
Current postretirement benefits................................ 16 13
Current postemployment benefits................................ 7 7
Accrued taxes.................................................. 18 26
Other.......................................................... 41 29
---- ----
$165 $157
==== ====
</TABLE>
9. FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Company's financial
instruments by class are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
DECEMBER 31 (MILLIONS) ASSETS (LIABILITIES)
----------------------
<S> <C> <C> <C> <C>
Asset and liability instruments
Accounts receivable, net................. $ 67 $ 67 $ 89 $ 89
Notes receivable......................... 18 18 -- --
Preferred stock investment............... -- -- 17 18
Accounts payable (trade and to Tenneco).. (166) (166) (180) (180)
Instruments with off-balance sheet risk....
Foreign currency contracts............... -- -- -- --
</TABLE>
The fair value of accounts receivable, notes receivable, and accounts
payable in the above table was considered to be the same as or was not
determined to be materially different from the carrying amount. The short-term
and long-term debt reflected in the Combined Balance Sheets represents
corporate debt allocated to the Company for financial reporting purposes by
Tenneco. As such, an estimate of fair value has not been provided.
Preferred stock investment--The fair value of the preferred stock received
as part of the Sperry sale (see Note 5) was determined based on the proceeds
from the sale of such stock that were received in 1996.
F-13
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Foreign currency contracts--The Company periodically utilizes foreign
currency contracts to hedge certain specific foreign currency transactions,
principally the purchase of raw materials and machinery denominated in a
foreign currency. Such contracts generally mature in one year or less and the
cost of replacing these contracts in the event of nonperformance by
counterparties is not significant. At December 31, 1995 and 1994, the Company
had no significant foreign currency contracts outstanding.
10. INCOME TAXES
The Company's income before income taxes was principally domestic for all
years presented in the accompanying Combined Financial Statements. Following
is a comparative analysis of the components of the provision for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current--
Federal................................................ $51 $101 $40
State.................................................. 9 20 8
--- ---- ---
60 121 48
--- ---- ---
Deferred--
Federal................................................ (2) (46) 30
--- ---- ---
$58 $ 75 $78
=== ==== ===
</TABLE>
Current Federal tax expense for the years ended December 31, 1995, 1994 and
1993, include tax benefits of $10 million, $9 million and $12 million,
respectively, related to the allocation of corporate interest expense to the
Company from Tenneco. See Note 4.
The following is a reconciliation of income taxes computed using the
statutory U.S. federal income tax rate (35% for all years presented) to the
provision for income taxes reflected in the Combined Statements of Earnings:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. Federal income
tax rate................................................. $46 $60 $66
State and local taxes on income, net of Federal benefit... 6 14 5
U.S. Federal income tax rate change....................... -- -- 5
Other..................................................... 6 1 2
--- --- ---
$58 $75 $78
=== === ===
</TABLE>
F-14
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 (MILLIONS) 1995 1994
---------------------- ---- ----
<S> <C> <C>
Deferred tax assets--
Postretirement benefits...................................... $ 36 $ 36
Postemployment benefits...................................... 14 15
Accrued vacation............................................. 13 14
Other........................................................ 13 7
---- ----
Total deferred tax assets.................................. 76 72
---- ----
Deferred tax liabilities--
Tax over book depreciation................................... 179 183
Long-term shipbuilding contracts............................. 62 55
Other........................................................ 12 13
---- ----
Total deferred tax liabilities............................. 253 251
---- ----
$177 $179
==== ====
</TABLE>
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
The Company has postretirement health care and life insurance plans which
cover its employees who meet certain eligibility requirements. For salaried
employees, the plans cover employees retiring from the Company on or after
attaining age 55 who have had at least 10 years service with the Company after
attaining age 45. For hourly employees, the postretirement benefit plans
generally cover employees who retire pursuant to one of the Company's hourly
employee retirement plans. All of these benefits may be subject to
deductibles, copayment provisions and other limitations, and the Company has
reserved the right to modify these benefits. The Company's postretirement
benefit plans are funded on a pay-as-you-go basis.
Generally, the Company, will retain liabilities with respect to the welfare
benefits of its current and former employees and their dependents.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the accompanying Combined Balance Sheets as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 109 $ 112
Fully eligible active plan participants........................ 24 22
Other active plan participants................................. 28 30
----- -----
Total accumulated postretirement benefit obligation.............. 161 164
Plan assets at fair value at September 30........................ -- --
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (161) (164)
Claims paid during the fourth quarter............................ 4 3
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (20) (11)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 60 55
----- -----
Accrued postretirement benefit cost at December 31............... $(117) $(117)
===== =====
</TABLE>
F-15
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The accrued postretirement benefit cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
The net periodic postretirement benefit cost consists of the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year.......... $ 3 $ 3 $ 3
Interest cost on accumulated postretirement benefit
obligation............................................... 13 11 12
Net amortization of unrecognized amounts.................. 1 -- --
--- --- ---
Net periodic postretirement benefit cost.................. $17 $14 $15
=== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $10 million each year and would increase
the aggregate of the service cost and interest cost components of the net
postretirement benefit cost for 1995, 1994 and 1993 by approximately $1
million, $1 million, and $2 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112 "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual versus cash
basis of accounting. The postemployment benefit liability, which is based on
actuarial estimates, is recorded at its discounted present value, using
discount rates similar to those used for postretirement liabilities.
Implementation of this new rule
reduced 1994 net income by $4 million, net of tax benefits of $2 million,
which was reported as the cumulative effect of a change in accounting
principle.
12. PENSION PLANS
The Company has various defined benefit plans which cover substantially all
of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. The Company's funding
policies are to contribute to the plans amounts necessary to satisfy the
funding requirements of federal laws and regulations. Plan assets consist
principally of listed equity and fixed income securities. Certain employees of
the Company participate in the Tenneco Inc. Retirement Plan ("TRP").
New Tenneco will become the sole sponsor of the TRP after the Distributions,
and the Company will establish benefit plans for its employees. The benefits
accrued by Company employees in the TRP will be frozen as of the last day of
the calendar month including the Distributions, and New Tenneco will amend the
TRP to provide that all benefits accrued through that day by Company employees
are fully vested and non-forfeitable.
F-16
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconcile with amounts recognized on the
Combined Balance Sheet at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
ALL PLANS
----------
(MILLIONS) 1995 1994
- ---------- ---- ----
<S> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels at September 30:
Vested benefit obligation....................................... $570 $514
Non-vested benefit obligation................................... 43 44
---- ----
Accumulated benefit obligation.................................. 613 558
Additional amounts related to projected salary increases.......... 104 92
---- ----
Total projected benefit obligation at September 30................ 717 650
Plan assets at fair value at September 30......................... 767 666
---- ----
Plan assets in excess of total projected benefit obligation at
September 30..................................................... 50 16
Contributions during the fourth quarter........................... -- --
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions......................................... 4 45
Unrecognized prior service obligations resulting from plan
amendments....................................................... 7 7
Remaining unrecognized net asset at initial application........... (49) (55)
---- ----
Prepaid pension cost at December 31............................... $ 12 $ 13
==== ====
</TABLE>
Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid pension cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
The Company measures pension cost according to independent actuarial
valuations. The projected unit credit actuarial cost method is used to
determine pension cost for financial accounting purposes consistent with the
provisions of FAS No. 87, "Employers' Accounting for Pensions." Net periodic
pension costs for the years ended December 31, 1995, 1994 and 1993 consist of
the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year... $23 $27 $27
Interest on prior year's projected benefit
obligation..................................... 52 50 48
Expected return on plan assets--
Actual (return) loss.......................... (132) 9 (95)
Unrecognized excess (deficiency) of actual
return over expected return.................. 65 (76) 32
---- --- ---
(67) (67) (63)
Net amortization of unrecognized amounts........ (6) (5) (6)
--- --- ---
Net pension costs............................... $ 2 $ 5 $ 6
=== === ===
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.75%, 8.25% and 7.50%. The rate of increase in
future compensation was 4.9% in 1995, 1994, and 1993. The weighted average
expected long-term
F-17
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
rate of return on plan assets was 10.0% in 1995, 1994 and 1993. Unrecognized
prior service obligations are being amortized on a straight-line basis over
the average remaining estimated service period of employees expected to
receive benefits under the plans.
13. COMMITMENTS AND CONTINGENCIES
Government Contracting
More than 90% of the Company's business involves contracting with the U.S.
Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases it believes such adjustments are appropriate.
Tenneco and the Company have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the
Distributions, including the disposition of the Tenneco Inc. Retirement Plan
(the "TRP"), which covers salaried employees of the Company and other Tenneco
divisions. The DCAA has been advised that (i) the TRP will retain the
liability for all benefits accrued by the Company's employees through the date
of the Distributions (the "Distribution Date"), (ii) the Company's employees
will not accrue additional benefits under the TRP after the Distribution Date
and (iii) no liabilities or assets of the TRP will be transferred from the TRP
to any plan maintained by the Company. A determination of the ratio of assets
to liabilities of the TRP attributable to the Company will be based on facts,
assumptions and legal issues which are complicated and uncertain; however, it
is likely that the Government will assert a claim against the Company with
respect to the amount, if any, by which the assets of the TRP attributable to
the Company's employees are alleged to exceed the liabilities. New Tenneco,
with the full cooperation of the Company, will defend against any claim by the
Government, and in the event there is a determination that an amount is due to
the Government, New Tenneco and the Company will share its obligation for such
amount plus the amount of related defense expenses, in the ratio of 80% and
20%, respectively. Pending a final determination of any such claim, the
Government may, absent an agreement with the Company to defer the payment of
the amounts claimed, withhold all or a portion of all future progress payments
due the Company under its government contracts until it has recovered its
alleged share of the claimed amount plus interest. In the event of a claim by
the Government, the Company will diligently seek a deferral agreement with the
Government; however, there can be no assurance that the Company will be able
to arrange such an agreement and thus avoid an offset against future progress
payments pending a final determination. At this preliminary stage it is
impossible to predict with certainty any eventual outcome regarding this
matter, however, the Company does not believe that this matter will have a
material adverse effect on its financial condition or results of operations.
In March 1995, the DCAA informed the Company that it would conduct a post-
award audit of the contract to build the aircraft carrier Reagan (CVN-76). The
audit concerns the Company's submission to the U.S. Navy of current, accurate
and complete data relating to labor and overhead costs submitted in connection
with the proposals and negotiations relating to the CVN-76 contract. The audit
is ongoing and the DCAA has not issued its audit report. In discussions with
the DCAA auditors, however, the DCAA auditors have indicated to Company
management that the $2.5 billion CVN-76 contract should be reduced by
approximately $122 million based on an alleged submission of defective cost
and pricing data. In addition, in May 1996, the Company received a subpoena
from the Inspector General of the Department of Defense requesting documents
in connection with a joint inquiry being conducted by the Department of
Defense, the Department of Justice, the U.S. Attorney's Office for the Eastern
District of Virginia, and the Naval Criminal Investigative Service. Like the
DCAA audit,
F-18
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the investigation appears to focus on whether data relating to labor and
overhead costs that the Company supplied in connection with the proposals and
negotiations relating to the CVN-76 contract were current, accurate and
complete. The Government has not asserted any formal claims against the
Company related to these CVN-76 contract matters. Based on the Company's
present understanding of the focus of the inquiries, it is the Company's
opinion that it has substantial defenses to claims that the government might
potentially assert that the Company submitted cost or pricing data that was
not current, accurate and complete for the CVN-76 contract. It is the
Company's intention to vigorously assert these defenses in the event that the
Government should assert such claims. Although the ultimate outcome cannot be
predicted, based on the Company's present understanding of the claims the
Government might assert, together with defenses the Company believes are
available to it, management is of the opinion that the ultimate resolution of
this matter will not have a material adverse effect on the financial condition
or results of operations of the Company.
In addition, various government agencies may at any time be conducting other
various investigations or making specific inquiries concerning the Company.
The Company believes that the outcome of such other investigations and
inquiries will not have a material adverse effect on the Company's financial
condition or results of operations.
Significant Estimates
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation at a price of $36 million per ship. Construction of the
first tanker is substantially complete; construction has begun on the second
tanker; and a substantial portion of the materials needed for the construction
of the three uncompleted tankers has been ordered. The Company presently
estimates that these ships will be constructed over the period ending in
February, 1998. In connection with the construction of these four tankers, the
Company has incurred or estimates it will incur costs of approximately $90
million in excess of the fixed contract prices. As of September 30, 1996, the
full amount of these excess costs has been reserved for by a charge against
income; $56.6 million in 1996 ($26.2 million through June 30), $29.7 million
in 1995 and $5.0 million in 1994. Disagreements have arisen with the
purchasers during the course of construction as to whether the first and
second ships were and are being constructed in compliance with the
specifications set forth in the contracts, and the purchasers sent letters to
the Company purporting to invoke the procedures set forth in the contracts for
resolution of this situation and requested that the Company in the interim
stop construction on the ships. The Company saw no reason to stop construction
on the ships because of its confidence that the ships will be in compliance
with all contract and classification society requirements. The purchasers have
withdrawn both their invocation of the dispute resolution procedures under the
contracts and their request that the Company cease further construction of the
ships. Discussions between the Company and the purchasers to date have
resulted in the resolution of a significant number of these disagreements,
although some remain unresolved and are the subject of further discussions. No
assurances can be given as to the effect the resolution of these remaining
disagreements will have on the Company (although the Company does not believe
such resolution will materially and adversely affect it) or the extent to
which the remaining work on these contracts can be completed without further
disagreements with the purchasers or the incurrence of additional losses in
excess of current estimates. These estimates are based on the use of new
robotic technology and the utilization of a different building strategy going
forward. The Company believes that these factors, as well as the experience
gained in the construction of the first ship, will result in a very
significant reduction in the man-hours necessary to construct each of the
remaining vessels. There can be no assurance that these factors will produce
this result. The Company intends to review this situation at the end of each
quarter and, accordingly, there can be no assurance that the estimate of costs
to be incurred on these contracts will not be revised at that time based on
the facts then known to the Company.
F-19
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In 1995, the Company entered into fixed price contracts with limited
liability companies comprised principally of Hvide Partners, L.P. and an
affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per ship.
The Company is in the process of completing its design work on these ships and
expects to begin construction in the first half of 1997. These ships are
scheduled for delivery in 1998. The Company presently estimates that it will
break even on these ships on a aggregate basis, but there can be no assurance
that the costs incurred in constructing these ships will not exceed the
contract prices for them for the reasons described in the immediately preceding
paragraph.
Contracting with the U.S. Government can also result in the Company filing a
Request for Equitable Adjustment ("REA") in connection with a contract. REAs
represent claims against the U.S. Government for changes in the original
contract specifications and resulting delays and disruption in contract
performance. All major REAs filed by the Company in connection with its
contracts, have been settled as of June 1996 for approximately the same amount
recorded previously by the Company. Through 1995, costs of $18 million had been
recognized on the Sealift REA in excess of the adjudicated REA price. Cost
growth of $36 million that was not recoverable through that REA has been
recognized in the first half of 1996. Due to uncertainties inherent in the
estimation process these contract completion costs could be increased in the
future by $0 to $10 million. The first of two Sealift ships was delivered in
August 1996. Management expects this contract to be substantially complete by
the end of the first quarter of 1997.
Litigation
The Company is also a defendant in other matters of varying nature. In the
opinion of management, the outcome of these proceedings should not have a
material adverse effect on the financial position or results of operations of
the Company.
Capital Commitments
The Company estimates that expenditures aggregating approximately $90 million
will be required after December 31, 1995, to complete facilities and projects
authorized at such date, and substantial commitments have been made in
connection therewith.
Lease Commitments
The Company holds certain equipment under long-term operating leases. Future
minimum lease payments under existing operating leases as of December 31, 1995,
are $1 million for 1996.
Rent expense recognized for the years ended December 31, 1995, 1994 and 1993,
was $14 million, $14 million and $16 million, respectively.
F-20
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS
BEFORE
INCOME EARNINGS
TAXES & BEFORE
CUMULATIVE CUMULATIVE
EFFECT OF EFFECT OF
CHANGE IN CHANGE IN
NET OPERATING ACCOUNTING ACCOUNTING NET
(MILLIONS) SALES EARNINGS PRINCIPLE PRINCIPLE EARNINGS
- ---------- ------ --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1996
1st Quarter..................... $ 476 $ 41 $ 32 $19 $19
2nd Quarter..................... 439 40 32 18 18
------ ---- ---- --- ---
$ 915 $ 81 $ 64 $37 $37
====== ==== ==== === ===
1995
1st Quarter..................... $ 421 $ 44 $ 37 $20 $20
2nd Quarter..................... 424 46 33 21 21
3rd Quarter..................... 445 35 29 17 17
4th Quarter..................... 466 32 32 15 15
------ ---- ---- --- ---
$1,756 $157 $131 $73 $73
====== ==== ==== === ===
1994
1st Quarter..................... $ 403 $ 48 $ 41 $23 $19
2nd Quarter..................... 464 53 46 28 28
3rd Quarter..................... 424 52 44 25 25
4th Quarter..................... 462 48 39 19 19
------ ---- ---- --- ---
$1,753 $201 $170 $95 $91
====== ==== ==== === ===
</TABLE>
Reference is made to the Notes 1, 2 and 3 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Information Statement for items affecting quarterly results.
F-21
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Newport News Shipbuilding Inc.
/s/ David J. Anderson
By: _________________________________
David J. Anderson
Senior Vice President and
Chief Financial Officer
Dated: November 4, 1996
<PAGE>
SCHEDULE II
THE BUSINESSES OF NEWPORT NEWS
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (NOTE) OF YEAR
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $8 $-- $-- $ 8 $--
=== === === === ===
Year Ended December 31,
1994.................. $2 $ 6 $-- $-- $ 8
=== === === === ===
Year Ended December 31,
1993.................. $3 $ 2 $-- $ 3 $ 2
=== === === === ===
</TABLE>
Note: Includes uncollectible accounts, net of recoveries, on accounts
previously written-off.
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2 Distribution Agreement, dated as of November 1, 1996, by and among
Tenneco Inc., New Tenneco Inc. and the Company
3.1 Certificate of Incorporation as currently in effect
3.2 Form of Restated Certificate of Incorporation
3.3 By-laws as currently in effect
3.4 Form of Amended and Restated By-laws
4.1 Form of Specimen Stock Certificate of NNS Common Stock
4.2 Form of Rights Agreement by and between First Chicago Trust Company of
New York and the Company
*10.1 Form of Debt and Cash Allocation Agreement by and among Tenneco Inc.,
New Tenneco Inc. and the Company
10.2 Form of Benefits Agreement by and among Tenneco Inc., New Tenneco Inc.
and the Company
10.3 Form of Insurance Agreement by and among Tenneco Inc., New Tenneco
Inc. and the Company
*10.4 Form of Tax Sharing Agreement by and among Tenneco Inc., the Company,
New Tenneco Inc. and El Paso Natural Gas Company
10.5 Form of the Company's Trademark Transition License Agreement by and
between New Tenneco Inc. and the Company
10.6 Form of Newport News Shipbuilding Inc. Change-in-Control Severance
Benefit Plan for Key Executives
10.7 Form of Newport News Shipbuilding Inc. Stock Ownership Plan
10.8 Award/Contract N0024-95-C-2106, issued by Naval Sea Systems Command to
Newport News Shipbuilding for Aircraft Carrier CVN-76
*10.9 Professional Services Agreement, dated August 22, 1996, by and between
Tenneco Business Services Inc. and Newport News Shipbuilding Inc.
12 Statement re computation of ratio of earnings to fixed charges
21 List of Subsidiaries of Newport News Shipbuilding Inc.
27(a) Financial Data Schedule
27(b) Financial Data Schedule
</TABLE>
- --------
*Filed herewith
E-1
<PAGE>
APPENDIX A
DISTRIBUTION AGREEMENT
AMONG
TENNECO INC.,
NEW TENNECO INC.
AND
NEWPORT NEWS SHIPBUILDING INC.
(FORMERLY KNOWN AS TENNECO INTERAMERICA INC.)
DATED AS OF
NOVEMBER 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS.................................................. A-1
SECTION 1.01. General........................................ A-1
SECTION 1.02. References..................................... A-12
ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS............. A-13
SECTION 2.01. Corporate Restructuring Transactions........... A-13
SECTION 2.02. Pre-Distribution Stock Dividends to Tenneco.... A-13
SECTION 2.03. Charters and Bylaws............................ A-13
SECTION 2.04. Election of Directors of Industrial Company and
Shipbuilding Company............................. A-13
SECTION 2.05. Transfer and Assignment of Certain Licenses and
Permits.......................................... A-14
SECTION 2.06. Transfer and Assignment of Certain Agreements.. A-14
SECTION 2.07. Consents....................................... A-15
SECTION 2.08. Other Transactions............................. A-15
SECTION 2.09. Election of Officers........................... A-15
SECTION 2.10. Registration Statements........................ A-16
SECTION 2.11. State Securities Laws.......................... A-16
SECTION 2.12. Listing Application............................ A-16
SECTION 2.13. Certain Financial and Other Arrangements....... A-16
SECTION 2.14. Director, Officer and Employee Resignations.... A-17
SECTION 2.15. Transfers Not Effected Prior to the
Distributions; Transfers Deemed Effective as of
the Distribution Date............................ A-17
SECTION 2.16. Ancillary Agreements........................... A-18
ARTICLE III THE DISTRIBUTIONS............................................ A-18
SECTION 3.01. Tenneco Action Prior to the Distributions...... A-18
SECTION 3.02. The Distributions.............................. A-19
SECTION 3.03. Fractional Shares.............................. A-19
ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS.............................. A-20
SECTION 4.01. Conditions Precedent to the Distributions...... A-20
SECTION 4.02. No Constraint.................................. A-21
SECTION 4.03. Deferral of Distribution Date.................. A-21
SECTION 4.04. Public Notice of Deferred Distribution Date.... A-21
ARTICLE V COVENANTS.................................................... A-22
SECTION 5.01. Further Assurances............................. A-22
SECTION 5.02. Tenneco Name................................... A-22
SECTION 5.03. Supplies and Documents......................... A-22
SECTION 5.04. Assumption and Satisfaction of Liabilities..... A-23
SECTION 5.05. No Representations or Warranties; Consents..... A-23
SECTION 5.06. Removal of Certain Guarantees.................. A-24
SECTION 5.07. Public Announcements........................... A-24
SECTION 5.08. Intercompany Agreements........................ A-25
SECTION 5.09. Tax Matters.................................... A-25
ARTICLE VI ACCESS TO INFORMATION........................................ A-25
SECTION 6.01. Provision, Transfer and Delivery of Applicable
Corporate Records........................................... A-25
SECTION 6.02. Access to Information.......................... A-26
SECTION 6.03. Reimbursement; Other Matters................... A-26
SECTION 6.04. Confidentiality................................ A-26
SECTION 6.05. Witness Services............................... A-27
SECTION 6.06. Retention of Records........................... A-27
SECTION 6.07. Privileged Matters............................. A-27
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VII INDEMNIFICATION............................................ A-28
SECTION 7.01. Indemnification by Tenneco................... A-28
SECTION 7.02. Indemnification by Industrial Company........ A-28
SECTION 7.03. Indemnification by Shipbuilding Company...... A-28
SECTION 7.04. Limitations on Indemnification Obligations... A-29
SECTION 7.05. Procedures for Indemnification............... A-30
SECTION 7.06. Indemnification Payments..................... A-31
SECTION 7.07. Other Adjustments............................ A-31
SECTION 7.08. Obligations Absolute......................... A-32
SECTION 7.09. Survival of Indemnities...................... A-32
SECTION 7.10. Remedies Cumulative.......................... A-32
SECTION 7.11. Cooperation of the Parties With Respect to
Actions and Third Party Claims................. A-32
SECTION 7.12. Contribution................................. A-33
ARTICLE VIII MISCELLANEOUS.............................................. A-33
SECTION 8.01. Complete Agreement; Construction............. A-33
SECTION 8.02. Ancillary Agreements......................... A-33
SECTION 8.03. Counterparts................................. A-33
SECTION 8.04. Survival of Agreements....................... A-33
SECTION 8.05. Responsibility for Expenses.................. A-34
SECTION 8.06. Notices...................................... A-34
SECTION 8.07. Waivers...................................... A-34
SECTION 8.08. Amendments................................... A-34
SECTION 8.09. Assignment................................... A-35
SECTION 8.10. Successors and Assigns....................... A-35
SECTION 8.11. Termination.................................. A-35
SECTION 8.12. Third Party Beneficiaries.................... A-35
SECTION 8.13. Attorney Fees................................ A-35
SECTION 8.14. Title and Headings........................... A-35
SECTION 8.15. Exhibits and Schedules....................... A-35
SECTION 8.16. Specific Performance......................... A-35
SECTION 8.17. Governing Law................................ A-35
SECTION 8.18. Severability................................. A-36
SECTION 8.19. Subsidiaries................................. A-36
SECTION 8.20. Shipbuilding Hedging Transactions............ A-36
</TABLE>
A-ii
<PAGE>
EXHIBITS
EXHIBIT ABenefits Agreement
EXHIBIT BCorporate Restructuring Transactions
EXHIBIT CDebt and Cash Allocation Agreement
EXHIBIT DEnergy Business Pro Forma Balance Sheet
EXHIBIT EEnergy Subsidiaries
EXHIBIT FIndustrial Business Pro Forma Balance Sheet
EXHIBIT GIndustrial Subsidiaries
EXHIBIT HInsurance Agreement
EXHIBIT IShipbuilding Business Pro Forma Balance Sheet
EXHIBIT JShipbuilding Subsidiaries
EXHIBIT KTax Sharing Agreement
EXHIBIT LTBS Services Agreement
EXHIBIT MTransition Services Agreement
EXHIBIT NForm of Restated Certificate of Incorporation
EXHIBIT OForm of Bylaws
EXHIBIT PTenneco Transition Trademark License
EXHIBIT QShipbuilding Transition Trademark License
iii
<PAGE>
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made and entered into as of this first day of
November, 1996 by and among TENNECO INC., a Delaware corporation ("TENNECO"),
NEW TENNECO INC., a Delaware corporation ("INDUSTRIAL COMPANY"), and NEWPORT
NEWS SHIPBUILDING INC. (formerly known as Tenneco InterAmerica Inc.), a
Delaware corporation ("SHIPBUILDING COMPANY").
R E C I T A L S
WHEREAS, Tenneco, El Paso Natural Gas Company, a Delaware corporation
("ACQUIROR"), and El Paso Merger Company, a Delaware corporation and an
indirect wholly owned subsidiary of Acquiror ("ACQUIROR SUBSIDIARY"), have
entered into an Amended and Restated Agreement and Plan of Merger, dated as of
June 19, 1996 (as amended from time to time, the "MERGER AGREEMENT"),
providing for the merger of Acquiror Subsidiary with and into Tenneco (the
"MERGER"), with Tenneco continuing as the surviving corporation of the Merger
(the "SURVIVING CORPORATION"), upon the terms and subject to the conditions
set forth in the Merger Agreement;
WHEREAS, the Board of Directors of Tenneco has deemed it appropriate and
advisable, prior to the Merger and as contemplated by the Merger Agreement,
to:
(a) separate and divide the existing businesses of Tenneco so that (i)
the automotive, packaging and business services businesses shall be owned
directly and indirectly by Industrial Company, and (ii) the shipbuilding
business shall be owned directly and indirectly by Shipbuilding Company;
and
(b) distribute, following such separation and division and immediately
prior to the Merger, as a dividend to the holders of shares of Common
Stock, par value $5.00 per share, of Tenneco (the "TENNECO COMMON STOCK")
all of the outstanding shares of common stock, $.01 par value, of
Industrial Company (the "INDUSTRIAL COMMON STOCK") and all of the
outstanding shares of common stock, $.01 par value, of Shipbuilding Company
(the "SHIPBUILDING COMMON STOCK");
WHEREAS, following such separation, division and distributions, the
remaining businesses, operations, assets and liabilities of Tenneco and its
remaining direct and indirect subsidiaries shall be acquired by Acquiror
pursuant to the Merger; and
WHEREAS, each of Tenneco, Industrial Company and Shipbuilding Company has
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect such separation, division and
distributions and to set forth other agreements that will govern certain other
matters prior to and following such separation, division and distributions.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL. Unless otherwise defined herein or unless the context
otherwise requires, the following terms will have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined).
"ACTION" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Authority or any arbitration
tribunal.
"ACQUIROR SUBSIDIARY" has the meaning ascribed to such term in the
recitals to this Agreement.
"AFFILIATE" means, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
A-1
<PAGE>
"AGENT" means First Chicago Trust Company of New York, or such other
trust company or bank designated by Tenneco, who shall act as agent for the
holders of Tenneco Common Stock in connection with the Distributions.
"AGREEMENT" means this Distribution Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, including any amendments
hereto and each Schedule and Exhibit attached hereto.
"ANCILLARY AGREEMENTS" means all of the written agreements, instruments,
understandings, assignments or other arrangements (other than this
Agreement or the Merger Agreement) entered into by the parties hereto or
any other member of their respective Group in connection with the Corporate
Restructuring Transactions, the Distributions and the other transactions
contemplated hereby or thereby, including, without limitation, the
following:
(i) the Debt and Cash Allocation Agreement;
(ii) the Insurance Agreement;
(iii) the Conveyancing and Assumption Instruments;
(iv) the Benefits Agreement;
(v) the Tax Sharing Agreement;
(vi) the Transition Services Agreement;
(vii) the TBS Services Agreement; and
(viii) the Transition Trademark License.
"BENEFITS AGREEMENT" means the Benefits Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT A, except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"BOOKS AND RECORDS" means all books, records, manuals, agreements and
other materials (in any form or medium), including without limitation, all
mortgages, licenses, indentures, contracts, financial data, customer lists,
marketing materials and studies, advertising materials, price lists,
correspondence, distribution lists, supplier lists, production data, sales
and promotional materials and records, purchasing materials and records,
personnel records, manufacturing and quality control records and
procedures, blue prints, research and development files, records, data and
laboratory books, accounts records, sales order files, litigation files,
computer files, microfiche, tape recordings and photographs.
"CODE" means the Internal Revenue Code of 1986, as amended, or any
successor law.
"COMMISSION" means the United States Securities and Exchange Commission.
"CONSENTS" has the meaning ascribed to such term in SECTION 2.07 hereof.
"CONVEYANCING AND ASSUMPTION INSTRUMENTS" means, collectively, the
various written agreements, instruments and other documents to be entered
into to effect the Corporate Restructuring Transactions or to otherwise
effect the transfer of assets and the assumption of Liabilities in the
manner contemplated by this Agreement, the Ancillary Agreements and the
Corporate Restructuring Transactions.
"CORPORATE RESTRUCTURING TRANSACTIONS" means, collectively, (a) each of
the distributions, transfers, conveyances, contributions, assignments and
other transactions described and set forth on EXHIBIT B attached hereto,
and (b) such other distributions, transfers, conveyances, contributions,
assignments and other transactions (so long as such other distributions,
transfers, conveyances, contributions, assignments and other transactions
do not, individually or in the aggregate, adversely affect the Energy
Business (other than to a de minimis extent) or materially delay or prevent
the consummation of the Merger) that may be required to be accomplished,
effected or consummated by any of Tenneco, Industrial Company,
A-2
<PAGE>
Shipbuilding Company or any of their respective Subsidiaries and Affiliates
in order to separate and divide, in a series of transactions that, to the
extent intended to qualify for tax-free transactions under the Code, shall
qualify for tax-free treatment under the Code, the existing businesses of
Tenneco so that, except as otherwise expressly set forth on EXHIBIT B
hereto:
(i) the Industrial Assets, Industrial Liabilities and Industrial
Business shall be owned, directly and indirectly, by Industrial
Company;
(ii) the Shipbuilding Assets, Shipbuilding Liabilities and
Shipbuilding Business shall be owned, directly and indirectly, by
Shipbuilding Company; and
(iii) the businesses, assets and liabilities of Tenneco that remain
after the separations and divisions described in clauses (i) and (ii)
above, including, without limitation, the Energy Assets, Energy
Liabilities and Energy Business, are, after giving effect to the
Distributions, owned, directly and indirectly, by Tenneco.
"DEBT AND CASH ALLOCATION AGREEMENT" means the Debt and Cash Allocation
Agreement by and among Tenneco, Industrial Company and Shipbuilding
Company, which agreement shall be entered into on or prior to the
Distribution Date in the form attached hereto as EXHIBIT C, except for such
changes or modifications thereto that do not, individually or in the
aggregate, adversely affect the Energy Business (other than to a de minimis
extent) or materially delay or prevent the consummation of the Merger.
"DEBT REALIGNMENT" has the meaning ascribed to such term in the Merger
Agreement.
"DEBT REALIGNMENT DOCUMENTS" means all documents furnished by Tenneco or
Industrial Company to any holders of indebtedness or debt securities of
Tenneco or any of its Subsidiaries or filed by Tenneco or Industrial
Company in connection therewith with any Governmental Authority or
securities exchange in connection with the Debt Realignment.
"DISTRIBUTIONS" means the Industrial Distribution and the Shipbuilding
Distribution.
"DISTRIBUTION DATE" means such date as may hereafter be determined by
Tenneco's Board of Directors as the date on which the Distributions shall
be effected.
"DISTRIBUTION RECORD DATE" means the close of business on the date
determined by the Board of Directors of Tenneco for the purpose of
determining the holders of record of Tenneco Common Stock entitled to
participate in the Distributions.
"DGCL" means the Delaware General Corporation Law, as amended.
"ENERGY ASSETS" means, collectively, all the rights and assets owned by
Tenneco or any of its Subsidiaries as of the close of business on the
Distribution Date other than the Industrial Assets, the Shipbuilding Assets
and the capital stock of Industrial Company and Shipbuilding Company,
including without limitation:
(i) the capital stock of the Energy Subsidiaries;
(ii) all of the assets included on the Energy Business Pro Forma
Balance Sheet which are owned by Tenneco and its Subsidiaries as of the
close of business on the Distribution Date and any other asset acquired
by Tenneco or any of its Subsidiaries from the date of the Energy
Business Pro Forma Balance Sheet to the close of business on the
Distribution Date that is owned by Tenneco and its Subsidiaries as of
the close of business on the Distribution Date and that is of a type or
nature that would have resulted in such asset being included as an
asset on the Energy Business Pro Forma Balance Sheet had it been
acquired on or prior to the date of the Energy Business Pro Forma
Balance Sheet, determined on a basis consistent with the determination
of assets included on the Energy Business Pro Forma Balance Sheet; and
(iii) all of the assets and rights expressly allocated to Tenneco or
any of the Energy Subsidiaries under this Agreement, any of the
Ancillary Agreements or the Merger Agreement.
"ENERGY BUSINESS" means the businesses (other than the Industrial
Business and the Shipbuilding Business) that, after giving effect to the
Corporate Restructuring Transactions, are or were conducted by:
(i) Tenneco, the Energy Subsidiaries or any of the other members of
the Energy Group;
(ii) any other division, Subsidiary or investment of Tenneco, or any
Energy Subsidiary or any of the other members of the Energy Group
managed or operated or in existence as of the date of this Agreement or
any prior time, unless such other division, Subsidiary or investment is
expressly included
A-3
<PAGE>
in either the Industrial Group or the Shipbuilding Group immediately
after giving effect to the Corporate Restructuring Transactions; and
(iii) any business entity acquired or established by or for Tenneco
or any of the Energy Subsidiaries between the date of this Agreement
and the close of business on the Distribution Date that is engaged in,
or intends to engage in, any business that is of a type or nature that
would have resulted in such business being included either as a
Subsidiary or an asset of Tenneco on the Energy Business Pro Forma
Balance Sheet had it been acquired or established on or prior to the
date of the Energy Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Energy Business Pro Forma Balance Sheet.
"ENERGY BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Tenneco and the Energy Subsidiaries as of
June 30, 1996 attached hereto as EXHIBIT D.
"ENERGY GROUP" means Tenneco, the Energy Subsidiaries and the
corporations, partnerships, joint ventures, investments and other entities
that represent equity investments of Tenneco or any of the Energy
Subsidiaries following consummation of the Corporate Restructuring
Transactions and the Distributions.
"ENERGY INDEMNITEES" means:
(i) Tenneco, the Energy Subsidiaries and each Affiliate thereof after
giving effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of such directors, officers, employees and
agents.
"ENERGY LIABILITIES" means, collectively, all of the Liabilities of
Tenneco and the Energy Subsidiaries and each of the other members of the
Energy Group remaining after giving effect to the Corporate Restructuring
Transactions, the Distributions and the transactions contemplated under the
Debt and Cash Allocation Agreement, including without limitation:
(i) all of the Liabilities included on the Energy Business Pro Forma
Balance Sheet which remain outstanding as of the close of business on
the Distribution Date;
(ii) all Liabilities which are incurred or which otherwise accrue or
are accrued at any time on, prior to or after the date of the Energy
Business Pro Forma Balance Sheet and which arise or arose out of, or in
connection with, the Energy Assets or the Energy Business, determined
on a basis consistent with the determination of Liabilities of Tenneco
included on the Energy Business Pro Forma Balance Sheet;
(iii) all of the Liabilities of Tenneco, the Energy Subsidiaries or
any of the other members of the Energy Group under, or to be retained
or assumed by Tenneco, any Energy Subsidiary or any of the other
members of the Energy Group pursuant to the Corporate Restructuring
Transactions, this Agreement, any of the Ancillary Agreements or the
Merger Agreement;
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Energy Business;
(v) all Securities Liabilities relating to or arising out of the
information and data (financial or otherwise and including pro forma
financial data) provided by or on behalf of Acquiror for inclusion in
the Registration Statement on Form S-4 of Industrial Company
registering certain debt securities of New Tenneco to be exchanged for
certain existing debt securities of Tenneco and certain of its
Subsidiaries in connection with the Debt Realignment, including,
without limitation, information, disclosures and data relating to or
concerning Acquiror, Acquiror Subsidiary, the business, operations and
management of the Energy Business and/or Energy Group following the
Merger and any refinancing or other transactions which Acquiror,
Acquiror Subsidiary and/or any member of the Energy Group anticipates
consummating following the Merger (collectively "ENERGY EXCHANGE
LIABILITIES"); and
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(vi) all other Liabilities of Tenneco, the Energy Subsidiaries or any
of the other members of the Energy Group (which do not constitute
Industrial Liabilities or Shipbuilding Liabilities), which other
Liabilities of Tenneco, the Energy Subsidiaries or any of the other
members of the Energy Group shall include, without limitation, any and
all Liabilities arising out of or relating to any Action or Third Party
Claim by any Governmental Authority or any other Person that is based
on (A) any violations or alleged violations by Tenneco, its
Subsidiaries (prior to giving effect to the Distributions) and/or any
of their respective directors, officers, employees, agents or
representatives of any of the provisions of the Exchange Act,
Securities Act, or the rules and regulations of the Commission
promulgated thereunder or any other securities or similar Law (other
than Liabilities (collectively "INFORMATION STATEMENT LIABILITIES") for
violations or alleged violations that arise out of, or in connection
with, the Industrial Information Statement, the Shipbuilding
Information Statement or information or data in the Joint Proxy
Statement or the Debt Realignment Documents concerning the Shipbuilding
Business or the Industrial Business), (B) any alleged breach of
fiduciary duty by the Board of Directors of Tenneco or any member
thereof, or (C) any stockholder derivative suit or other similar
Actions.
"ENERGY RECORDS" has the meaning ascribed to such term in SECTION 6.01(C)
hereof.
"ENERGY SUBSIDIARIES" means the Subsidiaries of Tenneco set forth on
EXHIBIT E hereto and all other Subsidiaries of Tenneco other than
Shipbuilding Company, Industrial Company, the Shipbuilding Subsidiaries and
the Industrial Subsidiaries.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions (including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et
seq.), whether now or hereafter in existence, relating to the environment,
natural resources or human health and safety or endangered or threatened
species of fish, wildlife and plants or to emissions, discharges or
releases of pollutants, contaminants, petroleum or petroleum products,
chemicals or industrial, toxic or hazardous substances or wastes into the
environment, including, without limitation, ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE FILE MATERIAL" means the Registration Statements, as amended at
the times they were declared effective under the Exchange Act, the related
Information Statements or any amendment or supplement thereto, the related
letter of transmittal, any related stockholder communication, any other
exhibits to any of the foregoing and any amendment or supplement thereto,
in each case including all information incorporated by reference therein.
"GAAP" means United States generally accepted accounting principles and
practices, as in effect on the date of this Agreement, as promulgated by
the Financial Accounting Standards Board and its predecessors.
"GOVERNMENTAL AUTHORITY" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
"GROUP" means (i) with respect to Tenneco, the Energy Group, (ii) with
respect to Industrial Company, the Industrial Group, and (iii) with respect
to Shipbuilding Company, the Shipbuilding Group.
"INDEMNIFIABLE LOSSES" means, with respect to any Person, any and all
losses, liabilities, penalties, claims, damages, demands, costs and
expenses (including, without limitation, reasonable attorneys' fees,
investigation expenses and any and all other out-of-pocket expenses, but
excluding any punitive or consequential damages) or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by such Person either (a) in investigating, preparing for, defending
against or otherwise arising out of or in connection with any Actions, any
potential or threatened Actions or any Third Party
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Claims for which such Person would be entitled to indemnification under
ARTICLE VII hereof, or (b) in respect of any other event, occurrence or
matter for which such Person would be entitled to indemnification under
ARTICLE VII hereof, in each case whether accrued or incurred on, before or
after the date of this Agreement.
"INDEMNIFYING PARTY" has the meaning ascribed to such term in SECTION
7.04(A) hereof.
"INDEMNITEE" has the meaning ascribed to such term in SECTION 7.04(A)
hereof.
"INDUSTRIAL ASSETS" means, collectively, all of the following rights and
assets that are owned by Tenneco or any of its Subsidiaries as of the close
of business on the Distribution Date:
(i) the capital stock of the Industrial Subsidiaries;
(ii) all of the assets included on the Industrial Business Pro Forma
Balance Sheet that are owned by Tenneco or any of its Subsidiaries as
of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to Industrial
Company or any of the Industrial Subsidiaries under this Agreement or
any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Industrial Business Pro Forma Balance Sheet to the
close of business on the Distribution Date that is owned by Tenneco or
any of its Subsidiaries as of the close of business on the Distribution
Date and that is of a type or nature that would have resulted in such
asset being included as an asset on the Industrial Business Pro Forma
Balance Sheet had it been acquired on or prior to the date of the
Industrial Business Pro Forma Balance Sheet, determined on a basis
consistent with the determination of the assets included on the
Industrial Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Industrial Company, the Industrial Subsidiaries or any of the
other members of the Industrial Group; and
(ii) any business entity acquired or established by or for Tenneco,
Industrial Company or any of the Industrial Subsidiaries between the
date of this Agreement and the close of business on the Distribution
Date that is engaged in, or intends to engage in, any business that is
of a type or nature that would have resulted in such business being
included either as a Subsidiary or an asset of Industrial Company on
the Industrial Business Pro Forma Balance Sheet had it been acquired or
established on or prior to the date of the Industrial Business Pro
Forma Balance Sheet, determined on a basis consistent with the
determination of the Subsidiaries and assets included on the Industrial
Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Industrial Company and the Industrial
Subsidiaries as of June 30, 1996 attached hereto as EXHIBIT F.
"INDUSTRIAL COMMON SHARES" means the shares of Industrial Common Stock
owned by Tenneco after giving effect to the stock dividend provided for in
SECTION 2.02(A) hereof.
"INDUSTRIAL COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"INDUSTRIAL COMPANY" means New Tenneco Inc., a Delaware corporation.
"INDUSTRIAL DISTRIBUTION" means the distribution on the Distribution Date
as a dividend to holders of record of shares of Tenneco Common Stock as of
the Distribution Record Date of all of the outstanding Industrial Common
Shares owned by Tenneco on the basis provided in SECTION 3.02 hereof.
"INDUSTRIAL GROUP" means Industrial Company, the Industrial Subsidiaries
and the corporations, partnerships, joint ventures, investments and other
entities that represent equity investments of any of Industrial Company or
any of the Industrial Subsidiaries following the consummation of the
Corporate Restructuring Transactions and the Distributions.
"INDUSTRIAL INDEMNITEES" means:
(i) Industrial Company and each Affiliate thereof after giving effect
to the Corporate Restructuring Transactions and the Distributions; and
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(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"INDUSTRIAL INFORMATION STATEMENT" means the information statement or
registration statement relating to Industrial Company and the transactions
contemplated hereby to be distributed to holders of Tenneco Common Stock
pursuant to the terms of this Agreement.
"INDUSTRIAL LIABILITIES" means, collectively, all of the Liabilities of
Industrial Company, the Industrial Subsidiaries and each of the other
members of the Industrial Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated under the Debt and Cash Allocation Agreement, including,
without limitation:
(i) all of the Liabilities included on the Industrial Business Pro
Forma Balance Sheet which remain outstanding as of the close of
business on the Distribution Date;
(ii) all Liabilities (other than Energy Exchange Liabilities) which
are incurred or which otherwise accrue or are accrued at any time on,
prior to or after the date of the Industrial Business Pro Forma Balance
Sheet and which arise or arose out of, or in connection with (A) the
Industrial Assets, the Industrial Business or the Prior Industrial
Businesses, determined on a basis consistent with the determination of
Liabilities of Industrial Company on the Industrial Business Pro Forma
Balance Sheet, including Information Statement Liabilities which arise
or arose out of or in connection with, the Industrial Information
Statement or which arise or arose out of or in connection with
information or data in the Joint Proxy Statement or the Debt
Realignment Documents concerning the Industrial Business (except to the
extent such Liabilities constitute Shipbuilding Securities Liabilities
or are otherwise based on any of (i) the actions or inactions of
Shipbuilding Company, any other member of the Shipbuilding Group, or
any director, officer or employee of the Shipbuilding Company or any
other member of the Shipbuilding Group or any underwriter or investment
banking firm of any member of the Shipbuilding Group (or any of their
directors, officers, employees, advisors or representatives)
(collectively, the "SHIPBUILDING PARTIES," or individually, a
"SHIPBUILDING PARTY"), or (ii) the information or data provided in
writing by any Shipbuilding Party expressly for inclusion in the
Industrial Information Statement), or (B) the Shipbuilding Information
Statement to the extent such Information Statement Liabilities are
based on information or data concerning directly and solely the
Industrial Company or the Industrial Business that is provided in
writing by Industrial Company (or any other member of its Group or any
Affiliate thereof after giving effect to the Distributions) expressly
for inclusion in the Shipbuilding Information Statement;
(iii) all of the Liabilities of Industrial Company, the Industrial
Subsidiaries or any of the other members of the Industrial Group under,
or to be retained or assumed by Industrial Company, any Industrial
Subsidiary or any of the other members of the Industrial Group pursuant
to this Agreement or any of the Ancillary Agreements; and
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, at or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Industrial Business.
"INDUSTRIAL RECORDS" has the meaning ascribed to such term in SECTION
6.01(A) hereof.
"INDUSTRIAL REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations thereunder in
order to register the Industrial Common Stock under Section 12(b) of the
Exchange Act.
"INFORMATION STATEMENT LIABILITIES" has the meaning ascribed to such term
in CLAUSE (V) of the definitions herein of Energy Liabilities.
"INFORMATION STATEMENTS" means the Industrial Information Statement and
the Shipbuilding Information Statement.
"INDUSTRIAL SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT G
hereto.
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"INSURANCE AGREEMENT" means the Insurance Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT H except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"INSURANCE PROCEEDS" means, with respect to any insured party, those
monies, net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, or cost of reserve paid or held by or for
the benefit of such insured, which are either:
(i) received by an insured from an insurance carrier; or
(ii) paid by an insurance carrier on behalf of an insured.
"JOINT PROXY STATEMENT" has the meaning ascribed to such term in the
Merger Agreement.
"LAW" means all laws, statutes and ordinances and all regulations, rules
and other pronouncements of Governmental Authorities having the effect of
law of the United States, any foreign country, or any domestic or foreign
state, province, commonwealth, city, country, municipality, territory,
protectorate, possession or similar instrumentality, or any Governmental
Authority thereof.
"LIABILITIES" means any and all debts, liabilities, obligations,
responsibilities, response actions, losses, damages (whether compensatory,
punitive or treble), fines, penalties and sanctions, absolute or
contingent, matured or unmatured, liquidated or unliquidated, foreseen or
unforeseen, joint, several or individual, asserted or unasserted, accrued
or unaccrued, known or unknown, whenever arising, including, without
limitation, those arising under or in connection with any Law (including
any Environmental Law), Action, threatened Action, order or consent decree
of any Governmental Authority or any award of any arbitration tribunal, and
those arising under any contract, guarantee, commitment or undertaking,
whether sought to be imposed by a Governmental Authority, private party, or
party to this Agreement, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, or
otherwise, and including any costs, expenses, interest, attorneys' fees,
disbursements and expense of counsel, expert and consulting fees and costs
related thereto or to the investigation or defense thereof.
"MERGER" has the meaning ascribed to such term in the recitals to this
Agreement.
"MERGER AGREEMENT" has the meaning ascribed to such term in the recitals
to this Agreement.
"NYSE" means the New York Stock Exchange.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or
other entity, or any government, or any agency or political subdivision
thereof.
"PRIOR INDUSTRIAL BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Industrial
Business Pro Forma Balance Sheet, were included in the "automotive parts"
or "packaging" segments for purposes of segment reporting in any of
Tenneco's Annual Reports on Form 10-K, and were sold, transferred,
otherwise disposed of or discontinued prior to such date.
"PRIOR SHIPBUILDING BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Shipbuilding
Business Pro Forma Balance Sheet, were included in the "shipbuilding"
segment for purposes of segment reporting in any of Tenneco's Annual
Reports on Form 10-K, and were sold, transferred, otherwise disposed of or
discontinued prior to such date.
"PRIVILEGE" has the meaning ascribed to such term in SECTION 6.07(A)
hereof.
"PRIVILEGED INFORMATION" has the meaning ascribed to such term in SECTION
6.07(A) hereof.
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"REGISTRATION STATEMENTS" means the Industrial Registration Statement and
the Shipbuilding Registration Statement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES LIABILITIES" means any and all losses, liabilities,
penalties, claims, damages, demands, costs or expenses or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by a Person arising out of or relating in whole or in part to any Action,
any potential or threatened Action or any Third Party Claim (or potential
or threatened Third Party Claim) by any Governmental Authority or any other
Person that is based on any violations or alleged violations of the
Securities Act, Exchange Act, any of the rules or regulations of the
Commission promulgated under the Securities Act or Exchange Act, or any
other securities or other similar Law.
"SHIPBUILDING ASSETS" means, collectively, all of the following rights
and assets that are owned by Tenneco and or any of its Subsidiaries as of
the close of business on the Distribution Date:
(i) the capital stock of the Shipbuilding Subsidiaries;
(ii) all of the assets included on the Shipbuilding Business Pro
Forma Balance Sheet that are owned by Tenneco or any of its
Subsidiaries as of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to
Shipbuilding Company or any of the Shipbuilding Subsidiaries under this
Agreement or any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Shipbuilding Business Pro Forma Balance Sheet to
the close of business on the Distribution Date that is owned by Tenneco
or any of its Subsidiaries as of the close of business on the
Distribution Date and that is of a nature or type that would have
resulted in such asset being included as an asset on the Shipbuilding
Business Pro Forma Balance Sheet had it been acquired on or prior to
the date of the Shipbuilding Business Pro Forma Balance Sheet,
determined on a basis consistent with the determination of the assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Shipbuilding Company, the Shipbuilding Subsidiaries or any of
the other members of the Shipbuilding Group; and
(ii) any business entity acquired or established by or for Tenneco,
Shipbuilding Company or any of the Shipbuilding Subsidiaries between
the date of this Agreement and the close of business on the
Distribution Date that is engaged in, or intends to engage in, any
business that is of a type or nature that would have resulted in such
business being included either as a Subsidiary or an asset of
Shipbuilding Company on the Shipbuilding Business Pro Forma Balance
Sheet had it been acquired or established on or prior to the date of
the Shipbuilding Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Shipbuilding Company and the Shipbuilding
Subsidiaries (prepared in accordance with GAAP) as of June 30, 1996
attached hereto as EXHIBIT I.
"SHIPBUILDING COMMON SHARES" means the Shares of Shipbuilding Common
Stock owned by Tenneco after giving effect to the stock dividend provided
for in SECTION 2.02(B) hereof.
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"SHIPBUILDING COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"SHIPBUILDING COMPANY" means Newport News Shipbuilding Inc. (formerly
known as Tenneco InterAmerica Inc.), a Delaware corporation.
"SHIPBUILDING DISTRIBUTION" means the distribution on the Distribution
Date as a dividend to holders of record of shares of Tenneco Common Stock
as of the Distribution Record Date, of all of the outstanding Shipbuilding
Common Shares owned by Tenneco on the basis provided in SECTION 3.02
hereof.
"SHIPBUILDING FINANCING MATERIALS" means any registration statement,
private placement memorandum, offering circular, prospectus, information
memorandum and/or any other document or filing (with the Commission or any
Governmental Authority or the NYSE or other stock exchange) prepared by or
on behalf of Shipbuilding Company (or its Affiliates) and distributed to
prospective lenders or prospective purchasers of any debt or equity
securities of the Shipbuilding Company (or any other member of the
Shipbuilding Group) in connection with any of the transactions contemplated
under this Agreement, the Merger Agreement or any of the Ancillary
Agreements, including, without limitation, the Confidential Information
Memorandum dated September 1996 relating to the Senior Credit Facility (as
defined in the Shipbuilding Information Statement), the 144A Offering
Memorandum relating to the Senior Subordinated Notes and Senior Notes (as
such terms are defined in the Shipbuilding Information Statement), and the
registration statement on Form S-1 to be filed by Shipbuilding Company
after the Distribution Date to register the Senior Subordinated Notes and
Senior Notes under the Securities Act and all related documents.
"SHIPBUILDING GROUP" means Shipbuilding Company, the Shipbuilding
Subsidiaries and the corporations, partnerships, joint ventures,
investments and other entities that represent equity investments of
Shipbuilding Company or any of the Shipbuilding Subsidiaries following the
consummation of the Corporate Restructuring Transactions and the
Distributions.
"SHIPBUILDING INDEMNITEES" means:
(i) Shipbuilding Company and each Affiliate thereof after giving
effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"SHIPBUILDING INFORMATION STATEMENT" means the information statement or
registration statement relating to Shipbuilding Company and the
transactions contemplated hereby to be distributed to holders of Tenneco
Common Stock pursuant to the terms of this Agreement.
"SHIPBUILDING LIABILITIES" means, collectively, all of the Liabilities of
Shipbuilding Company, the Shipbuilding Subsidiaries and each of the other
members of the Shipbuilding Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated by the Debt and Cash Allocation Agreement, including, without
limitation:
(i) all of the Liabilities included on the Shipbuilding Business Pro
Forma Balance Sheet that remain outstanding as of the close of business
on the Distribution Date;
(ii) all other Liabilities that are incurred or which accrue or are
accrued at any time on, prior to or after the date of the Shipbuilding
Business Pro Forma Balance Sheet and that arise or arose out of, or in
connection with, the Shipbuilding Assets, the Shipbuilding Business or
the Prior Shipbuilding Businesses, determined on a basis consistent
with the determination of Liabilities of Shipbuilding Company on the
Shipbuilding Business Pro Forma Balance Sheet, including, without
limitation,
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Shipbuilding Securities Liabilities and Information Statement
Liabilities to the extent such Information Statement Liabilities (A)
arise or arose out of or in connection with the Shipbuilding
Information Statement or information or data in the Joint Proxy
statement or the Debt Realignment Documents concerning the Shipbuilding
Business or (B) are based on information or data provided in writing by
Shipbuilding Company (or any member of its Group or any Affiliate
(after giving effect to the Distributions) thereof) expressly for
inclusion in the Industrial Information Statement;
(iii) all of the Liabilities of Shipbuilding Company, the
Shipbuilding Subsidiaries or any of the other members of the
Shipbuilding Group under, or to be retained or assumed by Shipbuilding
Company, any Shipbuilding Subsidiary or any of the other members of the
Shipbuilding Group pursuant to, this Agreement or any of the Ancillary
Agreements; and
(iv) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Shipbuilding Business.
"SHIPBUILDING RECORDS" has the meaning ascribed to such term in SECTION
6.01(B) hereof.
"SHIPBUILDING REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations promulgated
thereunder in order to register the Shipbuilding Common Stock under Section
12(b) of the Exchange Act.
"SHIPBUILDING SECURITIES LIABILITIES" means any and all Securities
Liabilities arising out of, or in connection with, or relating in whole or
in part to any of the following: (i) the Shipbuilding Registration
Statement; (ii) the Shipbuilding Information Statement (whether in the form
as an Appendix to the Joint Proxy Statement or as the Information Statement
included in the Shipbuilding Registration Statement); (iii) the
Shipbuilding Financing Materials; (iv) any of the information, data
(financial or otherwise) or disclosures in (or any alleged failure to set
forth certain information, data or disclosures in) the Shipbuilding
Registration Statement, Shipbuilding Information Statement (whether in the
form as an Appendix to the Joint Proxy Statement or as the Information
Statement included in the Shipbuilding Registration Statement) or
Shipbuilding Financing Materials, irrespective of (A) who authored,
prepared or provided such information, data or disclosures (or, as the case
may be, the section or discussion in which certain information, data or
disclosure is alleged to have been omitted), or (B) the form in which, or
medium through which (e.g., verbally, in writing, etc.), such information,
data, disclosures, discussion or section were provided; or (v) any of the
information, data (financial or otherwise) or disclosures in (or any
alleged failure to set forth certain information, data or disclosures in)
the Joint Proxy Statement or the Debt Realignment Documents concerning any
matter relating to the business, operations, management, financial results
or potential risks of (or pending or threatened claims or investigations
relating to) the Shipbuilding Business, Prior Shipbuilding Businesses,
Shipbuilding Assets or Shipbuilding Liabilities, irrespective of (A) who
authored, prepared or provided such information data or disclosures (or, as
the case may be, the section or discussion in which certain information,
data or disclosure is alleged to have been omitted), or (B) the form in
which, or medium through which (e.g., verbally, in writing, etc.), such
information, data, disclosure, section or discussion were provided.
"SHIPBUILDING SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT J
hereto.
"SUBSIDIARY" means, with respect to any Person:
(i) any corporation of which at least a majority in interest of the
outstanding voting stock (having by the terms thereof voting power
under ordinary circumstances to elect a majority of the directors of
such corporation, irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of a contingency) is at
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the time, directly or indirectly, owned or controlled by such Person or
by such Person and one or more of its Subsidiaries; or
(ii) any non-corporate entity in which such Person or such Person and
one or more Subsidiaries of such Person either (a) directly or
indirectly, at the date of determination thereof, has at least majority
ownership interest, or (b) at the date of determination is a general
partner or an entity performing similar functions (e.g., manager of a
Limited Liability Company or a trustee of a trust).
"SURVIVING CORPORATION" has the meaning ascribed to such term in the
recitals to this Agreement.
"TAX" or "TAXES" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, services, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment or other charge in the nature of or in lieu
of any tax) imposed by any governmental entity or political subdivision
thereof, and any interest, penalties, additions to tax, or additional
amounts in respect of the foregoing.
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and among
Tenneco, Shipbuilding Company, Industrial Company and Acquiror, which
agreement shall be entered into on or prior to the Distribution Date in the
form attached hereto as EXHIBIT K, except for such changes or modifications
thereto that do not, individually or in the aggregate, adversely affect the
Energy Business other than to a de minimis extent.
"TENNECO" means Tenneco Inc., a Delaware corporation.
"TENNECO COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"TENNECO CORPORATE RECORDS" has the meaning ascribed to such term in
SECTION 6.01(A) hereof.
"TENNECO HOLDERS" means the holders of record of Tenneco Common Stock as
of the Distribution Record Date.
"TENNECO TRADEMARKS AND TRADENAMES" means all trademarks, service marks,
and tradenames containing "TENNECO", "TEN", or "TENN" or variations
thereof, along with their respective applications and registrations
wherever used or registered; provided, however, that the term shall not
include the word "Tennessee" to the extent such word is used in the
business and operations of Tennessee Gas Pipeline Company or otherwise in
the Energy Business.
"TERMINATION DATE" means the date on which this Agreement is terminated
pursuant to and in accordance with the provisions of SECTION 8.11 of this
Agreement.
"THIRD PARTY CLAIM" has the meaning as defined in SECTION 7.05(A) hereof.
"TBS SERVICES AGREEMENT" means the Services Agreement by and among
Industrial Company, Shipbuilding Company and Tenneco Business Services
Inc., which agreement shall be entered into on or prior to the Distribution
Date in substantially the form attached hereto as EXHIBIT L and which
agreement Tenneco and the Energy Business will not become a party to and
not be bound by without the consent of Acquiror, which Acquiror may
withhold in its sole discretion.
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
by and between Tenneco and Tenneco Business Services Inc., which agreement
shall be entered into on or prior to the Distribution Date in the form
attached hereto as EXHIBIT M.
"TRANSITION TRADEMARK LICENSE" has the meaning ascribed to such term in
SECTION 5.02 hereof.
SECTION 1.02. REFERENCES. References to an "EXHIBIT" or to a "SCHEDULE" are,
unless otherwise specified, to one of the Exhibits or Schedules attached to
this Agreement, and references to a "SECTION" are, unless otherwise specified,
to one of the Sections of this Agreement.
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ARTICLE II
PRE-DISTRIBUTION TRANSACTIONS;
CERTAIN COVENANTS
SECTION 2.01. CORPORATE RESTRUCTURING TRANSACTIONS. On or prior to the
Distribution Date (but in all events prior to the Distributions) and otherwise
in accordance with the terms and provisions set forth in EXHIBIT B hereto,
each of Tenneco, Industrial Company and Shipbuilding Company shall, and shall
cause each of their respective Subsidiaries to, as applicable, take such
action or actions as is necessary to cause, effect and consummate the
Corporate Restructuring Transactions. Each of Tenneco, Shipbuilding Company
and Industrial Company hereby agrees that any one or more of the Corporate
Restructuring Transactions may be modified, supplemented or eliminated;
provided such modification, supplement or elimination (a) is determined to be
necessary or appropriate (i) to divide the existing businesses of Tenneco so
that the automotive, packaging and business services businesses shall be
owned, directly and indirectly, by Industrial Company and the shipbuilding
business shall be owned, directly and indirectly, by Shipbuilding Company, or
(ii) to obtain a ruling from the Internal Revenue Service as described in
Section 7.1(g) of the Merger Agreement, and (b) does not, individually or in
the aggregate, adversely affect the Energy Business (other than to a de
minimis extent) or materially delay or prevent the consummation of the Merger.
SECTION 2.02. PRE-DISTRIBUTION STOCK DIVIDENDS TO TENNECO. On or prior to
the Distribution Date (but in all events prior to the Distributions):
(a) INDUSTRIAL COMPANY STOCK DIVIDEND. Industrial Company shall issue to
Tenneco, as a stock dividend, the number of shares of Industrial Common
Stock as is required to effect the Industrial Distribution, as certified by
the Agent. In connection therewith, Tenneco shall deliver to Industrial
Company for cancellation the share certificate (or certificates) currently
held by it representing all Industrial Common Stock, and Industrial Company
shall issue a new certificate (or certificates) to Tenneco representing the
total number of Industrial Common Shares to be owned by Tenneco after
giving effect to such stock dividend.
(b) SHIPBUILDING COMPANY STOCK DIVIDEND. Shipbuilding Company shall issue
to Tenneco, as a stock dividend, the number of shares of Shipbuilding
Common Stock as is required to effect the Shipbuilding Distribution, as
certified by the Agent. In connection therewith, Tenneco shall deliver to
Shipbuilding Company for cancellation the share certificate (or
certificates) currently held by it representing all Shipbuilding Common
Stock, and Shipbuilding Company shall issue a new certificate (or
certificates) representing the total number of Shipbuilding Common Shares
to be owned by Tenneco after giving effect to such stock dividend.
SECTION 2.03. CHARTERS AND BYLAWS.
(a) CERTIFICATE OF INCORPORATION AND BYLAWS OF INDUSTRIAL COMPANY. On or
prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Industrial Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Industrial Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
(b) CERTIFICATE OF INCORPORATION AND BYLAWS OF SHIPBUILDING COMPANY. On
or prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Shipbuilding Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Shipbuilding Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
SECTION 2.04. ELECTION OF DIRECTORS OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. On or prior to the Distribution Date, Tenneco, as the sole
stockholder of each of Industrial Company and Shipbuilding Company, shall take
all necessary action so that as of the Distribution Date the directors of
Industrial Company and of Shipbuilding Company will be as set forth in the
Industrial Information Statement and the Shipbuilding Information Statement,
respectively.
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SECTION 2.05. TRANSFER AND ASSIGNMENT OF CERTAIN LICENSES AND PERMITS.
(a) LICENSES AND PERMITS RELATING TO THE INDUSTRIAL BUSINESS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter,
each of Tenneco and Shipbuilding Company shall (and, if applicable, shall
cause any other Person over which it has legal or effective direct or
indirect control to), severally but not jointly, duly and validly transfer
or cause to be duly and validly transferred to the appropriate member of
the Industrial Group (as directed by Industrial Company) all transferrable
licenses, permits and authorizations issued by any Governmental Authority
that relate to the Industrial Business but which are held in the name of
any member of the Energy Group or the Shipbuilding Group, or any of their
respective employees, officers, directors, stockholders or agents.
(b) LICENSES AND PERMITS RELATING TO THE SHIPBUILDING BUSINESS. On or
prior to the Distribution Date, or as soon as reasonably practicable
thereafter, each of Tenneco and Industrial Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Shipbuilding Group (as directed by Shipbuilding
Company) all transferrable licenses, permits and authorizations issued by
any Governmental Authority that relate to the Shipbuilding Business but
which are held in the name of any member of the Energy Group or the
Industrial Group, or any of their respective employees, officers,
directors, stockholders or agents.
(c) LICENSES AND PERMITS RELATING TO THE ENERGY BUSINESS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter,
each of Industrial Company and Shipbuilding Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Energy Group (as directed by Tenneco) all
transferrable licenses, permits and authorizations issued by any
Governmental Authority that relate to the Energy Business but which are
held in the name of any member of the Industrial Group or the Shipbuilding
Group, or any of their respective employees, officers, directors,
stockholders or agents.
SECTION 2.06. TRANSFER AND ASSIGNMENT OF CERTAIN AGREEMENTS.
(a) TRANSFER AND ASSIGNMENT OF ENERGY BUSINESS AGREEMENTS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Industrial
Company and Shipbuilding Company shall (and, if applicable, shall cause any of
the other members of its Group over which it has legal or effective direct or
indirect control to), severally but not jointly, assign, transfer and convey
to Tenneco (or such other member of the Energy Group as Tenneco shall direct)
all of its (or such other member of its Group's) right, title and interest in
and to any and all agreements that relate exclusively to the Energy Business
or any member of the Energy Group.
(b) TRANSFER AND ASSIGNMENT OF INDUSTRIAL BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Shipbuilding Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Industrial Company (or such other member of the Industrial Group as Industrial
Company shall direct) all of its (or such other member of its Group's) right,
title and interest in and to any and all agreements that relate exclusively to
the Industrial Business or any member of the Industrial Group.
(c) TRANSFER AND ASSIGNMENT OF SHIPBUILDING BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Industrial Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Shipbuilding Company (or such other member of the Shipbuilding Group as
Shipbuilding Company shall direct) all of its (or such other member of its
Group's) right, title and interest in and to any and all agreements that
relate exclusively to the Shipbuilding Business or any member of the
Shipbuilding Group.
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(d) JOINT AGREEMENTS. Subject to the provisions of SECTION 2.06(F) below,
any agreement to which any party hereto (or any other member of such party's
Group) is a party that inures to the benefit of more than one of the Energy
Business, the Industrial Business and the Shipbuilding Business shall be
assigned in part, at the expense and risk of the assignee, on or prior to the
Distribution Date or as soon as reasonably practicable thereafter, so that
each party (or such other member of such party's Group) shall be entitled to
the rights and benefits inuring to its business under such agreement.
(e) OBLIGATIONS OF ASSIGNEES. The assignee of any agreement assigned, in
whole or in part, hereunder (an "ASSIGNEE") shall, as a condition to such
assignment, assume and agree to pay, perform, and fully discharge all
obligations of the assignor under such agreement (whether such obligations
arose or were incurred prior to, on or subsequent to the Distribution Date and
irrespective of whether such obligations have been asserted as of the
Distribution Date) or, in the case of a partial assignment under SECTION
2.06(D) above, such Assignee's related portion of such obligations as
determined in accordance with the terms of the relevant agreement, where
determinable on the face thereof, and otherwise as determined in accordance
with the practice of the parties prior to the Distributions. Furthermore, the
Assignee shall use its commercially reasonable efforts to cause the assignor
of such agreement to be released from its obligations under the assigned
agreements.
(f) NO ASSIGNMENT OF CERTAIN AGREEMENTS. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or attempt to assign, without the consent of a third
party, would constitute a breach thereof or in any way adversely affect the
rights of the Assignee thereof until such consent is obtained. If an attempted
assignment thereof would be ineffective or would adversely affect the rights
of any party hereto so that the Assignee would not, in fact, receive all such
rights, the parties hereto will cooperate with each other to effect any
arrangement designed reasonably to provide for the Assignee the benefits of,
and to permit the Assignee to assume liabilities under, any such agreement,
subject to the remaining sentences of this SECTION 2.06(F). There are certain
software license agreements held in the name of a member of the Industrial
Group that presently inure to the benefit of the Energy Business, the
Industrial Business and the Shipbuilding Business. Notwithstanding any other
provision of this Agreement, each such license agreement shall continue to be
held by that member of the Industrial Group without any obligation of any
party to cause the assignment or inurement to the benefit of such license
agreement, or to effect any arrangement to provide such benefit, to the Energy
Business or the Shipbuilding Business, except where the license agreement
expressly permits the benefits and obligations to be divided among the
Businesses or as may be negotiated with the licensor by that member of the
Industrial Group and such other parties and the Industrial Business shall use
commercially reasonable efforts to do so.
SECTION 2.07. CONSENTS. The parties hereto shall use their best efforts to
obtain any third-party consents or approvals that are required to consummate
the Corporate Restructuring Transactions, the Distributions and the other
transactions contemplated herein (the "CONSENTS").
SECTION 2.08. OTHER TRANSACTIONS. On or prior to the Distribution Date (but
in all events prior to the Distributions), each of Tenneco, Industrial Company
and Shipbuilding Company shall have consummated those other transactions in
connection with the Corporate Restructuring Transactions and the Distributions
that are contemplated by the Information Statements and the ruling request
submission by Tenneco to the Internal Revenue Service dated June 27, 1996 (as
subsequently supplemented), and not specifically referred to in SECTIONS 2.01
through 2.07 above, subject, however, to the limitations set forth in
SUBPARAGRAPH (B) of SECTION 2.01 above.
SECTION 2.09. ELECTION OF OFFICERS. On or prior to the Distribution Date,
each of Tenneco, Industrial Company and Shipbuilding Company shall, as
applicable, take all actions necessary and desirable so that as of the
Distribution Date the officers of Industrial Company and of Shipbuilding
Company will be as set forth in the Industrial Information Statement and the
Shipbuilding Information Statement, respectively.
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SECTION 2.10. REGISTRATION STATEMENTS. Each of Tenneco, Industrial Company
and Shipbuilding Company shall prepare, and shall file with the Commission,
the Registration Statements in accordance with the terms of this SECTION 2.10.
(a) PREPARATION AND FILING OF INDUSTRIAL REGISTRATION STATEMENT. Tenneco,
Industrial Company and Shipbuilding Company shall prepare or cause to be
prepared, and Industrial Company shall file or cause to be filed with the
Commission, the Industrial Registration Statement. The Industrial
Registration Statement shall include or incorporate by reference the
Industrial Information Statement setting forth appropriate disclosure
concerning Tenneco, Industrial Company, Shipbuilding Company, the
Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Industrial Company shall take all such
actions as may be reasonably necessary or appropriate in order to cause the
Industrial Registration Statement to become effective by order of the
Commission pursuant to the Exchange Act.
(b) PREPARATION AND FILING OF SHIPBUILDING REGISTRATION STATEMENT.
Tenneco, Industrial Company and Shipbuilding Company shall prepare or cause
to be prepared, and Shipbuilding Company shall file or cause to be filed
with the Commission, the Shipbuilding Registration Statement. The
Shipbuilding Registration Statement shall include or incorporate by
reference the Shipbuilding Information Statement setting forth appropriate
disclosure concerning Tenneco, Shipbuilding Company, Industrial Company,
the Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Shipbuilding Company shall take all
such actions as may be reasonably necessary or appropriate in order to
cause the Shipbuilding Registration Statement to become effective by order
of the Commission pursuant to the Exchange Act.
SECTION 2.11. STATE SECURITIES LAWS. Prior to the Distribution Date,
Tenneco, Industrial Company and Shipbuilding Company shall take all such
action as may be necessary or appropriate under the securities or blue sky
laws of states or other political subdivisions of the United States in order
to effect the Distributions.
SECTION 2.12. LISTING APPLICATION. Prior to the Distribution Date, Tenneco,
Industrial Company and Shipbuilding Company shall prepare and file with the
NYSE listing applications and related documents and shall take all such other
actions with respect thereto as shall be necessary or desirable in order to
cause the NYSE to list on or prior to the Distribution Date, subject to
official notice of issuance, the Industrial Common Shares and the Shipbuilding
Common Shares.
SECTION 2.13. CERTAIN FINANCIAL AND OTHER ARRANGEMENTS.
(a) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND ENERGY
GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Energy Group, on the
other hand, shall, as of the close of business on the Distribution Date, be
settled, capitalized or converted into ordinary trade accounts, in each case
as may be agreed in writing prior to the Distribution Date by duly authorized
representatives of Tenneco, Industrial Company and the Acquiror.
(b) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN SHIPBUILDING GROUP AND
ENERGY GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Shipbuilding Group, on the one hand, and any member of the Energy Group, on
the other hand, shall, as of the close of business on the Distribution Date,
be settled, capitalized or converted into ordinary trade accounts, in each
case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Tenneco, Shipbuilding Company and the Acquiror.
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(c) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND
SHIPBUILDING GROUP. All intercompany receivables, payables and loans (other
than receivables, payables and loans otherwise specifically provided for in
any of the Ancillary Agreements or hereunder), including, without limitation,
in respect of any cash balances, any cash balances representing deposited
checks or drafts for which only a provisional credit has been allowed or any
cash held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Shipbuilding Group,
on the other hand, shall, as of the close of business on the Distribution
Date, be settled, capitalized or converted into ordinary trade accounts, in
each case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Industrial Company and Shipbuilding Company.
(d) OPERATIONS IN ORDINARY COURSE. Except as otherwise provided in this
Agreement, the Merger Agreement or any Ancillary Agreement, during the period
from the date of this Agreement through the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall, and shall cause
any entity that is a Subsidiary of such party at any time during such period
to, conduct its business in a manner substantially consistent with current and
past operating practices and in the ordinary course, including, without
limitation, with respect to the payment and administration of accounts payable
and the collection and administration of accounts receivable, the purchase of
capital assets and equipment and the management of inventories.
SECTION 2.14. DIRECTOR, OFFICER AND EMPLOYEE RESIGNATIONS. Subject to the
provisions of SECTION 2.04 and SECTION 2.09 above:
(a) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE ENERGY GROUP. Tenneco
shall cause all of its directors and all employees of the Energy Group to
resign, effective as of the close of business on the Distribution Date,
from all boards of directors or similar governing bodies of each member of
the Industrial Group or the Shipbuilding Group on which they serve, and
from all positions as officers or employees of any member of the Industrial
Group or the Shipbuilding Group, except as otherwise set forth in the
Information Statements or mutually agreed to in writing on or prior to the
Distribution Date by Tenneco, on the one hand, and, as applicable,
Industrial Company and/or Shipbuilding Company, on the other hand.
(b) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE INDUSTRIAL GROUP.
Industrial Company shall cause all of its directors and all employees of
the Industrial Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Shipbuilding Group on
which they serve, and from all positions as officers or employees of any
member of the Energy Group or the Shipbuilding Group, except as otherwise
set forth in the Information Statements or mutually agreed to in writing on
or prior to the Distribution Date by Industrial Company, on the one hand,
and, as applicable, Tenneco and/or Shipbuilding Company, on the other hand.
(c) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE SHIPBUILDING GROUP.
Shipbuilding Company shall cause all of its directors and all employees of
the Shipbuilding Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Industrial Group on which
they serve, and from all positions as officers or employees of any member
of the Energy Group or the Industrial Group, except as otherwise set forth
in the Information Statements or mutually agreed to in writing on or prior
to the Distribution Date by Shipbuilding Company, on the one hand, and, as
applicable, Industrial Company and/or Tenneco, on the other hand.
SECTION 2.15. TRANSFERS NOT EFFECTED PRIOR TO THE DISTRIBUTIONS; TRANSFERS
DEEMED EFFECTIVE AS OF THE DISTRIBUTION DATE. To the extent that any transfers
contemplated by this ARTICLE II shall not have been consummated on or prior to
the Distribution Date, the parties hereto shall cooperate (and shall cause
each of their respective Affiliates and each member of their respective Groups
over which they have legal or effective direct or indirect control to
cooperate) to effect such transfers as promptly following the Distribution
Date as shall be practicable. Nothing herein shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of Law cannot be transferred or assumed; provided, however,
that the parties hereto shall cooperate (and shall cause each of their
respective Affiliates and each member of their respective Groups over which
they have legal or effective direct or indirect control to cooperate) to seek
to
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obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this ARTICLE II. In the
event that any such transfer of assets or Liabilities has not been
consummated, from and after the Distribution Date the party retaining such
asset or Liability (or, as applicable, such other member or members of such
party's Group) shall hold such asset in trust for the use and benefit of the
party entitled thereto (at the expense of the party entitled thereto) or
retain such Liability for the account of the party by whom such Liability is
to be assumed pursuant hereto, as the case may be, and take such other action
as may be reasonably requested by the party to whom such asset is to be
transferred, or by whom such Liability is to be assumed, as the case may be,
in order to place such party, insofar as is reasonably possible, in the same
position as would have existed had such asset or Liability been transferred or
assumed as contemplated hereby. As and when any such asset or Liability
becomes transferable or assumable, such transfer shall be effected forthwith.
As of the Distribution Date, each party hereto (or, if applicable, such other
members of such party's Group) shall be deemed to have acquired (or, as
applicable, retained) complete and sole beneficial ownership over all of the
assets, together with all rights, powers and privileges incident thereto, and
shall be deemed to have assumed in accordance with the terms of this Agreement
all of the Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party (or any other member of such party's Group)
is entitled to acquire or required to assume pursuant to the terms of this
Agreement.
SECTION 2.16. ANCILLARY AGREEMENTS. Prior to the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall enter into, and/or
where applicable shall cause such other members of their respective Groups to
enter into, (a) the Ancillary Agreements and (b) any other agreements in
respect of the Corporate Restructuring Transactions and the Distributions as
are reasonably necessary or appropriate in connection with the transactions
contemplated hereby and thereby so long as such agreements do not materially
delay or prevent consummation of the Merger or adversely affect the Energy
Business other than to a de minimis extent.
ARTICLE III
THE DISTRIBUTIONS
SECTION 3.01. TENNECO ACTION PRIOR TO THE DISTRIBUTIONS. Subject to the
terms and conditions set forth herein, Tenneco shall take, or cause to be
taken, the following acts or actions in connection with, and to otherwise
effect in accordance with the terms of this Agreement, the Distributions.
(a) DECLARATION OF DISTRIBUTIONS AND ESTABLISHMENT OF DISTRIBUTION DATE.
The Board of Directors of Tenneco shall, in its sole discretion and subject
to and in accordance with the applicable rules of the NYSE and provisions
of the DGCL, declare the Distributions and establish the Distribution
Record Date, the Distribution Date, the date on which Industrial Common
Shares, Shipbuilding Common Shares and any cash in lieu of fractional
shares shall be mailed to the Tenneco Holders and all appropriate
procedures in connection with the Distributions to the extent not provided
for herein; provided, however, that no such action shall create any
obligation on the part of Tenneco to effect the Distributions or in any way
limit Tenneco's power of termination as set forth in SECTION 8.11 hereof or
alter the consequences of any such termination from those specified in such
Section.
(b) NOTICE TO NYSE. Tenneco shall, to the extent possible, give the NYSE
not less than ten days advance notice of the Distribution Record Date in
compliance with Rule 10b-17 under the Exchange Act.
(c) MAILING OF INDUSTRIAL INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Industrial Registration Statement shall have been
declared effective under the Exchange Act, cause the Industrial Information
Statement to be mailed to the Tenneco Holders.
(d) MAILING OF SHIPBUILDING INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Shipbuilding Registration Statement shall have
been declared effective under the Exchange Act, cause the Shipbuilding
Information Statement to be mailed to the Tenneco Holders.
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SECTION 3.02. THE DISTRIBUTIONS.
(a) DUTIES AND OBLIGATIONS OF TENNECO. Subject to the conditions contained
herein, on the Distribution Date but effective immediately following the close
of business on the Distribution Date Tenneco shall:
(i) deliver to the Agent the share certificates representing the
Industrial Common Shares and Shipbuilding Common Shares issued to
Tenneco by Industrial Company and Shipbuilding Company, respectively,
pursuant to SECTION 2.02 hereof, endorsed by Tenneco in blank, for the
benefit of the Tenneco Holders; and
(ii) instruct the Agent to distribute, as soon as practicable
following consummation of the Distributions, to the Tenneco Holders the
following:
(A) one share of Industrial Common Stock for every one share of
Tenneco Common Stock;
(B) one share of Shipbuilding Common Stock for every five shares
of Tenneco Common Stock; and
(C) cash, if applicable, in lieu of fractional shares obtained in
the manner provided in SECTION 3.03 hereof.
(b) DUTIES AND RESPONSIBILITIES OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. Industrial Subsidiary and Shipbuilding Subsidiary shall provide, or
cause to be provided, to the Agent sufficient certificates representing
Industrial Common Stock and Shipbuilding Common Stock, respectively, in such
denominations as the Agent may request in order to effect the Distributions.
All shares of Industrial Common Stock issued pursuant to the Industrial
Distribution will be validly issued, fully paid and nonassessable and free of
any preemptive (or similar) rights. All shares of Shipbuilding Common Stock
issued pursuant to the Shipbuilding Distribution will be validly issued, fully
paid and nonassessable and free of any preemptive (or similar) rights.
SECTION 3.03. FRACTIONAL SHARES.
(a) NO FRACTIONAL SHARES. Notwithstanding anything herein to the contrary,
no certificate or scrip evidencing a fractional share of Industrial Common
Stock or Shipbuilding Common Stock shall be issued in connection with the
Distributions, and any such fractional share interests to which a Tenneco
Holder would otherwise be entitled will not entitle such Tenneco Holder to
vote or to any rights of a stockholder of Industrial Company or Shipbuilding
Company, as the case may be. In lieu of any such fractional shares, each
Tenneco Holder who, but for the provisions of this SECTION 3.03, would be
entitled to receive a fractional share interest of Industrial Common Stock or
Shipbuilding Common Stock pursuant to the Distributions shall be paid cash,
without any interest thereon, as hereinafter provided. Tenneco shall instruct
the Agent to determine the number of whole shares and fractional shares of
Industrial Common Stock and Shipbuilding Common Stock allocable to each
Tenneco Holder, to aggregate all such fractional shares into whole shares, to
sell the whole shares obtained thereby in the open market at the then
prevailing prices on behalf of Tenneco Holders who otherwise would be entitled
to receive fractional share interests and to distribute to each such Tenneco
Holder his, her or its ratable share of the total proceeds of such sale, after
making appropriate deductions of the amount required for federal income tax
withholding purposes and after deducting any applicable transfer taxes. All
brokers' fees and commissions incurred in connection with such sales shall be
paid by Tenneco.
(b) UNCLAIMED STOCK OR CASH. Any Industrial Common Stock, Shipbuilding
Common Stock or cash in lieu of fractional shares and dividends or
distributions with respect to Industrial Common Stock or Shipbuilding Common
Stock that remain unclaimed by any Tenneco Holder 180 days after the
Distribution Date shall be returned to Tenneco and any such Tenneco Holders
shall look only to Tenneco for the Industrial Common Stock, Shipbuilding
Common Stock, cash, if any, in lieu of fractional share interests and any such
dividends or distributions to which they are entitled, subject in each case to
applicable escheat or other abandoned property laws.
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(c) BENEFICIAL OWNERS. Solely for purposes of computing fractional share
interests pursuant to SECTION 3.03(A), the beneficial owner of shares of
Tenneco Common Stock held of record in the name of a nominee will be treated
as the holder of record of such shares.
ARTICLE IV
CONDITIONS TO THE DISTRIBUTIONS
SECTION 4.01. CONDITIONS PRECEDENT TO THE DISTRIBUTIONS. The obligation of
Tenneco to cause the Distributions to be consummated shall be subject, at the
option of Tenneco, to the fulfillment or waiver, on or prior to the
Termination Date, of each of the following conditions.
(a) TAX SHARING AGREEMENT. Tenneco, Industrial Company, Shipbuilding
Company and Acquiror shall have executed and delivered the Tax Sharing
Agreement and such agreement shall be in full force and effect.
(b) BENEFITS AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Benefits Agreement and such
agreement shall be in full force and effect.
(c) TRANSITION SERVICES AGREEMENT. Tenneco and Tenneco Business Services
Inc. shall have executed and delivered the Transition Services Agreement
and such agreement shall be in full force and effect.
(d) INSURANCE AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Insurance Agreement and such
agreement shall be in full force and effect.
(e) DEBT AND CASH ALLOCATION AGREEMENT. Tenneco, Industrial Company and
Shipbuilding Company shall have executed and delivered the Debt and Cash
Allocation Agreement and such agreement shall be in full force and effect.
(f) EFFECTIVE DATE OF REGISTRATION STATEMENT. Each of the Registration
Statements shall have been declared effective by order of the Commission
and no stop order shall have been entered, and no proceeding for that
purpose shall have been initiated or threatened by the Commission with
respect thereto.
(g) NYSE LISTING. The Industrial Common Shares and the Shipbuilding
Common Shares shall have been approved for listing on the NYSE, subject to
official notice of issuance.
(h) TAX RULING. Tenneco shall have received rulings from the Internal
Revenue Service reasonably acceptable to Tenneco and Acquiror, which
rulings shall be in full force and effect as of the Distribution Date, to
the effect that:
(i) The Industrial Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under Section
355(c)(1) of the Code and to the stockholders of Tenneco under
Section 355(a) of the Code;
(ii) The Shipbuilding Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under
Section 355(c)(1) of the Code and to the stockholders of Tenneco
under Section 355(a) of the Code; and
(iii) The following distributions will be tax free to the respective
transferor corporations under Section 355(c)(1) of the Code and
to the respective stockholders of the transferor corporations
under Section 355(a) of the Code: (A) the distribution by the
Shipbuilding Company of the capital stock of Tenneco Packaging
Inc. to Tenneco Corporation contemplated under the Corporate
Restructuring Transactions; (B) the distribution by Tenneco
Corporation of the capital stock of the Shipbuilding Company
and the Industrial Company to Tennessee Gas Pipeline Company as
contemplated under the Corporate Restructuring Transactions;
and (C) the distribution by Tennessee Gas Pipeline Company of
the capital stock of the Shipbuilding Company and the
Industrial Company to Tenneco Inc. as contemplated under the
Corporate Restructuring Transactions.
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(i) PRE-DISTRIBUTION TRANSACTIONS. Each of the transactions and other
matters contemplated by ARTICLE II and SECTION 3.01 hereof (including,
without limitation, each of the distributions, transfers, conveyances,
contributions, assignments or other transactions included in, or otherwise
necessary to consummate, the Corporate Restructuring Transactions) shall
have been fully effected, consummated and accomplished.
(j) COVENANTS. The covenants contained in ARTICLE V of this Agreement
that are required to be performed on or before the Distribution Date shall
have been fully performed.
(k) NO PROHIBITIONS. Consummation of the transactions contemplated hereby
shall not be prohibited by Law and no Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
which materially restricts, prevents or prohibits consummation of the
Distributions, the Merger or any transaction contemplated by this Agreement
or the Merger Agreement, it being understood that the parties hereto hereby
agree to use their reasonable best efforts to cause any such decree,
judgment, injunction or other order to be vacated or lifted as promptly as
possible.
(l) CONSENTS. Tenneco, Industrial Company, Shipbuilding Company and the
other members of their respective Groups shall have obtained all Consents
the failure of which to obtain would, in the determination of the Board of
Directors of Tenneco, have a material adverse effect on the Energy Group,
the Industrial Group or the Shipbuilding Group, each taken as a whole, and
such Consents shall be in full force and effect.
(m) STOCKHOLDER APPROVAL. The Distributions shall have been approved by
the requisite vote of the holders of the outstanding Tenneco Common Stock
and the holders of the outstanding $7.40 Cumulative Preferred Stock of
Tenneco, voting together as a class, by the requisite vote of the holders
of the outstanding $4.50 Cumulative Preferred Stock of Tenneco and the
holders of the outstanding $7.40 Cumulative Preferred Stock of Tenneco,
voting together as a class, and by any requisite vote of the holders of the
outstanding New Preferred Stock (as defined in the Merger Agreement),
voting separately as a class, in accordance with the DGCL and the
provisions of Tenneco's Certificate of Incorporation.
(n) HSR ACT. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, applicable to the transactions
contemplated under the Merger Agreement shall have expired or been
terminated.
(o) DEBT REALIGNMENT. Each of the transactions and other matters
contemplated under the Debt Realignment (as defined under the Merger
Agreement) shall have been fully effected, consummated and accomplished.
SECTION 4.02. NO CONSTRAINT. Notwithstanding the provisions of SECTION 4.01
above (but subject to Tenneco's obligations under the Merger Agreement), the
fulfillment or waiver of any or all of the conditions precedent to the
Distributions set forth therein shall not:
(i) create any obligation on the part of Tenneco or any other party
hereto to effect the Distributions;
(ii) in any way limit Tenneco's right and power under SECTION 8.11 hereof
to terminate this Agreement and the process leading to the Distributions
and to abandon the Distributions; or
(iii) alter the consequences of any such termination under SECTION 8.11
hereof from those specified in such Section.
SECTION 4.03. DEFERRAL OF DISTRIBUTION DATE. If the Distribution Date shall
have been established by the Board of Directors of Tenneco but all the
conditions precedent to the Distributions set forth in this Agreement have not
theretofore been fulfilled or waived, or Tenneco does not reasonably
anticipate that they will be fulfilled or waived, on or prior to the date
established as the Distribution Date, Tenneco may, by resolution of its Board
of Directors (or a committee thereof, so authorized), defer the Distribution
Date to a later date.
SECTION 4.04. PUBLIC NOTICE OF DEFERRED DISTRIBUTION DATE. If the Board of
Directors (or a committee thereof, so authorized) of Tenneco shall defer the
Distribution Date in accordance with SECTION 4.03 above and public
announcement of the prior Distribution Date has theretofore been made, Tenneco
shall promptly thereafter
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issue, in accordance with the advice of legal counsel, a public announcement
with respect to such deferment and shall, with the advice of legal counsel,
take such other actions as may be deemed necessary or desirable with respect
to the dissemination of such information.
ARTICLE V
COVENANTS
SECTION 5.01. FURTHER ASSURANCES. Each of Tenneco, Industrial Company and
Shipbuilding Company shall use all reasonable efforts to:
(a) take or cause to be taken all actions, and to do or cause to be done
all things reasonably necessary, proper or advisable under applicable Law
and agreements or otherwise to consummate and make effective the
transactions contemplated hereby, including without limitation using
commercially reasonable efforts to obtain any consents and approvals from,
enter into any amendatory agreements with and make any applications,
registrations or filings with, any third Person or any Governmental
Authority necessary or desirable in order to consummate the transactions
contemplated hereby or to carry out the purposes of this Agreement; and
(b) execute and deliver such further instruments and documents and take
such other actions as the other party may reasonably request in order to
consummate the transactions contemplated hereby and effectuate the purposes
of this Agreement.
SECTION 5.02. TENNECO NAME. Industrial Company shall grant to each of
Tenneco and Shipbuilding Company transition licenses, in the forms of EXHIBIT
P and Q, respectively (the "Transition Trademark License"), to use the Tenneco
Trademarks and Tradenames for the limited use as more fully described below in
this SECTION 5.02 and in SECTION 5.03. Each of Tenneco and Shipbuilding
Company shall, and shall cause each of the other members of its Group over
which it has legal or effective direct or indirect control to, at its own
expense:
(a) Within 30 days following the Distribution Date, change, if necessary,
its corporate name to delete therefrom the word "Tenneco" or any other word
that is confusingly similar to the word "Tenneco" (except the word
"Tennessee"); and
(b) With respect to Tenneco, within two years following the Distribution
Date, and, with respect to Shipbuilding Company, within one year following
the Distribution Date, remove any and all references to the Tenneco
Trademark and Tradenames from any and all signs, displays or other
identification or advertising material (excluding any such material that is
the subject of SECTION 5.03 below). After the conclusion of such period,
each of Tenneco, Shipbuilding Company, and each other member of its
respective Group or over which it has legal or effective direct or indirect
control shall not use or display any of the Tenneco Trademarks and
Tradenames without the prior written consent of Industrial Company, which
consent may be withheld for any reason or no reason whatsoever. After the
Distribution Date, no party hereto shall represent or permit to be
represented to any third Person that it or any member of its Group has a
business affiliation with any other party hereto or any member of such
other party's Group, except as expressly permitted by any of the Ancillary
Agreements.
SECTION 5.03. SUPPLIES AND DOCUMENTS. Notwithstanding the provisions of
SECTION 5.02 above, for a period of six (6) months following the Distribution
Date, the Transition Trademark License shall license (on a nonexclusive basis)
to each of the members of the Energy Group and the Shipbuilding Group the
right to use existing supplies and documents which have imprinted thereon any
of the Tenneco Trademarks and Tradenames to the extent that such supplies and
documents were existing in the inventory of such member of the Energy Group or
Shipbuilding Group, as applicable, as of the Distribution Date.
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SECTION 5.04. ASSUMPTION AND SATISFACTION OF LIABILITIES. Except as
otherwise specifically set forth in any Ancillary Agreement, from and after
the Distribution Date:
(a) Tenneco shall, and shall cause each of the other members of the
Energy Group over which it has legal or effective direct or indirect
control to, assume, pay, perform and discharge all Energy Liabilities in
accordance with their terms, when determinable, and otherwise as determined
in accordance with the practice of the parties prior to the Distributions;
(b) Industrial Company shall, and shall cause each of the other members
of the Industrial Group over which it has legal or effective direct or
indirect control to, assume, pay, perform and discharge all Industrial
Liabilities in accordance with their terms, when determinable, and
otherwise as determined in accordance with the practice of the parties
prior to the Distributions; and
(c) Shipbuilding Subsidiary shall, and shall cause each of the other
members of the Shipbuilding Group over which it has legal or effective
direct or indirect control to, assume, pay, perform and discharge all
Shipbuilding Liabilities in accordance with their terms, when determinable,
and otherwise as determined in accordance with the practice of the parties
prior to the Distributions.
SECTION 5.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS.
(a) GENERAL. Each of the parties hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement (including the Ancillary Agreements) or
otherwise, making any representation or warranty whatsoever, including without
limitation, any representation or warranty:
(i) as to the value or freedom from encumbrance of, or any other matter
concerning, any assets of such party; or
(ii) as to the legal sufficiency to convey title to any asset as of the
execution, delivery and filing of this Agreement or any Ancillary
Agreement, including, without limitation, any Conveyancing and Assumption
Instrument.
(b) DISCLAIMER OF MERCHANTABILITY OR FITNESS OF ASSETS. Each party hereto
further understands and agrees that there are no warranties, express or
implied, as to the merchantability or fitness of any of the assets either
transferred to or retained by the Energy Group, the Industrial Group or the
Shipbuilding Group, as the case may be, pursuant to Corporate Restructuring
Transactions and the other terms and provisions of this Agreement, any
Conveyancing and Assumption Agreement or any Ancillary Agreement, and all such
assets which are so transferred will be transferred on an "AS IS, WHERE IS"
basis, and the party to which any such assets are transferred hereunder, or
which retains assets hereunder, shall bear the economic and legal risk that
any conveyances of such assets shall prove to be insufficient or that the
title of such party or any other member of its respective Group to any such
assets shall be other than good and marketable and free from encumbrances.
(c) ACKNOWLEDGEMENT OF DISCLOSURE AND WAIVER. Each of Industrial Company and
Shipbuilding Company acknowledges, for itself and on behalf of each other
member of its respective Group, that:
(i) Tenneco and the other members of the Energy Group have disclosed, and
Industrial Company and Shipbuilding Company have knowledge of, all matters
pertaining to the assets and properties to be conveyed to Industrial
Company, Shipbuilding Company or any member of their respective Group
pursuant to the Corporate Restructuring Transactions or otherwise pursuant
to the other terms of this Agreement to the same extent that Tenneco and
the other members of the Energy Group have knowledge of such matters; and
(ii) such knowledge constitutes notice and disclosure of such matters.
Each of Industrial Company and Shipbuilding Company waives, to the fullest
extent permitted by law, for itself and for each other member of its
respective Group, any and all claims or causes of action which any of them may
have arising out of such matters or the failure of any Conveyancing and
Assumption Instrument to describe or refer to, or provide notice of, any such
matters.
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(d) NO REPRESENTATIONS OR WARRANTIES REGARDING CONSENTS. Each of the parties
hereto understands and agrees that no party hereto is, in this Agreement or
any Ancillary Agreement or in any other agreement or document contemplated by
this Agreement or any Ancillary Agreement or otherwise, representing or
warranting in any way that the obtaining of any consents or approvals, the
execution and delivery of any amendatory agreements and the making of any
filings or applications contemplated by this Agreement will satisfy the
provisions of any or all applicable agreements or the requirements of any or
all applicable Law. Each of the parties hereto further agrees and understands
that the party to which any assets are transferred as contemplated by the
Corporate Restructuring Transactions or the other provisions of this Agreement
shall bear the economic and legal risk that any necessary consents or
approvals are not obtained, that any necessary amendatory agreements are not
executed and delivered or that any requirements of Laws are not complied with.
(e) COVENANT TO USE REASONABLE EFFORTS TO OBTAIN CONSENTS. Notwithstanding
the provisions of SECTION 5.05(D) above, each of the parties hereto shall (and
shall cause each other member of its respective Group over which it has direct
or indirect legal or effective control to) use commercially reasonable efforts
to obtain all consents and approvals, to enter into all amendatory agreements
and to make all filings and applications which may be reasonably required for
the consummation of the transactions contemplated by this Agreement and shall
take all such further reasonable actions as shall be reasonably necessary to
preserve for each of the Energy Group, the Industrial Group and the
Shipbuilding Group, to the greatest extent feasible, the economic and
operational benefits of the allocation of assets and Liabilities contemplated
by this Agreement. In case at any time after the Distribution Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall take
all such necessary or desirable action.
SECTION 5.06. REMOVAL OF CERTAIN GUARANTEES.
(a) REMOVAL OF ENERGY GROUP AS GUARANTOR OF INDUSTRIAL AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Tenneco and any other member of the
Energy Group removed as a guarantor of, or obligor under or for, any
Industrial Liability or Shipbuilding Liability.
(b) REMOVAL OF INDUSTRIAL GROUP AS GUARANTOR OF ENERGY AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Industrial Company and any other member
of the Industrial Group removed as a guarantor of, or obligor under or for,
any Energy Liability or Shipbuilding Liability.
(c) REMOVAL OF SHIPBUILDING GROUP AS GUARANTOR OF ENERGY AND INDUSTRIAL
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use their
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Shipbuilding Company and any other
member of the Shipbuilding Group removed as a guarantor of, or obligor under
or for, any Energy Liability or Industrial Liability.
SECTION 5.07. PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with
each other before issuing any press release or otherwise issuing any other
similar written public statement with respect to this Agreement or the
Distributions and shall not issue any such press release or make any such
public statement without the prior consent of each other party, which shall
not be unreasonably withheld; provided, however, that a party may, without the
prior consent of any other party, issue such press release or other similar
written public statement as may be required by law or any listing agreement
with a national securities exchange to which any party hereto (or any member
of such party's Group) is a party if it has used all reasonable efforts to
consult with such other party and to obtain such party's consent but has been
unable to do so in a timely manner.
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SECTION 5.08. INTERCOMPANY AGREEMENTS. Effective as of the consummation of
the Distributions, each of Industrial Company, Shipbuilding Company and
Tenneco shall (and shall cause each other member of its respective Group over
which it has legal or effective direct or indirect control) to terminate each
and every agreement between it and any member of any of the other Groups other
than this Agreement, any of the Ancillary Agreements and any of the license
agreements referred to in SECTION 2.06(F) above; provided, however, that such
termination shall not have any effect whatsoever on any of its rights and/or
obligations that accrued or were incurred prior to the Distribution Date
(subject to the terms of SECTION 2.13 above).
SECTION 5.09. TAX MATTERS. Each of Tenneco, the Industrial Company and the
Shipbuilding Company intend the Distributions to be treated as tax-free
distributions under Code Section 355 and each such party shall use its
reasonable best efforts to cause the Distributions to so qualify. Neither
Tenneco, on the one hand, nor the Industrial Company and Shipbuilding Company,
on the other hand, shall take any action (other than the Merger) which might
cause:
(i) the Distributions to fail to qualify as tax-free distributions under
Code Section 355;
(ii) any other transfer described in the Corporate Restructuring
Transactions that is intended (as described in Tenneco's request for
rulings from the Internal Revenue Service) to qualify as a tax free
transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify; or
(iii) Tenneco or any Energy Subsidiary to recognize any gains relating to
deferred intercompany transactions or excess loss accounts between or among
any member of affiliated group of corporations of which Tenneco is the
common parent, other than those defined intercompany gains listed on
EXHIBIT H to the Merger Agreement.
ARTICLE VI
ACCESS TO INFORMATION
SECTION 6.01. PROVISION, TRANSFER AND DELIVERY OF APPLICABLE CORPORATE
RECORDS.
(a) PROVISION, TRANSFER AND DELIVERY OF INDUSTRIAL RECORDS. Each of Tenneco
and Shipbuilding Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Industrial Company's cost) to Industrial Company of the
Books and Records in its possession (i) that relate primarily to the
Industrial Business or are necessary to operate the Industrial Business
(collectively, the "INDUSTRIAL RECORDS"), and (ii) that consist of the
corporate minutes of the Board of Directors (or committees thereof) of Tenneco
or otherwise relate to the business, administrative and management operations
of Tenneco as the parent holding company of the Energy Business, Industrial
Business and Shipbuilding Business (collectively, the "TENNECO CORPORATE
RECORDS") except to the extent such items are already in the possession of any
member of the Industrial Group. The Industrial Records and the Tenneco
Corporate Records shall be the property of Industrial Company, but shall be
available to each of Tenneco and Shipbuilding Company for review and
duplication, at their cost, pursuant to the terms of this Agreement.
(b) PROVISION, TRANSFER AND DELIVERY OF SHIPBUILDING RECORDS. Each of
Tenneco and Industrial Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Shipbuilding Company's cost) to Shipbuilding Company of
the Books and Records in its possession that relate primarily to the
Shipbuilding Business or are necessary to operate the Shipbuilding Business
(collectively, the "SHIPBUILDING RECORDS"), except to the extent such items
are already in the possession of any member of the Shipbuilding Group. The
Shipbuilding Records shall be the property of Shipbuilding Company, but shall
be available to each of Tenneco and Industrial Company for review and
duplication , at their cost, pursuant to the terms of this Agreement.
(c) PROVISION, TRANSFER AND DELIVERY OF ENERGY RECORDS. Each of Industrial
Company and Shipbuilding Company shall (and shall cause each other member of
its respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Tenneco's cost) to Tenneco of the Books and Records in
its possession that relate primarily to the Energy
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Business or are necessary to operate the Energy Business (collectively, the
"ENERGY RECORDS"), except to the extent such items are already in the
possession of any member of the Energy Group. The Energy Records shall be the
property of Tenneco, but shall be available to each of Industrial Company and
Shipbuilding Company for review and duplication, at their cost, pursuant to
the terms of this Agreement.
SECTION 6.02. ACCESS TO INFORMATION.
(a) ACCESS TO BOOKS AND RECORDS. Unless otherwise contemplated by SECTION
6.06 hereof, from and after the Distribution Date, each of Tenneco, Industrial
Company and Shipbuilding Company shall (and shall cause each of the other
members of its respective Group over which it has legal or effective direct or
indirect control to) afford to each other party and its authorized
accountants, counsel and other designated representatives reasonable access
and duplicating rights (all such duplicating costs to be borne by the
requesting party) during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, Books and Records and other data and information of
such party and each other member of such party's Group relating to operations
prior to the Distributions insofar as such access is reasonably required by
the other requesting party for the conduct of the requesting party's business
(but not for competitive purposes).
(b) PROVISION OF POST-DISTRIBUTION COMMISSION FILINGS. For a period of five
years following the Distribution Date, each of Tenneco, Industrial Company and
Shipbuilding Company shall (and shall cause each of the other members of its
respective Group over which it has legal or effective direct or indirect
control to) provide to the other, promptly following such time at which such
documents are filed with the Commission, all documents (other than documents
or portions thereof for which confidential treatment has been granted or a
request for confidential treatment is pending) filed by it and by each other
member of such party's Group with the Commission pursuant to the Securities
Act or the periodic and interim reporting requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder.
SECTION 6.03. REIMBURSEMENT; OTHER MATTERS. Except to the extent otherwise
contemplated hereby or by any Ancillary Agreement, a party providing Books and
Records or access to information to any other party (or such party's
representatives) under this ARTICLE VI shall be entitled to receive from such
other party, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Books and Records or access to
information.
SECTION 6.04. CONFIDENTIALITY.
(a) GENERAL RESTRICTION ON DISCLOSURE. Each of Tenneco, Industrial Company
and Shipbuilding Company shall not (and shall not permit any other member of
its respective Group over which it has legal or effective direct or indirect
control to) use or permit the use of (without the prior written consent of the
other) and shall hold, and shall cause its consultants, advisors and other
representatives and any other member of its respective Group (over which it
has legal or effective direct or indirect control) to hold, in strict
confidence, all information concerning each other party hereto and the other
members of such other party's Group in its possession, custody or control to
the extent such information either
(i)relates to the period up to the Distribution Date,
(ii)relates to any Ancillary Agreement, or
(iii)is obtained in the course of performing services for the other party
pursuant to any Ancillary Agreement, and each party hereto shall not (and
shall cause each other member of its respective Group over which it has
legal or effective direct or indirect control not to) otherwise release or
disclose such information to any other Person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors,
without the prior written consent of the other affected party or parties,
unless compelled to disclose such information by judicial or administrative
process or unless such disclosure is required by Law and such party has
used commercially reasonable efforts to consult with the other affected
party or parties prior to such disclosure.
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(b) COMPELLED DISCLOSURE. To the extent that a party hereto is compelled by
judicial or administrative process to disclose such information under
circumstances in which any evidentiary privilege would be available, such
party agrees to assert such privilege in good faith prior to making such
disclosure. Each of the parties shall consult with each relevant other party
in connection with any such judicial or administrative process, including,
without limitation, in determining whether any privilege is available, and
shall not object to each such relevant party and its counsel participating in
any hearing or other proceeding (including, without limitation, any appeal of
an initial order to disclose) in respect of such disclosure and assertion of
privilege.
(c) EXCEPTIONS TO CONFIDENTIAL TREATMENT. Anything herein to the contrary
notwithstanding, no party hereto shall be prohibited from using or permitting
the use of, or required to hold in confidence, any information to the extent
that (i) such information has been or is in the public domain through no fault
of such party, (ii) such information is, after the Distribution Date, lawfully
acquired from other sources by such party, or (iii) this Agreement, any
Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information by such party.
SECTION 6.05. WITNESS SERVICES. At all times from and after the Distribution
Date, each of Tenneco, Industrial Company and Shipbuilding Company shall use
its reasonable efforts to make available to each other party hereto, upon
reasonable written request, the officers, directors, employees and agents of
each member of its respective Group for fact finding, consultation or
interviews and as witnesses to the extent that:
(a) such persons may reasonably be required in connection with the
prosecution or defense of any Action in which the requesting party or any
member of its respective Group may from time to time be involved; and
(b) there is no conflict in the Action between the requesting party or
any member of its respective Group and the party to which a request is made
pursuant to this SECTION 6.05 or any member of such party's Group. Except
as otherwise agreed by the parties, a party providing witness services to
any other party under this Section shall be entitled to receive from the
recipient of such services, upon the presentation of invoices therefor,
payments for such amounts, relating to supplies, disbursements and other
out-of-pocket expenses (but not salary expenses) and direct and indirect
costs of employees who participate in fact finding, consultation or
interviews or are witnesses, as are actually and reasonably incurred in
providing such fact finding, consulting, interviews or witness services by
the party providing such services.
SECTION 6.06. RETENTION OF RECORDS. Except when a longer period is required
by Law or is specifically provided for herein or in any Ancillary Agreement,
each party hereto shall cause the members of its Group over which it has legal
or effective direct or indirect control, to retain, for a period of at least
seven years following the Distribution Date, all material information
(including without limitation all material Books and Records) relating to such
Group and its operations prior to the Distribution Date. Notwithstanding the
foregoing, any party hereto may offer in writing to deliver to the other
parties all or a portion of such information as it relates to members of the
offering party's Group and, if such offer is accepted in writing within 90
days after receipt thereof, the offering party shall promptly arrange for the
delivery of such information (or copies thereof) to each accepting party (at
the expense of such accepting party). If such offer is not so accepted, the
offered information may be destroyed or otherwise disposed of by the offering
party at any time thereafter.
SECTION 6.07. PRIVILEGED MATTERS.
(a) PRIVILEGED INFORMATION. Each of the parties hereto shall, and shall
cause the members of its Group over which it has legal or effective direct
or indirect control to, use its reasonable efforts to maintain, preserve,
protect and assert all privileges including, without limitation, all
privileges arising under or relating to the attorney-client relationship
(including without limitation the attorney-client and attorney work product
privileges) that relate directly or indirectly to any member of any other
Group for any period prior to the Distribution Date ("PRIVILEGE" or
"PRIVILEGES"). Each of the parties hereto shall use its reasonable efforts
not to waive, or permit any member of its Group over which it has legal or
effective direct or indirect control to waive, any such Privilege that
could be asserted under applicable Law without the prior written consent of
the other parties. With respect to each party, the rights and obligations
created by this SECTION 6.07 shall apply to all information as to which a
member of any Group did assert or, but for the
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Distributions, would have been entitled to assert the protection of a
Privilege ("PRIVILEGED INFORMATION") including, but not limited to, any and
all information that either:
(i) was generated or received prior to the Distribution Date but
which, after the Distributions, is in the possession of a member of
another Group; or
(ii) is generated or received after the Distribution Date but refers
to or relates to Privileged Information that was generated or received
prior to the Distribution Date.
(b) PRODUCTION OF PRIVILEGED INFORMATION. Upon receipt by a party or any
member of its Group of any subpoena, discovery or other request that
arguably calls for the production or disclosure of Privileged Information,
or if a party or any member of its Group obtains knowledge that any current
or former employee of such party or any member of its Group has received
any subpoena, discovery or other request which arguably calls for the
production or disclosure of Privileged Information, such party shall
promptly notify the other parties of the existence of the request and shall
provide the other parties a reasonable opportunity to review the
information and to assert any rights it may have under this SECTION 6.07 or
otherwise to prevent the production or disclosure of Privileged
Information. No party will, or will permit any member of its Group over
which it has direct or indirect legal or effective control to, produce or
disclose any information arguably covered by a Privilege under this SECTION
6.07 unless:
(i) each other party has provided its express written consent to such
production or disclosure; or
(ii) a court of competent jurisdiction has entered an order which is
not then appealable or a final, nonappealable order finding that the
information is not entitled to protection under any applicable
privilege.
(c) NO WAIVER. The parties hereto understand and agree that the transfer
of any Books and Records or other information between any members of the
Energy Group, the Industrial Group, or the Shipbuilding Group shall be made
in reliance on the agreements of Tenneco, Industrial Company and
Shipbuilding Company, as set forth in SECTION 6.04 and SECTION 6.07 hereof,
to maintain the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The Books and Records being transferred
pursuant to SECTION 6.01 hereof, the access to information being granted
pursuant to SECTION 6.02 hereof, the agreement to provide witnesses and
individuals pursuant to SECTION 6.05 hereof and the transfer of Privileged
Information to either party pursuant to this Agreement shall not be deemed
a waiver of any Privilege that has been or may be asserted under this
Section or otherwise.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01. INDEMNIFICATION BY TENNECO. Except as otherwise specifically
set forth in any provision of this Agreement or of any Ancillary Agreement,
Tenneco shall, to the fullest extent permitted by law, indemnify, defend and
hold harmless the Industrial Indemnitees and the Shipbuilding Indemnitees from
and against any and all Indemnifiable Losses of the Industrial Indemnitees and
the Shipbuilding Indemnitees, respectively, arising out of, by reason of or
otherwise in connection with either (i) the Energy Liabilities, or (ii) the
breach by Tenneco of any provision of this Agreement or any Ancillary
Agreement.
SECTION 7.02. INDEMNIFICATION BY INDUSTRIAL COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Industrial Company shall, to the fullest extent permitted by law,
indemnify, defend and hold harmless the Energy Indemnitees and the
Shipbuilding Indemnitees from and against any and all Indemnifiable Losses of
the Energy Indemnitees and the Shipbuilding Indemnitees, respectively, arising
out of, by reason of or otherwise in connection with either (i) the Industrial
Liabilities, or (ii) the breach by Industrial Company of any provision of this
Agreement or any Ancillary Agreement.
SECTION 7.03. INDEMNIFICATION BY SHIPBUILDING COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Shipbuilding Company shall, to the fullest
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entent permitted by law, indemnify, defend and hold harmless the Energy
Indemnitees and the Industrial Indemnitees from and against any and all
Indemnifiable Losses of the Energy Indemnitees and the Industrial Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with
either (i) the Shipbuilding Liabilities, or (ii) the breach by Shipbuilding
Company of any provision of this Agreement or any Ancillary Agreement. In
addition, and without limiting the generality of the foregoing indemnification
provisions of this SECTION 7.03, Shipbuilding Company shall, to the fullest
extent permitted by law, indemnify, defend and hold harmless the Industrial
Indemnitees and the Energy Indemnitees from and against any and all
Indemnifiable Losses of the Industrial Indemnitees and the Energy Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with any
matter, of whatever kind or nature, relating in any way to the commercial
ships commonly known as the "Double Eagle" product tankers, including without
limitation, (i) the design, engineering or construction of any of the Double
Eagle product tankers, (ii) the sale or other disposition of any of the Double
Eagle product tankers (or the sale or other disposition of any direct or
indirect equity interest in any of the Double Eagle product tankers), (iii)
the direct or indirect financing of the construction of any of the Double
Eagle product tankers or any other financing relating to any of the Double
Eagle product tankers, (iv) the direct or indirect equity investments in any
of the Double Eagle product tankers, (v) the purchase of raw materials and
other materials and services in connection with the design, construction or
engineering of any of the Double Eagle product tankers, (vi) the negotiation
of any contract for the construction of or financing for the construction of,
any of the Double Eagle product tankers, or (vii) the operation by any Person
whatsoever of any of the Double Eagle product tankers.
SECTION 7.04. LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.
(a) REDUCTIONS FOR INSURANCE PROCEEDS AND OTHER RECOVERIES. The amount that
any party (an "INDEMNIFYING PARTY") is or may be required to pay to any other
Person (an "INDEMNITEE") pursuant to SECTION 7.01, SECTION 7.02 or SECTION
7.03 above, as applicable, shall be reduced (retroactively or prospectively)
by any Insurance Proceeds or other amounts actually recovered from third
parties by or on behalf of such Indemnitee in respect of the related
Indemnifiable Losses (except that nothing herein shall be construed as
requiring any Indemnitee in respect of any Shipbuilding Securities Liability
to file any claim for insurance). The existence of a claim by an Indemnitee
for insurance or against a third party in respect of any Indemnifiable Loss
shall not, however, delay any payment pursuant to the indemnification
provisions contained herein and otherwise determined to be due and owing by an
Indemnifying Party. Rather the Indemnifying Party shall make payment in full
of such amount so determined to be due and owing by it against an assignment
by the Indemnitee to the Indemnifying Party of the entire claim of the
Indemnitee for such insurance or against such third party. Notwithstanding any
other provisions of this Agreement, it is the intention of the parties hereto
that no insurer or any other third party shall be (i) entitled to a benefit it
would not be entitled to receive in the absence of the foregoing
indemnification provisions or (ii) relieved of the responsibility to pay any
claims for which it is obligated. If an Indemnitee shall have received the
payment required by this Agreement from an Indemnifying Party in respect of
any Indemnifiable Losses and shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Indemnifiable Losses, then such
Indemnitee shall hold such Insurance Proceeds in trust for the benefit of such
Indemnifying Party and shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
(b) FOREIGN CURRENCY ADJUSTMENTS. In the event that any indemnification
payment required to be made hereunder or under any Ancillary Agreement shall
be denominated in a currency other than U.S. Dollars, the amount of such
payment shall be translated into U.S. Dollars using the foreign exchange rate
for such currency determined in accordance with the following rules:
(i) with respect to any Indemnifiable Losses arising from the payment by
a financial institution under a guarantee, comfort letter, letter of
credit, foreign exchange contract or similar instrument, the foreign
exchange rate for such currency shall be determined as of the date on which
such financial institution shall have been reimbursed;
(ii) with respect to any Indemnifiable Losses covered by insurance, the
foreign exchange rate for such currency shall be the foreign exchange rate
employed by the insurance company providing such insurance in settling such
Indemnifiable Losses with the Indemnifying Party; and
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(iii) with respect to any Indemnifiable Losses not covered by either
clause (i) or (ii) above, the foreign exchange rate for such currency shall
be determined as of the date that notice of the claim with respect to such
Indemnifiable Losses shall be given to the Indemnitee.
SECTION 7.05. PROCEDURES FOR INDEMNIFICATION. Except as otherwise
specifically provided in any Ancillary Agreement, including, without
limitation, the Tax Sharing Agreement and the Benefits Agreement:
(a) NOTICE OF THIRD PARTY CLAIMS. If a claim or demand is made against an
Indemnitee by any Person who is not a member of the Energy Group, Industrial
Group or Shipbuilding Group (a "THIRD PARTY CLAIM") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 15 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the Indemnitee's right to indemnification hereunder except to the
extent the Indemnifying Party shall have been actually prejudiced as a result
of such failure (except that the Indemnifying Party shall not be liable for
any expenses incurred during the period in which the Indemnitee failed to give
such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying
Party, promptly (and in any event within 15 business days) after the
Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.
(b) LEGAL DEFENSE OF THIRD PARTY CLAIMS. If a Third Party Claim is made
against an Indemnitee, the Indemnifying Party shall be entitled to participate
in the defense thereof and, if it so chooses, to assume the defense thereof
with counsel selected by the Indemnifying Party, which counsel shall be
reasonably satisfactory to the Indemnitee. Should the Indemnifying Party so
elect to assume the defense of a Third Party Claim, the Indemnifying Party
shall not be liable to the Indemnitee for legal or other expenses subsequently
incurred by the Indemnitee in connection with the defense thereof. If the
Indemnifying Party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it
being understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the reasonable fees and expenses of
counsel employed by the Indemnitee for any period during which the
Indemnifying Party has failed to assume the defense of the Third Party Claim
(other than during the period prior to the time the Indemnitee shall have
given notice of the Third Party Claim as provided above). If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, all of the
Indemnitees shall cooperate with the Indemnifying Party in the defense or
prosecution thereof. Notwithstanding the foregoing:
(i) the Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable to the Indemnitee for the
reasonable fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim either (A) seeks
an order, injunction or other equitable relief or relief for other than
money damages against the Indemnitee which the Indemnitee reasonably
determines, after conferring with its counsel, cannot be separated from any
related claim for money damages; provided, however, that if such equitable
relief or other relief portion of the Third Party Claim can be so separated
from that for money damages, the Indemnifying Party shall be entitled to
assume the defense of the portion relating to money damages; or (B) relates
to or arises out of any Shipbuilding Securities Liability.
(ii) an Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable for the reasonable fees and
expenses of counsel incurred by the Indemnitee in defending such Third
Party Claim) if, in the Indemnitee's reasonable judgment, a conflict of
interest between such Indemnitee and such Indemnifying Party exists in
respect of such Third Party Claim; and
(iii) if at any time after assuming the defense of a Third Party Claim an
Indemnifying Party shall fail to prosecute or withdraw from the defense of
such Third Party Claim, the Indemnitee shall be entitled to resume the
defense thereof and the Indemnifying Party shall be liable for the
reasonable fees and expenses of counsel incurred by the Indemnitee in such
defense.
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(c) SETTLEMENT OF THIRD PARTY CLAIMS. Except as otherwise provided below in
this SECTION 7.05(C), or as otherwise specifically provided in any Ancillary
Agreement, including without limitation, the Tax Sharing Agreement and the
Benefits Agreement, if the Indemnifying Party has assumed the defense of any
Third Party Claim, then
(i) in no event will the Indemnitee admit any liability with respect to,
or settle, compromise or discharge, any Third Party Claim without the
Indemnifying Party's prior written consent; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party, and
(ii) the Indemnitee will agree to any settlement, compromise or discharge
of a Third Party Claim that the Indemnifying Party may recommend and that
by its terms obligates the Indemnifying Party to pay the full amount of the
liability in connection with such Third Party Claim and releases the
Indemnitee completely in connection with such Third Party Claim and that
would not otherwise adversely affect the Indemnitee.
provided, however, that the Indemnitee may refuse to agree to any such
settlement, compromise or discharge if the Indemnitee agrees that the
Indemnifying Party's indemnification obligation with respect to such Third
Party Claim shall not exceed the amount that would be required to be paid by
or on behalf of the Indemnifying Party in connection with such settlement,
compromise or discharge. If the Indemnifying Party has not assumed the defense
of a Third Party Claim then in no event shall the Indemnitee settle,
compromise or discharge such Third Party Claim without providing prior written
notice to the Indemnifying Party, which shall have the option within 15
business days following receipt of such notice to
(i) approve and agree to pay the settlement,
(ii) approve the amount of the settlement, reserving the right to contest
the Indemnitee's right to indemnity pursuant to this Agreement,
(iii) disapprove the settlement and assume in writing all past and future
responsibility for such Third Party Claim (including all of Indemnitee's
prior expenditures in connection therewith), or
(iv) disapprove the settlement and continue to refrain from participation
in the defense of such Third Party Claim, in which event the Indemnifying
Party shall have no further right to contest the amount or reasonableness
of the settlement if the Indemnitee elects to proceed therewith.
In the event the Indemnifying Party does not respond to such written notice
from the Indemnitee within such 15 business-day period, the Indemnifying Party
shall be deemed to have elected option (i).
(d) OTHER CLAIMS. Any claim on account of an Indemnifiable Loss which does
not result from a Third Party Claim shall be asserted by written notice given
by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying
Party shall have a period of 15 business days after the receipt of such notice
within which to respond thereto. If such Indemnifying Party does not respond
within such 15 business-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 15 business-day period or rejects such
claim in whole or in part, such Indemnitee shall be free to pursue such
remedies as may be available to such party under applicable Law or under this
Agreement.
SECTION 7.06. INDEMNIFICATION PAYMENTS. Indemnification required by this
ARTICLE VII shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred.
SECTION 7.07. OTHER ADJUSTMENTS.
(a) ADJUSTMENTS FOR TAXES. The amount of any Indemnifiable Loss shall be:
(i) increased to take into account any net Tax cost actually incurred by
the Indemnitee arising from any payments received from the Indemnifying
Party (grossed up for such increase); and
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(ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such
Indemnifiable Loss.
In computing the amount of such Tax cost or Tax benefit, the Indemnitee shall
be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt of any payment
with respect to an Indemnifiable Loss or the incurrence or payment of any
Indemnifiable Loss.
(b) REDUCTIONS FOR SUBSEQUENT RECOVERIES OR OTHER EVENTS. In addition to any
adjustments required pursuant to SECTION 7.04 hereof or SECTION 7.07(A) above,
if the amount of any Indemnifiable Losses shall, at any time subsequent to any
indemnification payment made by the Indemnifying Party pursuant to this
ARTICLE VII, be reduced by recovery, settlement or otherwise, the amount of
such reduction, less any expenses incurred in connection therewith, shall
promptly be repaid by the Indemnitee to the Indemnifying Party, up to the
aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
SECTION 7.08. OBLIGATIONS ABSOLUTE. The foregoing contractual obligations of
indemnification set forth in this ARTICLE VII shall:
(i) also apply to any and all Third Party Claims that allege that any
Indemnitee is independently, directly, vicariously or jointly and severally
liable to such third party;
(ii) to the extent permitted by applicable law, apply even if the
Indemnitee is partially negligent or otherwise partially culpable or at
fault, whether or not such liability arises under any doctrine of strict
liability; and
(iii) be in addition to any liability or obligation that an Indemnifying
Party may have other than pursuant to this Agreement.
SECTION 7.09. SURVIVAL OF INDEMNITIES. The obligations of Tenneco,
Industrial Company and Shipbuilding Company under this ARTICLE VII shall
survive the sale or other transfer by any of them of any assets or businesses
or the assignment by any of them of any Liabilities, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets, businesses or
Liabilities.
SECTION 7.10. REMEDIES CUMULATIVE. The remedies provided in this ARTICLE VII
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
SECTION 7.11. COOPERATION OF THE PARTIES WITH RESPECT TO ACTIONS AND THIRD
PARTY CLAIMS.
(a) IDENTIFICATION OF PARTY IN INTEREST. Any party to this Agreement that
has responsibility for an Action or Third Party Claim shall identify itself as
the true party in interest with respect to such Action or Third Party Claim
and shall use its commercially reasonable efforts to obtain the dismissal of
any other party to this Agreement from such Action or Third Party Claim.
(b) DISPUTES REGARDING RESPONSIBILITY FOR ACTIONS AND THIRD PARTY CLAIMS. If
there is uncertainty or disagreement concerning which party to this Agreement
has responsibility for any Action or Third Party Claim, the following
procedure shall be followed in an effort to reach agreement concerning
responsibility for such Action or Third Party Claim:
(i) The parties in disagreement over the responsibility for an Action or
Third Party Claim shall exchange brief written statements setting forth
their position concerning which party has responsibility for the Action or
Third Party Claim in accordance with the provisions of this ARTICLE VII.
These statements shall be exchanged within 5 days of a party putting
another party on written notice that the other party is or may be
responsible for the Action or Third Party Claim.
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(ii) If within 5 days of the exchange of the written statement of each
party's position agreement is not reached on responsibility for the Action
or Third Party Claim, the General Counsel for each of the parties in
disagreement over responsibility for the Action or Third Party Claim shall
speak either by telephone or in person to attempt to reach agreement on
responsibility for the Action or Third Party Claim.
(c) EFFECT OF FAILURE TO FOLLOW PROCEDURE. Failure to follow the procedure
set forth in clause (b) above shall not affect the rights and responsibilities
of the parties as established by the other provisions of this ARTICLE VII.
(d) EXCHANGE OF INFORMATION. In connection with the handling of current or
future Actions or Third Party Claims, the parties may determine that it is in
their mutual interest to exchange privileged or confidential information. If
so, the parties agree to discuss whether it is in their mutual interest to
enter into a joint defense agreement or information exchange agreement to
maintain the confidentiality of their communications and to permit them to
maintain the confidentiality of proprietary information or information that is
otherwise confidential or subject to an applicable privilege, including but
not limited to the attorney-client, work product, executive, deliberative
process, or self-evaluation privileges.
SECTION 7.12. CONTRIBUTION. To the extent that any indemnification provided
for under SECTION 7.01, SECTION 7.02 or SECTION 7.03 is unavailable to an
Indemnified Party or is insufficient in respect of any the Indemnifiable
Lossess of such Indemnified Party then the Indemnifying Party under such
Section, in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Indemnifiable Losses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Indemnifying Party on the one
hand and the Indemnified Party on the other hand from the transaction or other
matter which resulted in the Indemnifiable Losses or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted in such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, including
the Exhibits and Schedules hereto, and the Ancillary Agreements shall
constitute the entire agreement between the parties with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. In the event of
any inconsistency between this Agreement and any Schedule or Exhibit hereto,
the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding
any other provisions in this Agreement to the contrary, in the event and to
the extent that there shall be a conflict between the provisions of this
Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 8.02. ANCILLARY AGREEMENTS. This Agreement is not intended to
address, and should not be interpreted to address, the matters specifically
and expressly covered by the Ancillary Agreements.
SECTION 8.03. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION 8.04. SURVIVAL OF AGREEMENTS. Except as otherwise expressly provided
herein, all covenants and agreements of the parties contained in this
Agreement shall survive the Distribution Date.
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SECTION 8.05. RESPONSIBILITY FOR EXPENSES.
(a) EXPENSES INCURRED ON OR PRIOR TO DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, all costs and expenses incurred on or
prior to the Distribution Date (whether or not paid on or prior to the
Distribution Date) in connection with the preparation, execution, delivery and
implementation of this Agreement and any Ancillary Agreement, the Information
Statements and the Distribution, and the consummation of the transactions
contemplated hereby and thereby shall be charged to and paid by Tenneco;
provided, however, that (i) such amounts shall be included in the calculation
of the Actual Energy Debt Amount to the extent expressly provided in the Debt
and Cash Allocation Agreement, and (ii) each of Industrial Company and
Shipbuilding Company shall be solely responsible and liable for any expenses,
fees, or other costs that it separately and directly incurs in connection with
any of the transactions contemplated under this Agreement or any of the
Ancillary Agreements.
(b) EXPENSES INCURRED OR ACCRUED AFTER DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses first incurred or accrued after the Distribution Date.
(c) ENVIRONMENTAL EXPENSES. Notwithstanding the provisions of SECTION
8.05(A) and SECTION 8.05(B) above, expenses and other costs incurred in
connection with compliance with any Environmental Laws applicable to the
transactions contemplated hereby shall be paid by the party that after the
Distribution Date will, or that this Agreement contemplates will, own the
assets or operate the business subject to such Environmental Laws.
SECTION 8.06. NOTICES. All notices and other communications to a party
hereunder shall be in writing and hand delivered or mailed by registered or
certified mail (return receipt requested) or sent by any means of electronic
message transmission with delivery confirmed (by voice or otherwise) to such
party (and will be deemed given on the date on which the notice is received by
such party) at the address for such party set forth below (or at such other
address for the party as the party shall, from time to time, specify by like
notice to the other parties):
If to Tenneco, at:1010 Milam Street
Houston, Texas 77002
Telecopier:
Attention: Corporate Secretary
If to Industrial Company, at:1275 King Street
Greenwich, CT 06831
Telecopier:
Attention: Corporate Secretary
If to Shipbuilding Company, at:4101 Washington Avenue
Newport News, Virginia 23607
Telecopier:
Attention: Corporate Secretary
SECTION 8.07. WAIVERS. The failure of any party hereto to require strict
performance by any other party of any provision in this Agreement will not
waive or diminish that party's right to demand strict performance thereafter
of that or any other provision hereof.
SECTION 8.08. AMENDMENTS. Subject to the terms of SECTION 8.11 hereof, this
Agreement may not be modified or amended except by an agreement in writing
signed by the parties hereto; provided, however, any such amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior consent of Acquiror unless such
modifications or amendments do not, individually or in the aggregate,
adversely affect the Energy Business (other than to a de minimis extent) or
materially delay or prevent the consummation of the Merger.
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SECTION 8.09. ASSIGNMENT. This Agreement shall be assignable in whole in
connection with a merger or consolidation or the sale of all or substantially
all the assets of a party hereto so long as the resulting, surviving or
transferee entity assumes all the obligations of the relevant party hereto by
operation of law or pursuant to an agreement in form and substance reasonably
satisfactory to the other parties to this Agreement. Otherwise this Agreement
shall not be assignable, in whole or in part, directly or indirectly, by any
party hereto without the prior written consent of the others, and any attempt
to assign any rights or obligations arising under this Agreement without such
consent shall be void.
SECTION 8.10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon, inure to the benefit of and be enforceable by the parties and
their respective permitted successors and permitted assigns.
SECTION 8.11. TERMINATION. This Agreement may be terminated and the
Distributions may be amended, modified or abandoned at any time prior to the
Distributions by and in the sole discretion of Tenneco without the approval of
Industrial Company or Shipbuilding Company or the stockholders of Tenneco;
provided, however, any such termination, abandonment, amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior written consent of Acquiror
unless, in the case of a modification or amendment only, such modification or
amendment does not, individually or in the aggregate, adversely affect the
Energy Business (other than to a de minimis extent) or materially delay or
prevent the consummation of the Merger. In the event of such termination, no
party shall have any liability of any kind to any other party or any other
person. After the Distributions, this Agreement may not be terminated except
by an agreement in writing signed by all of the parties hereto; provided,
however, that ARTICLE VIII shall not be terminated or amended after the
Distributions in respect of the third party beneficiaries thereto without the
consent of such persons. Nothing in this SECTION 8.11 shall relieve Tenneco of
its obligations, under Section 6.13 of the Merger Agreement.
SECTION 8.12. THIRD PARTY BENEFICIARIES. Except as provided in ARTICLE VII
hereof (relating to Indemnitees), this Agreement is solely for the benefit of
the parties hereto, the members of their respective Groups and Affiliates and
the Acquiror, after giving effect to the Distributions, and should not be
deemed to confer upon third parties any remedy, claim, liability, right of
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
SECTION 8.13. ATTORNEY FEES. A party in breach of this Agreement shall, on
demand, indemnify and hold harmless the other parties hereto for and against
all out-of-pocket expenses, including, without limitation, reasonable legal
fees, incurred by such other party by reason of the enforcement and protection
of its rights under this Agreement. The payment of such expenses is in
addition to any other relief to which such other party may be entitled
hereunder or otherwise.
SECTION 8.14. TITLE AND HEADINGS. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
SECTION 8.15. EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached
hereto shall be construed with and as an integral part of this Agreement to
the same extent as if the same had been set forth verbatim herein.
SECTION 8.16. SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
that there is no adequate remedy at law for the failure by such parties to
comply with the provisions of this Agreement and that such failure would cause
immediate harm that would not be adequately compensable in damages.
Accordingly, each of the parties hereto agrees that their agreements contained
herein may be specifically enforced without the requirement of posting a bond
or other security, in addition to all other remedies available to the parties
hereto under this Agreement.
SECTION 8.17. GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE SCHEDULES
AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW
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OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO
THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE
STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH
PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND
(iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL
HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY
WITHIN THE STATE OF DELAWARE.
SECTION 8.18. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid
provisions, the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
SECTION 8.19. SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantee the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
SECTION 8.20. SHIPBUILDING HEDGING TRANSACTIONS. Notwithstanding any other
provisions of this Agreement or any other document or instrument (including
any of the other Ancillary Agreements), any gains or losses relating to
hedging or similar transactions undertaken by Shipbuilding Company or any
other member of the Shipbuilding Group which are in effect on the date hereof
or at any time hereafter through the Distribution Date shall be for the
account of Shipbuilding Company, and, without limiting the generality of the
foregoing, (i) Shipbuilding Company and the other members of the Group shall
finance and fund any such losses through their own finance facilities, and
(ii) no cash or debt relating to any such gains or losses shall be taken into
account in making any of the determinations under the Debt and Cash Allocation
Agreement, including determinations regarding the amount of the Allocated
Shipbuilding Debt and/or the Guaranteed Shipbuilding Cash Amount.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
By __________________________________
Name:
Title:
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<PAGE>
EXHIBIT C
TO
DISTRIBUTION AGREEMENT
DEBT AND CASH ALLOCATION AGREEMENT
THIS DEBT AND CASH ALLOCATION AGREEMENT (this "Agreement") is made and
entered into as of this day of , 1996 by and among Tenneco
Inc., a Delaware corporation ("Tenneco"), Newport News Shipbuilding Inc.
(formerly known as Tenneco InterAmerica Inc.), a Delaware corporation
("Shipbuilding Company"), and New Tenneco Inc., a Delaware corporation
("Industrial Company").
WHEREAS, pursuant to the terms of that certain Distribution Agreement by and
among the parties hereto and dated as of , 1996 (the "Distribution
Agreement"), the parties have entered into this Agreement regarding the
allocation of the Cash and Cash Equivalents and Consolidated Debt of Tenneco
and its consolidated subsidiaries as of the Effective Time. For purposes of
this Agreement only, the "Effective Time" means 12:01 AM, Houston time, on the
date on which the Merger Effective Time occurs.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, each of
the parties hereto, on behalf of itself and each of the other members of its
Group over which it has direct or indirect legal or effective control, hereby
agrees as follows:
1. Certain Definitions. Capitalized terms which are used herein but which
are not defined below in this SECTION 1 or in any of the other provisions or
Sections of this Agreement or in the Distribution Agreement, shall have the
meaning ascribed to such terms in the Debt Realignment Plan attached as
Exhibit C to the Merger Agreement.
(a) "Actual Energy Debt Amount" means the aggregate amount, as of the
Effective Time, of the following, without duplication:
(i) the then outstanding amount of the Tenneco Revolving Debt plus
accrued and accreted interest and fees and expenses in respect thereof
(as reflected on the Energy Adjusted Closing Balance Sheet) ; plus
(ii) the Consolidated Public Debt Value; plus
(iii) the then outstanding principal amount of Consolidated Debt of
Tenneco and the Energy Subsidiaries other than that which is described
in clauses (i) and (ii) above (for this purpose undrawn letters of
credit and guarantees shall not be treated as outstanding) plus accrued
and accreted interest and fees and expenses in respect thereof as
reflected on the Energy Adjusted Closing Balance Sheet; plus
(iv) except as otherwise expressly provided in the Merger Agreement
or the Distribution Agreement, the unpaid amount of all direct and out
of pocket fees, costs and expenses (as reflected on the Energy Adjusted
Closing Balance Sheet) incurred on or prior to the Effective Time by
Tenneco and its subsidiaries in respect of the transactions
contemplated under the Debt Realignment, with respect to the Merger
Agreement, the NPS Issuance and with respect to the Distribution
Agreement, including, without limitation, the Corporate Restructuring
Transactions, the Distributions, the Merger and the other related
transactions, including by way of example items specifically set forth
on Schedule 1 to the extent incurred in respect of the aforesaid
transactions (collectively, the "Tenneco Transaction Expenses");
(v) any sales and use, gross receipts or other transfer Taxes
(including Gains Taxes and Transfer Taxes, as defined in the Merger
Agreement) imposed as a result of the Corporate Restructuring
Transactions or otherwise occurring pursuant to the Distribution
Agreement or the Merger Agreement, excluding, however, any stamp duty
imposed by the Stamp Act 1894 (Queensland) as a result of the Merger;
plus
(vi) Restructuring Taxes (as defined in the Tax Sharing Agreement),
except (A) for Taxes resulting from the deferred intercompany items on
Schedule 2, and (B) to the extent the IRS ruling provides the
Transactions (as defined in the Tax Sharing Agreement) are tax-free;
plus
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(vii) the then outstanding amount of any off-balance sheet
indebtedness incurred after June 19, 1996 and before the Effective Time
to finance the acquisition of any additional interest in the Oasis
Pipeline;
(viii) dividends declared by Tenneco on its common stock, $4.50
Preferred Stock and $7.40 Preferred Stock which have not been paid
prior to the Effective Time but as to which the record date is before
the Effective Time; plus
(ix) the total amount of dividends accrued on the shares of New
Preferred Stock issued pursuant the NPS Issuance that remain unpaid as
of the Effective Time.
The parties hereto hereby acknowledge and agree that the Actual Energy Debt
Amount shall include any amounts (including interest, fees and other charges)
that may be due and owing ASCC under or as a result of the factoring
arrangement between ASCC and Tenneco (and/or any of its Subsidiaries) other
than the amount of Factored Proceeds (the "ASCC Amount").
(b) "Actual Energy Expenditures Amount" means the actual amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996 capital budget
provided to Acquiror) made and paid for by the Energy Business from and
after January 1, 1996 to and including the Effective Time, including,
without limitation any capital expenditures in respect of the 70 MW
Dunaferr power project in Hungary; provided, however, that any amount paid
for the acquisition of any additional interest in either Tenneco Energy
Resources Inc. or the Oasis Pipeline or to repair any gas pipeline shall
not be capital expenditures for any purpose under this Agreement and shall
not be included in the Actual Energy Expenditures Amount.
(c) "Allocated Energy Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
as of the Effective Time under each of the Tenneco Revolving Debt, the
Consolidated Debt (other than the Tenneco Revolving Debt) of Tenneco and
the Energy Subsidiaries and the Tenneco Transaction Expenses, and any and
all such indebtedness outstanding or other obligations and liabilities
incurred or accrued under any of the foregoing from time to time and at any
time after the Effective Time.
(d) "Allocated Industrial Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Industrial Debt Securities as of the Effective Time, any and all
such indebtedness outstanding from time to time thereafter and all other
obligations and liabilities incurred or accrued at any time under the
Industrial Debt Securities.
(e) "Allocated Shipbuilding Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Shipbuilding Credit Facility as of the Effective Time, any and
all such indebtedness outstanding from time to time at any time thereafter
and all other obligations and liabilities incurred or accrued at any time
under the Shipbuilding Credit Facility.
(f) "Auditors" has the meaning ascribed to such term in SECTION 6 below.
(g) "Base Amount" means an amount equal to $2,650,000,000, (i) plus,
without duplication, the sum of (A) with respect to Tenneco gas purchase
contracts, the amount of all cash payments made by Tenneco and/or any of
its Subsidiaries during the period commencing on the date of Merger
Agreement and ending as of the Effective Time as a result or in respect of
any settlement, judgment or satisfaction of a bond in excess of the market
price for gas received by Tenneco and/or any of its Subsidiaries reduced by
the amount of any cash payments received from customers, insurers or other
third parties with respect thereto (other than ones refunded prior to the
Effective Time) or with respect to any gas supply realignment costs which
are so recovered (and not refunded) on or prior to the Effective Time, (B)
the purchase price paid by Tenneco and/or any of its subsidiaries to
acquire any additional interest in the Oasis Pipeline, (C) the amount of
all cash payments made by Tenneco and/or any of the Energy Subsidiaries
during the period commencing on the date of the Merger Agreement and ending
on the Closing Date in settlement of any significant claim, action, suit or
proceeding to the extent such matter would be an Energy Liability and with
the consent of Acquiror, which shall not be arbitrarily withheld
(including, without limitation, cash
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<PAGE>
payments in settlement of claims against Tenneco and/or any of its
affiliates arising from the Stock Purchase Agreement dated as of July 31,
1986 by and between Tenneco Inc. and I.C.H. Corporation) reduced by the
amount of any cash payments received by Tenneco or any of the Energy
Subsidiaries during such period from customers, insurers or other third
parties with respect thereto, and (D) the total amount of the specific
additions or increases to the Base Amount set forth on SCHEDULE 4 attached
hereto, (ii) less, without duplication, the sum of (A) the gross amount of
cash proceeds from the NPS Issuance (as defined in the Merger Agreement)
less the amount of any expenses, fees or other out-of-pocket costs related
thereto which are included in the Actual Energy Debt Amount), and (B) the
total amount of the specific subtractions and reductions to the Base Amount
set forth on SCHEDULE 4 attached hereto.
(h) "Cash and Cash Equivalents" has the meaning ascribed to such term
under United States generally accepted accounting principles; provided,
that in all events checks issued by Tenneco and the Energy Subsidiaries
which remain unpaid as of the Effective Time shall be deducted from Cash
and Cash Equivalents, and checks received by Tenneco and the Energy
Subsidiaries which remain uncollected prior to the Effective Time (other
than checks that have been dishonored) shall be included in Cash and Cash
Equivalents.
(i) "Consolidated Public Debt Value" means the value (including any
accrued and unpaid interest thereon) of publicly-held Consolidated Debt of
Tenneco and the Energy Subsidiaries outstanding as of the Effective Time
(as reflected on the Energy Adjusted Closing Balance Sheet), calculated and
determined by Tenneco and Acquiror or if, they are unable to agree, by a
nationally recognized investment banking firm selected by mutual agreement
between Tenneco and Acquiror, as of the close of business on the fifth
(5th) business day preceding the Effective Time based on the applicable
spreads to treasuries and the applicable benchmark treasury securities
listed on Schedule 3.
(j) "Closing Calendar Month" means the calendar month in which the
Effective Time occurs.
(k) "Debt Realignment" has the meaning ascribed to such term in the
Merger Agreement.
(l) "Dispute" has the meaning ascribed to such term in SECTION 6 below.
(m) "Energy Adjusted Closing Balance Sheet" has the meaning ascribed to
such term in SECTION 6 below.
(n) "Energy Closing Balance Sheet" has the meaning ascribed to such term
in SECTION 6 below.
(o) "Energy Receivables" means any and all accounts receivable of the
Energy Business (after giving effect to the Corporate Restructuring
Transactions and the Distributions and, therefore, specifically excluding
receivables relating to the business of Case Corporation and the Industrial
Business).
(p) "Factored Proceeds" means the total amount of outstanding cash
proceeds received by Tenneco from ASCC, as of the last business day of the
month preceding the Closing Calendar Month, through the factoring of Energy
Receivables, which amount shall not exceed $100,000,000.
(q) "Guaranteed Energy Cash Amount" has the meaning ascribed to such term
in SECTION 5 below.
(r) "Guaranteed Shipbuilding Cash Amount" has the meaning ascribed to
such term in SECTION 5 below.
(s) "Independent Auditors" has the meaning ascribed to such term in
SECTION 6 below.
(t) "Industrial Debt Securities" means, collectively, the notes,
debentures and other debt securities issued by Industrial Company in
exchange for certain issues of the Consolidated Debt pursuant to and in
accordance with the debt exchange by Industrial Company contemplated under
the Debt Realignment.
(u) "Merger Agreement" means the Amended and Restated Agreement and Plan
of Merger, dated as of June 19, 1996, among Tenneco, El Paso Natural Gas
Company and El Paso Merger Company, as amended from time to time.
(v) "Merger Closing Date" means the date on which the Merger is
consummated.
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<PAGE>
(w) "Required Energy Expenditures Amount" means an aggregate amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996 capital budget
provided to Acquiror) by the Energy Business for 1996 equal to
$333,200,000, plus an amount of capital expenditures by the Energy Business
for 1997 equal to $27,750,000 per month for each month (or pro rata portion
thereof) from January 1, 1997 to the Effective Time.
(x) "Shipbuilding Adjusted Closing Balance Sheet" has the meaning
ascribed to such term in SECTION 6 below.
(y) "Shipbuilding Closing Balance Sheet" has the meaning ascribed to such
term in SECTION 6 below.
(z) "Shipbuilding Credit Facility" has the meaning ascribed to such term
in SECTION 3 below.
(aa) "Tenneco Allocation Percentage" means a fraction, the numerator of
which is the total number of business days remaining in the Closing
Calendar Month from and after the Effective Time (including the day on
which the Effective Time occurs), and the denominator of which is the total
number of business days in the Closing Calendar Month.
(bb) "Tenneco Revolving Debt" has the meaning ascribed to such term in
SECTION 2 below.
2. Tenneco Credit Facility and Tenneco Revolving Debt. Tenneco shall, at its
expense, have the sole right and authority to, and will use its commercially
reasonable efforts to, have in place prior to the Distribution Date a credit
facility for itself (with such guarantees of its obligations thereunder by the
Energy Subsidiaries as it deems necessary) in an aggregate principal amount
sufficient (together with other available funds to Tenneco) to fund the
tenders, redemptions, prepayments, defeasances and maturities contemplated
under the Debt Realignment; to pay all the fees, costs and expenses incurred
by Tenneco and its subsidiaries in preparing for, negotiating and effecting
the Distributions, the Merger and the Debt Realignment and any financings in
connection therewith; and for other general corporate purposes (including,
without limitation, working capital, the repayment or refinancing of
Consolidated Debt and the payments of dividends). This facility shall be in
effect at, and shall have a remaining stated maturity of at least 180 days
following, the closing of the Merger and the Distributions. The aggregate
amount of debt (including accrued and accreted interest and fees and expenses)
outstanding as of the Effective Time under this facility is hereinafter called
the "Tenneco Revolving Debt".
Notwithstanding anything contained herein, (a) contemporaneously with the
Distributions, Tenneco and the Energy Subsidiaries shall be removed as obligor
under (and released from liability with respect to) any indebtedness for
borrowed money for which Tenneco or its subsidiaries are liable and which are
assumed by the Industrial Company or the Shipbuilding Company pursuant to the
terms hereof and the Distribution Agreement, (b) any Tenneco Revolving Debt
shall be prepayable without penalty, subject to customary notice provisions,
(c) in respect of publicly-traded Consolidated Debt, between the date of the
Merger Agreement and the Effective Time there shall be no (i) extension of
maturity or average life, (ii) increase in interest rates or (iii) adverse
change in defeasance or redemption provisions with respect to any indebtedness
for borrowed money for which Tenneco or the Energy Subsidiaries will be liable
on or after the Effective Time and (d) except for the Tenneco Revolving Debt,
no indebtedness for borrowed money of Tenneco or the Energy Subsidiaries at
the Effective Time shall contain any affirmative or negative financial or
operational covenants other than ones that are (x) mutually acceptable to
Tenneco and Acquiror or (y) no more restrictive in the aggregate and
substantially equivalent to those set forth in the Indenture dated as of
January 1, 1992 of El Paso Natural Gas Company as in effect as of the date of
the Merger Agreement (other than Section 10.05 of the Indenture).
3. Shipbuilding Credit Facility and Shipbuilding Revolving Debt. Prior to
the Distributions (and at such time as Tenneco shall request), Shipbuilding
Company shall, at its expense, obtain and have in place a credit facility (the
"Shipbuilding Credit Facility") for itself (with such guarantees of its
obligations thereunder by the Shipbuilding Subsidiaries as is necessary to
obtain the Shipbuilding Credit Facility) in an aggregate principal amount of
at least $600 million (the "Minimum Debt Amount") and shall borrow the Minimum
Debt Amount thereunder and distribute the proceeds of such borrowing to
Tenneco (or such subsidiary of Tenneco as Tenneco shall designate) at such
time on or prior to the consummation of the Distributions as Tenneco shall
request.
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<PAGE>
4. Allocation and Assumption of Debt.
(a) Allocated Energy Debt. On the Distribution Date, Tenneco shall assume,
and shall thereafter be solely liable and responsible for, the Allocated
Energy Debt. Tenneco hereby acknowledges and agrees that the Allocated Energy
Debt shall constitute an Energy Group Liability as defined in the Distribution
Agreement.
(b) Allocated Industrial Debt. On the Distribution Date, Industrial Company
shall assume, and shall thereafter be solely liable and responsible for, the
Allocated Industrial Debt. Industrial Company hereby acknowledges and agrees
that the Allocated Industrial Debt shall constitute an Industrial Group
Liability as defined in the Distribution Agreement.
(c) Allocated Shipbuilding Debt. On the Distribution Date, Shipbuilding
Company shall assume, and shall thereafter be solely liable and responsible
for, the Allocated Shipbuilding Debt. Shipbuilding Company hereby acknowledges
and agrees that the Allocated Shipbuilding Debt shall constitute a
Shipbuilding Group Liability as defined in the Distribution Agreement.
5. Allocation of Cash and Cash Equivalents. Prior to or contemporaneously
with the consummation of the Distributions, each of the parties hereto shall
make such transfers of the Cash and Cash Equivalents of Tenneco and its
consolidated subsidiaries (prior to giving effect to the Distributions) so
that to the extent possible, based on estimates of the aggregate amount of
Cash and Cash Equivalents of Tenneco and its consolidated subsidiaries then on
hand, (a) Tenneco and the Energy Subsidiaries, on a consolidated basis, shall,
as of the Effective Time, have an aggregate amount of Cash and Cash
Equivalents equal to the sum of the following:
(i) $25.0 million,
(ii) the product of (A) the Tenneco Allocation Percentage, and (B) the
lesser of (I) $100 million and (II) the total amount of the Factored
Proceeds (the lesser of such amounts being referred to as the "Section 5
Amount") and
(iii) should the Effective Time occur after the day of the month on which
Tenneco generally collects receivables from customers of its regulated
pipeline business (typically, the 25th day of a month), the lesser of the
amount of (A) the Section 5 Amount owing to ASCC as of the Effective Time,
and (B) the total amount of such receivables actually collected by Tenneco
or any of its Subsidiaries during the period beginning on the day such
receivables are first collected and ending at the Effective Time (the
"Actual Collection Amount"), so long as that amount is owing to ASCC as of
the Effective Time. It is expressly understood that as of the Effective
Time all payables and receivables are for the account of Acquiror.
(the sum of the amounts described in the immediately preceding clause (i),
(ii) and (iii) is hereinafter, referred to as the "Guaranteed Energy Cash
Amount"), and (b) Shipbuilding Company and the Shipbuilding Subsidiaries, on a
consolidated basis, shall, as of the close of business on the Merger Closing
Date, have an aggregate of $5 million of Cash and Cash Equivalents (the
"Guaranteed Shipbuilding Cash Amount"). All remaining Cash and Cash
Equivalents of Tenneco and its consolidated subsidiaries shall be allocated to
Industrial Company and the Industrial Subsidiaries.
6. Post Distribution Audit.
(a) Preparation of Closing Balance Sheets. As soon as practicable after the
Merger Closing Date, but in any event within 60 days following the Merger
Closing Date, Industrial Company shall cause Arthur Andersen LLP (the
"Auditors") to:
(i) conduct an audit of Tenneco and the Energy Subsidiaries to determine
the aggregate amount, as of the Effective Time, of each of the Factored
Proceeds, the Section 5 Amount, the Actual Collection Amount, the Tenneco
Revolving Debt, the Consolidated Debt (other than the Tenneco Revolving
Debt) of Tenneco and the Energy Subsidiaries, the Tenneco Transaction
Expenses, the Cash and Cash Equivalents of Tenneco
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and the Energy Subsidiaries and the Actual Energy Expenditures Amount, and
to prepare and deliver to each of Industrial Company and Tenneco a
consolidated balance sheet for Tenneco and the Energy Subsidiaries as of
the Effective Time reflecting (x) the amount of each of the foregoing
(other than the aggregate amount of the Factored Proceeds, the Section 5
Amount, the Actual Collection Amount (which shall be set forth in a
footnote to such consolidated balance sheet) and the Consolidated Debt
valued as part of the Consolidated Public Debt Value) and (y) the
Consolidated Public Debt Value (the "Energy Closing Balance Sheet"); and
(ii) conduct an audit of Shipbuilding Company and the Shipbuilding
Subsidiaries to determine the aggregate amount of the Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries as of
the Effective Time, and to prepare and deliver to each of Industrial
Company and Shipbuilding Company a consolidated balance sheet for
Shipbuilding Company and the Shipbuilding Subsidiaries as of the Effective
Time reflecting the aggregate amount of such Cash and Cash Equivalents (the
"Shipbuilding Closing Balance Sheet").
The Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet
shall each be prepared on the basis of an audit conducted by the Auditors in
accordance with generally accepted auditing standards and prepared in
accordance with generally accepted accounting principles consistently applied
and without giving effect to any change in accounting principles required on
account of the consummation of the Merger or the Distributions, except that,
to the extent that any definition contained herein contemplates inclusion or
exclusion of an item that would not be included or excluded under generally
accepted accounting principles, the Auditors shall compute such item in
accordance with such definition. During the course of the preparation of the
Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet by the
Auditors, and during any period in which there is a dispute regarding either
the Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet,
each of Tenneco, Industrial Company and Shipbuilding Company, as the case may
be, shall cooperate with the Auditors and each other and shall have access to
all work papers of the Auditors and all pertinent accounting and other records
of Tenneco and the Energy Subsidiaries and Shipbuilding Company and the
Shipbuilding Subsidiaries, as applicable. Tenneco shall pay the fees and
expenses of the Auditors. Notwithstanding any provision of this Agreement or
the Distribution Agreement, the Claims Deposit (as defined in Insurance
Agreement) shall not be included as Cash and Cash Equivalents of Tenneco and
the Energy Subsidiaries.
(b) Disputes Regarding Closing Balance Sheet. Unless (i) in the case of the
Energy Closing Balance Sheet, Tenneco delivers written notice to Industrial
Company on or prior to the 30th day after its receipt of the Energy Closing
Balance Sheet that it disputes any of the amounts set forth on the Energy
Closing Balance Sheet (hereinafter, an "Energy Dispute"), or (ii) in the case
of the Shipbuilding Closing Balance Sheet, Shipbuilding Company delivers
written notice to Industrial Company on or prior to the 30th day after its
receipt of the Shipbuilding Closing Balance Sheet that it disputes the amount
of Cash and Cash Equivalents set forth on the Shipbuilding Closing Balance
Sheet (hereinafter, a "Shipbuilding Dispute") then, as applicable, Tenneco
and/or Shipbuilding Company shall be deemed to have accepted and agreed to the
Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet, as
applicable, in the form in which it was delivered to it by the Auditors. If
such a notice of an Energy Dispute is given by Tenneco or a notice of a
Shipbuilding Dispute is given by Shipbuilding Company (in either case such
party being hereinafter referred to as the "Disputing Party") within such 30-
day period, then Industrial Company and the Disputing Party shall, within 15
days after the giving of any such notice, attempt to resolve such Energy
Dispute or Shipbuilding Dispute, as the case may be, and agree in writing upon
the final content of the Energy Closing Balance Sheet or Shipbuilding Closing
Balance Sheet, as the case may be. In the event that the Disputing Party and
Industrial Company are unable to resolve any Energy Dispute or Shipbuilding
Dispute, as the case may be, within such 15-day period, then the certified
public accounting firm of Ernst & Young or another mutually acceptable
independent accounting firm (the "Independent Auditors") shall be employed as
arbitrator hereunder to settle such Energy Dispute and/or Shipbuilding
Dispute, as the case may be, as soon as practicable. The Independent Auditors
shall have access to all documents and facilities necessary to perform its
function as arbitrator. The determination of the Independent Auditors with
respect to any Energy Dispute and/or Shipbuilding Dispute, as the case may be,
shall be final and binding on the applicable parties hereto. Industrial
Company and the Disputing Party shall each pay one-half ( 1/2) of the fees and
expenses of the Independent Auditors for such services. Industrial Company and
the
A-C-6
<PAGE>
Disputing Party each agree to execute, if requested by the Independent
Auditors, a reasonable engagement letter. The term "Energy Adjusted Closing
Balance Sheet," as used herein, shall mean the definitive Energy Closing
Balance Sheet agreed to by Tenneco and Industrial Company or, as the case may
be, the definitive Energy Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
Section 6(b) (in addition to the matters theretofore agreed to by Tenneco and
Industrial Company). The term "Shipbuilding Closing Balance Sheet," as used
herein, shall mean the definitive Shipbuilding Closing Balance Sheet agreed to
by Shipbuilding Company and Industrial Company or, as the case may be, the
definitive Shipbuilding Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
SECTION 6(B) (in addition to the matters theretofore agreed to by Shipbuilding
Company and Industrial Company). The date on which the Energy Adjusted Closing
Balance Sheet is determined and provided to each of Industrial Company and
Tenneco pursuant to this SECTION 6(B) is hereinafter referred to as the
"Energy Determination Date". The date on which the Shipbuilding Adjusted
Closing Balance Sheet is determined and provided to each of Industrial Company
and Shipbuilding Company pursuant to this SECTION 6(B) is hereinafter referred
to as the "Shipbuilding Determination Date".
7. Post Distribution Adjustments and Cash Payments.
(a) Adjustments and Payments Relating to Consolidated Debt. If the Actual
Energy Debt Amount exceeds the Base Amount, Industrial Company shall pay
Tenneco the amount of such excess in cash within 10 days after the Energy
Determination Date. If, on the other hand, the Actual Energy Debt Amount is
less than the Base Amount, Tenneco shall pay Industrial Company the amount of
such deficiency in cash within 10 days after the Energy Determination Date.
(b) Adjustments and Payments Relating to Cash and Cash Equivalents.
(i) Adjustments and Payments Relating to Shipbuilding Company. If the
amount of Cash and Cash Equivalents of Shipbuilding Company and the
Shipbuilding Subsidiaries as reflected on the Shipbuilding Adjusted
Closing Balance Sheet is less than the Guaranteed Shipbuilding Cash
Amount, Industrial Company shall pay Shipbuilding Company the amount of
such deficiency in cash within 10 days after the Shipbuilding
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries
as reflected on the Shipbuilding Adjusted Closing Balance Sheet exceeds
the Guaranteed Shipbuilding Cash Amount, Shipbuilding shall pay
Industrial Company the amount of such excess in cash within 10 days
after the Shipbuilding Determination Date.
(ii) Adjustments and Payments Relating to Tenneco. (A) If the amount
of Cash and Cash Equivalents of Tenneco and the Energy Subsidiaries as
reflected on the Energy Adjusted Closing Balance Sheet is less than the
Guaranteed Energy Cash Amount, Industrial Company shall pay Tenneco the
amount of such deficiency in cash within 10 days after the Energy
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Tenneco and the Energy Subsidiaries as reflected on the
Energy Adjusted Closing Balance Sheet exceeds the Guaranteed Energy
Cash Amount, Tenneco shall pay Industrial Company the amount of such
excess in cash within 10 days after the Energy Determination Date.
(B) If the Actual Energy Expenditures Amount as reflected on the
Energy Adjusted Closing Balance Sheet is less than the Required Energy
Expenditures Amount, Industrial Company shall pay Tenneco the amount of
such deficiency in cash within 10 days after the Energy Determination
Date. If, on the other hand, the Actual Energy Expenditures Amount as
reflected on the Energy Adjusted Closing Balance Sheet is greater than
the Required Energy Expenditures Amount, Tenneco shall pay to
Industrial Company the amount of such excess in cash within 10 days
after the Energy Determination Date.
(C) Each of Tenneco and Industrial Company hereby agrees that the
amount of any cash payment otherwise due it under any provision of this
SECTION 7 may be offset against and reduced, on a dollar for dollar
basis, in respect of any cash payment it may otherwise be required to
make to the other pursuant to and in accordance with any other
provision of this SECTION 7, and that the amount of such offset and
reduction shall be treated as payment of its obligations under any
provision of this SECTION 7 to the extent of such offset and reduction.
A-C-7
<PAGE>
8. Miscellaneous Provisions.
(a) Termination. This Agreement may not be terminated except upon the
written agreement of each of the parties hereto.
(b) Best Efforts. If at any time after the Merger Closing Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of Tenneco, Industrial Company and Shipbuilding Company shall, on the
written request of any of them, take (or cause the appropriate member of its
Group over which it has direct or indirect legal or effective control to take)
all such reasonably necessary or desirable action.
(c) Cooperation. The parties hereto agree to use their reasonable best
efforts to cooperate with respect to the various matters contemplated by this
Agreement.
(d) Successors and Assigns. Except as otherwise expressly provided herein,
no party hereto may assign or delegate, whether by operation of law or
otherwise, any of such party's rights or obligations under or in connection
with this Agreement without the written consent of each other party hereto. No
assignment will, however, release the assignor of any of its obligations under
this Agreement or waive or release any right or remedy the other parties may
have against such assignor hereunder. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto will be binding upon and enforceable
against the respective successors and assigns of such party and will be
enforceable by and will inure to the benefit of the respective successors and
permitted assigns of such party.
(e) Modification; Waiver; Severability. This Agreement may not be amended or
modified except in a writing executed by each of the parties hereto. The
failure by any party to exercise or a delay in exercising any right provided
for herein shall not be deemed a waiver of any right hereunder. Whenever
possible, each provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which
taken together shall constitute one and the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(h) Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally or
five business days after mailing by certified or registered mail, return
receipt requested and postage prepaid, to the recipient at such recipient's
address as indicated in the Distribution Agreement or to such other address or
to the attention of such other person as the recipient party has specified by
prior written notice to the sending party.
(i) Survival. Each of the agreements of the parties herein shall survive the
Merger Closing Date.
(j) No Third Party Beneficiaries. This Agreement is made solely for the
benefit of the parties hereto and the other members of their respective
Groups, and shall not give rise to any rights of any kind to any other third
parties.
(k) Governing Law and Consent to Jurisdiction. ALL QUESTIONS AND/OR DISPUTES
CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND
THE SCHEDULES AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND
NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO
THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO,
AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE
STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
A-C-8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
(formerly known as Tenneco
InterAmerica Inc.)
By __________________________________
Name:
Title:
A-C-9
<PAGE>
Schedule 1
to Debt and Cash Allocation Agreement
Accounting fees and expenses
Actuarial fees and expenses
Appraisal fees and expenses
Audit fees and expenses
Broker/dealer fees and expenses
Consulting fees and expenses
Exchange/paying agent fees and expenses
Exit consent fees
Fees and expenses incurred in connection with arranging the Revolving Debt,
including commitment fees, drawdown fees, agent's fees, facility fees and
similar fees and expenses, and lender's costs and expenses payable by the
borrower
Filing fees, including SEC, NYSE, NASD, HSR and other similar fees
Information agent fees and expenses
Investment banking fees and expenses, dealer manager fees and expenses, and
similar fees and expenses
Fees and expenses with respect to legal matters pertaining to the transactions
Mailing expenses
Newspaper advertising costs
Printing fees and expenses
Proxy solicitation fees and expenses
Soliciting dealer fees and expenses
Rating Agency fees
Underwriting, placement, registration and similar fees, commissions and
discounts payable in connection with the NPS Preferred Stock
A-C-10
<PAGE>
Schedule 2
to Debt and Cash Allocation Agreement
The deferred intercompany items referred to in SECTION 1(A)(VI) of the Debt
and Cash Allocation agreement are the following intercompany transactions
<TABLE>
<CAPTION>
SELLER BUYER PROPERTY TRANSFERRED
- ------ ----- --------------------
<S> <C> <C>
Tenneco Corporation Tenneco Inc. Stock of Kern County Land Co.
Tenneco Corporation Tenneco Inc. Stock of Tenneco Credit Corp.
Tenneco Corporation Tennessee Gas Pipeline Co. Stock of Tenneco International Inc.
Channel Gas Marketing Channel Industries Gas DT Line
Tenngasco Gas Supply Channel Industries Gas Transmission facilities
Tennessee Gas Pipeline
Co. Energy TRACS Software assignment agreement
</TABLE>
A-C-11
<PAGE>
TENNECO INC.
Schedule 3
<TABLE>
<CAPTION>
PRE-DETERMINED
------------------------------------------------
SECURITY DESCRIPTION BENCHMARK TREASURY SPREAD TO TREASURY(1)
- ------------------------------------------------ ------------------------- ----------------------
INDENTURE FACE COUPON MATURITY COUPON MATURITY CASE A CASE B
--------- ------ ------ -------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inc. ................... $300.0 6.500% 12/15/05 5.875% 11/05 84 bp 76 bp
Inc. ................... 300.0 7.250% 12/15/25 pricing 30yr UST 125 113
Inc. ................... 500.0 7.875% 10/01/02 6.375% 08/02 73 66
Inc. ................... 250.0 8.000% 11/15/99 7.750% 11/99 58 52
Inc. ................... 150.0 9.000% 11/15/12 pricing 30yr UST 95 86
Inc. ................... 200.0 9.875% 02/01/01 7.750% 02/01 66 59
Inc. ................... 250.0 10.000% 03/15/08 pricing 30yr UST 91 82
Inc. ................... 500.0 10.000% 08/01/98 5.875% 08/98 51 46
Inc. ................... 175.0 10.375% 11/15/00 5.625% 11/00 64 58
TGP..................... 400.0 6.000% 12/15/11 pricing 30yr UST 95 86
TGP..................... 75.0 8.000% 05/15/97 NA NA NA NA
TGP..................... 250.0 9.000% 01/15/97 NA NA NA NA
TCC..................... 7.5 8.500% 01/30/97 NA NA NA NA
TCC..................... 0.5 8.500% 03/17/97 NA NA NA NA
TCC..................... 3.0 8.500% 03/24/97 NA NA NA NA
TCC..................... 5.0 8.520% 03/28/97 NA NA NA NA
TCC..................... 6.6 8.570% 03/18/97 NA NA NA NA
TCC..................... 150.0 9.250% 11/01/96 NA NA NA NA
TCC..................... 12.0 9.470% 09/21/98 5.875% 08/98 48 43
TCC..................... 10.0 9.480% 01/28/02 7.500% 11/01 69 62
TCC..................... 250.0 9.625% 08/15/01 7.875% 08/01 68 61
TCC..................... 7.6 9.720% 09/15/01 7.875% 08/01 68 61
TCC..................... 10.0 9.720% 09/25/01 7.875% 08/01 69 62
TCC..................... 5.0 9.900% 12/02/96 7.500% 12/96 45 41
TCC..................... 3.0 9.900% 08/19/98 5.875% 08/98 48 43
TCC..................... 4.5 10.000% 08/19/98 5.875% 08/98 48 43
TCC..................... 5.0 10.000% 12/13/01 7.500% 11/01 70 63
TCC..................... 50.0 10.500% 08/17/98 5.875% 08/98 48 43
TCC..................... 150.0 10.125% 12/01/97 5.250% 12/97 48 43
Inc. ................... $2,625
TGP..................... 725
TCC..................... 680
------
$4,030
------
</TABLE>
NOTE: (1) Case A represents the spread to treasury for each security in the
event that the percentage of the aggregate principal amount of the bonds
participating in any tender or exchange, measured as a group for all
bonds tendered or exchanged for, equals or exceeds 80% of all such bonds
eligible to participate. In the event that the percentage of bonds
participating in any tender or exchange falls short of 80% (calculated as
aforesaid), the market value of all bonds remaining outstanding will be
determined by using the spread to treasury indicated in Case B.
A-C-12
<PAGE>
SCHEDULE 4
TO
DEBT AND CASH ALLOCATION AGREEMENT
ADDITIONAL ADJUSTMENTS TO BASE AMOUNT
1. Indonesia (the South Sulawesi Project)
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time between June 19, 1996 and the Effective
Time (the "PRE-CLOSING PERIOD") shall be added to the Base Amount (but shall
not be included as a capital expenditure for purposes of determining the
Actual Energy Expenditures Amount); provided, however, the Base Amount will be
reduced by the amount of any Net Cash Proceeds (as defined) received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any monetization of this project during the Pre-Closing Period. As used
in the Schedule 4, the term "Net Cash Proceeds" means the total amount of cash
proceeds actually received by the party in question during the Pre-Closing
Period from the consummation during the Pre-Closing Period of the transaction
or transactions in question, less the sum of any and all costs, expenses and
taxes related to the transaction or transactions in question which either are
(i) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to or at the Effective Time (other than taxes based upon
income, which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (ii) incurred but not paid prior to or at the Effective Time by
any member of either the Industrial Group and/or Shipbuilding Group and which
will remain an obligation or liability of such entity (or any member of its
Group) after giving effect to the Distributions without reimbursement therefor
by Tenneco or any other member of the Energy Group.
2. Orange Cogeneration Project
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time during the Pre-Closing Period shall be
added to the Base Amount (but shall not be included as a capital expenditure
for purposes of determining the Actual Energy Expenditures Amount); provided,
however, the Base Amount will be reduced by the amount of any Net Cash
Proceeds received by Tenneco or any of its consolidated subsidiaries during
the Pre-Closing Period from any monetization of this project during the Pre-
Closing Period.
3. Australian Infrastructure Bonds
(a) The Base Amount shall be reduced by any Net Cash Proceeds received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any off-balance sheet financing in respect of this project.
4. Asset Sales
(a) Microwave Licenses. The Base Amount shall be reduced by the aggregate
amount of Microwave Net Cash Proceeds (as defined below) from any sale or
assignment during the Pre-Closing Period of private operational-fixed
microwave licenses issued by the Federal Communications Commission. As used
herein, "Microwave Net Cash Proceeds" means the gross cash proceeds actually
received by Tenneco or any of its consolidated subsidiaries less the sum of
(i) the total amount of relocation costs and cost and expenses of rebuilding
an acceptable replacement communication system that are actually incurred and
paid by Tenneco or any of its consolidated subsidiaries during the Pre-Closing
Period (or incurred by any member of the Industrial Group or Shipbuilding
Group and remain unpaid as of the Effective Time), and (ii) the amount of any
taxes incurred in connection with any such sale or assignment which are either
(A) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to the Effective Time (other than taxes based upon income,
which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (B) incurred by any member of the Shipbuilding Group or
Industrial Group and remain unpaid as of the Effective Time and which will
remain an obligation or liability of such entity (or any member of its Group)
after giving effect to the Distributions without reimbursement therefor by
Tenneco or any other member of the Energy Group.
A-C-13
<PAGE>
5. Land Sales
(a) 960 Acre Parcel Located Along Galveston Bay at Ingleside, Texas. The
Base Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period, in connection with the sale of the above referenced
property.
(b) Westchase Development in West Houston (also known as Tract 6A). The Base
Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period in connection with the sale of the above referenced
property.
(c) 1625 West Loop (also known as Post Oak Ranch). The Base Amount shall be
reduced by the total amount of Net Cash Proceeds actually received by Tenneco
or any of its consolidated subsidiaries at any time during the Pre-Closing
Period in connection with the sale of the above referenced property.
6. Sales of Gas Turbines
The Base Amount shall be reduced by the total amount of Net Cash Proceeds
actually received by Tenneco or any of its consolidated subsidiaries (and
credited to the account of Industrial Company under the Debt and Cash
Allocation Agreement) from its sale of any gas turbines at any time during the
Pre-Closing Period.
7. ICH Tax Indemnity Matter
The Base Amount shall be increased (without duplication) by any cash payment
(up to a maximum amount, however, of $19.0 million) made by Tenneco or any of
its consolidated subsidiaries during the Pre-Closing Period in respect of the
settlement of the ICH tax indemnity matter.
8. Payments due on Settlement of Certain Lawsuits During the Pre-Closing
Period
All cash payments actually received by Tenneco or any of its consolidated
subsidiaries during the Pre-Closing Period in respect of any settlement of any
of the lawsuits or other proceedings identified and referred to in paragraph 9
of, and Schedule G-2 to, Exhibit G to the Merger Agreement shall, to the
extent provided for under the terms described under paragraph 9 of such
Exhibit G, be for the account of Industrial Company and shall not be included
in the Guaranteed Energy Cash Amount or have any effect on the Base Amount or
the calculation thereof.
9. Hedging Transactions
Any hedging transactions and all costs and expenses with respect thereto
that are entered into in connection with or in anticipation of the Debt
Realignment shall be for the benefit or detriment of Industrial Company and
shall have no effect whatsoever on the Base Amount or the calculation thereof.
10. Rate Refunds Payable to Customers
The Base Amount shall be reduced by the amount, calculated as of the
Effective Time, of any rate refunds, including interest, which would be
payable to customers pursuant to the rate settlement filed with the Federal
Energy Regulatory Commission at Docket No. RP95-112 and have not been paid as
of the Effective Time, whether such amounts are to be paid to customers or
credited against gas supply realignment costs pursuant to a settlement with
customers.
11. Sale of Tenneco Ventures
The Base Amount shall be reduced by the aggregate amount of Net Cash
Proceeds actually received by Tenneco or any of its subsidiaries from any sale
of Tenneco Ventures during the Pre-Closing Period.
12. Bonuses for Energy Employees
(a) The total amount of cash bonuses for Energy Employees for the calendar
year 1996 (the "1996 Bonus Amount") shall be pro rated based on the date on
which the Effective Time occurs and shall be shared between Tenneco and
Industrial Company based on such pro ration as follows:
A-C-14
<PAGE>
(i) Tenneco shall be responsible and liable for the payment of that
portion (the "Tenneco Bonus Portion") of the 1996 Bonus Amount that equals
the product of (A) the 1996 Bonus Amount, and (B) a fraction, the numerator
of which is the number of days remaining in the 1996 calendar year
following the day on which the Effective Time occurs (the "Effective Day"),
and the denominator of which is 365.
(ii) New Tenneco shall be responsible and liable for the payment of that
portion of the 1996 Bonus Amount that equals the amount by which the 1996
Bonus Amount exceeds the Tenneco Bonus Portion.
(b) Each of Tenneco's and New Tenneco's liability for its share of the 1996
Bonus Amount shall be accounted for in the Merger as follows:
(i) If 100% of the 1996 Bonus Amount is paid on or before the Effective
Time, the Base Amount shall be increased by the Tenneco Bonus Portion.
(ii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid exceeds the Tenneco Bonus Portion, the Base Amount
shall be reduced by the amount of such excess.
(iii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid equals the Tenneco Bonus Portion, the Base Amount
shall not be increased or decreased in respect of the 1996 Bonus Amount.
(c) The 1996 Bonus Amount shall be determined by Tenneco prior to the
Effective Time with the consent of Acquiror which shall not be unreasonably
withheld.
13. Non Cash Proceeds
Any proceeds received by Tenneco or any of its subsidiaries from the
transactions described in paragraphs 1, 2, 3, 4, 5, 6 and 11 other than cash
proceeds shall be for the account of Acquiror and shall be retained by or
distributed to the Energy Business.
A-C-15
<PAGE>
EXHIBIT 10.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT K
TO
DISTRIBUTION AGREEMENT
TAX SHARING AGREEMENT
AMONG
TENNECO INC.,
NEW TENNECO INC.,
NEWPORT NEWS SHIPBUILDING INC.,
AND
EL PASO NATURAL GAS COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 1. Definition of Terms......................................... 1
Section 2. Allocation of Tax Liabilities............................... 6
Section 3. Proration of Taxes for Straddle Periods..................... 10
Section 4. Preparation and Filing of Tax Returns....................... 10
Section 5. Tax Payments and Intercompany Billings...................... 13
Section 6. Tax Benefits................................................ 16
Section 7. Assistance and Cooperation.................................. 17
Section 8. Tax Records................................................. 17
Section 9. Tax Contests................................................ 18
Effective Date; Termination of Prior Intercompany Tax
Section 10. Allocation Agreements....................................... 19
Section 11. No Inconsistent Actions..................................... 19
Section 12. Survival of Obligations..................................... 19
Section 13. Employee Matters............................................ 20
Section 14. Treatment of Payments; Tax Gross Up......................... 20
Section 15. Disagreements............................................... 20
Section 16. Late Payments............................................... 20
Section 17. Expenses.................................................... 21
Section 18. Special Rules for Determining Members of Groups............. 21
Section 19. General Provisions.......................................... 21
</TABLE>
<PAGE>
TAX SHARING AGREEMENT
This Agreement is entered into as of October 31, 1996 by and between Tenneco
Inc., a Delaware corporation ("Tenneco"), Newport News Shipbuilding Inc.
(formerly known as Tenneco InterAmerica Inc.), a Delaware corporation
("Shipbuilding Company"), New Tenneco Inc., a Delaware corporation
("Industrial Company"), and El Paso Natural Gas Company, a Delaware
corporation ("Acquiror"). Tenneco, Shipbuilding Company, and Industrial
Company are sometimes collectively referred to herein as the "Companies."
Capitalized terms used in this Agreement are defined in Section 1 below.
Unless otherwise indicated, all "Section" references in this Agreement are to
sections of this Agreement.
RECITALS
WHEREAS, as of the date hereof, Tenneco is the common parent of an
affiliated group of corporations, including Shipbuilding Company and
Industrial Company, which has elected to file consolidated Federal income tax
returns; and
WHEREAS, the Companies have entered into a Distribution Agreement setting
forth the corporate transactions pursuant to which Tenneco will distribute all
of the outstanding shares of common stock of Shipbuilding Company and all of
the outstanding shares of common stock of Industrial Company to Tenneco
shareholders in transactions intended to qualify as tax-free distributions
under Section 355 of the Code (as defined below); and
WHEREAS, as a result of the Distributions, Shipbuilding Company and
Industrial Company, and their respective subsidiaries, will cease to be
members of the affiliated group of which Tenneco is the common parent,
effective as of the Distribution Date; and
WHEREAS, the Companies desire to provide for and agree upon the allocation
between the parties of liabilities for Taxes arising prior to, as a result of,
and subsequent to the transactions contemplated by the Distribution Agreement,
and to provide for and agree upon other matters relating to Taxes;
NOW THEREFORE, in consideration of the mutual agreements contained herein,
the Companies hereby agree as follows:
Section 1. Definition of Terms. For purposes of this Agreement (including
the recitals hereof), the following terms have the following meanings:
"ACCOUNTING CUTOFF DATE" means, with respect to each of Shipbuilding Company
and Industrial Company, any date as of the end of which there is a closing of
the financial accounting records for such entity.
"ACCOUNTING FIRM" shall have the meaning provided in Section 15.
"ACQUIROR" means El Paso Natural Gas Company, a Delaware corporation, and
any successor.
"ADJUSTMENT REQUEST" means any formal or informal claim or request filed
with any Tax Authority, or with any administrative agency or court, for the
adjustment, refund, or credit of Taxes, including (a) any amended Tax return
claiming adjustment to the Taxes as reported on the Tax Return or, if
applicable, as previously adjusted, or (b) any claim for refund or credit of
Taxes previously paid.
"AFFILIATE" means any entity that directly or indirectly is "controlled" by
the person or entity in question. "Control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a person, whether through ownership of voting securities, by
contract or otherwise. Except as otherwise provided herein, the term Affiliate
shall refer to Affiliates of a person as determined immediately after the
Distributions.
"AGREEMENT" shall mean this Tax Sharing Agreement.
1
<PAGE>
"ALLOCATED FEDERAL TAX LIABILITY" shall have the meaning provided in Section
5.01(b)(i).
"BASE AMOUNT ADJUSTMENT ITEMS" means any Tax Items arising from the amounts
described in clause (i)(A) of the definition of Base Amount in the Debt and
Cash Allocation Agreement attached as Exhibit C to the Distribution Agreement
(relating to gas supply realignment costs and recoveries of such costs) or in
clause (i)(C) of such definition of Base Amount (relating to payments made in
settlement of any significant Energy Liability (as defined in the Merger
Agreement)), and any Tax Items related to such amounts (such as income accrued
with respect to payments to be received after the Distribution Date from
customers, insurers, or other third parties with respect to gas supply
realignment costs or settlements of Energy Liabilities).
"CARRYBACK" means any net operating loss, net capital loss, excess tax
credit, or other similar Tax item which may or must be carried from one Tax
Period to another Tax Period under the Code or other applicable Tax Law.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended, or any
successor law.
"COMPANIES" means Tenneco, Shipbuilding Company, and Industrial Company,
collectively, and "COMPANY" means any one of Tenneco, Shipbuilding Company, or
Industrial Company.
"CONSOLIDATED OR COMBINED INCOME TAX" means any Income Tax computed by
reference to the assets and activities of members of more than one Group.
"CONSOLIDATED OR COMBINED STATE INCOME TAX" means any State Income Tax
computed by reference to the assets and activities of members of more than one
Group.
"CONSOLIDATED TAX LIABILITY" means, with respect to any Tenneco Federal
Consolidated Return, the "tax liability of the group" as that term is used in
Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest,
additions to the tax, additional amounts, and penalties as provided in the
Code), adjusted as follows:
(i) such tax liability shall be treated as including any alternative
minimum tax liability under Code Section 55;
(ii) in the case of the Tax Period which includes the Distribution Date,
the Consolidated Tax Liability shall be computed as if the Distribution
Date were the last day of the Tax Period; and
(iii) Base Amount Adjustment Items and Debt Discharge Items shall be
disregarded.
"CUMULATIVE FEDERAL TAX PAYMENT" shall have the meaning provided in Section
5.01(b)(ii).
"DEBT DISCHARGE ITEMS" means any Tax Items arising from the Debt Realignment
(as defined in the Merger Agreement).
"DISTRIBUTION AGREEMENT" means the agreement, as amended from time to time,
setting forth the corporate transactions required to effect the distribution
to Tenneco shareholders of Shipbuilding Common Shares and Industrial Common
Shares, and to which this Tax Sharing Agreement is attached as an exhibit.
"DISTRIBUTION DATE" means the Distribution Date as that term is defined in
the Distribution Agreement.
"DISTRIBUTIONS" means the distributions to Tenneco shareholders on the
Distribution Date of all of the outstanding stock of Industrial Company and
Shipbuilding Company owned by Tenneco.
"EFFECTIVE TIME" shall have the meaning provided in the Merger Agreement.
"ENERGY INVESTMENTS GROUP" means the corporations, or divisions of
corporations, identified on Schedule 3.
"FEDERAL ALLOCATION METHOD" shall have the meaning provided in Section
2.02(a).
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"FEDERAL INCOME TAX" means any Tax imposed by Subtitle A or F of the Code.
"FEDERAL TAX ADJUSTMENT" shall have the meaning provided in Section 2.02(b).
"FOREIGN INCOME TAX" means any Tax imposed by any foreign country or any
possession of the United States, or by any political subdivision of any
foreign country or United States possession, which is an income tax as defined
in Treasury Regulation Section 1.901-2.
"GROUP" means the Tenneco Group, the Shipbuilding Group, and the Industrial
Group, as the context requires.
"GSR ITEMS" means, for any Tax Period: (a) the deductions or losses
allowable in such Tax Period attributable to (i) the payment of gas supply
realignment costs as described in clause (i) of the definition of Base Amount
in the Debt and Cash Allocation Agreement attached as Exhibit C to the
Distribution Agreement, or (ii) the payment in any Post-Distribution Tax
Period of gas supply realignment costs incurred pursuant to contracts entered
into on or prior to the Distribution Date; and (b) any taxable income or gain
recognized in such Tax Period attributable to the recovery of such costs from
customers, insurers, or third parties or attributable to any reduction in any
previously deducted payments.
"INCOME TAX" means any Federal Income Tax, State Income Tax, or Foreign
Income Tax.
"INDUSTRIAL ADJUSTMENT" means any proposed adjustment by a Tax Authority or
claim for refund asserted in a Tax Contest to the extent Industrial Company
would be exclusively liable for any resulting Tax under this Agreement and
exclusively entitled to receive any resulting Tax Benefit under this
Agreement. For purposes of this Agreement, any proposed adjustment relating to
Tenneco Business Services Inc. (or the predecessor shared services project of
Tenneco) shall be an Industrial Adjustment, and Industrial Company shall be
liable for any Taxes (and shall be entitled to receive any Tax Benefit)
arising from such adjustments.
"INDUSTRIAL COMPANY" means New Tenneco Inc., a Delaware corporation, and any
successor.
"INDUSTRIAL GROUP" means Industrial Company and its Affiliates as determined
immediately after the Distributions, modified as provided in Section 18.
"INDUSTRIAL GROUP PRIOR FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(ii).
"INDUSTRIAL GROUP PRIOR STATE TAX LIABILITY" shall have the meaning provided
in Section 2.03(b)(ii)(B).
"INDUSTRIAL GROUP RECOMPUTED FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(i).
"INDUSTRIAL GROUP RECOMPUTED STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(A).
"JOINT ADJUSTMENT" means any proposed adjustment by a Tax Authority or claim
for refund asserted in a Tax Contest which is neither an Industrial
Adjustment, a Shipbuilding Adjustment, nor a Tenneco Adjustment.
"MERGER" means the merger of El Paso Merger Company with and into Tenneco as
described in the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger among Tenneco,
Acquiror, and El Paso Merger Company dated as of June 19, 1996, as amended
from time to time.
"PAYMENT DATE" means (i) with respect to any Tenneco Federal Consolidated
Return, the due date for any required installment of estimated taxes
determined under Code Section 6655, the due date (determined without regard to
extensions) for filing the return determined under Code Section 6072, and the
date the return is filed,
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and (ii) with respect to any Tax Return for any Consolidated or Combined State
Income Tax, the corresponding dates determined under the applicable Tax Law.
"POST-DISTRIBUTION PERIOD" means any Tax Period beginning after the
Distribution Date, and, in the case of any Straddle Period, the portion of
such Straddle Period beginning the day after the Distribution Date.
"PRE-DISTRIBUTION PERIOD" means any Tax Period ending on or before the
Distribution Date, and, in the case of any Straddle Period, the portion of
such Straddle Period ending on the Distribution Date.
"PRIME RATE" means the base rate on corporate loans charged by Citibank,
N.A., New York, New York from time to time, compounded daily on the basis of a
year of 365 or 366 (as applicable) days and actual days elapsed.
"PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS" means any written or oral
agreement or any other arrangements relating to allocation of Taxes existing
between or among the Tenneco Group, the Shipbuilding Group, and the Industrial
Group as of the Distribution Date (other than this Agreement and other than
any such agreement or arrangement between or among persons who are members of
a single Group). The following agreements, including any amendments thereto,
shall not be considered a Prior Intercompany Tax Allocation Agreement: (i) the
agreement by and between Tenneco and Case Equipment Corporation (now known as
Case Corporation) dated June 23, 1994; (ii) the agreement by and among
Tenneco, Tenneco United Kingdom Holdings Limited, and Albright and Wilson plc
dated February 16, 1995; and (iii) the agreement by and between Tennessee Gas
Pipeline Company, Tenneco Gas Marketing Company, and IGC Energy, Inc. dated
November 1, 1995.
"PROHIBITED ACTION" shall have the meaning provided in Section 11.
"RESPONSIBLE COMPANY" means, with respect to any Tax Return, the Company
having responsibility for preparing and filing such Tax Return under this
Agreement.
"RESTRUCTURING TAX" means the Taxes described in Sections 2.06(a)(ii) or
2.06(a)(iii) (relating to Tax resulting from any income or gain recognized as
a result of the Transactions).
"RULING REQUEST" means the letter filed by Tenneco with the Internal Revenue
Service requesting a ruling from the Internal Revenue Service regarding
certain tax consequences of the Transactions (including all attachments,
exhibits, and other materials submitted with such ruling request letter) and
any amendment or supplement to such ruling request letter.
"SEPARATE COMPANY TAX" means any Tax computed by reference to the assets and
activities of a member or members of a single Group.
"SHIPBUILDING ADJUSTMENT" means any proposed adjustment by a Tax Authority
or claim for refund asserted in a Tax Contest to the extent Shipbuilding
Company would be exclusively liable for any resulting Tax under this Agreement
and exclusively entitled to receive any resulting Tax Benefit under this
Agreement.
"SHIPBUILDING COMPANY" means Newport News Shipbuilding Inc. (formerly known
as Tenneco InterAmerica Inc.), a Delaware corporation, and any successor.
"SHIPBUILDING GROUP" means Shipbuilding Company and its Affiliates as
determined immediately after the Distributions, modified as provided in
Section 18.
"STRADDLE PERIOD" means any Tax Period that begins on or before and ends
after the Distribution Date.
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"STATE INCOME TAX" means any Tax imposed by any State of the United States
or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.
"TAX" or "TAXES" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp, excise,
severance, occupation, service, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in
respect of the foregoing.
"TAX AUTHORITY" means, with respect to any Tax, the governmental entity or
political subdivision thereof that imposes such Tax, and the agency (if any)
charged with the collection of such Tax for such entity or subdivision.
"TAX BENEFIT" means any refund, credit, or other reduction in otherwise
required Tax payments (including any reduction in estimated tax payments).
"TAX CONTEST" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Affiliates (including any
administrative or judicial review of any claim for refund) for any Tax Period
ending on or before the Distribution Date or any Straddle Period.
"TAX CONTEST COMMITTEE" shall have the meaning provided in Section 9.02(b).
"TAX ITEM" means, with respect to any Income Tax, any item of income, gain,
loss, deduction, and credit.
"TAX LAW" means the law of any governmental entity or political subdivision
thereof relating to any Tax.
"TAX OPINION" means the opinion letter to be issued by Tenneco's tax counsel
as required by the Merger Agreement, a form of which is attached as Exhibit K
of the Merger Agreement.
"TAX PERIOD" means, with respect to any Tax, the period for which the Tax is
reported as provided under the Code or other applicable Tax Law.
"TAX RECORDS" means Tax Returns, Tax Return workpapers, documentation
relating to any Tax Contests, and any other books of account or records
required to be maintained under the Code or other applicable Tax Laws or under
any record retention agreement with any Tax Authority.
"TAX RETURN" means any report of Taxes due, any claims for refund of Taxes
paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under the
Code or other Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing, and including any amendments or
supplements to any of the foregoing.
"TENNECO" means Tenneco Inc., a Delaware corporation, and any successor.
"TENNECO ADJUSTMENT" means any proposed adjustment by a Tax Authority or
claim for refund asserted in a Tax Contest to the extent Tenneco would be
exclusively liable for any resulting Tax under this Agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.
"TENNECO FEDERAL CONSOLIDATED RETURN" means any United States federal Tax
Return for the affiliated group (as that term is defined in Code Section 1504)
that includes Tenneco as the common parent and includes any member of the
Shipbuilding Group or the Industrial Group.
"TENNECO GROUP" means Tenneco and its Affiliates, excluding any entity that
is a member of the Industrial Group or the Shipbuilding Group.
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"TRANSACTIONS" means the transactions contemplated by the Distribution
Agreement (including the Corporate Restructuring Steps and Distributions, as
defined in such agreement) and by the Merger Agreement (including the Debt
Realignment, as defined in such agreement).
"TREASURY REGULATIONS" means the regulations promulgated from time to time
under the Code as in effect for the relevant Tax Period.
Section 2. Allocation of Tax Liabilities. The provisions of this Section 2
are intended to determine each Company's liability for Taxes with respect to
Pre-Distribution Periods. Once the liability has been determined under this
Section 2, Section 5 determines the time when payment of the liability is to
be made, and whether the payment is to be made to the Tax Authority directly
or to another Company.
2.01 General Rule
(a) Tenneco Liability. Tenneco shall be liable for all Taxes not
specifically allocated to either Industrial Company or Shipbuilding Company
under this Section 2. Tenneco shall indemnify and hold harmless the
Industrial Group and the Shipbuilding Group from and against any liability
for Taxes which Tenneco is liable for under this Section 2.01(a).
(b) Industrial Company Liability. Industrial Company shall be liable for,
and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, Taxes which are
allocated to Industrial Company under this Section 2.
(c) Shipbuilding Company Liability. Shipbuilding Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Industrial Group from and against any liability for, Taxes which are
allocated to Shipbuilding Company under this Section 2.
2.02 Allocation of United States Federal Income Tax. Except as provided in
Sections 2.06, 6.02, and 6.03:
(a) Allocation of Tax Relating to Tenneco Federal Consolidated Returns
Filed After the Distribution Date. With respect to any Tenneco Federal
Consolidated Return filed after the Distribution Date, the Consolidated Tax
Liability shall be allocated among the Groups in accordance with the method
prescribed in Treasury Regulation Section 1.1552-1(a)(1) (as in effect on
the date hereof) determined by treating each Group as a single member of
the consolidated group and by disregarding Base Amount Adjustment Items and
Debt Discharge Items in computing each Group's taxable income (the "Federal
Allocation Method"). For purposes of such allocation, the excess, if any,
of (i) Consolidated Tax Liability over (ii) Consolidated Tax Liability
determined without regard to any alternative minimum tax liability under
Code Section 55, shall be allocated among the Groups in accordance with
their respective amounts of alternative minimum taxable income, and any
corresponding alternative minimum tax credit shall be allocated in
accordance with the allocation of such alternative minimum tax liability.
Any amount so allocated to the Industrial Group shall be a liability of
Industrial Company to Tenneco under this Section 2, and any amount so
allocated to the Shipbuilding Group shall be a liability of Shipbuilding
Company to Tenneco under this Section 2. Amounts described in Code Section
1561 (relating to limitations on certain multiple benefits) shall be
divided equally among the Tenneco Group, the Industrial Group, and the
Shipbuilding Group to the extent permitted by the Code.
(b) Allocation of Tenneco Federal Consolidated Return Tax Adjustments. If
there is any adjustment to the reported Tax liability with respect to any
Tenneco Federal Consolidated Return, or to such Tax liability as previously
adjusted, Industrial Company shall be liable to Tenneco for the excess (if
any) of--
(i) the Consolidated Tax Liability of the Industrial Group computed
as if all members of the Industrial Group included in the Tax Return
had filed a consolidated Tax Return for such members based on the Tax
Items of such members as so adjusted (the "Industrial Group Recomputed
Federal Tax Liability"); over
(ii) the Consolidated Tax Liability of the Industrial Group computed
as if such members of the Industrial Group had filed a consolidated Tax
Return for such members based on the Tax Items of such
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members as reported (or, if applicable, as previously adjusted) (the
"Industrial Group Prior Federal Tax Liability").
If the Industrial Group Prior Federal Tax Liability exceeds the Industrial
Group Recomputed Federal Tax Liability, Tenneco shall be liable to
Industrial Company for such excess. The Shipbuilding Group liability shall
be recomputed in a like manner, and Shipbuilding Company shall be liable to
Tenneco for any excess of the Shipbuilding Group Recomputed Federal Tax
Liability over the Shipbuilding Group Prior Federal Tax Liability, and
Tenneco shall be liable to Shipbuilding Company for any excess of the
Shipbuilding Group Prior Federal Tax Liability over the Shipbuilding Group
Recomputed Federal Tax Liability. For purposes of this Section 2.02(b), if
the Industrial Group or the Shipbuilding Group has a net operating loss
after taking into account the adjustments allocable to such group, the
Recomputed Federal Tax Liability of the group shall be less than zero to
the extent such net operating loss produces a Tax Benefit in consolidation
for the applicable taxable year.
(c) Special Allocation With Respect to Energy Investments Group. If the
net operating loss of the Energy Investments Group as reported on the
Tenneco Federal Consolidated Tax Return for the taxable year ended December
31, 1996 (but computed as if the Distribution Date were the last day of the
Tax Period) is less than $185,000,000, Industrial Company shall be liable
to Tenneco for an amount equal to 35% of the difference between
$185,000,000 and the Energy Investments Group net operating loss or net
taxable income. If such net operating loss of the Energy Investments Group
is greater than $213,000,000, Tenneco shall be liable to Industrial Company
for an amount equal to 35% of the difference between $213,000,000 and the
amount of the Energy Investments Group net operating loss. If there is any
subsequent adjustment to the Energy Investment Group's net operating loss
or taxable income, the amount payable by or to Industrial Company under
this Section 2.02(c) shall be adjusted accordingly based on the net
operating loss or taxable income as adjusted.
2.03 Allocation of State Income Taxes. Except as provided in Sections 2.04,
2.05, 2.06, 6.02, and 6.03, State Income Taxes shall be allocated as follows:
(a) Separate Company Taxes. In the case of any State Income Tax which is
a Separate Company Tax, Industrial Company shall be liable for such Tax
imposed on any members of the Industrial Group, and Shipbuilding Company
shall be liable for such Tax imposed on any members of the Shipbuilding
Group.
(b) Consolidated or Combined State Income Taxes. In the case of any
Consolidated or Combined State Income Tax, the liability of Industrial
Company and Shipbuilding Company with respect to such Tax for any Tax
Period shall be computed as follows:
(i) Allocation of Tax Reported on Tax Returns Filed After the
Distribution Date. In the case of any Consolidated or Combined State
Income Tax reported on any Tax Return filed after the Distribution Date
(excluding any amended return), Industrial Company shall be liable to
Tenneco for the State Income Tax liability computed as if all members
of the Industrial Group included in the computation of such Tax had
filed a consolidated or combined Tax Return for such Industrial Group
members based on the income, apportionment factors, and other items of
such members, and Shipbuilding Company shall be liable to Tenneco for
the State Income Tax liability computed as if all members of the
Shipbuilding Group included in the computation of such Tax had filed a
consolidated or combined Tax Return for such Shipbuilding Group members
based on the income, apportionment factors, and other items of such
members.
(ii) Allocation of Combined or Consolidated State Income Tax
Adjustments. If there is any adjustment to the amount of Consolidated
or Combined State Income Tax reported on any Tax Return (or as
previously adjusted), the liability of the Industrial Group and the
Shipbuilding Group shall be recomputed as provided in this
subparagraph. Industrial Company shall be liable to Tenneco for the
excess (if any) of--
(A) the State Income Tax liability computed as if all members of
the Industrial Group included in the Tax Return had filed a
consolidated or combined Tax Return for such members
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based on the income, apportionment factors, and other items of such
members as so adjusted (the "Industrial Group Recomputed State Tax
Liability"); over
(B) the State Income Tax liability computed as if such members of
the Industrial Group had filed a consolidated or combined Tax Return
for such members based on the income, apportionment factors, and
other items of such members as reported (or, if applicable, as
previously adjusted) (the "Industrial Group Prior State Tax
Liability").
If the Industrial Group Prior State Tax Liability exceeds the
Industrial Group Recomputed State Tax Liability, Tenneco shall be
liable to Industrial Company for such excess. The Shipbuilding Group
liability shall be recomputed in a like manner, and Shipbuilding
Company shall be liable to Tenneco for any excess of the Shipbuilding
Group Recomputed State Tax Liability over the Shipbuilding Group Prior
State Tax Liability, and Tenneco shall be liable to Shipbuilding
Company for any excess of the Shipbuilding Group Prior State Tax
Liability over the Shipbuilding Group Recomputed State Tax Liability.
For purposes of this paragraph, the determination and payment of
estimated Taxes (including the determination and payment of any Tax
required to be paid with a request for an extension of time to file a
Tax Return) shall not be treated as an adjustment to the related
Consolidated or Combined State Income Tax.
2.04 Allocation of State Income Tax Effects of Federal Audit Adjustments.
Tenneco shall be liable for any State Income Taxes resulting from the
adjustments to Tenneco Federal Consolidated Returns for Tax Periods ending on
or before December 31, 1989. In accordance with Section 6, any Tax Benefit
realized by the Shipbuilding Group or by the Industrial Group as a result of
Tenneco's payment of such State Income Taxes shall be for the account of
Tenneco and shall be paid to Tenneco under Section 6. For example, if Tenneco
pays a State Income Tax liability of $100x related to adjustments to the Tax
Return of a member of the Shipbuilding Group, and if such payment is available
as a deduction on the Shipbuilding Group's Tax Return for Federal Income Tax,
Shipbuilding Company shall pay to Tenneco the Federal Income Tax benefit
attributable to the deduction (i.e., $35x assuming a 35% maximum marginal tax
rate under Code Section 11, and assuming the payment is treated as a
nondeductible dividend under the Code in accordance with Section 14 of this
Agreement).
2.05 Allocation of Other Taxes. Except as provided in Section 2.06, all
Taxes other than those specifically allocated pursuant to Sections 2.03
through 2.04 shall be allocated based on the legal entity on which the legal
incidence of the Tax is imposed. As between the parties to this Agreement,
Industrial Company shall be liable for all Taxes imposed on any member of the
Industrial Group (including Taxes imposed on the separate consolidated federal
income tax return of Tenneco International Holding Corp.), and Shipbuilding
Company shall be liable for all Taxes imposed on any member of the
Shipbuilding Group. The Companies believe that there is no Tax not
specifically allocated pursuant to Sections 2.03 through 2.04 which is legally
imposed on more than one legal entity (e.g., joint and several liability);
however, if there is any such Tax, it shall be allocated in accordance with
past practices as reasonably determined by the affected Companies, or in the
absence of such practices, in accordance with any allocation method agreed
upon by the affected Companies.
2.06 Transaction and Other Taxes
(a) Tenneco Liability. Except as otherwise provided in Sections 2.06 and
6.02, Tenneco shall be liable for, and shall indemnify and hold harmless
Industrial Group and the Shipbuilding Group from and against any liability
for, all Taxes resulting from the Transactions (other than Taxes allocated
to the Acquiror under the Merger Agreement), including:
(i) Any sales and use, gross receipts, or other transfer Taxes
imposed on the transfers occurring pursuant to the Transactions;
(ii) any Tax resulting from any income or gain recognized under
Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any
corresponding provisions of other applicable Tax Laws) as a result of
the Transactions; and
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(iii) any Tax resulting from any income or gain recognized as a
result of any of the transactions contemplated by the Distribution
Agreement failing to qualify for tax-free treatment under Code Sections
332, 351, 355, 361, or other provisions of the Code (as contemplated in
the Ruling Request) or other applicable Tax Laws, or as a result of the
Merger failing to qualify for tax-free treatment under Code Sections
354 and 361 or other provisions of the Code or other applicable Tax
Laws (as contemplated in the Merger Agreement).
If any Tax referred to in this Section 2.06(a) is included in the
definition of Actual Energy Debt Amount, but cannot be calculated on the
Energy Determination Date (as such terms are defined in the Debt and Cash
Allocation Agreement attached as Exhibit C to the Distribution Agreement),
then Industrial Company shall pay to Tenneco the amount which would have
been included in the Actual Energy Debt Amount. Such payments shall be made
at the time such amounts are determinable. For the purposes of this Section
2.06(a) and the definition of Actual Energy Debt Amount (as defined in the
Debt and Cash Allocation Agreement), the term "transfer Taxes" includes any
Illinois franchise tax imposed under Ill. Rev. Stat. ch. 805, (S) 15.65(b)
in connection with the transfer by Tenneco Corporation of net intercompany
receivables in the approximate amount of $6.9 billion to a subsidiary of
Midwestern Gas Transmission Company in connection with the Corporate
Restructuring Transactions.
(b) Indemnity for Inconsistent Acts. Industrial Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, any Restructuring
Tax (described in subparagraphs (ii) and (iii) above) to the extent arising
from any breach of Industrial Company's representations or covenants under
Section 11. Shipbuilding Company shall be liable for, and shall indemnify
and hold harmless the Tenneco Group and the Industrial Group from and
against any liability for, any Restructuring Tax to the extent arising from
any breach of Shipbuilding Company's representations or covenants under
Section 11. Acquiror shall be liable for, and shall indemnify and hold
harmless the Industrial Group and Shipbuilding Group from and against any
liability for, any Restructuring Tax to the extent arising from any breach
of Acquiror's representations or covenants under Section 11.
(c) Indemnity for Representations. Industrial Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, any Restructuring
Tax to the extent arising from the inaccuracy of any factual statements or
representations in connection with the Ruling Request or the Tax Opinion,
but in each case only to the extent such inaccuracy arises from facts in
existence prior to the Effective Time, and excluding any inaccuracy with
respect to any statements or representations relating to Acquiror,
Shipbuilding Company, or their Affiliates or any plan or intention on the
part of Acquiror, Shipbuilding Company, or their Affiliates as to actions
to be taken at or subsequent to the Effective Time. Shipbuilding Company
shall be liable for, and shall indemnify and hold harmless the Tenneco
Group and the Industrial Group from and against any liability for, any
Restructuring Tax to the extent arising from the inaccuracy of any factual
statements or representations relating to the Shipbuilding Company or its
Affiliates in connection with the Ruling Request or the Tax Opinion.
Acquiror shall be liable for, and shall indemnify and hold harmless the
Industrial Group and the Shipbuilding Group from and against any liability
for, any Restructuring Tax to the extent arising from the inaccuracy of any
factual statements or representations relating to Acquiror or its
Affiliates (other than the Tenneco Group) in connection with the Ruling
Request or the Tax Opinion.
(d) Change in Law Relating to Deferred Gains. If between the date of the
Merger Agreement and the Effective Time there is a change in law and as a
result of such change in law Tenneco is required to restore to income as a
result of the Merger the deferred gains identified on Schedule 2 to the
Debt and Cash Allocation Agreement attached as Exhibit C to the
Distribution Agreement, then any resulting Tax shall be allocated equally
between Industrial Company and Tenneco. For purposes of this Section
2.06(d), the term "change in law" shall mean any of the following occurring
between the date of the Merger Agreement and the Effective Time: (i) an
amendment to the Code; (ii) an amendment to the Treasury Regulations
(including any issuance of proposed, temporary, or final Treasury
Regulations); (iii) a decision of the Tax Court, any Federal District
Court, the Court of Federal Claims, the Federal Circuit Court, or the
United States Supreme Court; and (iv) any notice, announcement, or other
administrative pronouncement published by the Internal
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Revenue Service in the Internal Revenue Bulletin to the effect that the
Treasury Department intends to issue Treasury Regulations after the
Effective Time that will be effective with respect to the Transactions.
(e) Taxes Relating to Settlement Receipts For Account of Industrial
Company. To the extent the economic benefit of any amounts received by the
Energy Business prior to the Effective Time from the settlement of pending
litigation (as identified on Schedule G2 to Exhibit G of the Merger
Agreement) is allocated to Industrial Company under the Debt and Cash
Allocation Agreement, any corresponding tax liability with respect to such
amounts shall be allocated to Industrial Company.
Section 3. Proration of Taxes for Straddle Periods
3.01 General Method of Proration. In the case of any Straddle Period, Tax
Items shall be apportioned between Pre-Distribution Periods and Post-
Distribution Periods in accordance with the principles of Treasury Regulation
Section 1.1502-76(b) as reasonably interpreted and applied by the Companies.
No election shall be made under Treasury Regulation Section 1.1502-
76(b)(2)(ii) (relating to ratable allocation of a year's items). If the
Distribution Date is not an Accounting Cutoff Date, the provisions of Treasury
Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably allocate
the items (other than extraordinary items) for the month which includes the
Distribution Date.
3.02 Transaction Treated as Extraordinary Item. In determining the
apportionment of Tax Items between Pre-Distribution Periods and Post-
Distribution Periods, any Tax Items relating to the Transactions shall be
treated as an extraordinary item described in Treasury Regulation Section
1.1502-76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and
any Taxes related to such items shall be treated under Treasury Regulation
Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall
be allocated to Pre-Distribution Periods.
Section 4. Preparation and Filing of Tax Returns
4.01 General. Except as otherwise provided in this Section 4, Tax Returns
shall be prepared and filed when due (including extensions) by the person
obligated to file such Tax Returns under the Code or applicable Tax Law. The
Companies shall provide, and shall cause their Affiliates to provide,
assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7. As used in this Section 4,
the terms "domestic" and "foreign" have the meanings ascribed to such terms in
Code Section 7701.
4.02 Industrial Company's Responsibility. Industrial Company has the
exclusive obligation and right to prepare and file, or to cause to be prepared
and filed:
(a) Tenneco Federal Consolidated Returns for Tax Periods ending on or
before December 31, 1996.
(b) Tax Returns for State Income Taxes (including Tax Returns with
respect to State Income Taxes that are Separate Company Taxes) which the
Companies reasonably determine, in accordance with Tenneco's past
practices, are required to be filed by the Companies or any of their
Affiliates for Tax Periods ending on or before December 31, 1996, other
than Tax Returns with respect to State Income Taxes that are Separate
Company Taxes of the Shipbuilding Group for Tax Periods beginning on or
after the Distribution Date. If Acquiror elects or is required to combine
the income of any Company or its Affiliates with the income of the Acquiror
or any of its Affiliates (other than any Company or its Affiliates) with
respect to any Tax Return for State Income Taxes for any Tax Period ending
on or before December 31, 1996, Industrial Company shall provide to
Acquiror in accordance with a compliance schedule to be agreed to by
Industrial Company and Acquiror information and documents reasonably
required by Acquiror to prepare and file such Tax Return, and Acquiror
shall have the exclusive obligation and right to prepare and file such Tax
Return, or to cause such Tax Return to be prepared and filed.
(c) Tax Returns that are required to be filed by the members of the
Industrial Group (including the federal consolidated Tax Return required to
be filed by Tenneco International Holding Corp.).
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Nothing in this Section 4.02 shall impose on Industrial Company any liability
for any failure to file any Tax Return, or for failure to file any Tax Return
when due, with respect to any Pre-Distribution Period if the due date for such
return (including extensions) was prior to the Distribution Date.
4.03 Shipbuilding Company's Responsibility. Shipbuilding Company has the
exclusive obligation and right to prepare and file, or to cause to be prepared
and filed, Tax Returns required to be filed by members of the Shipbuilding
Group other than those Tax Returns which Industrial Company is required to
prepare and file under Section 4.02.
4.04 Tenneco Responsibility. Tenneco shall prepare and file, or shall cause
to be prepared and filed, Tax Returns required to be filed by or with respect
to members of the Tenneco Group other than those Tax Returns which Industrial
Company is required to prepare and file under Section 4.02. The Tax Returns
required to be prepared and filed by Tenneco under this Section 4.04 shall
include (a) the Tenneco Federal Consolidated Return for Tax Periods ending
after December 31, 1996, (b) Tax Returns for Consolidated or Combined State
Income Taxes which the Companies reasonably determine, in accordance with
Tenneco's past practices, are required to be filed by the Companies or any of
their Affiliates for Tax Periods ending after December 31, 1996, and (c) Tax
Returns for State Income Taxes for Tax Periods ending on or before December
31, 1996 if Acquiror elects or is required to combine the income of any
Company or its Affiliates with the income of the Acquiror or any of its
Affiliates (other than any Company or its Affiliates) with respect to such Tax
Return.
4.05 Tax Accounting Practices
(a) General Rule. Except as otherwise provided in this Section 4.05, any
Tax Return for any Pre-Distribution Period or any Straddle Period, and any
Tax Return for any Post-Distribution Period to the extent items reported on
such Tax Return might reasonably affect items reported on any Tax Return
for any Pre-Distribution Period or any Straddle Period, shall be prepared
in accordance with past Tax accounting practices used with respect to the
Tax Returns in question (unless such past practices are no longer
permissible under the Code or other applicable Tax Law), and to the extent
any items are not covered by past practices (or in the event such past
practices are no longer permissible under the Code or other applicable Tax
Law), in accordance with reasonable Tax accounting practices selected by
the Responsible Company. The Companies agree to report their portion of the
consolidated cumulative overall foreign loss based on the notional account
balances determined on a legal entity basis in a manner consistent with
past practices.
(b) Reporting of Transaction Tax Items Other Than Debt Discharge Items
and Base Amount Adjustment Items. The tax treatment reported on any Tax
Return of Tax Items relating to the Transactions shall be consistent with
the treatment of such item in the IRS Ruling Letter (as defined in the
Merger Agreement) and the Tax Opinion (unless such treatment is not
permissible under the Code). To the extent there is a Tax Item relating to
the Transactions which is not covered by the IRS Ruling Letter or the Tax
Opinion, the Companies shall agree on the tax treatment of any such Tax
Item reported on any Tax Return. For this purpose, the tax treatment of
such Tax Items on a Tax Return by the Responsible Company with respect to
such Tax Return shall be agreed to by the other Company unless either (i)
there is no reasonable basis for such tax treatment, or (ii) such tax
treatment is inconsistent with the tax treatment contemplated in the Ruling
Request or in the Tax Opinion. Such Tax Return shall be submitted for
review pursuant to Section 4.07(a), and any dispute regarding such proper
tax treatment shall be referred for resolution pursuant to Section 15,
sufficiently in advance of the filing date of such Tax Return (including
extensions) to permit timely filing of the return.
(c) Debt Discharge Items. Industrial Company shall determine the tax
treatment of any Debt Discharge Item on any Tax Return, subject only to the
other Companies' rights of review under Section 4.07.
(d) Base Amount Adjustment Items. Tenneco shall determine the tax
treatment of any Base Amount Adjustment Item on any Tax Return, subject
only to the other Companies' rights of review under Section 4.07.
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4.06 Consolidated or Combined Returns. The Companies will elect and join,
and will cause their respective Affiliates to elect and join, in filing
consolidated, unitary, combined, or other similar joint Tax Returns, to the
extent each entity is eligible to join in such Tax Returns, if the Companies
reasonably determine that the filing of such Tax Returns is consistent with
past reporting practices, or in the absence of applicable past practices, will
result in the minimization of the net present value of the aggregate Tax to
the entities eligible to join in such Tax Returns.
4.07 Right to Review Tax Returns
(a) General. The Responsible Company with respect to any Tax Return shall
make such Tax Return and related workpapers available for review by the
other Companies, if requested, to the extent (i) such Tax Return relates to
Taxes for which the requesting party may be liable, (ii) such Tax Return
relates to Taxes for which the requesting party may be liable in whole or
in part for any additional Taxes owing as a result of adjustments to the
amount of Taxes reported on such Tax Return, (iii) such Tax Return relates
to Taxes for which the requesting party may have a claim for Tax Benefits
under this Agreement, or (iv) the requesting party reasonably determines
that it must inspect such Tax Return to confirm compliance with the terms
of this Agreement. The Responsible Company shall use its reasonable best
efforts to make such Tax Return available for review as required under this
paragraph sufficiently in advance of the due date for filing such Tax
Returns to provide the requesting party with a meaningful opportunity to
analyze and comment on such Tax Returns and have such Tax Returns modified
before filing, taking into account the person responsible for payment of
the tax (if any) reported on such Tax Return and the materiality of the
amount of Tax liability with respect to such Tax Return. The Companies
shall attempt in good faith to resolve any issues arising out of the review
of such Tax Returns.
(b) Execution of Returns Prepared by Other Party. In the case of any Tax
Return which is required to be prepared and filed by one Company under this
Agreement and which is required by law to be signed by another Company (or
by its authorized representative), the Company which is legally required to
sign such Tax Return shall not be required to sign such Tax Return under
this Agreement if there is no reasonable basis for the tax treatment of any
material items reported on the Tax Return.
4.08 Claims for Refund, Carrybacks, and Self-Audit Adjustments ("Adjustment
Requests")
(a) Consent Required for Adjustment Requests Related to Consolidated or
Combined Income Taxes. Except as provided in paragraphs (b), (c), and (d)
below, each of the Companies hereby agrees that, unless each of the other
Companies consents in writing, which consent shall not be unreasonably
withheld, (i) no Adjustment Request with respect to any Consolidated or
Combined Income Tax for a Pre-Distribution Period shall be filed, and (ii)
any available elections to waive the right to claim in any Pre-Distribution
Period with respect to any Consolidated or Combined Income Tax any
Carryback arising in a Post-Distribution Period shall be made, and no
affirmative election shall be made to claim any such Carryback. Any
Adjustment Request which the Companies consent to make under this Section
4.08 shall be prepared and filed by the Responsible Company under Section
4.02 for the Tax Return to be adjusted. The Company requesting the
Adjustment Request shall provide to the Responsible Company all information
required for the preparation and filing of such Adjustment Request in such
form and detail as reasonably requested by the Responsible Company.
(b) Exception for Adjustment Requests Related to Debt Discharge Items.
Industrial Company shall have the right, without the consent of any other
party, to file (i) IRS Form 4466 (Corporation Application for Quick Refund
of Overpayment of Estimated Tax) (or any similar Adjustment Request allowed
under the Code or other Tax Laws) to claim the benefit of any reduction of
required estimated Federal Income Tax as a result of Debt Discharge Items,
or (ii) IRS Form 1139 (Corporation Application for Tentative Refund) or IRS
Form 1120X (Corporation Amended Return) (or any similar Adjustment Request
allowed under the Code or other Tax Laws), and to make any elections
necessary to file such forms, with respect to any net operating loss
Carryback arising in any Tax Period in which there is any reduction of
Taxes as a result of Debt Discharge Items if any portion of such Carryback
is attributable to such Debt Discharge Items (determined in accordance with
the principles of Section 6.04). If Industrial Company is not the
Responsible
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Company with respect to any such return, then the Responsible Company shall
file such return upon request of the Industrial Company.
(c) Exception for Adjustment Requests Related to Base Amount Adjustment
Items. Tenneco shall have the right, without the consent of any other
party, to file (i) IRS Form 4466 (Corporation Application for Quick Refund
of Overpayment of Estimated Tax) (or any similar Adjustment Request allowed
under the Code or other Tax Laws) to claim the benefit of any reduction of
required estimated Federal Income Tax as a result of Base Amount Adjustment
Items, or (ii) IRS Form 1139 (Corporation Application for Tentative Refund)
or IRS Form 1120X (Corporation Amended Return) (or any similar Adjustment
Request allowed under the Code or other Tax Laws), and to make any
elections necessary to file such forms, with respect to any net operating
loss Carryback arising in Tax Period in which there is any reduction of
Taxes as a result of Base Amount Adjustment Items if any portion of such
Carryback is attributable to Base Amount Adjustment Items (determined in
accordance with the principles of Section 6.04). If Tenneco is not the
Responsible Company with respect to any such return, then the Responsible
Company shall file such return upon request of the Industrial Company.
(d) Exception for Adjustment Requests Related to Audit Adjustments. Each
of the Companies shall be entitled, without the consent of any other
Company, to require Industrial Company to file an Adjustment Request to
take into account any net operating loss, net capital loss, deduction,
credit, or other adjustment attributable to such Company or any member of
its Group corresponding to any adjustment resulting from any audit by the
Internal Revenue Service or other Tax Authority with respect to
Consolidated or Combined Income Taxes for any Pre-Distribution Tax Period.
For example, if the Internal Revenue Service requires a Company to
capitalize an item deducted for the taxable year 1993, the Company shall be
entitled, without the consent of any other Company, to require Industrial
Company to file an Adjustment Request for the taxable year 1994 (and later
years) to take into account any depreciation or amortization deductions in
such years directly related to the item capitalized in 1993.
(e) Other Adjustment Requests Permitted. Nothing in this Section 4.08
shall prevent any Company or its Affiliates from filing any Adjustment
Request with respect to Income Taxes which are not Consolidated or Combined
Income Taxes or with respect to any Taxes other than Income Taxes. Any
refund or credit obtained as a result of any such Adjustment Request (or
otherwise) shall be for the account of the person liable for the Tax under
this Agreement.
(f) Payment of Refunds. Any refunds or other Tax Benefits received by any
Company (or any of its Affiliates) as a result of any Adjustment Request
which are for the account of another Company (or member of such other
Company's Group) shall be paid by the Company receiving (or whose Affiliate
received) such refund or Tax Benefit to such other Company in accordance
with Section 6.
Section 5. Tax Payments and Intercompany Billings
5.01 Payment of Taxes With Respect to Tenneco Federal Consolidated Returns
Filed After the Distribution Date. In the case of any Tenneco Federal
Consolidated Return the due date for which (including extensions) is after the
Distribution Date,
(a) Computation and Payment of Tax Due. At least three business days
prior to any Payment Date, the Responsible Company shall compute the amount
of Tax required to be paid to the Internal Revenue Service (taking into
account the requirements of Section 4.05 relating to consistent accounting
practices) with respect to such Tax Return on such Payment Date and, if
Tenneco is not the Responsible Company with respect to such Tax Return,
shall notify Tenneco in writing of the amount of Tax required to be paid on
such Payment Date. Tenneco will pay such amount to the Internal Revenue
Service on or before such Payment Date.
(b) Computation and Payment of Industrial Company Liability With Respect
to Tax Due. Within 30 days following any Payment Date, Industrial Company
will pay to Tenneco the excess (if any) of--
(i) the Consolidated Tax Liability determined as of such Payment Date
with respect to the applicable Tax Period allocable to the members of
the Industrial Group as determined by the
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Responsible Company in a manner consistent with the provisions of
Section 2.02(a) (relating to allocation of the Consolidated Tax
Liability in accordance with the Federal Allocation Method) (the
"Allocated Federal Tax Liability"), over
(ii) the cumulative net payments with respect to such Tax Return
prior to such Payment Date by the members of the Industrial Group (the
"Cumulative Federal Tax Payment").
If the Industrial Group Cumulative Federal Tax Payment is greater than the
Industrial Group Allocated Federal Tax Liability as of any Payment Date,
then Tenneco shall pay such excess to Industrial Company within 30 days of
Tenneco's receipt of the corresponding Tax Benefit (i.e., through either a
reduction in Tenneco's otherwise required Tax payment, or a refund of prior
tax payments). Any amount due under Section 2.02(c) with respect to the
Energy Investments Group net operating loss or taxable income as reported
on the Tenneco Federal Consolidated Tax Return for the taxable year ended
December 31, 1996 shall be paid within 30 days following the Payment Date
which is the date the return is filed, and any subsequent adjustment to the
payment due under Section 2.02(c) shall be paid with interest as determined
in a manner consistent with the provisions of Section 5.02.
(c) Computation and Payment of Shipbuilding Company Liability With
Respect to Tax Due. Within the time for any payment under paragraph (b) of
this subsection, the Responsible Company shall also notify Tenneco, if
necessary, and Shipbuilding Company in writing of the Shipbuilding Group
Allocated Federal Tax Liability and the Shipbuilding Group Cumulative
Federal Tax Payment (computed in manner consistent with paragraph (b) of
this subsection). If the Shipbuilding Group Allocated Federal Tax Liability
exceeds the Shipbuilding Group Cumulative Federal Tax Payment, then
Shipbuilding Company shall pay such excess to Tenneco within three business
days following receipt of such notice. If the Shipbuilding Group Cumulative
Federal Tax Payment exceeds the Shipbuilding Group Allocated Federal Tax
Liability, then Tenneco shall pay such excess to Shipbuilding Company
within 30 days of Tenneco's receipt of the corresponding Tax Benefit (i.e.,
either a reduction in Tenneco's otherwise required Tax payment, or a refund
of estimated tax payments).
(d) Deemed Cumulative Federal Tax Payment for First Payment Date After
the Distribution Date. For purposes of Sections 5.01(b)(ii) and 5.01(c)
with respect to the Tenneco Federal Consolidated Tax Return for the taxable
year ended December 31, 1996, the Industrial Group's Cumulative Federal Tax
Payment shall be equal to $49,000,000, and the Shipbuilding Group's
Cumulative Federal Tax Payment shall be equal to $40,000,000.
(e) Interest on Intergroup Tax Allocation Payments. In the case of any
payments to Tenneco required under paragraphs (b) or (c) of this subsection
5.01, the payor shall also pay to Tenneco an amount of interest computed at
the Prime Rate on the amount of the payment required based on the number of
days from the applicable Payment Date to the date of payment. In the case
of any payments by Tenneco required under paragraphs (b) or (c) of this
subsection 5.01, Tenneco shall also pay to the payee an amount of interest
computed at the Prime Rate on the amount of the payment required based on
the number of days from the date of receipt of the Tax Benefit to the date
of payment of such amount to the payee.
(f) Representation Regarding Cumulative 1996 Federal Income Tax Payments.
Industrial Company represents and warrants to Tenneco that, as of the the
date hereof, $205,500,000 of cumulative net payments have been made by
Tenneco, and credited by the Internal Revenue Service, with respect to the
1996 Tenneco Federal Consolidated Return.
5.02 Payment of Federal Income Tax Related to Adjustments
(a) Adjustments Resulting in Underpayments. Tenneco shall pay to the
Internal Revenue Service when due any additional Federal Income Tax
required to be paid as a result of any adjustment to the Tax liability with
respect to any Tenneco Federal Consolidated Return for any Pre-Distribution
Period. The Responsible Company shall compute the amount attributable to
Industrial Group and the Shipbuilding Group in accordance with Section
2.02(b) and Industrial Company and Shipbuilding Company shall pay to
Tenneco any amount due Tenneco under Section 2.02(b) within 30 days from
the later of (i) the date the additional Tax was paid by Tenneco or (ii)
the date of receipt by Industrial Company or Shipbuilding Company (as
applicable) of a written notice and demand from Tenneco for payment of the
amount due, accompanied by evidence of payment and a statement detailing
the Taxes paid and describing in reasonable detail the
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particulars relating thereto. Any amount due to Industrial Company or
Shipbuilding Company under Section 2.02(b) shall be paid within 30 days
from the date the additional Tax was paid by Tenneco to the Internal
Revenue Service. Any payments required under this Section 5.02(a) shall
include interest computed at the Prime Rate based on the number of days
from the date the additional Tax was paid by Tenneco to the date of the
payment under this Section 5.02(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of receipt by
Tenneco of any Tax Benefit resulting from any adjustment to the
Consolidated Tax Liability with respect to any Tenneco Federal Consolidated
Return for any Pre-Distribution Period, Tenneco shall pay to Industrial
Company and Shipbuilding Company, or Industrial Company and Shipbuilding
Company shall pay to Tenneco (as the case may be), their respective amounts
due from or to Tenneco as determined by the Responsible Company in
accordance with Section 2.02(b). Any payments required under this Section
5.02(a) shall include interest computed at the Prime Rate based on the
number of days from the date the Tax Benefit was received by Tenneco to the
date of payment to Industrial Company or Shipbuilding Company under this
Section 5.02(b).
5.03 Payment of State Income Tax With Respect to Returns Filed After the
Distribution Date
(a) Computation and Payment of Tax Due. At least three business days
prior to any Payment Date for any Tax Return with respect to any State
Income Tax, the Responsible Company shall compute the amount of Tax
required to be paid to the applicable Tax Authority (taking into account
the requirements of Section 4.05 relating to consistent accounting
practices) with respect to such Tax Return on such Payment Date and--
(i) If such Tax Return is with respect to a Consolidated or Combined
State Income Tax, the Responsible Company shall, if Tenneco is not the
Responsible Company with respect to such Tax Return, notify Tenneco in
writing of the amount of Tax required to be paid on such Payment Date.
Tenneco will pay such amount to such Tax Authority on or before such
Payment Date.
(ii) If such Tax Return is with respect to a Separate Company Tax,
the Responsible Company shall, if it is not the Company liable for the
Tax reported on such Tax Return, notify the Company liable for such Tax
in writing of the amount of Tax required to be paid on such Payment
Date. The Company liable for such Tax will pay such amount to such Tax
Authority on or before such Payment Date.
(b) Computation and Payment of Industrial Company Liability and
Shipbuilding Company Liability With Respect to Tax Due. Within 120 days
following the due date (including extensions) for filing any Tax Return for
any Consolidated or Combined State Income Tax (excluding any Tax Return
with respect to payment of estimated Taxes or Taxes due with a request for
extension of time to file), (i) Industrial Company shall pay to Tenneco the
tax liability allocable to the Industrial Group as determined by the
Responsible Company under the provisions of Section 2.03(b)(i), plus
interest computed at the Prime Rate on the amount of the payment based on
the number of days from the due date (including extensions) to the date of
payment by Industrial Company to Tenneco, and (ii) the Responsible Company
shall notify Tenneco (if Tenneco is not the Responsible Company with
respect to such Tax Return) and Shipbuilding Company in writing of the tax
liability allocable to the Shipbuilding Group as determined by the
Responsible Company under the provisions of Section 2.03(b)(i). Within
three business days following receipt of such notice, Shipbuilding Company
shall pay to Tenneco the Shipbuilding Group's allocated tax liability as
set forth in such notice, plus interest computed at the Prime Rate on the
amount of the payment based on the number of days from the due date
(including extensions) to the date of payment by Shipbuilding Company to
Tenneco.
5.04 Payment of State Income Taxes Related to Adjustments
(a) Adjustments Resulting in Underpayments. Tenneco shall pay to the
applicable Tax Authority when due any additional State Income Tax required
to be paid as a result of any adjustment to the tax liability with respect
to any Tax Return for any Consolidated or Combined State Income Tax for any
Pre-Distribution Period. Industrial Company and Shipbuilding Company shall
pay to Tenneco their respective shares of any such additional Tax payment
determined by the Responsible Company in accordance with Section
2.03(b)(ii) within 120 days from the later of (i) the date the additional
Tax was paid by Tenneco or
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(ii) the date of receipt by Industrial Company or Shipbuilding Company (as
applicable) of a written notice and demand from Tenneco for payment of the
amount due, accompanied by evidence of payment and a statement detailing
the Taxes paid and describing in reasonable detail the particulars relating
thereto. Industrial Company and Shipbuilding Company shall also pay to
Tenneco interest on their respective shares of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was
paid by Tenneco to the date of their payment to Tenneco under this Section
5.04(a).
(b) Adjustments Resulting in Overpayments. Within 120 days of receipt by
Tenneco of any Tax Benefit resulting from any adjustment to the tax
liability with respect to any Tax Return for any Consolidated or Combined
State Income Tax for any Pre-Distribution Period, Tenneco shall pay to
Industrial Company and Shipbuilding Company their respective shares of any
such Tax Benefit determined by the Responsible Company in accordance with
Section 2.03(b)(ii). Tenneco shall also pay to Industrial Company or
Shipbuilding Company interest on their respective shares of such Tax
Benefit computed at the Prime Rate based on the number of days from the
date the Tax Benefit was received by Tenneco to the date of payment to
Industrial Company or Shipbuilding Company under this Section 5.04(b).
5.05 Payment of Separate Company Taxes. Each Company shall pay, or shall
cause to be paid, to the applicable Tax Authority when due all Separate
Company Taxes owed by such Company or a member of such Company's Group.
5.06 Indemnification Payments. If any Company (the "payor") is required to
pay to a Tax Authority a Tax that another Company (the "responsible party") is
required to pay to such Taxing Authority under this Agreement, the responsible
party shall reimburse the payor within 30 days of delivery by the payor to the
responsible party of an invoice for the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. The reimbursement shall include
interest on the Tax payment computed at the Prime Rate based on the number of
days from the date of the payment to the Tax Authority to the date of
reimbursement under this Section 5.06.
Section 6. Tax Benefits
6.01 General Rule. If a member of one Group receives any Tax Benefit with
respect to any Taxes for which a member of another Group is liable hereunder,
the Company receiving such Tax Benefit shall make a payment to the Company who
is liable for such Taxes hereunder within 30 days following receipt of the Tax
Benefit in an amount equal to the Tax Benefit (including any Tax Benefit
realized as a result of the payment), plus interest on such amount computed at
the Prime Rate based on the number of days from the date of receipt of the Tax
Benefit to the date of payment of such amount under this Section 6.01.
6.02 Debt Discharge Items
(a) Any Tax Benefit attributable to Debt Discharge Items (determined in
accordance with the principles of Section 6.04) shall be credited against
any amount owed by Industrial Company to Tenneco under Sections 5.01(b) or
5.03(b), and any excess Tax Benefit shall be paid by Tenneco to Industrial
Company as an amount owed by Tenneco to Industrial Company under Sections
5.01(b) or 5.03(b). If the Tax Benefit is subsequently adjusted (including
any adjustment to the Tax Benefit received as a reduction in otherwise
required estimated tax payments), Industrial Company shall pay to Tenneco
an amount equal to any reduction in the Tax Benefit, and Tenneco shall pay
to Industrial Company an amount equal to any increase in the Tax Benefit,
in each case under Section 5.01(b) (in the case of adjustments to Tax
payments), or Sections 5.02 or 5.04 (in the case of audit adjustments).
(b) Any Tax liability attributable to Debt Discharge Items (determined in
accordance with the principles of Section 6.04) shall be paid by Industrial
Company to Tenneco as an additional amount owed by Industrial Company to
Tenneco under Section 5.01(b) or 5.03(b). Any adjustment to such Tax
liability shall be paid under Section 5.01(b) (in the case of adjustments
to Tax payments), or Sections 5.02 or 5.04 (in the case of audit
adjustments).
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(c) Payments under this Section 6.02 shall include interest as provided
under Sections 5.01, 5.02, 5.03, or 5.04, as applicable.
6.03 Base Amount Adjustment Items. Any Tax Benefit (or Tax liability)
attributable to Base Amount Adjustment Items (determined in accordance with
the principles of Section 6.04) shall be for the account of Tenneco,
regardless of the legal entity reporting such Tax Benefit or Tax liability.
Pursuant to this Section 6.03, to the extent any net operating loss of the
Tenneco Group is attributable to Base Amount Adjustment Items (determined in
accordance with the principles of Section 6.04), any Tax Benefit associated
with the deduction of such net operating loss (either in the current year or
as a carryback or carryover) shall be for the account of Tenneco.
6.04 Ordering of Tax Items. Tax Items for any Tax Period shall be taken into
account for purposes of this Agreement in the following order of priority:
(a) First, Tax Items other than Debt Discharge Items and Base Amount
Adjustment Items.
(b) Second, Debt Discharge Items and Base Amount Adjustment Items (other
than GSR Items) in proportion to the relative net amounts of such items.
(c) Third, GSR Items.
Section 7. Assistance and Cooperation
7.01 General. After the Distribution Date, each of the Companies shall
cooperate (and cause their respective Affiliates to cooperate) with each other
and with each other's agents, including accounting firms and legal counsel, in
connection with Tax matters relating to the Companies and their Affiliates
including (i) preparation and filing of Tax Returns, (ii) determining the
liability for and amount of any Taxes due (including estimated Taxes) or the
right to and amount of any refund of Taxes, (iii) examinations of Tax Returns,
and (iv) any administrative or judicial proceeding in respect of Taxes
assessed or proposed to be assessed. Such cooperation shall include making all
information and documents in their possession relating to the other Companies
and their Affiliates available to such other Companies as provided in Section
8. Each of the Companies shall also make available to each other, as
reasonably requested and available, personnel (including officers, directors,
employees and agents of the Companies or their respective Affiliates)
responsible for preparing, maintaining, and interpreting information and
documents relevant to Taxes, and personnel reasonably required as witnesses or
for purposes of providing information or documents in connection with any
administrative or judicial proceedings relating to Taxes. Any information or
documents provided under this Section 7 shall be kept confidential by the
Company receiving the information or documents, except as may otherwise be
necessary in connection with the filing of Tax Returns or in connection with
any administrative or judicial proceedings relating to Taxes.
7.02 Income Tax Return Information. Each Company will provide to each other
Company information and documents relating to their respective Groups required
by the other Companies to prepare Tax Returns. The Responsible Company shall
determine a reasonable compliance schedule for such purpose in accordance with
Tenneco's past practices. Any additional information or documents the
Responsible Company requires to prepare such Tax Returns will be provided in
accordance with past practices, if any, or as the Responsible Company
reasonably requests and in sufficient time for the Responsible Company to file
such Tax Returns timely.
Section 8. Tax Records
8.01 Retention of Tax Records. Except as provided in Section 8.02, each
Company shall preserve and keep all Tax Records exclusively relating to the
assets and activities of their respective Groups for Pre-Distribution Tax
Periods, and Tenneco shall preserve and keep all other Tax Records relating to
Taxes of the Groups for Pre-Distribution Tax Periods, for so long as the
contents thereof may become material in the administration of any matter under
the Code or other applicable Tax Law, but in any event until the later of (i)
the expiration of any applicable statutes of limitation, and (ii) seven years
after the Distribution Date. If, prior to the expiration of the applicable
statute of limitation and such seven-year period, a Company reasonably
determines that any Tax Records which it is required to preserve and keep
under this Section 8 are no longer material in the administration
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of any matter under the Code or other applicable Tax Law, such Company may
dispose of such records upon 90 days prior notice to the other Companies. Such
notice shall include a list of the records to be disposed of describing in
reasonable detail each file, book, or other record accumulation being
disposed. The notified Companies shall have the opportunity, at their cost and
expense, to copy or remove, within such 90-day period, all or any part of such
Tax Records.
8.02 State Income Tax Returns. Tax Returns with respect to State Income
Taxes and workpapers prepared in connection with preparing such Tax Returns
shall be preserved and kept, in accordance with the guidelines of Section
8.01, by the Company responsible for preparing and filing the applicable Tax
Return.
8.03 Access to Tax Records. The Companies and their respective Affiliates
shall make available to each other for inspection and copying during normal
business hours upon reasonable notice all Tax Records in their possession to
the extent reasonably required by the other Company in connection with the
preparation of Tax Returns, audits, litigation, or the resolution of items
under this Agreement.
Section 9. Tax Contests
9.01 Notice. Each of the parties shall provide prompt notice to the other
parties of any pending or threatened Tax audit, assessment or proceeding or
other Tax Contest of which it becomes aware related to Taxes for Tax Periods
for which it is indemnified by one or more other parties hereunder. Such
notice shall contain factual information (to the extent known) describing any
asserted Tax liability in reasonable detail and shall be accompanied by copies
of any notice and other documents received from any Tax Authority in respect
of any such matters. If an indemnified party has knowledge of an asserted Tax
liability with respect to a matter for which it is to be indemnified hereunder
and such party fails to give the indemnifying party prompt notice of such
asserted Tax liability, then (i) if the indemnifying party is precluded from
contesting the asserted Tax liability in any forum as a result of the failure
to give prompt notice, the indemnifying party shall have no obligation to
indemnify the indemnified party for any Taxes arising out of such asserted Tax
liability, and (ii) if the indemnifying party is not precluded from contesting
the asserted Tax liability in any forum, but such failure to give prompt
notice results in a monetary detriment to the indemnifying party, then any
amount which the indemnifying party is otherwise required to pay the
indemnified party pursuant to this Agreement shall be reduced by the amount of
such detriment.
9.02 Control of Tax Contests
(a) Separate Company Taxes. In the case of any Tax Contest with respect
to any Separate Company Tax, the Company having liability for the Tax shall
have exclusive control over the Tax Contest, including exclusive authority
with respect to any settlement of such Tax liability.
(b) Consolidated or Combined Income Taxes. In the case of any Tax Contest
with respect to any Consolidated or Combined Income Tax, (i) Shipbuilding
Company shall control the defense or prosecution of the portion of the Tax
Contest directly and exclusively related to any Shipbuilding Adjustment,
including settlement of any such Shipbuilding Adjustment, (ii) Tenneco
shall control the defense or prosecution of the portion of the Tax Contest
directly and exclusively related to any Tenneco Adjustment, including
settlement of any such Tenneco Adjustment, and (iii) Industrial Company
shall control the defense or prosecution of the portion of the Tax Contest
directly and exclusively related to any Industrial Adjustment, including
any settlement of any Industrial Adjustment, and (iv) the Tax Contest
Committee shall control the defense or prosecution of Joint Adjustments and
any and all administrative matters not directly and exclusively related to
any Shipbuilding Adjustment, Tenneco Adjustment, or Industrial Adjustment.
The Tax Contest Committee shall be comprised of two persons, one person
selected by Industrial Company (as designated in writing to Tenneco) and
one person selected by Tenneco (as designated in writing to Industrial
Company). Each person serving on the Tax Contest Committee shall continue
to serve unless and until he or she is replaced by the party designating
such person. Any and all matters to be decided by the Tax Contest Committee
shall require the unanimous approval of both persons serving on the
committee. In the event the Tax Contest Committee shall be deadlocked on
any matter, the provisions of Section 15 of this
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Agreement shall apply. The Tax Contest Committee shall consult in good
faith with Shipbuilding Company to the extent Shipbuilding Company might
reasonably be expected to be materially affected by such matters. A Company
shall not agree to any Tax liability for which another Company may be
liable under this Agreement, or compromise any claim for any Tax Benefit
which another Company may be entitled under this Agreement, without such
other Company's written consent (which consent may be given or withheld at
the sole discretion of the Company from which the consent would be
required).
Section 10. Effective Date; Termination of Prior Intercompany Tax Allocation
Agreements. This Agreement shall be effective on the Distribution Date.
Immediately prior to the close of business on the Distribution Date (i) all
Prior Intercompany Tax Allocation Agreements shall be terminated, and (ii)
amounts due under such agreements as of the Distribution Date shall be settled
as of the Distribution Date (including capitalization or distribution of
amounts due or receivable under such agreements). Upon such termination and
settlement, no further payments by or to Tenneco, by or to the Shipbuilding
Group, or by or to the Industrial Group, with respect to such agreements shall
be made, and all other rights and obligations resulting from such agreements
between the Companies and their Affiliates shall cease at such time. Any
payments pursuant to such agreements shall be ignored for purposes of
computing amounts due under this Agreement.
Section 11. No Inconsistent Actions. Each of the Companies and the Acquiror
covenants and agrees that it will not take any action, and it will cause its
Affiliates to refrain from taking any action, which is inconsistent with the
Tax treatment of the Transactions as contemplated in the Ruling Request or in
the Tax Opinion (any such action is referred to in this Section 11 as a
"Prohibited Action"), unless such Prohibited Action is required by law, or the
person acting has obtained the prior written consent of each of the other
parties (which consent shall not be unreasonably withheld). With respect to
any Prohibited Action proposed by a Company or the Acquiror (the "Requesting
Party"), each of the other parties (the "Requested Parties") shall grant its
consent to such Prohibited Action if the Requesting Party obtains a ruling
with respect to the Prohibited Action from the Internal Revenue Service or
other applicable Tax Authority that is reasonably satisfactory to each of the
Requested Parties (except that the Requesting Party shall not submit any such
ruling request if a Requested Party determines in good faith that filing such
request might have a materially adverse effect upon such Requested Party).
Without limiting the foregoing:
(a) No Inconsistent Plan or Intent
(i) Each of Industrial Company and Shipbuilding Company represents
and warrants that neither it nor any of its Affiliates has any plan or
intent to take any action which is inconsistent with any factual
statements or representations in the Ruling Request or in the Tax
Opinion. Regardless of any change in circumstances, each of Industrial
Company and Shipbuilding Company covenants and agrees that it will not
take, and it will cause its Affiliates to refrain from taking, any such
inconsistent action on or before the last day of the calendar year
ending after the second anniversary of the Distribution Date other than
as permitted in this Section 11. For purposes of applying this Section
11(a) to any such inconsistent action prior to the Effective Time, the
members of the Tenneco Group shall be treated as Affiliates of
Industrial Company.
(ii) Acquiror represents and warrants that neither it nor any of its
Affiliates has any plan or intent to take any action which is
inconsistent with any factual statements or representations in the
Ruling Request or in the Tax Opinion. Regardless of any change in
circumstances, Acquiror covenants and agrees that it will not take, and
it will cause Tenneco and the other Affiliates of Acquiror to refrain
from taking, any such inconsistent action on or before the last day of
the calendar year ending after the second anniversary of the
Distribution Date other than as permitted in this Section 11.
(b) Amended or Supplemental Rulings. Each of the Companies covenants and
agrees that it will not file, and it will cause its Affiliates to refrain
from filing, any amendment or supplement to the Ruling Request subsequent
to the Distribution Date without the consent of the other Companies, which
consent shall not be unreasonably withheld.
Section 12. Survival of Obligations. The representations, warranties,
covenants and agreements set forth in this Agreement shall be unconditional
and absolute and shall remain in effect without limitation as to time.
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Section 13. Employee Matters. Each of the Companies agrees to utilize, or
cause its Affiliates to utilize, the alternative procedure set forth in
Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage reporting.
Section 14. Treatment of Payments; Tax Gross Up
14.01 Treatment of Tax Indemnity and Tax Benefit Payments. In the absence of
any change in tax treatment under the Code or other applicable Tax Law,
(a) any Tax indemnity payments made by a Company under Section 5 shall be
reported for Tax purposes by the payor and the recipient as distributions
or capital contributions, as appropriate, occurring immediately before the
distribution of the Industrial Common Shares and the Shipbuilding Common
Shares to Tenneco shareholders on the Distribution Date, but only to the
extent the payment does not relate to a Tax allocated to the payor in
accordance with Treasury Regulation Section 1.1502-33(d) (or under
corresponding principles of other applicable Tax Laws), and
(b) any Tax Benefit payments made by a Company under Section 6, shall be
reported for Tax purposes by the payor and the recipient as distributions
or capital contributions, as appropriate, occurring immediately before the
distribution of Industrial Common Shares and Shipbuilding Common Shares to
Tenneco shareholders on the Distribution Date, but only to the extent the
payment does not relate to a Tax allocated to the payor in accordance with
Treasury Regulation Section 1.1502-33(d) (or under corresponding principles
of other applicable Tax Laws).
14.02 Tax Gross Up. If notwithstanding the manner in which Tax indemnity
payments and Tax Benefit payments were reported, there is an adjustment to the
Tax liability of a Company as a result of its receipt of a payment pursuant to
this Agreement, such payment shall be appropriately adjusted so that the
amount of such payment, reduced by the amount of all Income Taxes payable with
respect to the receipt thereof (but taking into account all correlative Tax
Benefits resulting from the payment of such Income Taxes), shall equal the
amount of the payment which the Company receiving such payment would otherwise
be entitled to receive pursuant to this Agreement.
14.03 Interest Under This Agreement. Anything herein to the contrary
notwithstanding, to the extent one Company ("indemnitor") makes a payment of
interest to another Company ("indemnitee") under this Agreement with respect
to the period from the date that the indemnitee made a payment of Tax to a Tax
Authority to the date that the indemnitor reimbursed the indemnitee for such
Tax payment, or with respect to the period from the date that the indemnitor
received a Tax Benefit to the date indemnitor paid the Tax Benefit to the
indemnitee, the interest payment shall be treated as interest expense to the
indemnitor (deductible to the extent provided by law) and as interest income
by the indemnitee (includible in income to the extent provided by law). The
amount of the payment shall not be adjusted under Section 14.02 to take into
account any associated Tax Benefit to the indemnitor or increase in Tax to the
indemnitee.
Section 15. Disagreements. If after good faith negotiations the parties
cannot agree on the application of this Agreement to any matter, then the
matter will be referred to a nationally recognized accounting firm acceptable
to each of the parties (the "Accounting Firm"). The Accounting Firm shall
furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days
after its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this
Agreement. In accordance with Section 17, each party shall pay its own fees
and expenses (including the fees and expenses of its representatives) incurred
in connection with the referral of the matter to the Accounting Firm. All fees
and expenses of the Accounting Firm in connection with such referral shall be
shared equally by the parties affected by the matter.
Section 16. Late Payments. Any amount owed by one party to another party
under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus two percent, compounded semiannually, from the due date of the
payment to the date paid. To the extent interest required to be paid under
this Section 16 duplicates interest required to be paid under any other
provision of this Agreement, interest shall be computed at
20
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the higher of the interest rate provided under this Section 16 or the interest
rate provided under such other provision.
Section 17. Expenses. Except as provided in Section 15, each party and its
Affiliates shall bear their own expenses incurred in connection with
preparation of Tax Returns, Tax Contests, and other matters related to Taxes
under the provisions of this Agreement.
Section 18. Special Rules for Determining Members of Groups. For purposes of
this Agreement, the following special rules shall apply for determining the
members of the Industrial Group and members of the Shipbuilding Group:
18.01 Tennessee Gas Pipeline Company. The assets and activities of Tennessee
Gas Pipeline Company for Pre-Distribution Periods that comprise the Walker
Manufacturing Company Division, the Tenneco Automotive Headquarters Division,
and the Tenneco Brakes Division, as jointly determined by Industrial Company
and Tenneco in accordance with past practices, shall be combined and treated
as a separate corporate entity which is a member of the Industrial Group.
18.02 Former Affiliates of Shipbuilding Group or Industrial Group. The
entities listed on Schedule 1 attached hereto shall be treated as members of
the Shipbuilding Group, and the entities listed on Schedule 2 attached hereto
shall be treated as members of the Industrial Group. Any entity substantially
all of the assets and liabilities of which have been transferred to a member
of the Shipbuilding Group (e.g., by a statutory merger) shall be treated as a
member of the Shipbuilding Group, and any entity substantially all of the
assets and liabilities of which have been transferred to a member of the
Industrial Group shall be treated as a member of the Industrial Group. For
example, Newport News Shipbuilding and Dry Dock Company, a Virginia
corporation, shall, by virtue of its merger into Tenneco InterAmerica Inc., be
treated as a member of the Shipbuilding Group. For purposes of this paragraph,
Tenneco's Affiliates shall not be limited to persons who are Affiliates
immediately after the Distributions.
Section 19. General Provisions
19.01 Addresses and Notices. Any notice, demand, request or report required
or permitted to be given or made to any party under this Agreement shall be in
writing and shall be deemed given or made when delivered in party or when sent
by first class mail or by other commercially reasonable means of written
communication (including delivery by an internationally recognized courier
service or by facsimile transmission) to the party at the party's address as
follows:
If to Shipbuilding Company:
Director, Taxes
Newport News Shipbuilding and Dry Dock Company
4101 Washington Avenue
Newport News, VA 23607
If to Tenneco:
Director, Taxes
Tennessee Gas Pipeline Co.
1010 Milam Street
Houston, Texas 77002
With a copy to:
Director, Taxes
El Paso Natural Gas Co.
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
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If to Industrial Company:
Robert G. Simpson
Vice President, Tax
Tenneco Inc.
1275 King Street
Greenwich, CT 06831
If to Acquiror:
Director, Taxes
El Paso Natural Gas Co.
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.
19.02 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and assigns.
19.03 Waiver. No failure by any party to insist upon the strict performance
of any obligation under this Agreement or to exercise any right or remedy
under this Agreement shall constitute waiver of any such obligation, right, or
remedy or any other obligation, rights, or remedies under this Agreement.
19.04 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein
shall not be affected thereby.
19.05 Further Action. The parties shall execute and deliver all documents,
provide all information, and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement, including
the execution and delivery to the other parties and their Affiliates and
representatives of such powers of attorney or other authorizing documentation
as is reasonably necessary or appropriate in connection with Tax Contests (or
portions thereof) under the control of such other parties in accordance with
Section 9.
19.06 Integration. This Agreement constitutes the entire agreement among the
parties pertaining to the subject matter of this Agreement and supersedes all
prior agreements and understandings pertaining thereto. In the event of any
inconsistency between this Agreement and the Distribution Agreement or any
other agreements relating to the transactions contemplated by the Distribution
Agreement, the provisions of this Agreement shall control.
19.07 Construction. The language in all parts of this Agreement shall in all
cases be construed according to its fair meaning and shall not be strictly
construed for or against any party.
19.08 No Double Recovery; Subrogation. No provision of this Agreement shall
be construed to provide an indemnity or other recovery for any costs, damages,
or other amounts for which the damaged party has been fully compensated under
any other provision of this Agreement or under any other agreement or action
at law or equity. Unless expressly required in this Agreement, a party shall
not be required to exhaust all remedies available under other agreements or at
law or equity before recovering under the remedies provided in this Agreement.
Subject to any limitations provided in this Agreement (for example, the
limitation on filing claims for refund in Section 4.08), the indemnifying
party shall be subrogated to all rights of the indemnified party for recovery
from any third party.
19.09 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
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19.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
the respective officers as of the date set forth above.
Tenneco Inc.
By: _________________________________
Its: ________________________________
Newport News Shipbuilding Inc.
By: _________________________________
Its: ________________________________
New Tenneco Inc.
By: _________________________________
Robert G. Simpson
Vice President, Taxes
El Paso Natural Gas Company
By: _________________________________
Its: ________________________________
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TAX SHARING AGREEMENT
SCHEDULE 1
ADDITIONAL MEMBERS OF THE SHIPBUILDING GROUP
For purposes of this Agreement, in addition to Shipbuilding Company and its
Affiliates as determined immediately after the Distribution Date, the
Shipbuilding Group shall be deemed to include any corporation which was (1) a
member of the affiliated group (as defined in Code Section 1504(a), but
treating all corporations as "includible corporations" for purposes of such
Code Section) of which Tenneco is the common parent, (2) was included in the
"shipbuilding" segment for purposes of segment reporting in Tenneco's Annual
Reports on Form 10-K, and (3) sold, transferred, otherwise disposed of, or
discontinued prior to the date hereof. Without limiting the foregoing, the
Shipbuilding Group shall include:
Sperry Marine Inc.
Sperry Marine-Asia Inc.
Sperry Marine (S) PTE Ltd. (Singapore)
Sperry Marine S.p.A. (Italy)
Sperry Marine S.A.R.L. (France)
Sperry Marine Limited (United Kingdom)
Sperry Marine GmbH (Germany)
Sperry Marine A/S (Denmark)
Sperry Marine A/S (Norway)
Sperry Marine B.V. (Netherlands)
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TAX SHARING AGREEMENT
SCHEDULE 2
ADDITIONAL MEMBERS OF THE INDUSTRIAL GROUP
For purposes of this Agreement, in addition to Industrial Company and its
Affiliates as determined immediately after the Distribution Date, the
Industrial Group shall be deemed to include any corporation which was (1) a
member of the affiliated group (as defined in Code Section 1504(a), but
treating all corporations as "includible corporations" for purposes of such
Code Section) of which Tenneco is the common parent, (2) was included in the
"automotive parts" or "packaging" segment for purposes of segment reporting in
Tenneco's Annual Reports on Form 10-K, and (3) sold, transferred, otherwise
disposed of, or discontinued prior to the date hereof.
25
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TAX SHARING AGREEMENT
SCHEDULE 3
ENERGY INVESTMENTS GROUP
KERN COUNTY LAND COMPANY
PETRO-TEX CHEMICAL CORPORATION
TENFAC CORPORATION
TENNCHASE, INC.
TENNECO COAL COMPANY
TENNECO CORPORATION
TENNECO CREDIT CORPORATION
TENNECO EQUIPMENT CORPORATION (f/k/a Case Corporation)
TENNECO EQUIPMENT HOLDING IV CO. (f/k/a Case Finance Co.)
TENNECO EQUIPMENT HOLDING V CO. (f/k/a Integrated Technical Systems, Inc.)
TENNECO EQUIPMENT HOLDING VI CO. (f/k/a Viscosity Oil Co.)
TENNECO INC.
TENNECO INSURANCE VENTURES
TENNECO INTERAMERICA, INC.
TENNECO INTERNATIONAL, INC.
TENNECO MINERALS COMPANY--CALIFORNIA
TENNECO MINERALS COMPANY--NEVADA
TENNECO OIL COMPANY
TENNECO POLYMERS, INC.
TENNECO SHALE OIL COMPANY
TENNECO SNG, INC.
TENNECO SYNFUELS COMPANY
TENNECO WEST
TENNESSEE GAS PIPELINE COMPANY--CORPORATE DIVISION
26
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PROFESSIONAL SERVICES AGREEMENT
THIS PROFESSIONAL SERVICES AGREEMENT ("Agreement"), is made and entered
into this 22nd day of August, 1996, between Tenneco Technology Services Inc.
a Delaware corporation with its principal offices at 8401 New Trail Drive, The
Woodlands, Texas 77381 ("TTS") and Newport News Shipbuilding & Dry Dock
Company, a Virginia corporation with its principal offices at 4101 Washington
Avenue, Newport News, Virginia 23607 ("NNS").
RECITALS
--------
WHEREAS, TTS has been performing and/or providing certain mainframe data
processing and distributed system services to its corporate affiliate NNS
at the Newport News, Virginia data center ("Data Center");
WHEREAS, NNS will no longer be affiliated with TTS, but TTS has agreed to
provide the above-mentioned services to NNS, and NNS has agreed to continue
receiving the above-mentioned services from TTS, subject to the terms and
conditions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree to as follows:
1. SERVICES. During the term of this Agreement, TTS shall perform and/or
provide, as the case may be, all labor, professional services and supervision
necessary to perform certain services at the Data Center as more specifically
identified in the attached Schedule 1 relating to NNS' present mainframe and
distributed systems configurations (identified in Exhibits A and B to Schedule
1), including Business Management, Capacity Planning, Classified Processing,
Computer Operations, Production Control, Output Services, Performance and
Tuning, Service Desk Problem and Change Management, Product Installation and
Support, Service Delivery Reporting, Physical Security Management, Storage
Management, Systems Recovery Planning, Systems Security and Telecommunications.
Except to the extent otherwise provided herein, TTS will perform and/or provide
the above-mentioned services (collectively referred to herein as the "TTS
Services") in a competent and professional manner conforming to generally
accepted data processing practices and consistent with TTS' present manner and
level of performance and deliverables on behalf of NNS at the Data Center,
except as otherwise described in Schedule 1. The employees provided by TTS to
perform the Services, including the employees of any secondary suppliers
utilized by TTS, are referred to herein as the "Service Employees". It is
understood by the parties that performance of the TTS Services are conditioned
upon NNS fulfilling certain responsibilities and obligations as
<PAGE>
described in this Agreement and Schedule 1. Any additions, deletions or changes
to the TTS Services may result in a Change Order (as defined below).
2. TERM. The term of this Agreement shall begin on the effective date
("Effective Date") of NNS' spinoff from Tenneco Inc. (the "Spinoff") and
continue through December 31, 1998, unless terminated earlier pursuant to
Section 13 herein or terminated earlier or extended further by the parties'
mutual agreement.
3. TTS RESPONSIBILITIES.
a. TTS shall furnish all labor, professional services, supervision,
materials, tools and supplies necessary to perform the TTS Services.
Notwithstanding the foregoing, TTS shall not be responsible for providing
certain services and supplies identified in Schedule 1.
b. Except as identified in Schedule 1, TTS shall pay all fees and expenses
relating to performing and/or providing the TTS Services on a timely basis
and shall at all times otherwise perform the TTS Services so that no lien,
claim or encumbrance arises in connection therewith.
c. TTS will use reasonable efforts to provide to NNS information from TTS
records on TTS costs and comparable market pricing relating to the TTS
Services to assist NNS with NNS government contract compliance duties.
Further, in order to assist NNS in performing NNS obligations to the Defense
Contracting Auditing Agency ("DCAA"), DCAA will be permitted access to the
Data Center and limited computer access to verify security, compliance
procedures and cost data of NNS on the computer systems in the Data Center.
This Agreement shall not impose any other reporting or disclosure obligation
on TTS with respect to NNS or DCAA.
d. TTS will not be responsible for any potential software vendor fees or
associated taxes, if any, that may be incurred for TTS' right to continue
operating and maintaining the third party software identified in Exhibit
C of Schedule 1 on the NNS mainframe computer systems for NNS' benefit.
e. TTS will not be responsible for any potential software vendor fees or
associated taxes, if any, that may be incurred for NNS' right to continue
having the third party software identified in Exhibit D of Schedule 1 run on
its mainframe computers after TTS' right to do so for NNS' benefit has
terminated or expired.
f. If requested by NNS, TTS shall make all reasonable efforts to cooperate
with and assist NNS in the transfer of any assignable or assumable portion
of the third party software identified in Exhibit D to NNS.
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g. TTS will comply with all NNS security and safety rules and regulations
while on NNS' premises and will not allow access to such premises by non-
U.S. citizens, unless approved by NNS.
h. TTS will not use materials in the provision of TTS Services that
contain or have come in direct contact with mercury, mercury compounds or
with any mercury containing device employing a single boundary of
containment, unless approved by NNS.
4. NNS RESPONSIBILITIES.
a. NNS will allow TTS to keep system and network diagnostic and
maintenance programs and operating system software resident on NNS'
mainframe and/or distributed systems at the Data Center for TTS' use in
performing TTS Services. NNS acknowledges that NNS has no ownership
interest in such TTS-licensed software and that TTS may remove such
software from NNS' computer systems upon termination of this Agreement or
expiration of any term, if application, where TTS is permitted to continue
using such software for NNS' benefit after the Spinoff.
b. NNS will provide TTS with access to and use of all information, NNS
data, owned and licensed software, internal resources and facilities
determined necessary by TTS to provide the TTS Services.
c. NNS will secure, at its own cost and with TTS' assistance, the right
for TTS to continue installing and maintaining the third party software
identified in Exhibit C, which is currently licensed to NNS (for NNS'
benefit) and necessary for the provision of TTS Services.
d. NNS will secure, at its own cost and with TTS' assistance, the rights
for TTS to continue installing and maintaining the third party software
identified in Exhibit D, which currently runs on NNS' mainframe computers,
is licensed to TTS (in part, for NNS' benefit) and is necessary for the
provision of TTS Services after TTS' right to do so for NNS terminates or
expires.
e. NNS will renew and maintain current contracts for any services where
NNS expects TTS to act as its agent with a third party.
f. NNS will cooperate with TTS and respond to all reasonable requests to
facilitate TTS' provision of TTS Services.
g. NNS will be responsible for its own cost and expenses for services
outside the specific TTS Services provided for herein, including its costs
and expenses specifically identified in Schedule 1.
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<PAGE>
h. NNS will perform and comply with all NNS responsibilities
identified in Schedule 1.
i. NNS may, at its sole discretion and with reasonable notice to TTS,
add, delete, upgrade, modify or otherwise change NNS hardware or NNS-
licensed software or systems configurations at the Data Center (as
identified in Exhibits A-D of Schedule 1). NNS acknowledges that any
such change may adversely affect TTS' ability to provide the TTS
Services at the fixed prices identified in Article 5 herein and, if so,
will result in a Change Order to reimburse TTS for any additional
expenses incurred due to such change.
j. NNS will be responsible throughout the term hereof for advising TTS
of all applicable rules and regulations which will affect TTS'
provision of TTS Services, and of any subsequent changes thereto. If so
advised, TTS will use its reasonable efforts to comply with NNS' rules
and regulations and any changes thereto, but TTS shall not be required
to do so if such compliance would materially increase TTS costs or
burdens in relations to the TTS Services. NNS acknowledges that any
such compliance by TTS may result in a Change Order.
k. NNS will be responsible for all costs and expenses related to its
portion of software fees and associated taxes, if any, that may be
incurred by TTS for third party software identified in Exhibit D prior
to (i) the expiration of TTS' right to use the same for NNS' benefit or
(ii) NNS' entry, at its option, into an amendment, novation, new
agreement or other arrangement to effectively relieve TTS of NNS'
portion, whichever occurs first. If NNS does enter into an arrangement
to effectively relieve TTS of any such portion and TTS already has paid
for future license fee obligations related thereto which will
subsequently benefit NNS, NNS will reimburse TTS for such payment
within thirty (30) days of TTS' invoicing NNS for the same. If NNS
fails to enter into an arrangement to effectively relieve TTS of its
obligation with respect to such portion and TTS' right to use the third
party software related to such portion for NNS' benefit has
expired, NNS shall reimburse TTS for fifty percent (50%) of any
continued monetary obligation TTS subsequently incurs during the term
of this Agreement. Notwithstanding the foregoing, NNS is obligated to
relieve TTS of NNS' portion of the Computer Associates International
license agreement (see software identified in Exhibit D); and if NNS
fails to do so, it will reimburse TTS for one hundred percent (100%) of
any continued monetary obligation TTS subsequently incurs for NNS
during the term of TTS' license agreement with Computer Associates
International.
5. COMPENSATION.
a. In consideration for TTS' provision of TTS Services as described in
this Agreement, NNS will pay TTS a fixed price of Nine million One
Hundred Thousand Dollars ($9,100,000) for TTS Services in 1997 and Nine
Million Six
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<PAGE>
Hundred Thousand Dollars ($9,600,000) for TTS Services in 1998. For
each year, compensation shall be payable in equal monthly installments
due on or before the fifth of each month. If the Spinoff occurs prior
to the end of 1996, NNS shall pay TTS (as compensation for TTS Services
for the remainder of 1996) a proration of the 1997 fixed price. Except
for any initial payment, if applicable, to cover compensation for TTS
Services rendered for less than a full month, any 1996 compensation
payments shall be payable in equal monthly installments.
b. If NNS fails to fully pay any monthly installment when due, TTS may
discontinue the provision of TTS Services until payment is received
without committing breach of this Agreement.
c. If any sales, use or similar taxes are due with regard to the
annual fixed price, such taxes will be invoiced to NNS, if applicable,
as separate costs in addition to the annual fixed prices.
6. ADJUSTMENTS TO THE TTS SERVICES. During the term of this Agreement, NNS
may request changes to the TTS Services by submitting such requests in
writing to TTS. Within thirty (30) days after receipt of a change request,
TTS will advise NNS whether the requested change can be made and, if so,
the resulting impact on the provision of TTS Services and the related cost
adjustment (plus or minus) to the fixed price. TTS will not unreasonably
refuse to make a requested change. In order to implement any such
changes(s), the parties must mutually agree to any change in the TTS
Services and the resultant fixed price adjustment and execute a change
order ("Change Order") with respect thereto. TTS will not commence any work
related to any change(s) until such change(s) and fixed price adjustments
have been agreed to in writing by Change Order. If any additional TTS
Services are required in connection with transition services in the event
of any termination of this Agreement, such additional TTS Services shall be
the subject of a Change Order.
7. INTELLECTUAL PROPERTY RIGHTS.
a. Each party represents and warrants that it has the intellectual
property rights or interest necessary to perform its responsibilities
as identified in this Agreement, clear and free of all liens and
encumbrances and in a manner that does not infringe or misappropriate
any patent, copyright or trade secret of any third party.
b. NNS will defend and hold TTS harmless or settle at its own expense
any claim against TTS that TTS' use of NNS-owned hardware or software
or NNS-licensed software in the provision of TTS Services infringes or
misappropriates any third party's patent, copyright or trade secret.
-5-
<PAGE>
c. TTS will defend and hold NNS harmless or settle at its own expense
any claim against NNS that the use of TTS-licensed software (identified
in Exhibit D) for NNS' benefit in the provision of TTS Services
infringes or misappropriates any third party's patent, copyright or
trade secret. Notwithstanding the foregoing, this intellectual property
indemnification ceases when TTS' right to use such software for NNS'
benefit terminates or expires.
8. WORKERS COMPENSATION AND LIABILITY INSURANCE. During the term of this
Agreement, both TTS and NNS will, at the expense of each for its own
insurance, provide and keep in full force and effect Workers' Compensation,
Employer's Liability, Automobile Liability, Commercial General Liability,
Property and Umbrella Liability insurance, the kinds and minimum amounts of
such insurance to be agreed to by the parties. The types of coverage and
minimum amounts may be modified or supplemented by the parties on mutual
agreement.
Prior to or as soon as possible following commencement of the TTS Services,
each party will furnish the other party with certificates evidencing such
insurance coverage and name the other party an Additional Insured as the
party's interests may appear. There will be no cancellation of any
insurance coverage by either party without 30 days prior written notice.
9. EMPLOYEE SUPERVISION. Each party shall be responsible for supervision
of such party's own employees, including, without limitation, with respect
to compliance with all laws, regulations, rules and executive orders
relating to employment, discrimination, workplace safety, minimum wages and
overtime.
10. INDEMNIFICATIONS.
a. Subject to Sections 10.b. and 10.c. hereof, each party hereto shall
indemnify, hold harmless and defend the other party and its respective
present and future parents, subsidiaries, commonly controlled entities,
affiliates, directors, officers, employees and agents ("Related
Parties") from and against any and all claims, demands, losses,
damages, liabilities, causes of action and expenses (including but not
limited to costs of defense, mediation, settlement, and reasonable
attorneys' fees) ("Damages") on account of the death or personal injury
to any person or injury to or destruction of tangible property, if and
to the extent such Damages directly or indirectly arise out of, relate
to or are in connection with any negligent act or omission or the
intentional action of such indemnifying party or its Related Parties or
any permitted subcontractors.
b. NNS shall indemnify TTS and TTS' Related Parties for Damages on
account of the death or injury to any person, if and to the extent such
Damages directly or
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<PAGE>
indirectly arise out of, relate to or are in connection with any hazardous
substances, pollutants or contaminants present on, emanating from or
affecting any property owned, operated or controlled by NNS.
c. Notwithstanding any other provision of this Section 10, neither party
will be liable to the other party hereunder for Damages to tangible
property in excess of $300,000 in the aggregate per incident.
11. DISCLAIMER OF WARRANTY; LIMITATIONS OF LIABILITY.
a. DISCLAIMER OF WARRANTY. TTS EXPRESSLY DISCLAIMS ANY AND ALL
WARRANTIES WITH RESPECT TO ANY WORK OR SERVICES PROVIDED BY TTS PURSUANT
HERETO, INCLUDING WITHOUT LIMITATION, ANY WARRANTY THAT THE WORK OR
SERVICES PROVIDED PURSUANT HERETO WILL BE FIT FOR ANY PARTICULAR PURPOSE.
b. LIMITATIONS OF LIABILITY. Except for any fixed or license agreement
amounts owed, neither party will be liable to the other party for claims,
damages or losses of any kind whatsoever arising out of, related to or in
connection with lost data, lost profits, lost revenues or loss of goodwill.
Neither party will be liable to the other party for any indirect,
consequential, special, exemplary, punitive or incidental damages. Further,
the liability of a party in any action or series of actions by the other
party arising out of any alleged breach or breaches of this Agreement,
other than an action for indemnification under Section 10.a. hereof, shall
be limited to $250,000 in the aggregate.
12. PERMITS AND LICENSES. Each party will maintain in effect during the term
of this Agreement any and all federal, state and/or local licenses and permits
which may be required with respect to the respective business in which each
party is engaged. NNS will maintain at its expense the licenses and permits
required by applicable authorities in order to engage in NNS' business, and if
TTS is requested to obtain these types of permits and/or licenses on behalf of
NNS, any related cost, including time to procure such permit and/or license,
will be billed to NNS as an expense in addition to the fixed price.
-7-
<PAGE>
13. TERMINATION.
a. Either party may terminate this Agreement if the other party fails to
keep, observe or perform any material covenant in this Agreement by
providing the breaching party with prior written notice as stated below of
the material breach and the opportunity to cure the same. In the event the
material breach is a failure to pay an amount due and payable under this
Agreement when due, the cure period after prior written notice shall be ten
(10) days. For all other material breaches, the cure period after prior
written notice shall be forty-five (45) days. If it is unreasonable to
expect a cure of a non-monetary breach within the forty-five (45) day cure
period, the breaching party shall have an additional time reasonably
necessary to cure the breach, which shall not exceed thirty (30) additional
days. If the material breach is not cured within the aforementioned
periods, the terminating party may terminate the Agreement immediately by
giving written notice of the same to the breaching party.
b. Either party may terminate this Agreement if the other party:
i. is adjudicated an involuntary bankrupt, or a decree or order
approving a petition or answer filed against such party asking for
reorganization under the Federal bankruptcy laws as now or hereafter
amended, or under the laws of any state, shall be entered, or if a
petition for involuntary bankruptcy has been filed against the other
party and such petition (and the proceeding arising therefrom, if any)
has not been dismissed within thirty (30) days of the filing.
ii. files or admits to the jurisdiction of the court and the material
allegations contained in any petition pursuant, or purporting to be
pursuant, to the Federal Bankruptcy laws as now or hereafter amended,
or such party shall institute any proceeding for any relief under any
bankruptcy or insolvency law or any law relating to the relief of
debtors, readjustment of indebtedness, reorganization, arrangements,
composition or extension; or
iii. makes any assignment for the benefit of creditors or applies for
consent to the appointment of a receiver for itself or any of its
property.
14. INDEPENDENT CONTRACTOR. TTS is an independent contractor and nothing
herein shall be construed to create the relationship of agent, partner, joint
venturer or employee between TTS and NNS. All Service Employees hereunder shall
remain employees of TTS (or a secondary supplier, where applicable).
-8-
<PAGE>
15. CONFIDENTIALITY.
a. During the course of performing the TTS Services, each party may be
given access to information that relates to the other party's past,
present, and future research, development, business activities, products,
customer and vendor data, services, and technical knowledge, and other
similar information that is considered confidential and proprietary
(collectively "Confidential Information"). Each party acknowledges that all
reports of information produced as a result of this Agreement shall be
deemed Confidential Information. In connection therewith, the following
shall apply:
i. Any Confidential Information received by either party may be used only
for the purposes intended by this Agreement.
ii. Each party agrees to protect the confidentiality of the Confidential
Information in the same manner that it protects the confidentiality of its
own proprietary and confidential information. To that end, access to the
Confidential Information shall be restricted to those of each party's
personnel on a "need to know" basis only.
iii. All Confidential Information made available hereunder, including
copies thereof, shall be returned to the owner or destroyed upon the latter
to occur of (A) the need for access has been fulfilled or (B) completion of
the TTS Services or termination of this Agreement.
iv. Nothing in this Agreement shall prohibit or limit either party's use
of information (including, but not limited to ideas, concepts, know-how,
techniques, and methodologies) (A) previously known to it without
obligation of confidence, (B) independently developed by it outside of the
scope of the Services, (C) acquired by it from a third party which is not,
to its knowledge, under an obligation of confidence with respect to such
information or (D) which is or becomes publicly available through no breach
of this Agreement.
v. As part of the performance under this Agreement, each party will
promptly notify the other party of any of the following events:
A. Any unauthorized disclosure or use of any Confidential
Information,
B. Any request by anyone to examine, inspect or copy any
Confidential Information, or
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<PAGE>
C. Any attempt to serve, or the actual service of a court or
administrative order, subpoena, or summons that requires the
production of any Confidential Information.
Upon receiving such request, subpoena, order or summons, the receiving
party will surrender any Confidential Information to any third party only
with the consent of the other party or the final order of a court having
jurisdiction.
b. Nothing contained in this Agreement shall be construed as granting
either party a license, either express or implied, under any patent,
copyright, trade secret or other intellectual property right now or
hereafter owned, obtained or licensed by the other party.
16. NON-SOLICITATION OF EMPLOYEES. Throughout the term of this Agreement until
its last ninety (90) days, the parties hereto agree not to solicit or cause to
be solicited for employment any employee of the other party, or to encourage any
such employee to cease employment with the other party, unless the parties have
mutually agreed to such solicitation or encouragement. During the last ninety
(90) days of this Agreement, either party with prior written notice of the Chief
Information Officer ("CIO") of the other party may contact employees of the
other party to solicit their employment.
17. RESOLUTION OF DISPUTES. The parties hereto agree to use reasonable efforts
to resolve any disputes arising hereunder before resorting to litigation, and
the CIOs of the parties shall negotiate in good faith to reach a mutually
acceptable solution to unresolved disputes arising from time-to-time during the
term hereof. If the CIOs cannot resolve the dispute, then the dispute shall be
elevated to the presidents of TTS and NNS for their review and resolution. If
the dispute still cannot be resolved by the presidents, then either party may
initiate a formal proceeding for the judicial resolution of such dispute.
However, such formal proceeding may not be initiated until thirty (30) days
after the CIOs have initially met to negotiate such dispute.
18. PUBLICITY. Neither party shall advertise, make or issue any public
statement with respect to this Agreement or otherwise disclose the fact that
this Agreement is in existence without the prior review and written consent of
the other party; provided that either party may disclose that TTS is supplying
services to NNS. In the event, however, that legal counsel for either party is
of the opinion that a statement or announcement is required by applicable law,
then that party may issue a statement or announcement limited solely to that
which legal counsel for that party advises is required under law or such rules.
Notwithstanding the foregoing, Tenneco Inc. may make such disclosures in
connection with the reporting to the Securities and Exchange Commission and the
public by it and its subsidiaries in connection with the Spinoff and all other
transactions contemplated to take place on the Effective Date as Tenneco Inc.
and its counsel shall determine. In addition, NNS may make such disclosures in
connection with its reporting to the DCAA and related government contract
compliance procedures. The disclosing party shall
-10-
<PAGE>
provide the other party with a copy of any such statement or announcement for
prior review before issuing such statement or announcement. Subject to the
reporting requirements stated above, neither party shall in any case disclose
the contents of this Agreement to any third party.
19. NOTICES. Any and all notices and other communications necessary or
desirable to be served hereunder shall be either personally delivered or sent by
telecopy, prepaid same-day or overnight delivery service, proof of delivery
requested, or United States certified or registered mail, postage prepaid,
return receipt requested, addressed as follows:
a. If to NNS:
Newport News Shipbuilding and Dry Dock Company
4101 Washington Avenue
Newport News, Virginia 23607
Attention: Chief Information Officer
Telecopier No.: (757) 688-1900
b. If to TTS:
Director of Business Management
Tenneco Business Services Inc.
8401 New Trails Drive
The Woodlands, Texas 77381
Telecopier No.: (713) 539-6812
with a copy to:
Chief Information Officer
Tenneco Technology Services Inc.
230 41st Street
Newport News, Virginia 23607
Telecopier No.: (757) 380-4610
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<PAGE>
or to such other address or addresses as either party may designate for itself
from time to time in a written notice served upon the other party hereto in
accordance herewith. Any notice sent as hereinabove provided shall be deemed
delivered upon receipt or refusal of delivery.
20. BENEFIT; ASSIGNMENT. This Agreement and all provisions hereof shall be
binding upon and inure to the benefit of TTS, NNS and their respective
successors and assigns; provided, however, that neither party may assign its
rights or obligations under this Agreement without the prior written consent of
the other party, which consent may be withheld in other party's sole discretion.
Notwithstanding the foregoing, TTS may assign this Agreement to any present or
future parent or subsidiary of, or entity commonly controlled with, TTS. Any
assignment in violation of this provision shall be void. In the event that one
party consents to an assignment by the other party, the assigning party shall
remain jointly and severally responsible with the assignee for its obligations
and duties under this Agreement. Notwithstanding any other provision in this
Agreement, it is acknowledged by the parties that TTS is supplying the TTS
Services hereunder as a vendor, and not as a subcontractor, with respect to any
contracts between NNS or its subsidiaries or divisions and the United States
government and any of its agencies or departments. Further, TTS is supplying
commercially available automatic data processing services readily available in
the open market which NNS is using for the performance of administrative tasks
in support of all of its operations, including commercial and government sales.
21. CHOICE OF LAW; VENUE. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York without regard to
its conflicts of laws.
22. INTERPRETATION. This Agreement has been reviewed by counsel for both TTS
and NNS and, consequently, the parties agree that this Agreement shall not be
construed against the drafter.
23. NO WAIVER. The terms, covenants, representations, warranties and
conditions of this Agreement may be waived only by a written instrument executed
by the party waiving compliance. No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
24. SEVERABILITY. In the event any provision of this Agreement is invalid as
applied to any fact or circumstance, its invalidity shall not affect the
validity of any other provision or of the same provision as applied to any other
fact or circumstance. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as
enforceable.
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<PAGE>
25. ENTIRE AGREEMENT. This Agreement, together with all Exhibits hereto and
documents incorporated herein by reference, constitutes the entire agreement
between the parties, and supersedes all prior or contemporaneous oral or written
agreements and related documents and correspondence concerning the subject
matter hereof. The parties shall not be bound by, or liable for, any statement,
covenant, representation, promise, inducement or understanding not set forth
herein.
26. FORCE MAJEURE. Any delay or failure of either party in the performance of
its obligations hereunder shall be excused if and to the extent caused by
unforeseeable events beyond the reasonable control of such party. Such events
may include, but are not limited to, acts of God, strikes, actions of regulatory
agencies, fire, flood, windstorm, explosion, riot, war, sabotage, interruption
of power or other utilities, court injunction or order. The time for performing
any obligations affected by a Force Majeure event shall be extended during the
period such event persists, provided that prompt notice of such delay is given
by the affected party to the other and the affected party diligently attempts to
remove the cause or causes of such event.
27. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, and
all such separate counterparts taken together shall constitute one and the same
agreement.
28. NO THIRD PARTY BENEFICIARIES. This Agreement is made solely for the benefit
of the parties hereto and shall not give rise to any rights of any kind to any
other third parties.
29. AMENDMENT. No amendment or modification of any of the terms or conditions
of this Agreement shall be valid unless reduced to writing and executed by TTS
and NNS.
30. HEADINGS. The paragraph headings have been inserted for convenience only
and are not intended to affect the meaning or interpretation of this Agreement.
* * * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their
respective duly authorized representatives as of the day and year shown above.
TENNECO TECHNOLOGY SERVICES INC.
By: /s/ Mathew W. Appel
------------------------------
Title: President
------------------------------
NEWPORT NEWS SHIPBUILDING & DRY DOCK COMPANY
By: /s/ John E. Shepherd Jr.
------------------------------
Title: Vice President
------------------------------
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<PAGE>
Schedule 1
TTS Services
Introduction
- ------------
TTS Services to be provided NNS to support NNS' workload on its present
mainframe environment (Exhibit A) and distributed systems environment (Exhibit
B) are defined herein. References to UNIX and VMS Systems exclude Time and
Attendance, the Machine Shops VMS system and development LANs.
TTS Services
- ------------
Business Management
TTS will provide staff support for financial management, contract administration
and accounts payable relating to the TTS Services listed in this Schedule.
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Mainframe Systems
- --------------------------------------------------------------------------------
Negotiate NNS hardware, hardware maintenance, software license P A
and related service contracts.
- --------------------------------------------------------------------------------
Process and pay TTS hardware maintenance, software license and
related service invoices for the benefit of NNS. P
- --------------------------------------------------------------------------------
Secure the right for TTS to continue installing and maintaining the P A
third party software identified in Exhibit D on NNS' mainframe
environment after TTS' right to do so terminates or expires. All
such software must be properly licensed for TTS to provide TTS
Services.
- --------------------------------------------------------------------------------
Process and pay NNS software license invoices. P A
- --------------------------------------------------------------------------------
Secure the right for TTS to continue installing and maintaining the P A
third party software identified in Exhibit C on NNS' mainframe
environment. All such software supplied to NNS must be properly
licensed for TTS to provide TTS Services.
- --------------------------------------------------------------------------------
Manage hardware and software inventories. P P
- --------------------------------------------------------------------------------
Assist NNS with audit requests. P A
- --------------------------------------------------------------------------------
Distributed Systems
- --------------------------------------------------------------------------------
No TTS Services provided.
- --------------------------------------------------------------------------------
Legend:
P = Primary Responsibility Page 1
A = Assists
<PAGE>
- --------------------------------------------------------------------------------
[TENNECO LOGO]
Schedule 1
TTS Services
Capacity Planning
Annually, TTS will develop the planned mainframe (processor, DASD, tape and
telecommunications) resource capacity requirements for the next three year
period, based upon workload projections and data provided by NNS. As a result of
monthly performance reviews, TTS and NNS will address mainframe resource
capacity requirements, as needed. TTS shall use reasonable efforts to meet the
performance metric response time goals contained herein (see Service Delivery
Reporting).
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Mainframe Systems
- --------------------------------------------------------------------------------
Determine scope of capacity plan. P A
- --------------------------------------------------------------------------------
Gather and interpret NNS user requirements including P
proposed new applications.
- --------------------------------------------------------------------------------
Translate user requirements into systems' requirements. A P
- --------------------------------------------------------------------------------
Measure and verify base level of systems' capacity. A P
- --------------------------------------------------------------------------------
Document capacity planning assumptions and recommend A P
capacity planning strategy.
- --------------------------------------------------------------------------------
Determine tools required to monitor systems. A P
- --------------------------------------------------------------------------------
Produce capacity plan annually and deliver during the A P
first quarter.
- --------------------------------------------------------------------------------
Provide an actual versus plan utilization report quarterly. A P
- --------------------------------------------------------------------------------
Respond in writing within 30 days to a NNS request for A P
impact on a change in business volume that may necessitate
the installation of new hardware or negatively impact key
performance measurements.
- --------------------------------------------------------------------------------
Provide to NNS an actual performance and utilization report A P
monthly.
- --------------------------------------------------------------------------------
Distributed Systems
- --------------------------------------------------------------------------------
No TTS Services provided regarding capacity planning.
- --------------------------------------------------------------------------------
Legend:
P = Primary Responsibility
A = Assists
Page 2
<PAGE>
- --------------------------------------------------------------------------------
[TENNECO LOGO]
Schedule 1
TTS Services
Classified Processing
NNS is required to handle DoD (Department of Defense) classified data. TTS will
support and comply with NNS and DoD classified processing procedures.
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Mainframe Systems
- --------------------------------------------------------------------------------
Provide support for classified processing on System D in P
Building 600.
- --------------------------------------------------------------------------------
Provide print and plot room operations for System D. P
- --------------------------------------------------------------------------------
Distribute System D classified output to NNS. A P
- --------------------------------------------------------------------------------
Distributed Systems
- --------------------------------------------------------------------------------
Provide UNIX operating systems installation support for P
classified processing on the AIXC System in Building 600.
- --------------------------------------------------------------------------------
Legend:
P = Primary Responsibility
A = Assists
Page 3
<PAGE>
Schedule 1
TTS Services
COMPUTER OPERATIONS
TTS is responsible for monitoring and responding to mainframe systems console
commands, detecting and resolving mainframe hardware problems and monitoring the
facilities' environment. TTS will use reasonable efforts to provide computer
operations, 24 hours/day, 7 days/week, including holidays, with mainframe
systems availability at 99%, 24 hours/day, Monday through Friday. TTS will
operate the on-site tape cartridge library (currently 101,000 cartridge tapes).
NNS is responsible for all incremental expenses incurred to maintain the on-site
tape cartridge library if library usage exceeds 106,000 cartridge tapes or if
tape cartridge mounts exceed 67,000 per month.
TTS is responsible for monitoring and responding to systems console commands for
the mid-range computers and PC-based LAN servers in Building 521, as identified
in Exhibit B, between 12:30 AM and 4:30 PM, Monday through Friday, excluding
holidays. TTS will provide two (2) Full Time Equivalent (FTE) persons to support
the distributed systems environment. An FTE equals 2080 hours/year, including
vacation, sick days, and holidays.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Functional Description NNS TTS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
BOTH MAINFRAME AND DISTRIBUTED SYSTEMS ENVIRONMENTS
- -----------------------------------------------------------------------------------------
Coordinate systems maintenance with repair vendors. P
- -----------------------------------------------------------------------------------------
Pay for repair costs not covered by maintenance contracts. P
- -----------------------------------------------------------------------------------------
Initiate system problem determination. P
- -----------------------------------------------------------------------------------------
Document operations procedures. P
- -----------------------------------------------------------------------------------------
Perform backup and archive functions. P
- -----------------------------------------------------------------------------------------
Prepare and deliver to NNS backup tapes of systems data upon A P
request with reasonable notice.
- -----------------------------------------------------------------------------------------
MAINFRAME SYSTEMS
- -----------------------------------------------------------------------------------------
Use reasonable efforts to provide for mainframe systems availability P
(Building 521 9021-900, Building 600 9021-720) at 99%, 24
hours/day, Monday through Friday.
- -----------------------------------------------------------------------------------------
Legend:
P = Primary Responsibility Page 4
A = Assists
</TABLE>
<PAGE>
SCHEDULE 1
TTS SERVICES
PRODUCTION CONTROL
TTS is responsible for scheduling, processing, monitoring and distributing
output for all batch jobs submitted via the production job scheduler or restart
system. TTS will use reasonable efforts to provide job scheduling 24 hours/day,
7 days/week, including holidays. If an abnormal job termination (ABEND) occurs,
TTS will use reasonable efforts to complete the original job schedule in a
timely manner and will contact NNS if ABEND requires NNS's assistance. Job
scheduling for monthly batch jobs in excess of 75,000 or for additional IDMS
central versions, CICS regions or distributed platforms are outside the scope of
TTS Services, unless a Change Order is entered pursuant to Article 6.a. of the
Professional Services Agreement.
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
BOTH MAINFRAME AND DISTRIBUTED SYSTEMS ENVIRONMENTS
- --------------------------------------------------------------------------------
Job Scheduling
- --------------------------------------------------------------------------------
Set up and maintain production schedules. A P
- --------------------------------------------------------------------------------
Provided pre-turnover production analysis and
documentation as identified by TTS. P A
- --------------------------------------------------------------------------------
Schedule ad hoc jobs and tasks. A P
- --------------------------------------------------------------------------------
Establish production parameters. P A
- --------------------------------------------------------------------------------
Set and execute production parameters. P
- --------------------------------------------------------------------------------
Verify receipt of input data. A P
- --------------------------------------------------------------------------------
Select execution class, prioritize job selection and build
dependency structure during production turnover. A P
- --------------------------------------------------------------------------------
Alter dispatch priority, as necessary. A P
- --------------------------------------------------------------------------------
Execution Control
- --------------------------------------------------------------------------------
Initiate production schedule and monitor job termination
status. P
- --------------------------------------------------------------------------------
Terminate/cancel jobs. A P
- --------------------------------------------------------------------------------
Job Restart
- --------------------------------------------------------------------------------
Determine job failure condition. P
- --------------------------------------------------------------------------------
Review job rerun/restart documentation. P
- --------------------------------------------------------------------------------
Execute rerun/restart procedures and modify JCL, as
required. A P
- --------------------------------------------------------------------------------
Monitor and verify job termination status. P
- --------------------------------------------------------------------------------
Page 5
Legend:
P = Primary Responsibility
A = Assists
<PAGE>
Schedule 1
TTS Services
Output Services
TTS is responsible for the centralized printing and packaging for pick-up by NNS
of computer generated reports and drawings from Buildings 522 and 600.
Additionally, TTS will maintain mircofiche distribution information and
coordinate with the microfiche vendor the processing and delivery of microfiche
to NNS. NNS is responsible for paying for and providing consumable print and
plot supplies used for the benefit of NNS as well as paying for shipping charges
and electronic transmissions to authorized NNS addresses. TTS will exercise
reasonable efforts to reduce supply waste. The provision of more than 90,000
masters and 400,000 duplicate microfiche per year is outside the scope of TTS
Services, unless a Change Order is entered pursuant to Article 6.a. of the
Professional Services Agreement.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
BOTH MAINFRAME AND DISTRIBUTED SYSTEMS ENVIRONMENTS
- ----------------------------------------------------------------------------------------------------
Print and Plot
- ----------------------------------------------------------------------------------------------------
Provide NNS purchase order for consumable paper, toner, P A
special forms etc. used for NNS benefit.
- ----------------------------------------------------------------------------------------------------
Requisition consumable paper, toner, special forms, etc. P
against NNS purchase order.
- ----------------------------------------------------------------------------------------------------
Provide printer operations and maintenance. P
- ----------------------------------------------------------------------------------------------------
Collect, sort and prepare output for NNS pick-up. P
- ----------------------------------------------------------------------------------------------------
Microfiche
- ----------------------------------------------------------------------------------------------------
Prepare tapes for microfiche vendor pick-up. P
- ----------------------------------------------------------------------------------------------------
NNS' mailroom receives microfiche for local distribution. P
- ----------------------------------------------------------------------------------------------------
Magnetic Media
- ----------------------------------------------------------------------------------------------------
Package tapes and disks for NNS pick-up. P
- ----------------------------------------------------------------------------------------------------
</TABLE>
Legend:
P = Primary Responsibility Page 6
A = Assists
<PAGE>
Schedule 1
TTS Services
Performance and Tuning
TTS is responsible for monitoring systems performance and adjusting systems to
meet changing business requirements. TTS will make recommendations regarding
performance and tuning changes to NNS for NNS applications and databases. TTS
shall use reasonable efforts to meet the performance metric response time goals
contained herein. Annually, TTS will undertake a mainframe data center benchmark
analysis with an independent party.
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Both Mainframe and Distributed Environments (except LAN/NT)
- --------------------------------------------------------------------------------
Monitor systems and applications performance. A P
- --------------------------------------------------------------------------------
Provide systems performance adjustments. P
- --------------------------------------------------------------------------------
Recommend applications and database performance adjustments. A P
- --------------------------------------------------------------------------------
Implement applications and database performance adjustments. P A
- --------------------------------------------------------------------------------
Define performance groups, systems specifications and priorities. A P
- --------------------------------------------------------------------------------
Distributed Systems (LAN/NT Environment)
- --------------------------------------------------------------------------------
Monitor systems and applications performance. P
- --------------------------------------------------------------------------------
Provide systems and applications performance adjustments. P
- --------------------------------------------------------------------------------
</TABLE>
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P = Primary Responsibility
A = Assists
<PAGE>
SCHEDULE 1
TTS SERVICES
SERVICE DESK PROBLEM AND CHANGE MANAGEMENT
The TTS Service Desk is responsible for the problem and change management
process within the Data Center. All reported computer, network,
telecommunications, and software problems will be recorded and assigned by the
Service Desk to the appropriate TTS or NNS resolver group or to a repair vendor.
TTS is responsible for the ongoing process of communicating, scheduling,
monitoring, and coordinating changes to the computing environment. Reported
problems are monitored through resolution, and the resolution is verified with
the reporting user.
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
ALL ENVIRONMENTS
- --------------------------------------------------------------------------------
Use reasonable efforts to provide Service Desk operators 24 P
hours/day, 7 days/week, including holidays.
- --------------------------------------------------------------------------------
Install, customize and maintain problem and change management P
software.
- --------------------------------------------------------------------------------
Provided problem and change management training (4 hour session) P
to NNS twice a year.
- --------------------------------------------------------------------------------
Submit change requests, review requests for impact, assess P P
criticality of the requests, approve and prioritize requests.
- --------------------------------------------------------------------------------
Log change requests, track status, escalate and process A P
emergency change requests, where authorized.
- --------------------------------------------------------------------------------
Conduct weekly change management meetings. A P
- --------------------------------------------------------------------------------
Provide problem and change activity reports. P
- --------------------------------------------------------------------------------
Maintain interface between the IBM Information Management A P
product and NNS' CIMS system.
- --------------------------------------------------------------------------------
For each problem notification, Service Desk will create a problem P
ticket. TTS will use reasonable efforts to answer calls within one
minute, 95% of the time when volumes are less than 230 per day
between 6 AM and 6 PM, Monday through Friday, excluding
holidays.
- --------------------------------------------------------------------------------
At time of problem notification, Service Desk verifies NNS A P
computer inventory data and corrects the NNS CIMS database as
to location, make, model, and serial number, as necessary.
- --------------------------------------------------------------------------------
Analyze, categorize, prioritize and assign problem to resolver A P
group(s). TTS will use reasonable efforts to forward or re-route
reported problems to NNS resolver groups within 5 minutes
following initial contact by user reporting incident,
98% of time.
- --------------------------------------------------------------------------------
Page 8
Legend:
P= Primary Responsibility
A= Assists
<PAGE>
Schedule 1
TTS Services
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Contact repair vendors and coordinate repair A P
with user. Between 6 AM and 6 PM, Monday
through Friday, excluding holidays, TTS
will use reasonable efforts to initiate a
service call with the repair vendor within
30 minutes of "send to vendor" decision
98% of time.
- --------------------------------------------------------------------------------
Provide status and confirm resolution with A P
problem reporter.
- --------------------------------------------------------------------------------
Meet with repair vendor management, as needed. P
- --------------------------------------------------------------------------------
Coordinate time and material repairs for NNS A P
and Navy owned equipment and software.
- --------------------------------------------------------------------------------
Certify time and material invoices from P
repair vendors for payment by NNS.
- --------------------------------------------------------------------------------
Suspend, restart, redirect print jobs P
utilizing TSPrint and VPS.
- --------------------------------------------------------------------------------
Legend:
P = Primary Responsibility
A = Assists Page 9
<PAGE>
Schedule 1
TTS Services
PRODUCT INSTALLATION AND SUPPORT
TTS is responsible for installing and maintaining the latest version and/or
release upgrades to the existing installed mainframe software base, including a
reasonable transition to such upgrades. This includes management of the software
inventory, version and/or release levels, customization and installation
verification. TTS will perform a maximum of two software group updates per year
on the mainframe systems. TTS can only support software where maintenance is
current and available. New applications and software products which require
customization in the form of program code development are outside the scope of
TTS Services, unless a Change Order is entered pursuant to Article 6.a. of the
Professional Services Agreement.
TTS will provide ongoing product maintenance including problem identification,
regular maintenance cycles to implement fixes to known problems, and program fix
installation and validation.
TTS will provide installation and support for software products shown on the
software inventory lists attached as Exhibits C and D. NNS in-house developed
software and shareware (software code obtained from free as-is sources) is not
listed in Exhibits C and D. TTS will use reasonable efforts to support these
products, given adequate documentation exists, but cannot assume responsibility
for lost functionality due to supported software release upgrades, program
errors, lost data resulting from usage or system integrity flaws.
TTS will provide UNIX and VMS systems support expertise up to five (5) FTE
persons on an annual basis.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- ---------------------------------------------------------------------------------------
<S> <C> <C>
MAINFRAME SYSTEMS
- ---------------------------------------------------------------------------------------
Install, customize, test and maintain operating systems and A P
database management software.
- ---------------------------------------------------------------------------------------
Install, customize, test and maintain NNS applications P A
software.
- ---------------------------------------------------------------------------------------
Perform problem resolution services for operating systems A P
software.
- ---------------------------------------------------------------------------------------
Perform problem resolution services for applications P A
software.
- ---------------------------------------------------------------------------------------
Perform problem resolution services for database P P
management software.
- ---------------------------------------------------------------------------------------
Determine placement of program libraries. P
- ---------------------------------------------------------------------------------------
Provide response to NNS technical audits. P A
- ---------------------------------------------------------------------------------------
Perform global applications changes. P A
- ---------------------------------------------------------------------------------------
DISTRIBUTED SYSTEMS
- ---------------------------------------------------------------------------------------
Support NNS' main Internet server and its installed software. A P
- ---------------------------------------------------------------------------------------
Install, customize, test and maintain UNIX and VMS operating A P
systems and associated hardware platforms.
- ---------------------------------------------------------------------------------------
Install, customize, test and maintain NT operating systems P A
and associated hardware platforms.
- ---------------------------------------------------------------------------------------
Legend:
P = Primary Responsibility Page 10
A = Assists
</TABLE>
<PAGE>
Schedule 1
TTS Services
<TABLE>
<CAPTION>
<S> <C> <C>
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Set and enforce documentation standards. P
- --------------------------------------------------------------------------------
Support Unix to LAN/NT interfaces - UNIX side. A P
- --------------------------------------------------------------------------------
Support UNIX to LAN/NT interfaces - LAN/NT side. P A
- --------------------------------------------------------------------------------
Perform problem resolution services for UNIX and VMS
operating systems software. A P
- --------------------------------------------------------------------------------
Perform problem resolution services for LAN/NT
operating systems software. P
- --------------------------------------------------------------------------------
Perform problem resolution services for UNIX
and VMS applications software. P A
- --------------------------------------------------------------------------------
Perform problem resolution services for LAN/NT
applications software. P A
- --------------------------------------------------------------------------------
Perform mass script changes for NNS jobs on UNIX and VMS
systems. P A
- --------------------------------------------------------------------------------
Provide response to NNS technical audits. P A
- --------------------------------------------------------------------------------
</TABLE>
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A = Assists
<PAGE>
Schedule 1
TTS Services
Service Delivery Reporting
TTS will provide a "Morning Report" identifying the previous 24 hours processing
activities for production control, including scheduled jobs not run, unscheduled
jobs submitted, problems with job execution, ABENDS, reruns and reporting
schedule versus actual availability for on-line systems. TTS will provide
monthly reports that document systems performance as compared to the performance
metric response time goals set forth below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Users Percent of
NNS System ID/Name Max/Avg Transactions Response Time Goals
Category
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
System-D Engineering:
- ----------------------------------------------------------------------------------------------------------
TSO 35 22 90% 2 Seconds
- ----------------------------------------------------------------------------------------------------------
VIVID/R/ 60 38 85% 1 Second
- ----------------------------------------------------------------------------------------------------------
CADAM 260 150 Avg response per attention = (less than) .2 Sec.
- ----------------------------------------------------------------------------------------------------------
General Batch 90% (1st shift) 2 Hours
- ----------------------------------------------------------------------------------------------------------
Production Batch 90% (1st shift) 2 Hours
- ----------------------------------------------------------------------------------------------------------
Quickie Jobs (Class Q) 90% 15 Minutes
- ----------------------------------------------------------------------------------------------------------
System-E Business and
Manufacturing:
- ----------------------------------------------------------------------------------------------------------
TSO 70 50 90% 2 Seconds
- ----------------------------------------------------------------------------------------------------------
CICS 65 45 90% 1 Second
- ----------------------------------------------------------------------------------------------------------
IDMS 575 410 90% 5 Seconds
- ----------------------------------------------------------------------------------------------------------
General Batch 90% (1st shift) 2 Hours
- ----------------------------------------------------------------------------------------------------------
Production Batch 90% (1st shift) 2 Hours
- ----------------------------------------------------------------------------------------------------------
IDMS Batch 90% 1 Hour
- ----------------------------------------------------------------------------------------------------------
Quickie Jobs (Class Q) 90% 15 Minutes
- ----------------------------------------------------------------------------------------------------------
System-C End-User Computing:
- ----------------------------------------------------------------------------------------------------------
TSO 180 150 90% 2 Seconds
- ----------------------------------------------------------------------------------------------------------
General Batch 90% (1st shift) 1 Hour
- ----------------------------------------------------------------------------------------------------------
Quickie Jobs (Class Q) 90% 15 Minutes
- ----------------------------------------------------------------------------------------------------------
System-A Logistics and NNS
Customer Access:
- ----------------------------------------------------------------------------------------------------------
TSO 40 25 90% 2 Seconds
- ----------------------------------------------------------------------------------------------------------
CICS 65 45 90% 1 Second
- ----------------------------------------------------------------------------------------------------------
General Batch 90% (1st shift) 1 Hour
- ----------------------------------------------------------------------------------------------------------
Production Batch 90% (1st shift) 2 Hours
- ----------------------------------------------------------------------------------------------------------
Quickie Jobs (Class Q) 90% 15 Minutes
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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A= Assists
<PAGE>
SCHEDULE 1
TTS SERVICES
PHYSICAL SECURITY MANAGEMENT
TTS will provide physical security to restrict access to computer areas.
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
BOTH MAINFRAME AND DISTRIBUTED SYSTEMS (EXCEPT LAN/NT)
- --------------------------------------------------------------------------------
Maintain computer facility access and control for Buildings 521 A P
and 522.
- --------------------------------------------------------------------------------
Maintain card access control system. P
- --------------------------------------------------------------------------------
Maintain facility access control list of authorized personnel for P
Buildings 521 and 522.
- --------------------------------------------------------------------------------
Maintain facility access control list of authorized personnel for P
Building 600.
- --------------------------------------------------------------------------------
Comply with NNS access control requirements. P P
- --------------------------------------------------------------------------------
Page 13
Legend:
P = Primary Responsibility
A = Assists
<PAGE>
SCHEDULE 1
TTS SERVICES
STORAGE MANAGEMENT
TTS is responsible for monitoring mainframe DASD usage, identifying and
correcting mainframe and distributed systems hardware problems and providing
tape backup. Except for archiving and restoring files, LAN/NT storage
management is outside the scope of TTS Services, unless a Change Order is
entered pursuant to Article 6.a. of the Professional Services Agreement.
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
BOTH MAINFRAME AND DISTRIBUTED SYSTEMS (EXCEPT LAN/NT)
- --------------------------------------------------------------------------------
Monitor the performance of the DASD subsystems. P
- --------------------------------------------------------------------------------
Assign and initialize DASD volumes. P
- --------------------------------------------------------------------------------
Monitor DASD usage. P
- --------------------------------------------------------------------------------
Coordinate DASD hardware maintenance. P
- --------------------------------------------------------------------------------
Define NNS mainframe Budget DASD allocation percentages. P A
- --------------------------------------------------------------------------------
Manage data migration. P
- --------------------------------------------------------------------------------
Archive and restore files, including LAN/NT files, as requested by A P
NNS.
- --------------------------------------------------------------------------------
Page 14
Legend:
P = Primary Responsibility
A = Assists
<PAGE>
Schedule 1
TTS Services
Systems Recovery Planning
In the event of a disaster, TTS will restore the mainframe systems and data as
they existed when the last weekly disaster backup tapes were created and stored
off-site. In addition, TTS will establish the telecommunications network
facility to the backup site. NNS determines the frequency of disaster recovery
backups and is responsible for continuity plans for the period between the
disaster event and restoration of systems. TTS will provide a recovery
subscription for a mainframe hot site according to the following specifications:
<TABLE>
<CAPTION>
SYSTEM MIPS DASD GB
------ ---- -------
<S> <C> <C>
NNS-A 15 194
NNS-C 41 292
NNS-E 104 609
</TABLE>
NNS is responsible for its pro rata share of charges associated with actual use
of the hot site. Such charges, when incurred, are not part of the recovery
subscription fee and are not included in the fixed fee for TTS. They will be
invoiced separately to NNS. Recovery subscription for NNS-D is outside the
scope of TTS Services, unless a Change Order is entered pursuant to Article 6.a.
of the Professional Services Agreement.
TTS will backup UNIX, VMS and LAN/NT systems located in Building 521 connected
to the NNS corporate network. Recovery services, including the provision of
recovery facilities for the distributed systems environment and equipment to
backup these systems, are outside the scope of TTS Services, unless a Change
Order is entered pursuant to Article 6.a. of the Professional Services
Agreement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Functional Description NNS TTS
<S> <C> <C>
- --------------------------------------------------------------------------------
Mainframe Systems
- --------------------------------------------------------------------------------
Determine systems and data backup requirements and strategy. A P
- --------------------------------------------------------------------------------
Determine applications and database backup requirements and P A
strategy.
- --------------------------------------------------------------------------------
Perform complete systems and data backup weekly. P
- --------------------------------------------------------------------------------
Send disaster recovery backup tapes to an off-site vault, A P
as required by NNS.
- --------------------------------------------------------------------------------
Create business continuity plans. P A
- --------------------------------------------------------------------------------
Prepare system recovery plans. A P
- --------------------------------------------------------------------------------
Declare disaster situation. A P
- --------------------------------------------------------------------------------
Provide an operational system (from the last vaulted tapes) P
within 48 hours of a disaster declaration.
- --------------------------------------------------------------------------------
Establish testing schedule and execute test plan. A P
- --------------------------------------------------------------------------------
Provide feedback on test. P P
- --------------------------------------------------------------------------------
Distributed Systems
- --------------------------------------------------------------------------------
Determine systems and data backup strategy. A P
- --------------------------------------------------------------------------------
Determine applications and database backup strategy. P A
- --------------------------------------------------------------------------------
</TABLE>
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P = Primary Responsibility
A = Assists
<PAGE>
[TENNECO LOGO]
Schedule 1
TTS Services
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------
Perform complete systems and data backup weekly. P
- --------------------------------------------------------------------------------
Functional Description NNS TTS
- --------------------------------------------------------------------------------
Send disaster recovery backup tapes to an off-site vault, P
as required by NNS.
- --------------------------------------------------------------------------------
Create business continuity and system recovery plans. P A
- --------------------------------------------------------------------------------
</TABLE>
Legend:
P = Primary Responsibility Page 16
A = Assists
<PAGE>
Schedule 1
TTS Services
System Security
NNS will control access to its computer resources. TTS will install and provide
software maintenance on security software packages on the NNS mainframe and UNIX
and VMS systems.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Functional Description NNS TTS
<S> <C> <C>
- --------------------------------------------------------------------------------
Both Mainframe and Distributed Systems (excluding LAN/NT)
- --------------------------------------------------------------------------------
Authorize system users (issuing User-ID's). P
- --------------------------------------------------------------------------------
Administer file access and software access controls (read/write P A
permissions).
- --------------------------------------------------------------------------------
Maintain security software. P
- --------------------------------------------------------------------------------
Define, create and administer security groups. P A
- --------------------------------------------------------------------------------
Comply with security requirements. P A
- --------------------------------------------------------------------------------
</TABLE>
Legend:
P = Primary Responsibility
A = Assists
Page 17
<PAGE>
SCHEDULE 1
TTS SERVICES
TELECOMMUNICATIONS
TTS is responsible for the Network Control Center (NCC) functions relating to
NNS business systems in Building 521. In addition, TTS will provide NNS up to
4000 consultation hours per year for various telecommunication and network
design expertise. Consultation in excess of 4000 hours per year is outside the
scope of the TTS Services, unless a Change Order is entered pursuant to Article
6.a. of the Professional Services Agreement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
<S> <C> <C>
Participate in the Problem and Change Management Process.
- --------------------------------------------------------------------------------
Provide first and second level support for A P
telecommunications problem tickets. This support includes
problem resolution from the NCC, prioritizing, directing,
and assisting NNS field engineers, and redirecting remaining
problems to appropriate resolver.
- --------------------------------------------------------------------------------
Support change management processes for A P
telecommunication changes. This includes creating,
approving, and closing NNS change management tickets
and providing a point of contact for questions and impact
assessments.
- --------------------------------------------------------------------------------
Installation and Maintenance of Communications Equipment
- --------------------------------------------------------------------------------
Provide administration for the ISN (Information Systems A P
Network) packet switchers and concentrators from Building
521 for support of equipment within the NNS campus.
- --------------------------------------------------------------------------------
Install and maintain NNS modems and maintain associated A P
leased lines supporting NNS interests in Hawaii,
Charlottesville, Houston, Norwich, Portsmouth, Medford
and warehouses in Newport News.
- --------------------------------------------------------------------------------
Install and maintain all local controllers, channel A P
extenders, multiplexers and repeaters supporting the SNA
(System Network Architecture) environment in Buildings
521, 522 and 500.
- --------------------------------------------------------------------------------
Install, and maintain communications to NNS LANs (Local P A
Area Networks) within Building 521.
- --------------------------------------------------------------------------------
Install and maintain terminal servers, bridges, routers, P A
hubs and repeaters for NNS Banyan, Novell, DEC/VAX,
Ultimate and Time & Attendance platforms within Building 521.
- --------------------------------------------------------------------------------
Provide telephone voice systems and services support. P
- --------------------------------------------------------------------------------
</TABLE>
Legend:
P = Primary Responsibility
A = Assists
Page 18
<PAGE>
Schedule 1
TTS Services
- --------------------------------------------------------------------------------
FUNCTIONAL DESCRIPTION NNS TTS
- --------------------------------------------------------------------------------
Install and maintain the following NNS networking systems:
- --------------------------------------------------------------------------------
Information System Network (ISN). A P
- --------------------------------------------------------------------------------
AT&T STARKEEPER II Management System. A P
- --------------------------------------------------------------------------------
Intellinet Network Monitoring System. A P
- --------------------------------------------------------------------------------
UDS Global View Modem Pool, and A P
- --------------------------------------------------------------------------------
IBM Token Ring Manager. A P
- --------------------------------------------------------------------------------
Provide fault management and proactive problem determination A P
and resolution utilizing the following NNS management tools:
Accumaster Integrator, Systems Manager, Computer Manager,
Netview, Intellinet, Globalview, Token-ring manager/trace and
performance and LAN analyzer.
- --------------------------------------------------------------------------------
Respond to technology related questions and design reviews and P A
provide technical support for field engineers in the Computer
Equipment/Services Request (CE/SR) Process.
- --------------------------------------------------------------------------------
Provide operations recovery support for telecommunications A P
facilities.
- --------------------------------------------------------------------------------
Provide the following ad hoc support services, up to 4000 hours
per year:
- --------------------------------------------------------------------------------
On-call support between 4:30 PM and 7:30 AM, 7 A P
days/week, including holidays, for the Network
Control Center (Building 521). TTS will use
reasonable efforts to provide one hour callback
response utilizing proper escalation procedures.
- --------------------------------------------------------------------------------
LAN, Wide Area Network (WAN) and Desktop support. P A
- --------------------------------------------------------------------------------
CADAM and VIVID network design. P A
- --------------------------------------------------------------------------------
Technical resource assistance for most computer P A
network installations at NNS.
- --------------------------------------------------------------------------------
Network management and design consulting. P A
- --------------------------------------------------------------------------------
Intranet design and implementation consulting. P A
- --------------------------------------------------------------------------------
WAN design and consulting. P A
- --------------------------------------------------------------------------------
High-level network documentation and mapping. P A
- --------------------------------------------------------------------------------
Tier 3 level support for major computer network P A
problems at NNS.
- --------------------------------------------------------------------------------
Legend:
P = Primary Responsibility
A = Assists Page 19
<PAGE>
Schedule 1
TTS Services
Exhibit A
Mainframe Hardware Listing
Mainframe Systems
-----------------
- --------------------------------------------------------------------------------
PROCESSORS STORAGE (MB)
- ------------------------ CPU ----------------------------------------
MODEL QTY MIPS CENTRAL EXPANDED TOTAL
================================================================================
9021-720 1 117 512 512 1024
- --------------------------------------------------------------------------------
9021-900 1 235 1024 1024 2048
- --------------------------------------------------------------------------------
- ------------------------------------------ ----------------------------
NNS DASD SUMMARY NNS TAPE SUMMARY
- ------------------------------------------ ----------------------------
DISK DRIVES MODEL
- ------------------------------------------ NO. QTY
MODEL QTY GB ============================
========================================== 3422-A01 3
3380-AJ4 8 20.16 ----------------------------
- ------------------------------------------ 3422-B01 6
3380-BJ4 8 20.16 ----------------------------
- ------------------------------------------ 3490-A20 7
3390-A28 15 226.50 ----------------------------
- ------------------------------------------ 3490-B40 18
3390-A38 8 181.44 ----------------------------
- ------------------------------------------ TOTAL 34
3390-B2C 30 680.40 ----------------------------
- ------------------------------------------
3390-B3C 14 476.00
- ------------------------------------------
TOTAL 83 1,604.66
- ------------------------------------------
DISK CONTROLLERS
- ------------------------------------------
3990-002 4 --
- ------------------------------------------
3990-G03 3
- ------------------------------------------
3990-JO3 10 --
- ------------------------------------------
3990-LO3 4 --
- ------------------------------------------
TOTAL 21 --
- ------------------------------------------
Page 20
<PAGE>
Schedule I
TTS Services
Exhibit B
Distributed Hardware Listing
Distributed Systems Supported by Computer Operators
---------------------------------------------------
VAX/VMS Systems:
- ----------------
Alpha Beta (B.4632)
Gamma Quark (B.4632)
Vax-B Vax-C
Vax-D Vax-E
Vax-M
Open VMS: DEC-A DEC-B
- ---------
UNIX Systems: Global A520
- ------------- B520 B521
Ultimate Manager IV
IRIX Systems: SGIA SGIB
- -------------
ULTRIX Systems: Ult-D
- ---------------
UNIX Based BANYAN Systems:
- --------------------------
NNS003 NNS004
NNS005 NNS007
NNS008 NNS012
NNS013 NNS014
NNS016 NNS017
OS/2 Systems: NNS046
- -------------
NOVELL Systems: NNS009 NNS011
- --------------- NNS012 NNS021
NNS024 NNS029
NNS032 NNS033
NNS034 NNS035
NNS037 NNS040
NNS041 NNS042
NNS043 NNS048
NNS049 NNS050
WINDOWS NT Systems:
- -------------------
NNS305 NNS307
EXHIBIT B
Page 21
<PAGE>
Schedule 1
TTS Services
DOS Based Systems:
C60LAN01 C60LAN02
C60NOV01 Inventory Mgt.
NNS045 Human Resources
Trades A36 Master
A37 Slave NNS014 PC Any Where
NNS037 PC Any Where NNS003 FOCUS
Database Server
Distributed Systems Supported by Technical Support
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Platform Operating Model Number of Disks Department
System Clients Space Supported
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SGIA/SGIB IRIX Challenge L 200 70 GB Engineering
- -------------------------------------------------------------------------------
SGID IRIX Indy 40 4 GB NNS Internet
- -------------------------------------------------------------------------------
NNSOSS IRIX Indy 2 1 GB Double Eagle
- -------------------------------------------------------------------------------
SUN SUN O/S Sparc Station 14 20 GB All Plotting
- -------------------------------------------------------------------------------
AIXC AIX RS 6000 64 30 GB Vivid
- -------------------------------------------------------------------------------
JLTD Uitrix DEC 5500 4 30 GB C60
Development
(T & A)
- -------------------------------------------------------------------------------
/AXE VMS VAX 4300 3 30 GB C60
Development
(RADCON)
- -------------------------------------------------------------------------------
/AXB/VAXC VMS VAX 4300 11 20 GB Sheet Metal
- -------------------------------------------------------------------------------
/AXD VMS VAX 3100 1 GB Automated
Steel
Fabrication
- -------------------------------------------------------------------------------
Alpha/Beta VMS VAX 4200 2 10 GB RADCON
- -------------------------------------------------------------------------------
VAXI VMS VAXStation 5 GB RADCON
Imaging
- -------------------------------------------------------------------------------
AXM VMS VAXStation 2 GB Facilities
- -------------------------------------------------------------------------------
ECA/B VMS Alpha 34 30 GB Facilities
- -------------------------------------------------------------------------------
</TABLE>
Page 22
<PAGE>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNSA NNBC NNSD NNSE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BGS Systems BEST/1-DATACENTER Workload Modeling Tool X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
BGS Systems BEST/1-VISUALIZER Best/1-Visualizer X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
BGS Systems CAPTURE/DATACENTER Capture / DataCenter X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Boole And Babbage, Inc. BGT-DASD Budget Dasd (BBI Bought Emplact) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics GPR 5 Plotting Software X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics GPR 50 Plotting Software X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics ZMD-PLOT Zeta GDDM Services X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Cincom Systems, Inc. SUPRA V.1 Database Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics LINEAR Beasy Linear X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics PROC Beasy Pre & Post Processor X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics SUPERTAB Beasy Supertab Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Data Base Architects, Inc. OL-HELP On-Line Help X
- ------------------------------------------------------------------------------------------------------------------------------------
Data Based Development Systems, Inc. DBA-RPTS IDMS DB Analyzer Reports X X
- ------------------------------------------------------------------------------------------------------------------------------------
Dun & Bradstreet Software Services FIX ASSET Fixed Assets Accounting X
- ------------------------------------------------------------------------------------------------------------------------------------
Dun & Bradstreet Software Services UE RPTG Use W/MSA & Non-MSA Sys X
- ------------------------------------------------------------------------------------------------------------------------------------
Erisco CLAIMFACT Claimfacts X
- ------------------------------------------------------------------------------------------------------------------------------------
Gatileo-Travelmaster (Formerly Covia) TRVL-MSTR Travel Master X
- ------------------------------------------------------------------------------------------------------------------------------------
Generative Technology (formerly Precision Nesting) GEOMETRIC Geometric Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Generative Technology (formerly Precision Nesting MEGANEST Automatic Nesting Program X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. ABR Automatic Backup Recovery X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. COMPAKTOR DASD Volume Compactor X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FATAR Fast Analysis Tape Recovery X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FATS Fast Analysis Tape Surfaces X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FDR File Dump And Restore X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. IAM Innovation Access Method X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Integral Systems, Inc. CSP/DB2 Payroll/Personnel Mgmnt X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences DATASTORE TCP/IP-80 Datastore TCP/IP Maintenance-Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences DATASTORE/VS2 VMS Datastore VS2 VMS Site License X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3722 DECnet Network Controller Maintenance X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3752 Network Controller Maintenance - 2/2 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3762 FDDI Network Controller Maintenance X X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences SNS/NFS-60 SNS/NFS Maintenance - Model 60 X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interlink Computer Sciences SNS/NFS-80 SNS/NFS Maintenance - Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences SNS/TCPACCESS-60 SNS/TCPaccess Maintenance -
Model 60 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Scienes SNS/TCPACCESS-80 SNS/TCPaccess Maintenance -
Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Intersolv, Inc. (formerly Sage Software, Inc.) APS 20 Seats Of Aps X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates ADSO Migration Utility X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates ADSO/XREF ADSO XREF Utility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates LADERMAN UTILITIES Laderman Utilities X X
- ------------------------------------------------------------------------------------------------------------------------------------
Lockeed Missiles Space Corporation BOSOR4 Structural Analysis S/W X
- ------------------------------------------------------------------------------------------------------------------------------------
Lockeed Missiles Space Corporation BOSOR5 Structural Analysis S/W X
- ------------------------------------------------------------------------------------------------------------------------------------
Lucas Management ARTEMIS Artemis Project Management
(Formerly Lucas) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TOSRT TSO On-Line Sorce(Trak)
(Formerly The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TRAK Traking System (Formerly
The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TSO TSO Option(TRAK) (Formerly
The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Martin Marietta Data Systems EXIT Martin Marietta X
- ------------------------------------------------------------------------------------------------------------------------------------
Mazda Computer Corporation CHANGE ACTION Change Action X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Merrill Consultants MXG Site License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Mobius Management Systems, Inc. JCLWTR Infopac-JCL Writer X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DAMS Direct Access Management
System/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DAS Data Center Accounting System X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DIS Data Inquiry System/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/IDCI CA-IDMS Charging Interface X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/OLC Online Costing/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes BARCODE EXPRESS Barcode Express X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes CICS ON-LINE, WINDOWS CICS ON-LINE, WINDOWS X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes FINALIST NNS Employee Address Database X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ACCESS/DB2 Access DB2 Facility X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/AF Application Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ASSIST Assist Facility X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/BASE Core Product X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/C C Language Compiler X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/CALC Calculations Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/CBT Computer Based Training
Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNSA NNBC NNSD NNSE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SAS Institute SAS/CONNECT Connect Facility X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ETS Econometrics & Time Series Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/FSP Full Screen Processing Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/GRAPH Graphics Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/OR Operations Research Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/QC Quality Control Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/SHARE Multi-User File Sharing Facility X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/STAT Statistics Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
Software Engineering Of America PDSFAST PDSfast/Driver X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Sterling Software FTS-MVS File Transfer System-MVS X
- ------------------------------------------------------------------------------------------------------------------------------------
Sterling Software NETMASTER FOUNDATION File Transfer Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
Stone & Webster Engineering STONERULE Program #Srv-015 X
- ------------------------------------------------------------------------------------------------------------------------------------
Structural Dynamics Research I-DEAS I-Deas Complete X
- ------------------------------------------------------------------------------------------------------------------------------------
Tact-The A Consulting Team, Inc. TEDIT Tedit Software X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Technetron Unlimited, Inc. DB/DYNAM IDMS Dynamic File Allocate/Deallocate X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Tone Software Corporation TAM TSO Access Manager X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Tone Software Corporation TS-PRINT TS-Prnt License 9/96 9/96 9/96 9/96
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation ADS/DB2 Development System/HPO X
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation ADS/MVS Development System/MVS X
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation MVS HPO Development System/HPO X
- ------------------------------------------------------------------------------------------------------------------------------------
Unitech Systems, Inc. U/ACR-S Automated Control Reporting X
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. IMSL LIC Class II Primary License X
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. MULTIPLE 2Nd Multiple Use Pd-Up X
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. MUTIEIAT EIAT Multiple Use Pd-Up X
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Labs, Inc. (Formerly APX) XCHNGMVS XMS And VTAM Connectivity Access Control X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Labs, Inc. (Formerly APX) XPLCICS Send/Receive Interface CICS Gate X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Labs, Inc. (Formerly APX) XPLIDMS Send/Receive Interface Dynamic Transactions X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1 8/21/96
TTS Services
Exhibit D
TTS Licensed Software
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNSA NNBC NNSD NNSE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allen Systems Group, Inc. FAST/ACCESS DBMS Tool X X
- ------------------------------------------------------------------------------------------------------------------------------------
Allen Systems Group, Inc. JCLPREP JCL Checking Facility (Was Altare Owned) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Allen Systems Group, Inc. PRE-ALERT MVS/IDMS Pre Alert (Was Shopmon) X
- ------------------------------------------------------------------------------------------------------------------------------------
BMC Software, Inc. DB2 CATALOG MANAGER Mastermind Component X
- ------------------------------------------------------------------------------------------------------------------------------------
BMC Software, Inc. DB2 MON DB2 Activity Monitor X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle CL/SUPER Super-XSM Gateway/XA/ESA X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-CICS Omegamon Pac For CICS X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-MVS Omegamon Pac For MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-VTAM Omegamon For VTAM X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEGAVIEW Omegaview X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ADS BATCH ADS Batch X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ADS/ONLINE-MVS ADS Online X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ASTEX DASD Monitor (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CA90S SERVICES MVS CA Provided-Not A Product X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS ACCTS PAYABLE Accounts Payable X
- -----------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS BILL OF MATERIAL Bill Of Material X
- -----------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS INVENTORY CONTROL Inventory Control X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS MASTR PROD SCHED Master Product Scheduling X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS MATERIAL REQ PLN Material Requirements Planning X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS PURCHASING REP Purchasing Package X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS SHOP FLOOR CNTRL Shop Floor Control X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CMA CONN CMA Connection M-D Plot (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASE/AU Ease/Author (Formerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASE/IN Ease/Instructor (Formerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASYTRIEVE PLUS Easytrieve Plus MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASYTRIEVE PLUS DL/1 Easytrieve Plus DL/1 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ELEVEN Job Rerun/Restart/Tracking X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services
8/21/96
Exhibit D
TTS Licensed Software
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computer Associates International ENDEVOR Endvevor CI/MVS (Formerly Legent) X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ENDEVOR/CSP Endevor/CSP X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ENDEVOR/MVS Endevor/MVS (Formerly Legent) X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ESSI Extended Security System
(Formerly Legent) X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DATA DICTIONARY Integrated Data Dictionary (IDD) IBM X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DBA TOOL KIT DBA Tool Kit X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DEVELOPER TOOL Developer Tool Kit X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DICTIONARY LOAD Dictionary Loader X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DISTRIBUTED DB Distributive Database X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS PERF MONITOR Performance Monitor X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS SQL EXTEND ARCH IDMS SQL Extend Architecture X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS-MVS IDMS-MVS X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/CULPRIT-MVS IDMS/Culprit/Library Of Routines X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/CV-MVS IDMS Central Version X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/DC-MVS DC X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International INTERTEST/BATCH Intertest/Batch X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International INTERTEST/CICS Intertest/CICS X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International LIBRARY OF ROUTINES Library Of Routines X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MASTER LICENSE Computer Associates & Legent Agreement X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS BASE MICS Base (Formerly Legent) X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS CICS CICS (Formerly Legent) X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS DASD DASD Space Analyzer (Formerly Legent) X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS DB2 DB2 Analyzer (Formerly Legent) X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS IDMS IDMS Analyzer (Formerly Legent) X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS PERF Performance Management
(Formerly Legent) X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS SNA SNA Network Analyzer (Formerly Legent) X X X X
- --------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MIM Multi-Image Integrity Tape Share X X X X
(Formerly Legent)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computer Associates International ONE Tape Management System X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ONLINE QUERY-MVS Online Query (OLQ) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPS/MSF Multi-System Comm Facility (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPS/MVS OPS/MVS JESS2 Base Product (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPS/OCF Outboard Console Facility (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PHOENIX Phoenix (Foremerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PROAUDIT Auditor For DB2 Software X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PROSECURE Secure For DB2 Software X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International SEVEN Job Scheduler X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International SEVEN RPT Report Distribution X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International STORMATE MICS SMS Analyzer (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International TRANSIT Data File Translator X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International TSO/MON TSO Monitor (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International XCOM 6.2 Batch File Transfer S/W (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Hybrid Systems Limited, Inc. DBSTATS Database Statistics X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/CMT COBOL Master Translator X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/DB2 DB2 (Data Mgmt) Read/Write Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/EMR Extended Matrix Reporter X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/GPH Graphics Subsystem X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/DMS IDMS Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/MSO Multi-Session Option X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/PDE PC Date Export X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/TT Tabletalk/Filetalk/Modify X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/VSAM VSAM Read/Write Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/WTR Report Writer/Dialog Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Insync Marketing, Inc. BATCH/MVS Insync Master License X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
Insync Marketing, Inc. DB2 Insync Master License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insync Marketing, Inc. IMS Insync Master License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5635-001 Cadam/Base 3.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5635-003 Cadam/Pipe 3.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5648-001 IGES 3.1.0 Initial Graphics Exchange Standard X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5648-063 ACF/NCP V7 X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-007 Nelview MVS/ESA V3 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-018 CICS/ESA 4.1.1 Customer Information Control System 12/96 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-041 ACF/SSP MVS V4 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-042 ISPF 4.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-068 MVS/ESA 5.1.0 NNS Enterprise Systems Architecture X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-084 RMF/ESA 5.1.0 Feature X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-257 1.16.0 Device Suport Facility For MVS/XA (ICKDSF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-HAL TCP/IP MVS 3.1.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5658-260 3.5.0 Environment Recording Edit & Print (EREP) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-307 Print Management Facility (PMF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-310 Report Management & Distribution System (RMDS) X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-311 3270-PC File Transfer Program X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-403 CICS/MVS 12/96 12/96 12/96 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-488 System Display & Search Facility (SDSF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-948 Basic/MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-767 Pascal Compiler & Library 1.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-806 VS Fortran Compiler Library & Debug 2.6.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-812 2.1.2 GDDM Presentation Graphics Feature (GDDM/PGF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-854 ACF/NCP For 3725 4.3.1 Network Control Program X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-949 1.8.1 System Modification Program Extended (SMP/E) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-976 GAM/SP 1.3.1 Graphics Access Method X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5685-025 TSO/E 2.4.0 Extentions For MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Business Machine 5685-083 CICS/ESA 3.3.0 Customer Information Control Center X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5685-DB2 3.1.0 Database 2 MVS X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-015 Publishing Systems Bookmaster 1.4.0 X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-093 GDDM/Graphigs 2.3.0 Programming Interface X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-113 GDDM-OS2/Link 1.0 (GDDM) X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-169 GDGF 2.1.0 Graphical Display Query Facility X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-190 PPFA/370 1.1.0 Page Printer Formating Aid X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-191 OGL/370 1.1.0 Overlay Generation Language X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-197 COBOL/370 1.1.0 Ad/Cycle X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-198 Lang/370 1.3.0 Language Environment X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-206 CSP/370Rs 4.1.0 Cross Sys Product Runtime Services X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-216 C/370 Ad/Cycle Compiler 2.1.0 X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-218 CSP/370Ad 4.1.0 Cross System Product Ad X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-235 Ad/Cycle Pt/l Compiler 1.2.0 X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-039 RACF 2.1.0 Resource Access Control Facility X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-040 PSF 2.2.0 Print Service Facility Base Code X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-046 Book Manager/Read 1.2.0 MVS X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-100 MVS/Ditto 2.1.0 X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-117 VTAM 4.2.0 Virtual Telecommunications Access Methd X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-167 GDDM 3.1.0 Graphical Data Display Manager X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-171 Information Management 6.1.0 X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-DB2 DB2 4.1.0 X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-DF1 DFSMS/MVS 1.2.0 Data Facility Systems Managed Stor X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5696-234 High Level Assembler MVS, VM, VS 1.1.0 X X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5706-254 QMF/MVS 3.1.1 Query Management Facility X X X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5713-ADX Cadam Drawing Compare X
- -----------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5719-EMI Series/1 Input/Output Executive X X X
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Business Machine 5734-UT1 TSO/Utilities 1.1.4 TSO Data Utilities X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5735-XXB EP 1.9.0 27OX Emulation Program On 3705/20/25 X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5740-CB1 COBOL/VS 1.2.4 Compiler and Library X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5740-SM1 DF/Sort 1.12.0 Data Facility Sort/Merge X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-AP1 VS/APL 1.4.0 Application Programming Language X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-XX9 DCF/Base 1.4.0. Doc Composition Facility (Script) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-XXE DLF 1.3.0 Document Library Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5752-VS2 ICKD5F MVS/370 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5756-265 ANO 1.2.0 Automatic Network Operations/MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABA Fonts 1.1.2 Sonoran Serif Fonts X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABB Fonts 1.1.2 Sonoran Sans Serif X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABC Fonts 1.1.1 PL & Specials X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ADA Fonts 1.1.2. Data 1 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ADT Fonts 1.1.0 Math & Science X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5796-PPN Dataset Fsm 1.2.0 Dataset and Free Space Manager X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-DQD Cache/Reporter 1.1.4 Cache RMF Reporter X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-DWR 3 Of 9 Barcode For 3800/20-III Apa Mode 1.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-PXJ DSL Dynamic Symulation Language X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-RYA CDEP 2.1.0 Classified Data Erasure Program X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-AXX GASP 1.3.9 3277 Graphics Attachment Support X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-EPB NCIMM 1.1 Network Carrier Interconnect Mgt Agent X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-EPD NCIMA 1.1 Network Carrier Interconnect Mgt Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Macro 4, Inc. MACRO4 DUMPMASTER Dumpmaster/MVS Batch/CICS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Programart STROBE Perf Measurement Includes COBOL, IDMS, CICS, DB2 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Softworks, Inc. CATALOG SOLUTION Backup, Recovery & Integrity of File Sys Catalogs X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Teubner & Associates, Inc. A-NET A-Net Software/OS-A X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services
DOS Based Systems:
- ------------------
C60LAN01 C60LAN02
C60NOV01 Inventory Mgt.
NNS045 Human Resources
Trades A36 Master
A37 Slave NNS014 PC Any Where
NNS037 PC Any Where NNS003 FOCUS
Database Server
<TABLE>
<CAPTION>
DISTRIBUTED SYSTEMS SUPPORTED BY TECHNICAL SUPPORT
--------------------------------------------------
- -----------------------------------------------------------------------------------------------
PLATFORM OPERATING MODEL NUMBER OF DISKS DEPARTMENT
SYSTEM CLIENTS SPACE SUPPORTED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SGIA/SGIB IRIX Challenge L 200 70 GB Engineering
- ------------------------------------------------------------------------------------------------
SGID IRIX Indy 40 4 GB NNS Internet
- ------------------------------------------------------------------------------------------------
NNSOSS IRIX Indy 2 1 GB Double Eagle
- ------------------------------------------------------------------------------------------------
SUN SUN O/S Sparc Station 14 20 GB All Plotting
- ------------------------------------------------------------------------------------------------
AIXC AIX RS 6000 64 30 GB Vivid
- ------------------------------------------------------------------------------------------------
ULTD Ultrix DEC 5500 4 30 GB C60
Development
(T & A)
- ------------------------------------------------------------------------------------------------
VAXE VMS VAX 4300 3 30 GB C60
Development
RADCON
- ------------------------------------------------------------------------------------------------
VAXB/VAXC VMS VAX 4300 11 20 GB Sheet Metal
- ------------------------------------------------------------------------------------------------
VAXD VMS VAX 3100 1 GB Automated
Steel
Fabrication
- ------------------------------------------------------------------------------------------------
Alpha/Beta VMS VAX 4200 2 10 GB RADCON
- ------------------------------------------------------------------------------------------------
VAXI VMS VAXStation 5 GB RADCON
Imaging
- ------------------------------------------------------------------------------------------------
VAXM VMS VAXStation 2 GB Facilities
- ------------------------------------------------------------------------------------------------
DECA/B VMS Alpha 34 30 GB Facilities
- ------------------------------------------------------------------------------------------------
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BGS Systems BEST/1-DATACENTER Workload Modeling Tool X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
BGS Systems BEST/1-VISUALIZER Best/1-Visualizer X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
BGS Systems CAPTURE/DATACENTER Capture/Datacenter X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Boole And Babbage, Inc. BGT-DASD Budget Dasd (BB1 Bought
Empact) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics GPR 5 Plotting Software X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics GPR 50 Plotting Software X
- ------------------------------------------------------------------------------------------------------------------------------------
Bruning Computer Graphics ZMD-PLOT Zeta GDDM Services X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Cincom Systems, Inc. SUPRA V.1 Database Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics LINEAR Beasy Linear X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics PROC Beasy Pre & Post Processor X
- ------------------------------------------------------------------------------------------------------------------------------------
Computational Mechanics SUPERTAB Beasy Supertab Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Data Base Architects, Inc. OL-HELP On-Line Help X
- ------------------------------------------------------------------------------------------------------------------------------------
Data Based Development Systems, Inc. DBA-RPTS IDMS DB Analyzer Reports X X
- ------------------------------------------------------------------------------------------------------------------------------------
Dun & Bradstreet Software Services FIX ASSET Fixed Assets Accounting X
- ------------------------------------------------------------------------------------------------------------------------------------
Dun & Bradstreet Software Services UE RPTG Use W/MSA & Non-MSA Sys X
- ------------------------------------------------------------------------------------------------------------------------------------
Erisco CLAIMFACT Claimfacts X
- ------------------------------------------------------------------------------------------------------------------------------------
Galileo-Travelmaster (Formerly Covia) TRVL-MSTR Travel Master X
- ------------------------------------------------------------------------------------------------------------------------------------
Generative Technology (formerly Precision Nesting) GEOMETRIC Geometric Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Generative Technology (formerly Precision Nesting) MEGANEST Automatic Nesting Program X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. ABR Automatic Backup Recovery X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. COMPAKTOR DASD Volume Compactor X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FATAR Fast Analysis Tape Recovery X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FATS Fast Analysis Tape Surfaces X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. FDR File Dump and Restore X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Innovation Data Processing, Inc. IAM Innovation Access Method X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Integral Systems, Inc. CSP/DB2 Payroll/Personnel Mgmnt X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences DATASTORE TCP/IP-80 Datastore TCP/IP
Maintenance - Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences DATASTORE/VS2 VMS Datastore VS2 VMS Site
License X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3722 DECnet Network Controller
Maintenance X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3752 Network Controller
Maintenance - 2/2 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences NETWORK CNTRLR 3762 FDDI Network Controller X X
Maintenance
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences SNS/NFS-60 SNS/NFS Maintenance -
Model 60 X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNB-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interlink Computer Sciences SNS/NFS-80 SNS/NFS Maintenance - Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences SNS/TCPACCESS-60 SNS/TCPaccess Maintenance - Model 60 X
- ------------------------------------------------------------------------------------------------------------------------------------
Interlink Computer Sciences SNS/TCPACCESS-80 SNS/TCPaccess Maintenance - Model 80 X
- ------------------------------------------------------------------------------------------------------------------------------------
Intersolv, Inc. (formerly Sage Software, Inc.) APS 20 Seats Of Aps X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates ADSO Migration Utility X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates ADSO/XREF ADSO XREF Utility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Laderman Associates LADERMAN UTILITIES Laderman Utilities X X
- ------------------------------------------------------------------------------------------------------------------------------------
Lockheed Missiles Space Corporation BOSOR4 Structural Analysis S/W X
- ------------------------------------------------------------------------------------------------------------------------------------
Lockheed Missiles Space Corporation BOSOR5 Structural Analysis S/W X
- ------------------------------------------------------------------------------------------------------------------------------------
Lucas Management ARTEMIS Artemis Project Management
(Formerly Lucas) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TOSRT TSO On-Line Sorce (Trak)
(Formerly The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TRAK Traking System (Formerly The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Marcon & Associates, Inc. TSO TSO Option (TRAK) (Formerly The Bridge) X
- ------------------------------------------------------------------------------------------------------------------------------------
Martin Marietta Data Systems EXIT Martin Marietta X
- ------------------------------------------------------------------------------------------------------------------------------------
Mazda Computer Corporation CHANGE ACTION Change Action X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Merrill Consultants MXG Site License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Mobius Management Systems, Inc. JCLWTR Infopac-JCL Writer X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DAMS Direct Access Management System/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DAS Data Center Accounting System X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DIS Data Inquiry System/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/DCI CA-IDMS Changing Interface X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pace Applied Technology, Inc. KOM/OLC Online Costing/OS-A X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes BARCODE EXPRESS Barcode Express X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes CICS ON-LINE, WINDOWS CICS ON-LINE, WINDOWS X
- ------------------------------------------------------------------------------------------------------------------------------------
Pitney Bowes FINALIST NNS Employee Address Database X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ACCESS/DB2 Access DB2 Facility X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/AF Application Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ASSIST Assist Facility X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/BASE Core Product X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/C C Language Complier X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/CALC Calculations Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/CBT Computer Based Training Facility X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
TTS Services
Exhibit C
NNS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SAS Institute SAS/CONNECT Connect Facility x x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/ETS Econometrics & Time Series Facility x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/FSP Full Screen Processing Facility x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/GRAPH Graphics Facility x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/OR Operations Research Facility x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/QC Quality Control Facility x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/SHARE Multi-User File Sharing Facility x x
- ------------------------------------------------------------------------------------------------------------------------------------
SAS Institute SAS/STAT Statistics Facility x
- ------------------------------------------------------------------------------------------------------------------------------------
Software Engineering Of America PDSFAST PDS fast/Driver x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Sterling Software FTS-MVS File Transfer System-MVS x
- ------------------------------------------------------------------------------------------------------------------------------------
Sterling Software NETMASTER FOUNDATION File Transfer Facility x
- ------------------------------------------------------------------------------------------------------------------------------------
Stone & Webster Engineering STONERULE Program #Srv-015 x
- ------------------------------------------------------------------------------------------------------------------------------------
Structural Dynamics Research I-DEAS I-Deas Complete x
- ------------------------------------------------------------------------------------------------------------------------------------
Tact - The A Consulting Team, Inc TEDIT Tedit Software x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Technetron Unlimited, Inc. DB/DYNAM IDMS Dynamic File Allocate/Deallocate x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Tone Software Corporation TAM TSO Access Manager x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Tone Software Corporation TS-PRINT TS-Pmt License 9/96 9/96 9/96 9/96
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation ADS/DB2 Development System/HPO x
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation ADS/MVS Development System/MVS x
- ------------------------------------------------------------------------------------------------------------------------------------
Trinzic Corporation MVS/HPO Development System/HPO x
- ------------------------------------------------------------------------------------------------------------------------------------
Unitech Systems, Inc. U/ACR-S Automated Control Reporting x
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. IMSL LIC Class II Primary License x
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. MULTIPLE 2Nd Multiple Use Pd-Up x
- ------------------------------------------------------------------------------------------------------------------------------------
Visual Numerics, Inc. MUTI EIAT EIAT Multiple Use Pd-Up x
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Lab, Inc. (Formerly APX) XCHNGMVS XMS And VTAM Connectivity Access Control x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Labs, Inc. (Formerly APX) XPLCICS Send/Receive Interface CICS Gate x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Vmark Labs, Inc. (Formerly APX) XPLIDMS Send/Receive Interface Dynamic Transactions x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allen Systems Group, Inc. FAST/ACCESS DBMS Tool X X
- ------------------------------------------------------------------------------------------------------------------------------------
Allen Systems Group, Inc. JCLPREP JCL Checking Facility (Was Altare Owned) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Allen Systems Group, Inc. PRE-ALERT MVS/IDMS Pre Alert (Was Shopmon) X
- ------------------------------------------------------------------------------------------------------------------------------------
BMC Software, Inc. DB2 CATALOG MANAGER Mastermind Component X
- ------------------------------------------------------------------------------------------------------------------------------------
BMC Software, Inc. DB2 MON DB2 Activity Monitor X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle CL/SUPER Super-XSM Gateway/XA/ESA X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-CICS Omegamon Pac For CICS X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-MVS Omegamon Pac For MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEG-VTAM Omegamon For VTAM X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Candle OMEGAVIEW Omegaview X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ADS BATCH ADS Batch X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ADS/ONLINE-MVS ADS Online X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ASTEX DASD Monitor (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CA90S SERVICES MVS CA Provided - Not A Product X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS ACCTS PAYABLE Accounts Payable X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS BILL OF MATERIAL Bill of Material X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS INVENTORY CONTRL Inventory Control X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS MASTR PROD SCHED Master Product Scheduling X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS MATERIAL REQ PLN Material Requirements Planning X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS PURCHASING REP Purchasing Package X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CAS SHOP FLOOR CNTRL Shop Floor Control X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International CMA CONN CMA Connection M-D Plot (Formely Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASE/AU Ease/Author (Formerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASE/IN Ease/Instructor (Formerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASYTRIEVE PLUS Easytrieve Plus MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International EASYTRIEVE PLUS DL/1 Easytrieve Plus DL/1 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ELEVEN Job Rerun/Restart/Tracking X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services
Exhibit D 8/21/96
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computer Associates International ONE Tape Management System X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ONLINE QUERY-MVS Online Query (OLQ) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPW/MSF Multi-System Comm Facility (Formerly
Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPS/MVS OPS/MVS JESS 2 Base Product (Formerly
Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International OPS/OCF Outboard Console Facility (Formerly
Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PHOENIX Phoenix (Formerly Legent) X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PROAUDIT Auditor For DB2 Software X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International PROSECURE Secure For DB2 Software X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International SEVEN Job Scheduler X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International SEVEN RPT Report Distribution X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International STORMATE MICS SMS Analyzer (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International TRANSIT Data File Translator X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International TSO/MON TSO Monitor (Formerly Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International XCOM 6.2 Batch File Transfer S/W (Formerly
Legent) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Hybrid Systems Limited, Inc. DBSTATS Database Statistics X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/CMT COBOL Master Translator X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/DB2 DB2 (Data Mgmt) Read/Write Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/EMR Extended Matrix Reporter X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/GPH Graphics Subsystem X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/DMS IDMS Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/MSO Multi-Session Option X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/PDE PC Data Export X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/TT Tabletalk/Filetalk/Modify X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/VSAM VSAM Read/Write Interface X
- ------------------------------------------------------------------------------------------------------------------------------------
Information Builders, Inc. FOCUS/WTR Report Writer/Dialog Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Insync Marketing, Inc. BATCH MVS Insync Master License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Insync Marketing, Inc DB2 Insync Master License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 1
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insync Marketing, Inc. IMS Insync Master License X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5635-001 Cadam/Base 3.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5635-003 Cadam/Pipe 3.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5648-001 IGES 3.1.0 Initial Graphics Exchange
Standard X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5648-063 ACF/NCP V7 X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-007 Netview MVS/ESA V3 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-018 CICS/ESA 4.1.1 Customer Information
Control System 12/96 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-041 ACF/SSP MVS V4 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-042 ISPF 4.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-068 MVS/ESA/ 5.1.0 MVS Enterprise
Systems Architecture X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-084 RMF/ESA 5.1.0 Feature X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-257 1.16.0 Device Support Facility for
MVS/XA (ICKDSF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5655-HAL TCP/IP MVS 3.1.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5658-260 3.5.0 Environmental Recording Edit
& Print(EREP) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-307 Print Management Facility (PMF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-310 Report Management & Distribution
System (RMDS) X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-311 3270-PC File Transfer Program X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-403 CICS/MVS 12/96 12/96 12/96 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-488 System Display & Search Facility (SDSF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5665-948 Basic/MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-767 Pascal Complier & Library 1.2.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-806 VS Fortran Compiler Library
& Debug 2.6.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-812 21.2 GDDM Presentation Graphics
Feature (GDDM/PGF) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-854 ACF/NCP For 3725 4.3.1 Network
Control Program X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-949 1.8.1 System Modification Program
Extended (SMP/E) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5668-978 GAM/SP 1.3.1 Graphics Access Method X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5685-025 TSO/E 2.4.0 Extentions For MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule 1 8/21/96
TTS Services
Exhibit D
TTS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Business Machine 5685-083 CICS/ESA 3.3.0 Customer Information Control System X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5685-DB2 3.1.0 Database 2 MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-015 Publishing Systems Bookmaster 1.4.0 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-093 GDDM/Graphics 2.3.0 Programming Interface X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-113 GDDM-OS2/Link 1.0 (GDDM) X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-169 GDGF 2.1.0 Graphical Display Query Facility X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-190 PPFA/370 1.1.0 Page Printer Formating Aid X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-191 OGL/370 1.1.0 Overlay Generation Language X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-197 COBOL/370 1.1.0 Ad/Cycle X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-198 Lang/370 1.3.0 Language Environment X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-208 CSP/370Rs 4.1.0 Cross Sys Product Runtime Services X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-216 C/370 Ad/Cycle Compiler 2.1.0 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-218 CSP/370Ad 4.1.0 Cross System Product Ad X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5688-235 Ad/Cycle Pt/t Compiler 1.2.0 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-039 RACF 2.1.0 Resource Access Control Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-040 PSF 2.2.0 Print Service Facility Base Code X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-046 Book Manager/Read 1.2.0 MVS X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-100 MVS/Ditto 2.1.0 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-117 VTAM 4.2.0 Virtual Telecommunications Access Methd X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-167 GDDM 3.1.0 Graphical Data Display Manager X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-171 Information Management 5.1.0 X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-DB2 DB2 4.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5695-DF1 DFSMS/MVS 1.2.0 Data Facility Systems Managed Stor X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5696-234 High Level Assembler MVS, VM, VS 1.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5706-254 QMF/MVS 3.1.1 Query Management Facility X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5713-ADX Cedam Drawing Compare X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5719-EMI Series/1 Input/Output Executive X X X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule 1 8/21/96
TTS Services
Exhibit D
TTS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Business Machine 5734-UT1 TSO/Utilities 1.1.4 TSO Data Utilities X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5735-XXB EP 1.9.0 270X Emulation Program On 3705/20/25 X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5740-CB1 COBOL/VS 1.2.4 Compiler And Library X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5740-SM1 DF/Sort 1.12.0 Data Facility Sort/Merge X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-AP1 VS/APL 1.4.0 Application Programming Language X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-XX9 DCF/Base 1.4.0 Doc Composition Facility (Script) X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5748-XXE DLF 1.3.0 Document Library Facility X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5752-VS2 ICKD5F MVS/370 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5756-265 ANO 1.2.0 Automatic Network Operations/MVS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABA Fonts 1.1.2 Sonoran Serif Fonts X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABB Fonts 1.1.2 Sonoran Sans Serif X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ABC Fonts 1.1.1 Pl & Specials X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ADA Fonts 1.1.2 Data 1 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5771-ADT Fonts 1.1.0 Math & Science X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5796-PPN Dataset Fsm 1.2.0 Dataset And Free Space Manager X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-DQD Cache/Reporter 1.1.4 Cache RMF Reporter X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-DWR 3 Of 9 Barcode For 3800/20-iii Apa Mode 1.1.0 X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-PXJ DSL Dynamic Symulation Language X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5798-RYA CDEP 2.1.0 Classified Data Erasure Program X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-AXX GASP 1.3.9 3277 Graphics Attachment Support X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-EPB NCIMM 1.1 Network Carrier Interconnect Mgt Agent X
- ------------------------------------------------------------------------------------------------------------------------------------
International Business Machine 5799-EPD NCIMA 1.1 Network Carrier Interconnect Mgt Manager X
- ------------------------------------------------------------------------------------------------------------------------------------
Macro 4, Inc. MACRO4
DUMPMASTER Dumpmaster/MVS Batch/CICS X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Programart STROBE Perf Measurment includes COBOL, IDMS, CICS, DB2 X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Softworks, Inc. CATALOG
SOLUTION Backup, Recovery & Integrity Of File Sys Catalogs X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Teubner & Associates, Inc. A-NET A-Net Software / OS-A X
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule I
TTS Services 8/21/96
Exhibit D
TTS Licensed Software
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Vendor Name Model Description NNS-A NNS-C NNS-D NNS-E
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computer Associates International ENDEVOR Endevor CI/MVS (Formerly Legent) x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ENDEVOR/CSP Endevor/CSP x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ENDEVOR/MVS Endevor/MVS (Formerly Legent) x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International ESSI Extended Security System (Formerly Legent) x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DATA DICTIONARY Intergrated Data Dictionary (IDD) IBM x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DBA TOOL KIT DBA Tool Kit x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DEVELOPER TOOL Developer Tool Kit x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DICTIONARY LOAD Dictionary Loader x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS DISTRIBUTED DB Distributive Database x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS PERF MONITOR Performance Monitor x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS SQL ENTEND ARCH IDMS SQL Extend Architecture x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS-MVS IDMS-MVS x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/CULPRIT-MVS IDMS/Culprit/Library Of Routines x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/CV-MVS IDMS Central Version x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International IDMS/DC-MVS DC x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International INTERTEST/BATCH Intertest/Batch x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International INTERTEST/CICS Intertest/CICS x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International LIBRARY OF ROUTINES Library Of Routines x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MASTER LICENSE Computer Associates & Legent Agreement x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS BASE MICS Base (Formerly Legent) x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS CICS CICS (Formerly Legent) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS DASD DASD Space Analyzer (Formerly Legent) x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS DB2 DB2 Analyzer (Formerly Legent) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS IDMS IDMS Analyzer (Formerly Legent) x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS PERF Performance Management (Formerly Legent) x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MICS SNA SNA Network Analyzer (Formerly Legent) x x x x
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Associates International MIM Multi-Image Integrity Tape Share x x x x
(Formerly Legent)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
