UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14161
MARKETSPAN CORPORATION
(Exact name of Registrant as specified in its charter)
New York 11-3431358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 East Old Country Road, Hicksville, New York 11801
(Address of principal executive offices) (Zip Code)
(516) 755-6650
Registrant's telephone number, including area code
NONE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at August 12, 1998
$.01 par value 158,802,422
<PAGE>
MARKETSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
June 30, 1998 and March 31, 1998 3
Condensed Consolidated Statement of Income -
Three Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 15
Part II. Other Information
Item 1 - Legal Proceedings 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signature 28
<PAGE>
<TABLE>
<CAPTION>
MarketSpan Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
June 30,1998 March 31,1998
--------------- ------------------
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Utility Plant and Property
Electric $ 1,094,357 $ 4,049,629
Gas 3,147,633 1,233,281
Common 317,914 290,221
Construction work in progress 81,540 118,808
Accumulated depreciation (1,426,978) (1,877,858)
Gas exploration and production, at cost 816,079 -
Accumulated depletion (276,823) -
--------------- ------------------
3,753,722 3,814,081
--------------- ------------------
Regulatory Assets
Base financial component, net - 3,155,334
Rate moderation component - 434,004
Shoreham post-settlement costs - 1,005,316
Shoreham nuclear fuel - 66,455
Unamortized cost of issuing securities 7,711 159,941
Postretirement benefits other than pensions 52,210 340,109
Regulatory tax asset 66,080 1,737,932
Other 168,483 192,763
--------------- ------------------
294,484 7,091,854
--------------- ------------------
Other Property & Investments 111,884 50,816
--------------- ------------------
Goodwill 173,874 -
--------------- ------------------
Current Assets
Cash and temporary cash investments 2,171,649 180,919
Customer accounts receivable 190,600 321,372
Allowance for uncollectible accounts (30,773) (23,483)
Other accounts receivable 140,795 43,744
Special deposits 29,843 95,790
Accrued revenues 52,034 124,464
Gas in storage, at average cost 93,696 14,634
Fuel oil, at average cost - 32,142
Materials and supplies, at average cost 66,045 54,883
Deferred federal income taxes 75,415 -
Other 80,897 13,807
--------------- ------------------
2,870,201 858,272
--------------- ------------------
Deferred Charges 357,109 85,702
--------------- ------------------
Total Assets $ 7,561,274 $ 11,900,725
=============== ==================
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
MarketSpan Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
June 30,1998 March 31,1998
------------------- -------------------
(UNAUDITED) (AUDITED)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
Capitalization
Common stock $ 2,893,883 $ 1,706,355
Retained earnings 890,546 956,092
Foreign currency translation adjustment (1,429) -
------------------- -------------------
Total common equity 3,783,000 2,662,447
Preferred stock 448,000 562,600
Long-term debt 1,938,033 4,381,949
------------------- -------------------
Total Capitalization 6,169,033 7,606,996
------------------- -------------------
Regulatory Liabilities 48,746 389,431
------------------- -------------------
Current Liabilities
Current maturities of long-term debt - 101,000
Current redemption requirements of preferred stock - 139,374
Accounts payable and accrued expenses 380,818 258,701
Dividends payable 48,824 58,748
Accrued taxes 12,359 34,753
Customer deposits 29,608 28,627
Class settlement 60,000 60,000
Accrued interest and other 38,268 146,607
------------------- -------------------
569,877 827,810
------------------- -------------------
Deferred Credits and Other Liabilities
Deferred federal income tax 328,705 2,539,364
Class settlement 55,011 46,940
Pensions and other postretirement benefits 139,920 401,401
Claims,damages & other reserves 135,363 66,254
Other 15,697 22,529
------------------- -------------------
674,696 3,076,488
------------------- -------------------
Minority Interest in Subsidiary Company 98,922 -
------------------- -------------------
Total Capitalization and Liabilities $ 7,561,274 $ 11,900,725
=================== ===================
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
MarketSpan Corporation and Subsidiaries es
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Share Amounts)
Three Months Ended
-----------------------------------------
June 30 June 30
1998 1997
------------------ ------------------
<S> <C> <C>
Revenues
Electric $ 398,052 $ 560,086
Gas distribution 153,957 104,402
Gas production 11,713 -
Other 18,893 -
------------------ ------------------
Total Revenues 582,615 664,488
Operating Expenses
Fuel and purchased power 91,796 148,586
Purchased gas 64,390 43,190
Operations 149,416 94,306
Maintenance 33,639 27,782
Depreciation, depletion and amortization 47,555 38,893
Electric regulatory amortization (49,819) 6,317
Other regulatory amortization 10,476 11,043
Operating taxes 97,758 109,324
Federal income taxes (credit) (60,461) 33,867
------------------ ------------------
Total Operating Expenses 384,750 513,308
------------------ ------------------
Operating Income 197,865 151,180
Other Income and (Deductions)
Transaction related expenses (63,651) -
Other (20,139) (1,829)
------------------ ------------------
Income Before Interest Charges 114,075 149,351
Interest Charges 76,825 104,190
------------------ ------------------
Net Income 37,250 45,161
Preferred stock dividend requirements 11,216 12,968
------------------ ------------------
Earnings for Common Stock $ 26,034 $ 32,193
================== ==================
Average Common Shares Outstanding 134,166 121,146
Basic and Diluted Earnings Per Common Share $ 0.19 $ 0.26
================== ==================
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
MarketSpan Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
Three Months Ended
June 30 June 30
1998 1997
------------------------------
Operating Activities
<S> <C> <C>
Net Income $ 37,250 $ 45,161
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 47,555 38,893
Electric regulatory amortization (49,819) 12,298
Other regulatory amortization 10,476 13,052
Rate moderation component carrying charges (6,411) (5,981)
Class settlement (14,988) 4,199
Amortization of cost of issuing and redeeming securities 3,703 7,934
Federal income tax - deferred and other (181,293) 10,551
Pensions and other post retirement benefits 11,269 -
Other (155,428) 28,490
Changes in operating assets and liabilities
Accounts receivable and accrued revenue 90,418 53,075
Pensions and other post retirement benefits (285,212) -
Materials and supplies, fuel oil and gas in storage (3,766) (31,174)
Accounts payable and accrued expenses 70,370 33,485
Accrued taxes (80,234) (8,087)
Accrued interest and other 67,486 (27,288)
Class settlement 23,058 (10,639)
Special deposits 65,947 (30,285)
--------------- -------------
Net Cash Provided by (Used in) Operating Activities (349,619) 133,684
--------------- -------------
Investing Activities
Construction expenditures (100,199) (69,219)
Net cash from KeySpan and LILCO transactions 90,168 -
Proceeds from LIPA transaction 2,497,500 -
Shoreham post-settlement costs (6,650) (11,983)
Miscellaneous investment (1,740) 221
--------------- -------------
Net Cash Provided by (Used in) Investing Activities 2,479,079 (80,981)
--------------- -------------
Financing Activities
Proceeds from sale of common stock 6,514 4,309
Issuance of preferred stock 75,000 -
Redemption of long-term debt (100,000) -
Issuance of notes payable 350,000 -
Redemption of notes payable (350,000) -
Preferred stock dividends paid (12,926) (12,968)
Common stock dividends paid (90,353) (53,844)
Other (16,965) (729)
--------------- -------------
Net Cash Used in Financing Activities (138,730) (63,232)
--------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,990,730 (10,529)
=============== =============
Cash and cash equivalents at beginning of period $ 180,919 $ 64,539
Net Increase (Decrease) in cash and cash equivalents 1,990,730 (10,529)
=============== =============
Cash and cash equivalents at end of period $ 2,171,649 $ 54,010
=============== =============
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
<PAGE>
MARKETSPAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY
MarketSpan Corporation ("Company" or "MarketSpan"), a New York corporation,
is filing its first report on Form 10-Q as successor to Long Island
Lighting Company ("LILCO"), as a result of the transaction with the Long
Island Power Authority ("LIPA") discussed below (the "LIPA Transaction")
and following the acquisition of KeySpan Energy Corporation ("KeySpan").
MarketSpan is a utility holding company that has been granted exemption
under the Public Utility Holding Company Act of 1935, as amended. As a
result of the transaction with LIPA, LILCO became a wholly owned subsidiary
of LIPA, a corporate municipality and a political subdivision of New York
State. KeySpan, a wholly owned subsidiary of MarketSpan and an exempt
utility holding company under the Public Utility Holding Company Act of
1935, as amended, is no longer a registrant under the Securities Act of
1933, as amended and the Securities Exchange Act of 1934, as amended.
On May 28, 1998, the Company completed two business combinations as a
result of which it (i) acquired the non-nuclear electric generating
facilities, gas distribution operations and common plant formerly owned by
LILCO and entered into long-term service agreements to operate the
electric transmission and distribution system acquired by LIPA ; and (ii)
acquired KeySpan, the parent company of The Brooklyn Union Gas Company
("Brooklyn Union"), (See Notes to the Condensed Consolidated Financial
Statements, Note 2.)
With the exception of a small portion of Queens County, MarketSpan
subsidiaries are the only providers of gas distribution services on Long
Island, N.Y. - Nassau, Suffolk, Queens and Kings Counties - with a total
population of approximately 6.9 million. Queens and Kings Counties are
part of New York City. In addition, MarketSpan subsidiaries provide gas
distribution services to Richmond County, a part of New York City, with a
total population of approximately .4 million. Brooklyn Union provides gas
distribution services to Queens, Kings and Richmond Counties and
MarketSpan Gas Corporation, a subsidiary of MarketSpan provides gas
distribution services to Nassau and Suffolk Counties and the Rockaway
Pennisula in Queens County.
Prior to May 29, 1998, LILCO conducted its operations as a fully
integrated electric generation, transmission and distribution utility in
<PAGE>
combination with its separate gas distribution operations. Subsequent to
the consummation of the LIPA Transaction, MarketSpan through its subsidiary
MarketSpan Generation LLC, generates electricity on Long Island, N.Y. for
sale to LIPA under a 15 year Power Supply Agreement. Its production
operations are conducted at five steam generation facilities and forty-two
internal combustion facilities with an aggregate rated generating capacity
of 3,978 M.W. Electric transmission and distribution operating services and
customer billing services are provided to LIPA by a MarketSpan subsidiary
MarketSpan Electric Services LLC, under an eight year Management Service
Agreement. Fuel management and procurement services are provided to LIPA
under a 15 year Energy Management Agreement by MarketSpan Trading Services
LLC, a MarketSpan subsidiary. This Energy Management Agreement also
requires that MarketSpan Trading Services LLC provide LIPA with certain
system power supply services for a period of eight years. In addition,
three years after May 28, 1998, when the transaction with LIPA was
consummated, LIPA will have the right for a one year period to acquire the
non-nuclear generating assets formally owned by LILCO and currently owned
by MarketSpan Generation LLC. The purchase price for such assets would be
the fair market value at the time of the exercise of the right, which value
will be determined by independent appraisers.
KeySpan owns significant investments in gas exploration and production
operations primarily through The Houston Exploration Company ("THEC"), a
64% owned subsidiary of Brooklyn Union. THEC owns approximately 400 BCFe
of natural gas reserves primarily in the Gulf Coast region both onshore
and offshore. Moreover, KeySpan subsidiaries own investments accounted for
on the equity method, in domestic and international pipeline operations
and provide gas marketing and related energy systems installation and
management services primarily within the greater New York metropolitan
area.
As a result of the transactions and business combination described above,
the composition of MarketSpan's assets and liabilities reflects the
monetization of substantial regulatory and other assets previously owned by
its predecessor company and a related reduction of financial risk
associated with that company. Consequently, the results of operations
reported herein may not be indicative of future results or operating
trends. Management is exploring opportunities to expand the Company's
operations through possible investments and acquisitions, the magnitude and
timing of which can not be determined.
<PAGE>
2. SALE OF LILCO ASSETS, ACQUISITION OF KEYSPAN AND TRANSFER OF
ASSETS AND LIABILITIES TO MARKETSPAN
On May 28, 1998, pursuant to the Agreement and Plan of Merger, dated as of
June 26, 1997, by and among MarketSpan Corporation (formerly known as BL
Holding Corp., "MarketSpan"), Long Island Lighting Company, Long Island
Power Authority, and LIPA Acquisition Corp. (the "Merger Agreement"), LIPA
acquired all of the outstanding common stock of LILCO for $2.4975 billion
in cash and thereafter directly or indirectly assumed, certain liabilities
including approximately $3.5 billion in debt, as well as approximately
$222 million of LILCO's preferred stock. In addition, LIPA reimbursed
LILCO $117.5 million related to certain series of preferred stock which
were redeemed by LILCO prior to May 28, 1998. Immediately prior to such
acquisition, all of LILCO's assets employed in the conduct of its gas
distribution business and its non-nuclear electric generation business,
and all common assets used by LILCO in the operation and management of its
electric transmission and distribution business and its gas distribution
business and/or its non-nuclear electric generation business (the
"Transferred Assets") were sold to MarketSpan and transferred to the
following wholly owned subsidiaries of MarketSpan at MarketSpan's
direction: MarketSpan Gas Corporation, MarketSpan Trading Services LLC,
MarketSpan Generation LLC, MarketSpan Corporate Services LLC, MarketSpan
Utility Services LLC, and MarketSpan Electric Services LLC, each a New
York corporation or limited liability company, and MarketSpan Finance
Corporation, a Vermont corporation (the "Transfer").
The consideration for the Transferred Assets consisted of (i) 3,440,625
shares of the common stock of MarketSpan, (ii) 553,000 shares of the
Series B preferred stock of MarketSpan, (iii) 197,000 shares of the Series
C preferred stock of MarketSpan, and (iv) the assumption by MarketSpan of
certain liabilities of LILCO. In connection with the Transfer and prior to
the effectiveness of the LIPA Transaction, LILCO sold Series B and C
preferred stock for $75 million in a private placement.
Moreover, all of LILCO's outstanding long-term debt as of May 28, 1998,
except for its 1997 Series A Electric Facilities Revenue Bonds due
December 1, 2027 which were assigned to MarketSpan, was transferred to
LIPA. In accordance with the LIPA Agreement, MarketSpan issued promissory
notes to LIPA amounting to $1.078 billion which represents an amount
equivalent to the sum of (i) the principal amount of 7.3% Series
Debentures due July 15, 1999 and 8.2% Series Debentures due March 15, 2023
outstanding as of May 28, 1998, (ii) an allocation of certain of the
<PAGE>
Authority Financing Notes (such allocation representing the estimate of
the amount of debt required to finance certain generation construction
requirements), and (iii) the amount by which the net book value of the
assets transferred to LIPA at May 28, 1998 was less than $2,500,800,000.
The promissory notes contain identical terms as the debt referred to in
items (i) and (ii) above.
On May 28, 1998, immediately subsequent to the LIPA Transaction, KeySpan
was merged with and into a subsidiary of MarketSpan, pursuant to an
Agreement and Plan of Exchange and Merger, dated as of December 29, 1996,
between LILCO and Brooklyn Union. This agreement was amended and restated
as of February 7, 1997, June 26, 1997, and September 29, 1997, to reflect
certain technical changes and the assignment by Brooklyn Union of all of
its rights and obligations under the agreement to KeySpan. On September
29, 1997, KeySpan became the parent company of Brooklyn Union when
Brooklyn Union reorganized into a holding company structure.
As a result of these transactions, holders of KeySpan common stock
received one share of MarketSpan common stock, par value $.01 per share,
for each share of KeySpan they owned and holders of LILCO common stock
received 0.880 of a share of MarketSpan common stock for each share of
LILCO they owned. Upon the closing of these transactions, former holders
of KeySpan and LILCO owned 32% and 68%, respectively, of the MarketSpan
common stock. MarketSpan's common stock and its preferred stock Series AA
have been listed on the New York and Pacific Stock Exchanges under the
symbol "MN". KeySpan and LILCO common stock are no longer traded.
The purchase price of $1.223 billion for the acquisition of KeySpan has
been allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The fair value of the utility assets acquired is
represented by their book value which approximates the value recognized by
the New York State Public Service Commission ("PSC") in establishing rates
for regulated utility services. The estimated fair value of KeySpan's
non-utility assets approximates their carrying values.
MarketSpan has recorded goodwill in the amount of $174 million, including
$15 million of LILCO's transaction costs that will not be recovered in gas
rates. The $174 million represents the excess of the acquisition cost over
the fair value of the net assets acquired, and is being amortized over 40
years as goodwill.
<PAGE>
The following is the comparative unaudited pro forma combined condensed
financial information for the twelve months ended June 30, 1998 and 1997.
The pro forma disclosures are intended to reflect the results of operations
as if the combinations, as discussed above were consummated on the first
day of the reporting period. These pro forma disclosures may not be
indicative of future results.
Twelve Months Ended
June 30
-------
Pro Forma Results (in thousands) 1998 1997
-------------------------------- ---- ----
Revenues 2,375.7 2,447.7
Operating Income 382.1 293.2
Net Income 195.7 204.4
E.P.S. (basic and diluted) 1.02 1.08
3. BASIS OF PRESENTATION
The financial statements presented herein reflect the consolidated
statements of MarketSpan. For financial reporting purposes, LILCO is
deemed a predecessor company to MarketSpan pursuant to a purchase
accounting transaction, in which KeySpan was acquired. Since the
acquisition of KeySpan was accounted for as a purchase, purchase
accounting adjustments, including goodwill, have been reflected in the
financial statements herein. Further, the financial statements presented
reflect the results of operations of LILCO from April 1, 1998 through May
28, 1998 and of MarketSpan from May 29, 1998 through June 30, 1998.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments necessary to
present fairly the financial position of the Company as of June 30, 1998,
and the results of its operations and cash flows for the three months
ended June 30, 1998 and 1997. Certain reclassifications were made to
conform prior period financial statements with the current period
financial statement presentation. Other than as noted, adjustments were of
a normal, recurring nature.
As permitted by the rules and regulations of the Securities and Exchange
Commission ("SEC"), the Condensed Consolidated Financial Statements do not
include all of the accounting information normally included with financial
statements prepared in accordance with generally accepted accounting
principles. Accordingly, the Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements and notes
thereto included in the Long Island Lighting Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998, the KeySpan Energy
<PAGE>
Corporation Annual Report on Form 10-K for the fiscal year ended September
30, 1997, and the KeySpan Energy Corporation Form 10-Q for the quarter
ended December 31, 1997 and March 31, 1998.
THEC uses the full cost method of accounting for its investment in natural
gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and
properties in the pool are depleted and charged to operations using the
unit-of-production method based on the ratio of current production to
total proved natural gas and oil reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and
amortization) less deferred taxes exceed the present value (using a 10%
discount rate) of estimated future net cash flows from proved natural gas
and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a write-down
is required, it would result in a charge to earnings but would not have an
impact on cash flows from operating activities. Once incurred, a
write-down of oil and gas properties is not reversible at a later date
even if oil and gas prices increase.
Natural gas prices declined substantially in the quarter ended June 30,
1998 from prices in effect during the quarter ended March 31, 1998. If
prices continue to decline, THEC may be required to write down the
carrying value of its natural gas and oil properties depending upon prices
and the results of drilling programs during the quarter ended September
30, 1998.
As of June 30, 1998, THEC estimates, using prices in effect as of such
date, that the ceiling limitation imposed under full cost accounting rules
on total capitalized natural gas and oil property costs exceeded actual
capitalized costs.
The gas distribution business is influenced by seasonal weather
conditions. Annual revenues are substantially realized during the heating
season (November 1 to April 30) as a result of the large proportion of
heating sales, primarily residential, compared with total sales.
Accordingly, results of operations historically are most favorable in the
three months ended March 31, with results of operations being next most
favorable in the three months ended December 31. Results for the quarter
ended June 30 are marginally unprofitable, and losses are usually incurred
in the quarter ended September 30.
<PAGE>
The gas utility tariffs of Brooklyn Union and MarketSpan Gas Corporation
each contain a weather normalization adjustment that largely offsets
shortfalls or excesses of firm net revenues (revenues less gas costs)
during a heating season due to variations from normal weather.
Revenues associated with billings to LIPA for electric generation and
related transmission, distribution and delivery services are not affected
by weather. Further, the agreement with LIPA includes a provision for
MarketSpan to earn in the aggregate approximately $11.5 million plus up to
an additional $5 million if certain cost savings are achieved in annual
management service fees from LIPA for the management of the LIPA
transmission and distribution system and the management of all aspects of
fuel and power supply. These agreements also contain certain incentive and
penalty provisions which could impact earnings from such agreements.
Certain statements contained in this Form 10-Q concerning expectations,
beliefs, plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are
other than statements of historical facts, are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements reflect numerous assumptions
and involve a number of risks and uncertainties and actual results may
differ materially from those discussed in such statements. Among the
factors that could cause actual results to differ materially are:
available sources and cost of fuel, state and federal regulatory
initiatives that increase competition, threaten cost and investment
recovery, and impact rate structures; the ability of the Company to
successfully reduce its cost structure; the degree to which the Company
develops non-regulated business ventures; inflationary trends and interest
rates; and other risks detailed from time to time in reports and other
documents filed by the Company and its predecessors with the Securities
and Exchange Commission. For any of these statements, the Company claims
the protection of the safe harbor for forward-looking information
contained in the Private Securities Litigation Reform Act of 1995, as
amended.
4. REGULATORY ASSETS
MarketSpan's regulated subsidiaries are subject to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation". Regulatory assets arise from
the allocation of costs and revenues to accounting periods for utility
ratemaking purposes differently from bases generally applied by
<PAGE>
nonregulated companies. Regulatory assets are recognized in accordance
with SFAS-71.
MarketSpan's regulatory assets of $294.5 million are primarily comprised
of net regulatory tax assets, transaction costs associated with the
combinations and certain environmental remediation and investigation
costs. In the opinion of management, regulatory assets are fully
recoverable in rates. However, the Company continually assesses the
applicability of SFAS-71 to its operations both severally and as a whole.
In the event that the provisions of SFAS-71 were no longer applicable, the
Company estimates that the related write-off could result in a charge to
net income of approximately $159.7 million (excluding corresponding
credits) or approximately $1.19 per share of common stock which would be
classified as an extraordinary item.
<PAGE>
MARKETSPAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
- -----------------
The following is a summary of items affecting comparative earnings and a
discussion of the material changes in revenues and expenses during the following
periods:
(1) Three Months ended June 30, 1998 vs. Three Months ended
June 30, 1997.
To enhance the comparative disclosures, selected proforma information for the
twelve months ended June 30, 1998 vs June 30, 1997 is provided in Note 2 of
Notes to the Condensed Consolidated Financial Statements.
Results for the quarter ended June 30, 1998 include operations of LILCO's former
gas and electric business for the period April 1, 1998 through May 28, 1998.
Results for MarketSpan Gas Corporation, the electric supply and management
agreements with LIPA, and KeySpan are reflected for the period May 29, 1998
through June 30, 1998. (See below under Utility Rate and Regulatory Matters for
a description of the various agreements with LIPA.) As required under purchase
accounting, results for the period ended June 30, 1997, reflect results of the
former LILCO as previously reported, and do not include results of KeySpan.
Earnings
- --------
Consolidated earnings for the first quarter ended June 30, 1998 were $26.0
million, or $0.19 per share, compared to $32.2 million, or $0.26 per share, in
the corresponding period last year. In the period ended June 30, 1998, the
Company absorbed substantial costs related to the LIPA Transaction. The adverse
effect of these one time charges was offset by realizing certain federal income
tax deductions related to the funding of post employment benefits for employees.
In addition, the amortization of the Rate Moderation Component changed
significantly during the quarter, resulting in a favorable effect to earnings.
Due to the LIPA Transaction, the Rate Moderation Component is no longer in
effect. Moreover, the Company will be initiating a special retirement program
and exploring a voluntary severance program as part of the overall plan to
realize the $1 billion of operating synergy savings already reflected in both
utility tariff rates and contracts with LIPA. These programs, if adopted, will
result in additional one time charges during the current year.
<PAGE>
Earnings for the quarter ended June 30, 1998 also include KeySpan's net loss of
$9 million for the period May 29, 1998 through June 30, 1998. This loss was
primarily attributable to the seasonality of the gas distribution business. The
weighted average number of common shares outstanding used in the calculation of
earnings per share for the quarter ended June 30, 1998 reflect the issuance of
common stock to consummate the business combination effective on May 29, 1998.
Revenue Summary
- ---------------
Utility firm gas and transportation sales volumes for the quarter ended June 30,
1998, were 14,088 MDTH, compared to 10,097 MDTH in the corresponding period last
year. Total gas throughput, which includes sales to interruptible customers, was
21,407 MDTH for the quarter ended June 30, 1998, compared to 13,326 MDTH in the
corresponding period last year. Sales for the quarter ended June 30, 1997 do not
include sales made by KeySpan.
The revenues of the Company were significantly affected as a result of the LIPA
and KeySpan Transactions. Below are the Company's revenues for the three months
ended June 30, 1998 and 1997. (Note 2 of Notes to the Condensed Consolidated
Financial Statements includes proforma information for the twelve months ended
June 30, 1998 and 1997.)
Three Months Ended June 30,
--------------------------
(In Millions)
1998 1997
---- ----
MarketSpan Gas Revenues:
Gas Distribution $154.0 $104.4
Gas Production - THEC 11.7 -
MarketSpan Electric Revenues:
LIPA Service Agreements 68.1 -
Electric Services 329.9 560.1
Other Revenues 18.9 -
---- ----
TOTAL REVENUES $582.6 $664.5
====== ======
Gas Distribution and Production Revenues
- ----------------------------------------
Gas distribution revenues for 1998 include MarketSpan Gas Corporation and
KeySpan revenues covering the period May 29, 1998 through June 30, 1998 and
LILCO's former gas business revenues covering the period April 1, 1998 through
May 28, 1998. Included in the gas production revenues for 1998 are THEC revenues
covering the period May 29,1998 through June 30, 1998. For the comparable 1997
period, included in gas distribution revenues is MarketSpan Gas Corporation
(formerly LILCO) revenues covering the period April 1, 1997 through June 30,
<PAGE>
1997. Pursuant to purchase accounting requirements, the comparative June 1997
quarter does not include revenues for KeySpan.
The increase in gas distribution and production revenues of approximately $61.3
million for the three months ended June 30, 1998 when compared to the same
period in 1997, was principally the result of the inclusion in 1998 of revenues
generated by KeySpan for the period May 29, 1998 through June 30, 1998.
Electric Revenues
- -----------------
Electric revenues in 1998 include revenues under various LIPA Service Agreements
covering the period May 29, 1998 through June 30, 1998 and electric service
revenues covering the period April 1, 1998 through May 28, 1998. For the
comparable 1997 period, revenues include electric service revenues covering the
period April 1, 1997 through June 30, 1997.
The decrease in electric revenues of approximately $162.1 million for the three
months ended June 30, 1998 when compared to the same period in 1997, was the
result of the LIPA Transaction which was consummated on May 28, 1998. Prior to
the LIPA Transaction, LILCO provided fully integrated electric services to Long
Islanders. Included within the rates charged to customers was a return on the
capital investment in the generation and transmission and distribution (T&D)
assets required to operate the system, as well as recovery of the electric
business costs to operate the system, including interest. Upon completion of the
LIPA Transaction, the nature of the Company's electric activities has changed
from that of an owner of an integrated electric system, with a significant
capital investment to a new role as an owner of only the generation capacity
system and as a manager of the T&D system. In its new role, the Company's
capital investment is significantly reduced and accordingly, its revenues under
the LIPA contracts reflect that reduction. Revenues after May 28, 1998 reflect
the LIPA Service Agreements which contribute marginally to earnings.
Revenues resulting from the LIPA Service Agreements include the following:
Revenues realized under the Management Services Agreement(MSA) were
approximately $38 million for the period ended June 30, 1998 and are derived
<PAGE>
from the performance of the day-to-day operation and maintenance of the T&D
system and the management of LIPA's interest in the Nine Mile Point Nuclear
Power Station, Unit 2 (NMP2).
Revenues under the Power Supply Agreement (PSA) were approximately $27 million
for the period ended June 30, 1998 and are derived from the sale of capacity
from MarketSpan's generating facilities.
Revenues under the Energy Management Agreement (EMA) were approximately $3
million resulting from the management of fuel supplies for LIPA to fuel
MarketSpan's generating facilities, energy purchases on a least-cost basis,
off-system sales of output from MarketSpan's generating facilities and other
power supplies either owned or under contract to LIPA.
See Utility Rate and Regulatory Matters - Electric Operations for a more
detailed description of each of these agreements.
Other Revenues
- --------------
Other revenues include revenues from KeySpan's energy management subsidiary,
earnings from the investment of the proceeds from the LIPA Transaction, and
equity investments of KeySpan covering the period May 29, 1998 through June 30 ,
1998. Pursuant to purchase accounting requirements, the comparative June 1997
quarter does not include KeySpan.
Operating Expenses
- ------------------
For the three months ended June 30, 1998, purchased gas costs reflect the
seasonal nature of domestic heating consumption. Further, such costs reflect
activity of Brooklyn Union for the period May 29, 1998 through June 30, 1998.
For the three months ended June 30, 1998, electric fuel expense decreased
primarily as a result of the LIPA Transaction. In accordance with the terms of
the EMA, on May 29, 1998, LIPA began paying for the fuel and purchased power
necessary to provide for electric system requirements.
Other operating expenses reflect the effects of the business combination and the
LIPA Transaction. These expenses have increased this quarter as compared to last
year due to the addition of KeySpan operations and one time charges associated
with the LIPA Transaction. Federal income taxes reflect the benefit of certain
tax deductions taken prior to the LIPA Transaction and are related primarily to
the funding of other post employment benefits.
Other Income and Deductions
- ---------------------------
Transaction related expenses are primarily non-recurring charges associated with
the LIPA Transaction. Specifically these charges relate to severance payments to
certain former officers of LILCO, amounting to approximately $22.5 million, and
LIPA Transaction costs and certain payments made to LIPA upon the closing of the
transaction amounting to approximately $41.2 million. Other deductions primarily
<PAGE>
reflect a charge to earnings to reflect an updated present value of the
remaining payments under the Class Settlement.
Rate Moderation Component
- -------------------------
Prior to the LIPA Transaction, the Rate Moderation Component (RMC), included
within the electric regulatory amortizations, represented the difference between
the Company's revenue requirements under conventional ratemaking and the
revenues provided by its electric rate structure. The RMC was adjusted for the
operation of the Company's Fuel Moderation Component (FMC) mechanism and the
difference between the Company's share of actual operating costs at NMP2 and
amounts provided for in electric rates.
In April 1998, the PSC authorized a revision to the Company's method of
recording its monthly RMC amortization. Prior to this revision, the amortization
of the annual level of RMC was recorded monthly on a straight-line, levelized
basis over the Company's rate year, which runs from December 1 to November 30.
However, electric revenue requirements fluctuated from month to month based upon
consumption, which was greatly affected by the effects of weather. Under this
revised method, which was effective for the period December 1, 1997 through May
28, 1998, the monthly amortization of the annual RMC level varied based upon
each month's forecasted revenue requirements, which more closely aligned such
amortization with the Company's cost of service. As a result of this change, for
the period April 1, 1998 through May 28, 1998, the Company recorded
approximately $51.5 million more of non-cash RMC credits to income (representing
accretion of the RMC balance), or $33.5 million net of tax, representing $.25
per share more than it would have under the previous method.
Dividends and Financial Condition (Liquidity)
- ---------------------------------------------
On June 26, 1998, the Board of Directors declared a common stock dividend of 30
cents per share payable on August 1, 1998 to shareholders of record on July 15,
1998. This dividend is a prorated portion for approximately two months of a
dividend of $1.78 per share, annually. Hence, common stock dividend payments for
August 1, 1998 amount to $47.1 million equivalent to an annual requirement of
$282.5 million. Based on recent market prices, the dividend yield on the
Company's common stock approximates 6.5%. The Company is currently paying the
dividend at an annual rate of $1.78 per common share. The dividend rate will be
reviewed annually by the Board of Directors and is scheduled for review sometime
within the quarter that will end June 30, 1999. However, the amount and timing
of all dividend payments is subject to the discretion of the Board of Directors
and will depend upon business conditions, results of operations , financial
<PAGE>
conditions and other factors. In addition, on August 4, 1998, the Company
announced that the Board of Directors declared a quarterly dividend on the
Company's 7.95% Preferred Stock Series AA of $.49 per share payable on September
1, 1998 to shareholders of record on August 19, 1998. This dividend declaration
amounts to approximately $7.2 million. The annual dividend rate is $1.98 per
share and amounts to approximately $28.9 million.
At June 30, 1998, various MarketSpan subsidiaries had available lines of credit.
KeySpan's available bank lines of credit, which secure the issuance of
commercial paper, amounted to $100 million. The lines of credit are available to
KeySpan and its principal subsidiary Brooklyn Union. These lines of credit were
increased to $150 million on July 1, 1998. In addition, THEC had an available
line of credit of $135 million. In March 1998, THEC issued $100 million of
8.625% Senior Subordinate Notes due 2008. These notes are subordinate to
borrowings under THEC's line of credit.
Prior to the business combination, LILCO had available through October 1, 1998,
$250 million under its Revolving Credit Agreement (1989 RCA), of which $100
million was borrowed for interim financing. In addition, MarketSpan had a bridge
loan of $250 million to fund certain obligations for postretirement benefits
other than pensions. Upon the effectiveness of the LIPA Transaction, all
borrowings were repaid and the 1989 RCA was terminated.
As a result of the LIPA Transaction, the Company has a significant amount of
cash which it intends to use for, among other things, investment in energy
related businesses and repurchase of shares of its common stock. On August 3,
1998, the Company announced that the Board of Directors authorized the purchase
of up to 10 percent of the Company's outstanding common stock, or approximately
15 million shares, through open market purchases. Purchases are expected to
commence on August 17, 1998.
Pursuant to the PSC's order dated February 5, 1998 and April 14, 1998 approving
the business combination, Brooklyn Union's and MarketSpan Gas Corporation's
ability to pay dividends is conditioned upon maintenance of a utility capital
structure with debt not exceeding 55% and 58%, respectively, of total utility
capitalization. In addition, the level of dividends paid by both utilities may
not be increased from current levels if a 40 basis point penalty is incurred
under the customer service performance program.
<PAGE>
Utility Rate and Regulatory Matters
- -----------------------------------
Gas Operations
In 1997, Brooklyn Union and LILCO filed a joint petition with the PSC seeking
PSC approval, under section 70 of the New York Public Service Law, of the
combination by which KeySpan and LILCO each would become subsidiaries of a
newly-formed holding company MarketSpan (or if the transaction with LIPA was
also consummated KeySpan and certain other entities would become subsidiaries of
MarketSpan). (See Notes to the Condensed Consolidated Financial Statements, Note
2., "Sale of LILCO Assets, Acquisition of KeySpan, and Transfer of Assets and
Liabilities to MarketSpan".) In addition, the petition proposed $1.0 billion of
efficiency savings, excluding gas costs, attributable to operating synergies
that are expected to be realized over the 10 year period following the
combination, be allocated to ratepayers net of transaction costs. In December
1997, Brooklyn Union, LILCO, the Staff of the Department of Public Service and
six other parties entered into a Settlement Agreement (Stipulation) resolving
all issues among them in the proceeding and, by order dated February 5, 1998 and
April 14, 1998 the PSC approved the Stipulation.
Under the Stipulation, effective May 29, 1998, Brooklyn Union's base rates to
core customers were reduced by $23.866 million annually. In addition, Brooklyn
Union is now subject to an earnings sharing provision pursuant to which it will
be required to credit core customers with 60% of any utility earnings up to 100
basis points above certain threshold returns on equity levels over the term of
the rate plan (other than any earnings associated with discrete incentives) and
50% of any utility earnings in excess of 100 basis points above such threshold
levels. The threshold levels are 13.75% in rate year 1998, 13.50% in rate years
1999 through 2001, and 13.25% in rate year 2002. A safety and reliability
incentive mechanism was implemented on the consummation date of the combination,
with a maximum 12 basis point pretax return on equity penalty if Brooklyn Union
fails to achieve certain safety and reliability performance standards. With the
exception of the simplification of the customer service performance standards,
the Brooklyn Union rate plan approved by the PSC in September 1996 remains
unchanged. Any gas cost savings allocable to Brooklyn Union resulting from the
combination will be reflected in rates to utility customers as those savings are
realized.
The Stipulation also eliminated and relaxed many restrictions contained in the
September 1996 settlement agreement, by which the PSC approved Brooklyn Union's
reorganization into a holding company form, in such areas as affiliate
transactions; use of the name and reputation of Brooklyn Union by unregulated
affiliates; common officers of the holding company, the utility subsidiaries and
unregulated subsidiaries; dividend payment restrictions; and the composition of
<PAGE>
the Board of Directors of Brooklyn Union.
Also under the Stipulation, a three-year gas rate plan was implemented for
MarketSpan Gas Corporation which provides for, among other things, an estimated
reduction in customers' bills of approximately 3.9%, including fuel savings,
through at least November 30, 2000. This gas rate reduction will occur in three
phases as follows: (i) a reduction in base rates of approximately $12.2 million
to reflect decreases in MarketSpan Gas Corporation's gas cost of service
effective on February 5, 1998; (ii) a base rate reduction of approximately $6.2
million associated with non-fuel savings related to the combination effective on
May 28, 1998 and (iii) an expected reduction in the Gas Adjustment Clause (GAC)
to reflect annual fuel savings associated with the transaction estimated at
approximately $4.0 million, the actual level of which will be reflected in rates
if and when they actually materialize. MarketSpan Gas Corporation is subject to
an earnings sharing provision pursuant to which it is required to credit to
core/firm customers 60% of any utility earnings in any rate year up to 100 basis
points above 11.10% and 50% of any utility earnings in excess of 12.10%. Both a
customer service and a safety and reliability incentive performance program was
implemented effective December 1, 1997 with maximum pre-tax return on equity
penalties of 40 and 12 basis points, respectively, if MarketSpan Gas Corporation
fails to achieve certain performance standards in these areas.
Electric Operations
MarketSpan, through its subsidiaries, provides services to LIPA under the
following agreements:
MANAGEMENT SERVICES AGREEMENT (MSA) MarketSpan Electric Services LLC ("MES"),
will manage the day-to-day operations, maintenance and capital improvements of
the T&D system. LIPA will exercise control over the performance of the T&D
system through specific standards for performance and incentives to MarketSpan.
In exchange for providing the services, MES will earn a $10 million management
fee and will be operating under a contract which provides certain incentives and
imposes certain penalties based upon its performance. Annual service incentives,
excluding cost related incentives and penalties under the MSA can reach $7
million if certain targets are met or exceeded. MES can earn certain incentives
for cost reductions associated with its fixed fee to LIPA. These incentives
provide for MES to earn up to 100% of its cost reductions on the first $5
million in reductions and earn up to 50% of each additional cost reductions up
to 15% of the total cost budget, thereafter all savings accrue to LIPA. With
respect to cost overruns, MES absorbs the first $15 million of overruns, with a
sharing of overruns above $15 million. There are certain limitations on the
amount of cost sharing of
<PAGE>
overruns.
POWER SUPPLY AGREEMENT (PSA)
MarketSpan Generation LLC will sell to LIPA all of the capacity and to the
extent requested, energy from the Company's existing oil and gas-fired
generating plants. Sales of capacity and energy are made with rates approved by
the Federal Energy Regulatory Commission(FERC). Initial rates that were accepted
by FERC were implemented on May 29, 1998. The rates may be modified in the
future in accordance with the terms of the PSA for (i) agreed upon labor and
expense indices applied to the base year (ii) a return of and on net capital
additions required for the generating facilities and (iii) reasonably incurred
expenses that are outside the control of MarketSpan Generation LLC. The PSA
provides incentives and penalties that can total $4 million annually for the
maintenance of the output capability of the generating facilities.
ENERGY MANAGEMENT AGREEMENT (EMA) The EMA provides for MarketSpan Trading
Services LLC ("MTS") to procure and manage fuel supplies for LIPA to fuel the
generating facilities under contract to it and perform off-system capacity and
energy purchases on a least-cost basis to meet LIPA's needs. In exchange for
these services MTS earns an annual fee of $1.5 million. In addition, MTS will
make off-system sales of output from the generating facilities and other power
supplies either owned or under contract to LIPA. LIPA is entitled to two-thirds
of the profit from any off-system energy sales arranged by the MarketSpan
Trading Services LLC. The EMA provides incentives and penalties that can total
$7 million annually for performance related to fuel purchases and off-system
power purchases.
Environmental Matters
- ---------------------
The Company is subject to various Federal, State and local laws and regulatory
programs related to the environment. These environmental laws govern both the
normal, ongoing operations of the Company as well as the cleanup of historically
contaminated properties. Ongoing environmental compliance activities, which
historically have not been material, are integrated with the Company's regular
operation and maintenance activities. The Company is currently reviewing the
environmental liabilities of its subsidiaries. As of June 30, 1998 the Company
had an accrued liability of approximately $103 million representing the
previously estimated minimum costs associated with investigation and remediation
at former manufactured gas plant sites. (See Notes to the Condensed Consolidated
Financial Statements, Note 4., "Regulatory Assets".)
<PAGE>
Computer Software, Year 2000 Issue
- ----------------------------------
The Company has evaluated the extent to which modifications to its computer
software and database will be necessary to accommodate the Year 2000. The
Company's computer systems are generally based on two digits and will require
some additional programming to recognize the start of the new millennium. In
1996, the Emerging Issues Task Force of the Financial Accounting Standards Board
reached a consensus, EITF Issue No. 96-14, that internal and external costs
specifically associated with modifying internal-use computer software for the
Year 2000 should be charged to expense as incurred.
A corporate-wide program has been established to review all software, hardware
and associated compliance plans. The readiness of suppliers and vendor systems
is also under review. At this time, no estimate can be made of the effect, if
any, of Year 2000 problems on supplies and service providers. Contingency and
business continuation plans are being prepared and will be reviewed
periodically.
The Company expects to spend approximately $16.3 million to address the Year
2000 issue. As of June 30, 1998, $7.1 million has been expended in investigating
and modifying software. This effort is scheduled to continue into 1999 with
completion expected at the end of June 30, 1999.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed on time, the Year 2000 Issue
could have a material adverse impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
Risk Management
- ---------------
The Company's utility and gas exploration and production subsidiaries employ
derivative financial instruments, such as natural gas and oil futures, options
and swaps, for the purpose of hedging exposure to commodity price risk. The
value at risk of the related positions as measured by the maximum adverse price
movement in a single day is not material.
<PAGE>
The Company's subsidiaries are exposed to credit risk in the event of
nonperformance by counterparties to derivative contracts, as well as
nonperformance by the counterparties of the transactions against which they are
hedged. The Company believes that the credit risk related to the futures,
options and swap instruments is no greater than that associated with the primary
commodity contracts which they hedge, as the instrument contracts are with major
investment grade financial institutions, and that elimination of the price risk
lowers the Company's overall business risk.
New Financial Accounting Standards
- ----------------------------------
The Financial Accounting Standards Board has recently issued the following
accounting standards: Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128); Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130); Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" (SFAS No. 131); Statement of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits(SFAS No.132)";and Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No.133).
The Company has adopted SFAS No. 128 and SFAS No. 130. As computed in
accordance with the requirements of SFAS No. 128 there is no difference
between basic and diluted earnings per share amounts. Further, a separate
line item has been included in the Balance Sheet for disclosure of
comprehensive income as per the requirements of SFAS No. 130. The Company
will adopt SFAS No. 131 and SFAS No. 132 for its current year end reporting.
The Company will adopt SFAS No. 133 in fiscal year 2000. The Company does
not expect any material effect from the adoption of these statements.
<PAGE>
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings
- -------------------------
Subsequent to the closing of the transactions with LIPA and KeySpan on May 28,
1998, former shareholders of LILCO commenced 13 class action lawsuits against
one or more of LILCO, each of the former officers and directors of LILCO and
MarketSpan. The suits generally allege that in connection with certain payments
LILCO had determined were payable in connection with the LIPA and KeySpan
transaction to LILCO's chairman, and to former officers of LILCO (the
"Payments") (1) the named defendants breached their fiduciary duty owed to LILCO
and KeySpan former and/or current MarketSpan shareholders as a result of the
Payments (2) the former directors and officers of LILCO intended to defraud such
shareholders by means of manipulative, deceptive and wrongful conduct, including
materially inaccurate and incomplete news reports and filings with the
Securities and Exchange Commission; and (3) the former officers of LILCO derived
an improper economic benefit as a result of their breach of fiduciary duty.
In addition, three MarketSpan shareholder derivative actions have been commenced
pursuant to which such shareholders seek the return of Payments or damages
resulting from among other things, an alleged breach of fiduciary duty on the
part of the former LILCO officers and directors.
A class action lawsuit has also been filed by the County of Suffolk on behalf of
Suffolk County ratepayers against LILCO's former officers and/or directors. The
County of Suffolk alleges that the Payments were improper, and seeks to recover
the Payments for the benefit of ratepayers.
Finally, two class action securities suits were filed alleging that certain
officers and directors of LILCO violated the federal securities laws by failing
to properly disclose that the transactions with LIPA and KeySpan would trigger
the Payments.
MarketSpan believes the allegations in the suits are entirely without merit, and
is determined to defend the actions vigorously. Under the terms of the LIPA
Agreement, MarketSpan has assumed all indemnification obligations LILCO may have
to its former officers and directors and has agreed to indemnify LILCO for
certain liabilities relating to LILCO's activities prior to the closing of the
transaction with LIPA, including the activity relating to the Payments.
In addition, certain related proceedings have been commenced relating to the
Payments and disclosure made by LILCO with respect thereto. These proceedings
include investigations by the New York State Attorney General, the New York
State Public Service Commission and LIPA, hearings conducted by a committee of
the New York State assembly, and an informal, non-public inquiry by the SEC. At
this time the Company is unable to determine the outcome of these proceedings.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(3) Certificate of Incorporation filed April 16, 1998, Amendment to
Certification of Incorporation filed May 26, 1998 and Amendment
to Certificate of Incorporation filed June 1, 1998.
(10) Retirement Agreement between the Company and William J.
Catacosinos dated July 31, 1998.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
On June 12, 1998 the Company filed a report on Form 8-K providing disclosure
applicable to: the transaction between Long Island Lighting Company and Long
Island Power Authority; the formation of MarketSpan Corporation; the merger
of KeySpan Energy Corporation with and into a subsidiary of MarketSpan
Corporation and the commencement of lawsuits against one or more of LILCO,
each of the former officers and directors of LILCO and MarketSpan. The report
on Form 8-K also contained pro forma financial information as of and for the
twelve months ended March 31, 1998.
On August 5, 1998 the Company filed a report on Form 8-K providing disclosure
applicable to: the resignation of Dr. William J. Catacosinos as Chairman and
Chief Executive Officer and as a director; the Board of Directors
authorization to purchase up to 10% of the Company's outstanding common stock
or approximately 15 million shares, through open market purchases; and the
decision of Company's subsidiary, KeySpan Energy Development Corporation, to
enter into a joint venture with Duke Energy Corporation and the Williams
Companies in developing the Cross Bay(sm) pipeline to transport gas from
existing interstate pipelines in New Jersey to New York City and Long Island.
<PAGE>
MARKETSPAN CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
MARKETSPAN CORPORATION
(Registrant)
Date August 13, 1998 /s/ Craig G. Matthews
-------------------------------
Craig G. Matthews
Executive Vice President and
Chief Financial Officer
Date August 13, 1998 /s/ Joseph E. Fontana
------------------------------
Joseph E. Fontana
Vice President, Controller and
Chief Accounting Officer
EXHIBIT 3.(I)
CERTIFICATE OF INCORPORATION
OF
BL HOLDING CORP.
UNDER SECTION 402 OF THE
BUSINESS CORPORATION LAW OF THE STATE OF NEW YORK
I, Thomas D. Balliett, being a natural person over the age of 18
years, for the purpose of forming a corporation pursuant to Section 402 of the
New York Business Corporation Law (the "NYBCL"), do hereby certify as follows:
ARTICLE I
NAME
The name of the corporation (the "Corporation") is "BL Holding Corp."
ARTICLE II
PURPOSE
The purposes for which the Corporation is formed are to engage in
any lawful act or activity for which corporations may be organized under the
NYBCL, but the Corporation is not formed to engage in any act or activity
requiring the consent or approval of any state official, department, board,
agency or other body without such consent or approval first being obtained.
ARTICLE III
OFFICE
The office of the Corporation is to be located in the County of
Nassau, State of New York.
ARTICLE IV
CAPITAL STOCK
SECTION 1. The aggregate number of shares which the Corporation
shall have authority to issue shall be 450,000,000 shares of Common Stock, par
value $.01 per share and 100,000,000 shares of Preferred Stock, par value $.01
per share.
- 1 -
KL2:249558.1
<PAGE>
SECTION 2. The amount of capital stock of the Corporation shall be
$5,500,000.
SECTION 3. Shares of Preferred Stock may be issued from time to time
in one or more series as may be determined from time to time by the Board of
Directors. Except in respect of the particulars to be fixed by the Board of
Directors as provided below, all shares of Preferred Stock shall be of equal
rank. All shares in any one series of Preferred Stock shall be alike in every
particular except that shares of any one series issued at different times may
differ as to the dates from which dividends thereon shall be cumulative. The
voting rights, if any, of each such series and the preferences and relative,
participating, optional and other special rights of each series and the
qualifications, limitations and restrictions thereof, if any, may differ from
those of any and all other series. The Board of Directors shall have the
authority to fix by resolution duly adopted prior to the issuance of any shares
of a particular series of Preferred Stock designated by the Board of Directors,
the voting rights, if any, of the holders of shares of such series and the
designations, preferences and relative, participating, optional and other
special rights of each series and the qualifications, limitations and
restrictions thereof (the "Preferred Stock Designation").
Without limiting the generality of the foregoing authority of the Board of
Directors, the Board of Directors from time to time may:
a. establish and designate a series of Preferred Stock, which may be
distinguished by number, letter or title from other Preferred Stock of the
Corporation or any series thereof;
b. fix and thereafter increase or decrease (but not below the number of
shares thereof then outstanding) the number of shares that shall constitute
such series;
c. provide for dividends on shares of such series and if provision is made
for dividends, determine the dividend rate and the dates on which
dividends, if declared, shall be payable, whether the dividends shall be
cumulative and, if cumulative, for what date or dates dividends shall
accrue, and the other conditions, if any, including rights of priority, if
any, upon which the dividends shall be paid;
d. provide as to whether the shares of such series shall be redeemable,
and if redeemable, the terms, limitations and restrictions with respect to
such redemption, including without limitation, the manner of selecting
shares for redemption if less than all shares are to be redeemed, the time
or times and the price or prices at which the shares of such series shall
be subject to redemption, in whole or in part, and the amount, if any, in
addition to any accrued dividends thereon which the holders of shares of
any series shall be entitled to receive upon the redemption thereof, which
amount may vary at different redemption dates and may be different with
respect to shares redeemed through the operation of any purchase,
retirement or sinking fund and with respect to shares otherwise redeemed;
- 2 -
KL2:249558.1
<PAGE>
e. fix the amount, in addition to any accrued dividends thereon, which the
holders of shares of such series shall be entitled to receive upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, which amount may vary at different dates and may vary
depending on whether such liquidation, dissolution or winding up is
voluntary or involuntary, and to determine any other rights, if any, to
which holders of the shares of such series shall be entitled in the event
of any liquidation, dissolution or winding up of the Corporation;
f. establish whether the shares of such series shall be subject to the
operation of a purchase, retirement or sinking fund and if so, the terms,
limitations and restrictions with respect thereto, including without
limitation, whether such purchase, retirement or sinking fund shall be
cumulative or noncumulative, the extent to and the manner in which such
funds shall be applied to the purchase, retirement or redemption of the
shares of such series for retirement or to other corporate purposes and
the terms and provisions relative to the operation thereof;
g. determine the extent of the voting rights, if any, of the shares of such
series and determine whether the shares of such series having voting rights
shall have multiple votes per share;
h. provide whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes of capital
stock of the Corporation, including Common Stock, Preferred Stock or of
any series thereof, and if convertible or exchangeable, establish the
conversion or exchange price or rate, the adjustments thereof, and the
other terms and conditions, if any, on which such shares shall be
convertible or exchangeable; and
i. provide for any other preferences, any relative participating,
optional or other special rights, any qualifications, limitations or
restrictions thereof, or any other term or provision of shares of such
series as the Board of Directors may deem appropriate or desirable.
Shares of Preferred Stock may be issued by the Corporation for such
consideration as is determined by the Board of Directors.
SECTION 4. The Common Stock shall be subject to the express terms of
the Preferred Stock and any series thereof. The holders of shares of Common
Stock shall be entitled to one vote for each such share upon all proposals
presented to the shareholders on which the holders of Common Stock are entitled
to vote. Except as otherwise provided by law or by the resolution or resolutions
adopted by the Board of Directors designating the rights, powers and preferences
of any series of Preferred Stock, the Common Stock shall have the exclusive
right to vote for the election of Directors and for all other purposes, and
holders of Preferred Stock shall
- 3 -
KL2:249558.1
<PAGE>
not be entitled to receive notice of any meeting of shareholders at which they
are not entitled to vote. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to any Preferred Stock Designation.
The Corporation shall be entitled to treat the person in whose name
any share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the Corporation shall
have notice thereof, except as expressly provided by applicable law.
ARTICLE V
SHAREHOLDER ACTION
Any action required or permitted to be taken by the shareholders of
the Corporation must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing by such holders.
Except as otherwise required by law and subject to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, special meetings of shareholders of the
Corporation for any purpose or purposes may be called only by the Board of
Directors pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the total number of Directors which the Corporation
would have if there were no vacancies (the "Whole Board") and any power of
shareholders to call a special meeting is specifically denied. No business other
than that stated in the notice shall be transacted at any special meeting.
ARTICLE VI
ELECTION OF DIRECTORS
Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of Directors of the Corporation need not be by
written ballot.
ARTICLE VII
BOARD OF DIRECTORS
SECTION 1. NUMBER, ELECTION AND TERMS. Except as otherwise fixed by
or pursuant to the provisions of Article IV hereof relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional Directors under
specified circumstances, the number of the Directors of the Corporation shall be
fixed from time to time exclusively pursuant to a resolution adopted by a
majority of the Whole Board. No decrease in the number of Directors, however,
shall shorten the term of any incumbent Director. Directors shall be elected by
the shareholders of the Corporation
- 4 -
KL2:249558.1
<PAGE>
at their annual meeting except as herein otherwise provided for newly created
directorships and vacancies, to serve for one year or until their successors are
elected or chosen and qualified.
SECTION 2. SHAREHOLDER NOMINATION OF DIRECTOR CANDIDATES;
SHAREHOLDER PROPOSAL OF BUSINESS. Advance notice of shareholder nominations for
the election of Directors and of the proposal of business by shareholders shall
be given in the manner provided in the ByLaws of the Corporation, as amended and
in effect from time to time.
SECTION 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as
otherwise provided for or fixed by or pursuant to the provisions of Article IV
hereof relating to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect Directors under specified circumstances, newly created directorships
resulting from any increase in the number of Directors and any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall be filled by the affirmative vote of a majority of the
remaining Directors then in office, even though less than a quorum of the Board
of Directors, and not by the shareholders. Any Director elected in accordance
with the preceding sentence shall hold office for the remainder of such
unexpired term or until such Director's successor shall have been duly elected
and qualified. No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of any incumbent Director.
SECTION 4. REMOVAL. Subject to the rights of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect Directors under specified circumstances, any Director may
be removed from office only for cause by the affirmative vote of the holders of
at least a majority of the voting power of all shares of the Corporation
entitled to vote generally in the election of Directors (the "Voting Stock")
then outstanding, voting together as a single class.
SECTION 5. AMENDMENT, REPEAL, ETC. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class, shall be required to alter,
amend, adopt any provision inconsistent with or repeal this Article VII.
ARTICLE VIII
BY-LAWS
The By-Laws may be altered or repealed and new By-Laws may be
adopted (1) at any annual or special meeting of shareholders, by the affirmative
vote of the holders of a majority of the voting power of the stock issued and
outstanding and entitled to vote thereat, provided, however, that any proposed
alteration or repeal of, or the adoption of any By-Law inconsistent with,
Section 2.2, 2.7 or 2.10 of Article II of the By-Laws or with Section 3.9 or
3.11 of Article III of the By-Laws, by the shareholders shall require the
affirmative vote of the holders of at least
- 5 -
KL2:249558.1
<PAGE>
80% of the voting power of all Voting Stock then outstanding, voting together as
a single class; and provided, further, however, that in the case of any such
shareholder action at a special meeting of shareholders, notice of the proposed
alteration, repeal or adoption of the new By-Law or By-Laws must be contained in
the notice of such special meeting, or (2) by the affirmative vote of a majority
of the Whole Board; provided that any proposed alteration or repeal of, or the
adoption of any By-Law inconsistent with, Section 4.9 or 4.11 of the Article IV
of the By-Laws by the Board of Directors shall require the vote of two-thirds of
the Whole Board.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, and any other provisions authorized by the laws of the State of
New York at the time in force may be added or inserted, in the manner now or
hereafter prescribed by law; and, except as set forth in Articles XIV and XV,
all rights, preferences and privileges of whatsoever nature conferred upon
shareholders, Directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the Voting Stock then outstanding, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with or repeal Article V, VII, VIII or this sentence.
ARTICLE X
AGENT FOR SERVICE OF PROCESS
The Secretary of State of the State of New York is designated as
agent of the Corporation upon whom process against the Corporation may be
served. The post office address to which the Secretary of State shall mail a
copy of any process against the Corporation served upon him is: c/o C T
Corporation System, 1633 Broadway, New York, New York 10019.
ARTICLE XI
REGISTERED AGENT
The name and address of the registered agent which is to be the
agent of the corporation upon whom process against it may be served, is CT
Corporation System, 1633 Broadway, New York, New York 10019.
- 6 -
KL2:249558.1
<PAGE>
ARTICLE XII
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE XIII
NO PREEMPTIVE RIGHTS
The holders of equity shares and the holders of voting shares (as
each term is defined in Section 622 of the NYBCL) of the Corporation shall not
have any preemptive rights.
ARTICLE XIV
LIMITED LIABILITY; INDEMNIFICATION
SECTION 1. Each person who was or is made a party or is threatened
to be made a party to or is involved in any action, suit or proceeding, or
appeal thereof, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a Director or officer
of the Corporation or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a Director, officer, employee or agent or in any
other capacity while serving as a Director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the NYBCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including, but not limited to, all attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a Director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except
as provided in Section 2 of this Article XIV, the Corporation shall indemnify
any such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section 1 shall be a contract right and shall
include the right to be paid by the Corporation the expenses (including, without
limitation, attorneys' fees) incurred in defending any such proceeding in
advance of its final disposition; PROVIDED, HOWEVER, that, if the NYBCL
requires, the payment of such expenses incurred by a Director or officer in his
or her capacity as a Director or officer (and not in any other capacity in which
service was or is rendered by such person while a Director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery
- 7 -
KL2:249558.1
<PAGE>
to the Corporation of an undertaking, by or on behalf of such Director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that such Director or officer is not entitled to be indemnified under this
Article XIV or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of Directors and
officers, or on such other terms and conditions as the Board of Directors may
deem necessary or desirable.
SECTION 2. If a claim under Section 1 of this Article XIV is not
paid in full by the Corporation within thirty days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense (including, without limitation, attorneys' fees) of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the NYBCL for the Corporation to in
demnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, or any part thereof, independent legal
counsel, or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the NYBCL, nor an actual determination by the Corporation
(including its Board of Directors, or any part thereof, independent legal
counsel, or its shareholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
SECTION 3. The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article XIV shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Law, agreement, vote of shareholders or disinterested
Directors or otherwise.
SECTION 4. The Corporation may maintain insurance, at its expense,
to protect itself and any Director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, to the fullest extent allowed
by law, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the NYBCL.
ARTICLE XV DIRECTOR LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or
- 8 -
KL2:249558.1
<PAGE>
its shareholders for damages for any breach of duty in such capacity except that
the liability of a Director shall not be so limited if (1) a judgment or other
final adjudication adverse to him estab lishes that his acts or omissions were
in bad faith or involved intentional misconduct or a knowing violation of law or
that he personally gained in fact a financial profit or other advantage to which
he was not legally entitled or that his acts violated Section 719 of the NYBCL,
or (2) his acts or omissions occurred prior to the adoption of this provision.
No amendment to or repeal of this Article XV shall apply to or have any effect
on the liability or alleged liability of any Director of the Corporation for or
with respect to any acts or omissions of such Director occurring prior to such
amendment or repeal. If the NYBCL is amended hereafter to expand or limit the
liability of a director, then the liability of a Director of the Corporation
shall be expanded to the extent required or limited to the extent permitted by
the NYBCL, as so amended.
IN WITNESS WHEREOF, I have executed this Certificate of
Incorporation this 15th day of April, 1998.
/S/ THOMAS D. BALLIETT
----------------------
Thomas D. Balliett, Esq.
Incorporator
919 Third Avenue
New York, NY 10022
- 9 -
KL2:249558.1
<PAGE>
ACKNOWLEDGEMENT
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
On this 15 day of April, 1998, personally came before me Thomas D.
Balliett, a person known to me to be the person who executed the foregoing
Certificate of Incorporation, and he acknowledged that he signed said
Certificate of Incorporation and acknowledged the same as his free act and deed.
Given under my hand and seal the day and year first above written.
/s/ Judi Wasserman
------------------
Notary Public
[seal]
- 10 -
KL2:249558.1
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
BL HOLDING CORP.
Under Section 805 of the Business Corporation Law
of the State of New York
-----------
BL Holding Corp., a corporation organized and existing under the laws of
the State of New York (the "Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is BL Holding Corp.
SECOND: The certificate of incorporation of the Corporation was filed
by the New York Department of State on April 16, 1998.
THIRD: The certificate of incorporation is hereby amended to change
the name of the Corporation and to change the par value of the Preferred Stock
of the Corporation, each as authorized by the New York Business Corporation Law,
to wit:
Article I relating to the name of the Corporation is amended to read
in its entirety as follows:
"ARTICLE I
NAME
"The name of the corporation shall be: MarketSpan Corporation."
<PAGE>
Sections 1 and 2 of Article IV relating to the capital stock of the
Corporation are amended to read in their entirety as follows:
"SECTION 1. The aggregate number of shares which the
Corporation shall have the authority to issue shall be (i)
450,000,000 shares of Common Stock, par value $.01 per share, (ii)
16,000,000 shares of Preferred Stock, par value $25 per share, (iii)
1,000,000 shares of Preferred Stock, par value $100 per share and
(iv) 83,000,000 shares of Preferred Stock, par value $.01 per share.
SECTION 2. The amount of capital stock of the Corporation
shall be $505,330,000."
FOURTH: The foregoing amendments to the certificate of incorporation
were duly adopted by a Unanimous Written Consent of the Board of Directors of
the Corporation and by a Unanimous Written Consent of the shareholders of the
Corporation, in accordance with Section 803 of the New York Business Corporation
Law.
<PAGE>
IN WITNESS WHEREOF, the undersigned officers of the Corporation have
signed this Certificate of Amendment and each affirms that the statements made
herein are true under the penalties of perjury.
Dated: May 21, 1998
BL HOLDING CORP.
By: /s/ William J. Catacosinos
------------------------------
Name: Dr. William J. Catacosinos
Title: Chief Executive Officer
By: /s/ Kathleen Marion
-----------------------
Name: Kathleen Marion
Title: Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
MARKETSPAN CORPORATION
Under Section 805 of the Business Corporation Law
of the State of New York
-----------
MarketSpan Corporation, a corporation organized and existing under the
laws of the State of New York (the "Corporation"), does hereby certify as
follows:
FIRST: The present name of the Corporation is MarketSpan Corporation. The
Corporation was formed under the name "BL Holding Corp."
SECOND: The Certificate of Incorporation of the Corporation was filed with
the New York Department of State on April 16, 1998. A Certificate of Amendment
of the Certificate of Incorporation was filed with the New York Department of
State on May 26, 1998.
THIRD: The amendment of the Certificate of Incorporation of the Corporation
effected by this Certificate of Amendment is as follows:
To add provisions stating the number, designation, relative rights,
preferences, and limitations of the shares of the Series A ESOP
Convertible Preferred Stock, Series AA Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, as fixed by the Board of Directors of
the Corporation.
FOURTH: To accomplish the foregoing amendment, Article IV of the
Certificate of Incorporation of the Corporation, relating to the capital stock
of the Corporation is hereby amended as follows:
A Section 5 shall be inserted at the end of such Article IV, and such
Section 5 shall read in its entirety as follows:
<PAGE>
"SECTION 5. The designations, and relative, distribution, dividend, liquidation
and other rights, preferences and limitations of each series of Preferred Stock
are as follows:
PART A. SERIES A ESOP CONVERTIBLE PREFERRED STOCK
1. Designation and Issuance
(A) One hundred thousand (100,000) shares of Preferred Stock are hereby
designated as Series A ESOP Convertible Preferred Stock (hereinafter referred to
as "Series A Preferred Stock"). Such number of shares may be increased or
decreased by resolution of the Board of Directors, but no such decrease shall
reduce the number of shares of Series A Preferred Stock to a number less than
that of the shares then outstanding plus the number of shares issuable upon
exercise of any rights, options or warrants or upon conversion of outstanding
securities issued by the Corporation. All shares of Series A Preferred Stock
redeemed or purchased by the Corporation shall be retired and shall be restored
to the status of authorized but unissued shares of Preferred Stock.
(B) Shares of Series A Preferred Stock shall be issued only to a trustee
or trustees acting on behalf of an employee benefit plan of the Corporation or
any subsidiary or affiliated entity (a "Plan"). In the event of any sale,
transfer or other disposition (hereinafter for purposes of this Part A, a
"transfer") of shares of Series A Preferred Stock to any person other than any
trustee or trustees of any Plan, the shares of Series A Preferred Stock so
transferred, upon such transfer and without any further action by the
Corporation or the holder, shall be automatically converted into shares of
Common Stock at the Conversion Price (as hereinafter defined) and on the terms
otherwise provided for the conversion of shares of Series A Preferred Stock into
shares of Common Stock pursuant to Subsection 5 of this Part A and no such
transferee shall have any of the voting powers, preferences and relative,
participating, optional or special rights ascribed to shares of Series A
Preferred Stock hereunder but, rather, only the powers and rights pertaining to
the Common Stock into which such shares of Series A Preferred Stock shall be so
converted. In the event of such a conversion, such transferee shall be treated
for all purposes as the record holder of the shares of Common Stock into which
the Series A Preferred Stock shall have been converted as of the date of such
conversion. Certificates representing shares of Series A Preferred Stock shall
be legended to reflect such restrictions on transfer. Notwithstanding the
foregoing provisions of this Subsection 1, shares of Series A Preferred Stock
(i) may be converted into shares of Common Stock as provided by Subsection 5 of
this Part A and the shares of Common Stock issued upon such conversion may be
transferred by the holder thereof as permitted by law and (ii) shall be
redeemable by the Corporation upon the terms and conditions provided by
Subsections 6, 7 and 8 of this Part A.
2. Dividends and Distributions
(A)(1) Subject to the provisions for adjustment hereinafter set forth in
this Part A, the holders of shares of Series A Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available therefor, cash dividends ("Regular
<PAGE>
Preferred Dividends") in an amount per share initially equal to $6.00 per share
per annum, subject to adjustment from time to time as hereinafter provided, and
no more, except as provided in paragraph (A)(2) of this Subsection 2 (such
amount, as adjusted from time to time, being hereinafter referred to, for
purposes of this Part A, as the "Regular Preferred Dividend Rate"), payable
semiannually in arrears, one-half on March 1, and one-half on September 1 of
each year (each a "Series A Dividend Payment Date") commencing on September 1,
1998, to holders of record at the start of business on such Series A Dividend
Payment Date. Regular Preferred Dividends shall begin to accrue on outstanding
shares of Series A Preferred Stock from the date of issuance of such shares of
Series A Preferred Stock. Regular Preferred Dividends shall accrue on a daily
basis, based on the Regular Preferred Dividend Rate in effect on such date,
whether or not the Corporation shall have earnings or surplus at the time,
computed on the basis of a 360-day year of 30-day months in case of any period
less than a full semiannual period. Accrued but unpaid Regular Preferred
Dividends shall cumulate as of the Series A Dividend Payment Date on which they
first become payable, but no interest shall accrue on accumulated but unpaid
Regular Preferred Dividends.
(2) In the event that for any period of six (6) months preceding any
Series A Dividend Payment Date the aggregate fair value (as determined by the
Board of Directors) of all dividends and other distributions declared per share
of Common Stock during such six month period multiplied by the number of shares
of Common Stock into which a share of Series A Preferred Stock was convertible
on the appropriate dividend payment date for the Common Stock shall exceed the
amount of the Regular Preferred Dividends accrued on a share of Series A
Preferred Stock during such six month period, the holders of shares of the
Series A Preferred Stock shall be entitled to receive, when and as declared by
the Board of Directors out of funds legally available therefore, cash dividends
(the "Supplemental Preferred Dividends") in an amount per share (with
appropriate adjustments to reflect any stock split or combination of shares or
other adjustment provided for in Subsection 9 of this Part A) equal to the
amount of such excess up to but not exceeding (x) the product of two percent
(2%) times the average of the Fair Market Values of the number of shares of
Common Stock into which a share of Series A Preferred Stock was convertible on
the day next preceding the ex-dividend date for each such dividend and the
distribution date for each such distribution on the Common Stock of the
Corporation minus (y) such amount of accrued Regular Preferred Dividends. The
calculation of each Supplemental Preferred Dividend shall be subject to
adjustment corresponding to the adjustments provided in Subsection 9 of this
Part A. Supplemental Preferred Dividends shall accrue and cumulate as of the
close of each relevant six month period and shall be payable on the Series A
Dividend Payment Date next following the close of any such six month period, but
no interest shall accrue on accumulated but unpaid Supplemental Preferred
Dividends and no Supplemental Preferred Dividends shall accrue in respect of any
period of less than six months.
(B)(1) No full dividends shall be declared or paid or set apart for
payment on any shares ranking, as to dividends, on a parity with or junior to
the Series A Preferred Stock, for any period unless full cumulative dividends
(which for all purposes of this resolution shall include Regular Preferred
Dividends and Supplemental Preferred Dividends) have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Series A Preferred Stock for all Series A
Dividend Payment Dates occurring on
<PAGE>
or prior to the date of payment of such full dividends. When dividends are not
paid in full, as aforesaid, upon the shares of Series A Preferred Stock and any
other shares ranking, as to dividends, on a parity with Series A Preferred
Stock, all dividends declared upon shares of Series A Preferred Stock shall be
declared pro rata so that the amount of dividends declared per share on Series A
Preferred Stock and such other parity shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the shares of
Series A Preferred Stock and such other parity shares bear to each other. Except
as otherwise provided herein, holders of shares of Series A Preferred Stock
shall not be entitled to any dividends, whether payable in cash, property or
shares, in excess of full cumulative dividends, as herein provided, on Series A
Preferred Stock.
(B)(2) So long as any shares of Series A Preferred Stock are outstanding,
no dividend (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other shares ranking junior to Series A Preferred Stock as to dividends and
upon liquidation and other than as provided in paragraph (B)(1) of this
Subsection 2) shall be declared or paid or set aside for payment or other
distribution declared or made upon the Common Stock or upon any other shares
ranking junior to or on a parity with Series A Preferred Stock as to dividends
or upon liquidation, nor shall any Common Stock or any other shares of the
Corporation ranking junior to or on a parity with Series A Preferred Stock as to
dividends or upon liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by the Corporation (except by conversion
into or exchange for shares of the Corporation ranking junior to Series A
Preferred Stock as to dividends and upon liquidation) unless, in each case, the
full cumulative dividends on all outstanding shares of Series A Preferred Stock
shall have been paid.
(3) Any dividend payment made on shares of Series A Preferred Stock shall
first be credited against the earliest accumulated but unpaid dividend due with
respect to shares of Series A Preferred Stock.
3. Liquidation Preference
(A) In the event of any dissolution or liquidation of the Corporation,
whether voluntary or involuntary, before any payment or distribution of the
assets of the Corporation (whether capital or surplus) shall be made to or set
apart for the holders of any series or class or classes of stock of the
corporation ranking junior to Series A Preferred Stock upon dissolution or
liquidation, the holders of Series A Preferred Stock shall be entitled to
receive the Liquidation Price (as hereinafter defined) per share in effect at
the time of dissolution or liquidation, plus an amount equal to all dividends
accrued (whether or not accumulated) and unpaid thereon to the date of final
distribution to such holders; but such holders shall not be entitled to any
further payments. The Liquidation Price per share which holders of Series A
Preferred Stock shall receive upon dissolution or liquidation shall be equal to
$100, subject to adjustment as hereinafter provided in this Part A. If, upon any
dissolution or liquidation of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of Series A Preferred Stock
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares ranking as to dissolution or
liquidation, on a parity with Series A Preferred Stock, then such
<PAGE>
assets, or the proceeds thereof, shall be distributed among the holders of
Series A Preferred Stock and any such other shares ratably in accordance with
the respective amounts which would be payable on such shares of Series A
Preferred Stock and any such other shares if all amounts payable thereon were
paid in full. For the purposes of this Subsection 3, a consolidation or merger
of the Corporation with one or more corporations shall not be deemed to be a
dissolution or liquidation, voluntary or involuntary.
(B) Subject to the rights of the holders of shares of any series or class
or classes of stock ranking on a parity with or prior to Series A Preferred
Stock, upon any dissolution or liquidation of the Corporation, after payment
shall have been made in full to the holders of Series A Preferred Stock as
provided in this Subsection 3, but not prior thereto, any other series or class
or classes of stock ranking junior to Series A Preferred Stock upon dissolution
or liquidation shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of Series A Preferred Stock shall not be
entitled to share therein.
4. Ranking and Voting of Shares
(A) Any shares of the Corporation shall be deemed to rank:
(1) on a parity with Series A Preferred Stock as to dividends or as to
distribution of assets upon dissolution or liquidation, whether or not the
dividend rates, dividend payment dates, or redemption or liquidation prices per
share thereof be different from those of Series A Preferred Stock, if the
holders of such class of stock and Series A Preferred Stock shall be entitled to
the receipt of dividends or of amounts distributable upon dissolution or
liquidation, as the case may be, in proportion to their respective dividend or
liquidation amounts, as the case may be, without preference or priority one over
the other, and
(2) junior to Series A Preferred Stock as to dividends or as to the
distribution of assets upon dissolution or liquidation, if such shares shall be
Common Stock or if the holders of Series A Preferred Stock shall be entitled to
receipt of dividends or of amounts distributable upon dissolution or
liquidation, as the case may be, in preference or priority to the holders of
such shares.
(B) The holders of shares of Series A Preferred Stock shall have the
following voting rights:
(1) Except as otherwise required by law or set forth herein, holders of
Series A Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for the taking of any corporate
action, including the issuance of any preferred stock now or hereafter
authorized; PROVIDED, HOWEVER, that the vote of at least 66-2/3% of the
outstanding shares of Series A Preferred Stock, voting separately as a series,
shall be necessary to approve any alteration, amendment or repeal of any
provision of the Certificate of Incorporation or any alteration, amendment or
repeal of any provision of the Certificate of Incorporation relating to the
<PAGE>
designation, preferences and rights of Series A Preferred Stock (including any
such alteration, amendment or repeal effected by any merger or consolidation in
which the Corporation is the surviving or resulting corporation), if such
amendment, alteration or repeal would alter or change the powers, preferences,
or special rights of the Series A Preferred Stock so as to affect them
adversely.
5. Conversion into Common Stock
(A) Holders of shares of Series A Preferred Stock shall be entitled, at
any time prior to the close of business on the date fixed for redemption of such
shares pursuant to Subsections 6, 7, or 8 of this Part A, to cause any or all of
such shares to be converted into shares of Common Stock. The number of shares of
Common Stock into which each share of the Series A Preferred Stock may be
converted shall be determined by dividing the Liquidation Price in effect at the
time of conversion by the Conversion Price (as hereinafter defined) in effect at
the time of conversion. The Conversion Price per share at which shares of Common
Stock shall be issuable upon conversion of any shares of Series A Preferred
Stock shall be 115% of the Current Market Price of the Common Stock on the first
day on which the Common Stock is publicly traded, subject to adjustment as
hereinafter provided in this Part A.
(B) Any holder of shares of Series A Preferred Stock desiring to convert
such shares into shares of Common Stock shall surrender, if certificated, the
certificate or certificates representing the shares of Series A Preferred Stock
being converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), or if
uncertificated, a duly executed stock power relating thereto, at the principal
executive office of the Corporation or the offices of the transfer agent for the
Series A Preferred Stock or such office or offices in the continental United
States of an agent for conversion as may from time to time be designated by
notice to the holders of the Series A Preferred Stock by the Corporation or the
transfer agent for the Series A Preferred Stock, accompanied by written notice
of conversion. Such notice of conversion shall specify (i) the number of shares
of Series A Preferred Stock to be converted and the name or names in which such
holder wishes the Common Stock and any shares of Series A Preferred Stock not to
be so converted to be issued, and (ii) the address to which such holder wishes
delivery to be made of a confirmation of such conversion, if uncertificated, or
any new certificates which may be issued upon such conversion if certificated.
(C) Upon surrender, if certificated, of a certificate representing a share
or shares of Series A Preferred Stock for conversion, or if uncertificated, of a
duly executed stock power relating thereto, the Corporation shall issue and send
by hand delivery (with receipt to be acknowledged) or by first class mail,
postage prepaid, to the holder thereof or to such holder's designee, at the
address designated by such holder, if certificated, a certificate or
certificates for, or if uncertificated, confirmation of, the number of shares of
Common Stock to which such holder shall be entitled upon conversion. In the
event that there shall have been surrendered shares of Series A Preferred Stock,
only part of which are to be converted, the Corporation shall issue and deliver
to such holder or such holder's designee, if certificated, a new certificate or
certificates representing the number of shares of Series A Preferred Stock which
shall not have been
<PAGE>
converted, or if uncertificated, confirmation of the number of shares of Series
A Preferred Stock which shall not have been converted.
(D) The issuance by the Corporation of shares of Common Stock upon a
conversion of shares of Series A Preferred Stock into shares of Common Stock
made at the option of the holder thereof shall be effective as of the earlier of
(i) the delivery to such holder or such holder's designee of the certificates
representing the shares of Common Stock issued upon conversion thereof if
certificated or confirmation if uncertificated or (ii) the commencement of
business on the second business day after the surrender of the certificate or
certificates, if certificated, or a duly executed stock power, if
uncertificated, for the shares of Series A Preferred Stock to be converted. On
and after the effective date of conversion, the person or persons entitled to
receive Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock, but no
allowance or adjustment shall be made in respect of dividends payable to holders
of Common Stock of record on any date prior to such effective date. The
Corporation shall not be obligated to pay any dividends which shall have been
declared and shall be payable to holders of shares of Series A Preferred Stock
on a Series A Dividend Payment Date if such Series A Dividend Payment Date for
such dividend shall be on or subsequent to the effective date of conversion of
such shares.
(E) The Corporation shall not be obligated to deliver to holders of Series
A Preferred Stock any fractional share or shares of Common Stock issuable upon
any conversion of such shares of Series A Preferred Stock, but in lieu thereof
may make a cash payment in respect thereof in any manner permitted by law.
(F) The Corporation shall at all times reserve and keep available out of
its authorized and unissued Common Stock or treasury Common Stock, solely for
issuance upon the conversion of shares of Series A Preferred Stock as herein
provided, such number of shares of Common Stock as shall from time to time be
issuable upon the conversion of all the shares of Series A Preferred Stock then
outstanding.
6. Redemption at the Option of the Corporation
(A) The Series A Preferred Stock shall be redeemable, in whole or in part,
at the option of the Corporation at any time after January 1, 2004, out of funds
legally available therefor, at the following redemption prices per share (or if
pursuant to paragraph (C) of this Subsection 6, at the redemption price set
forth therein):
<TABLE>
<CAPTION>
DURING THE TWELVE-MONTH
PERIOD BEGINNING PRICE PER SHARE
---------------- ---------------
<S> <C>
Jan. 1, 2004 102% of the Liquidation Price in effect on date fixed for redemption
Jan. 1, 2005 101% of the Liquidation Price in effect on date fixed for redemption
Jan. 1, 2006 100% of the Liquidation Price in effect on date fixed for redemption
</TABLE>
<PAGE>
and thereafter at 100% of the Liquidation Price per share in effect on the date
fixed for redemption, plus, in each case (including in the case of redemptions
pursuant to paragraph (C) or (D) of this Subsection 6), an amount equal to all
accrued (whether or not accumulated) and unpaid dividends thereon to the date
fixed for redemption. Payment of the redemption price shall be made by the
Corporation in cash or shares of Common Stock, or a combination thereof, as
permitted by paragraph (D) of this Subsection 6. From and after the date fixed
for redemption, dividends on shares of Series A Preferred Stock called for
redemption will cease to accrue, such shares will no longer be deemed to be
outstanding and all rights in respect of such shares of the Corporation shall
cease, except the right to receive the redemption price. If less than all of the
outstanding shares of Series A Preferred Stock are to be redeemed, the
Corporation shall either redeem a portion of the shares of each holder
determined pro rata based on the number of shares held by each holder or shall
select the shares to be redeemed by lot, as may be determined by the Board of
Directors of the Corporation.
(B) Unless otherwise required by law, notice of redemption will be sent to
the holders of Series A Preferred Stock at the address shown on the books of the
Corporation or any transfer agent for Series A Preferred Stock by first class
mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty
(60) days prior to the redemption date. Each notice shall state: (i) the
redemption date; (ii) the total number of shares of the Series A Preferred Stock
to be redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates, if certificated,
for such shares are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; (vi) the conversion rights of the shares to be redeemed, the
period within which conversion rights may be exercised, and the Conversion Price
and number of shares of Common Stock issuable upon conversion of a share of
Series A Preferred Stock at the time. Upon surrender of the certificates, if
certificated, for any shares so called for redemption, or upon the date fixed
for redemption, if uncertificated, such shares if not previously converted shall
be redeemed by the Corporation on the date fixed for redemption and at the
redemption price set forth in this Subsection 6.
(C) Notwithstanding anything to the contrary in paragraph (A) of this
Subsection 6, in the event that the Plan is terminated, the Corporation may, in
its sole discretion, call for redemption any or all of the then outstanding
Series A Preferred Stock at a redemption price calculated on the basis of the
redemption prices provided in paragraph (A) of this Subsection 6, increased, in
each such case, by 50% of the amount thereof in excess of 100%.
(D) The Corporation, at its option, may make payment of the redemption
price required upon redemption of shares of Series A Preferred Stock in cash or
in shares of Common Stock, or in a combination of such shares and cash, any such
shares of Common Stock to be valued for such purpose at their Fair Market Value
as defined in paragraph 9(G)(2) of this Part A; PROVIDED, HOWEVER, that in
calculating their Fair Market Value the Adjustment Period shall be deemed to be
the five (5) consecutive trading days preceding the date of redemption.
7. Redemption at the Option of the Holder
<PAGE>
(A) Unless otherwise provided by law, shares of Series A Preferred Stock
shall be redeemed by the Corporation out of funds legally available therefor for
cash or, if the Corporation so elects, in shares of Common Stock, or a
combination of such shares and cash, any such shares of Common Stock to be
valued for such purpose as provided by paragraph (D) of Subsection 6 of this
Part A, at a redemption price equal to the higher of (x) the Liquidation Price
per share in effect on the date fixed for redemption or (y) the Fair Market
Value of the number of shares of Common Stock into which each share of Series A
Preferred Stock is convertible at the time the notice of such redemption is
given plus in either case an amount equal to accrued (whether or not
accumulated) and unpaid dividends thereon to the date fixed for redemption, at
the option of the holder, at any time and from time to time upon notice to the
Corporation given not less than five (5) business days prior to the date fixed
by the holder in such notice of redemption, when and to the extent necessary for
such holder to provide for distributions required to be made under, or to
satisfy an investment election provided to participants in accordance with, the
Profit Sharing Plan incorporated in the Employee Savings Plans holder or his
affiliates, or any successor plan or when the holder elects to redeem shares of
Series A Preferred Stock in respect of any Regular or Supplemental Preferred
Dividend (a "Dividend Redemption"). In the case of any Dividend Redemption, such
holder shall give the notice specified above within (5) business days after the
related Series A Dividend Payment Date and such redemption shall be effective as
to such number of shares of Series A Preferred Stock as shall equal (x) the
aggregate amount of such Regular or Supplemental Preferred Dividend with respect
to shares of Series A Preferred Stock allocated or credited to the accounts of
participants in the Plan, or any successor plan divided by (y) the redemption
price specified above.
8. Consolidation, Merger, etc.
(A) In the event that the Corporation shall consummate any consolidation
or merger or similar transaction, however named, pursuant to which the
outstanding shares of Common Stock are by operation of law exchanged solely for
or changed, reclassified or converted solely into shares of any successor or
resulting company (including the Corporation) that constitute "qualifying
employer securities" that are common stock with respect to a holder of Series A
Preferred Stock within the meanings of Section 409(1) of the Code and Section
407(d)(5) of ERISA, or any successor provision of law, and, if applicable, for a
cash payment in lieu of fractional shares, if any, then, in such event, the
terms of such consolidation or merger or similar transaction shall provide that
the shares of Series A Preferred Stock of such holder shall be converted into or
exchanged for and shall become preferred shares of such successor or resulting
company, having in respect of such company insofar as possible the same powers,
preferences and relative, participating, optional or other special rights
(including the redemption rights provided by Subsections 6, 7, and 8 of this
Part A), and the qualifications, limitations or restrictions thereon, that the
Series A Preferred Stock had immediately prior to such transaction; PROVIDED,
HOWEVER, that after such transaction each share of stock into which the Series A
Preferred Stock is so converted or for which it is exchanged shall be
convertible, pursuant to the terms and conditions provided by Subsection 5 of
this Part A, into the number and kind of qualifying employer securities
receivable by a holder of the number of shares of Common Stock into which such
shares of Series A Preferred Stock could have been converted pursuant to
Subsection 5 of this Part A immediately prior to such transaction and provided,
further, that if by virtue of the
<PAGE>
structure of such transaction, a holder of Common Stock is required to make an
election with respect to the nature and kind of consideration to be received in
such transaction, which election cannot practicably be made by the holders of
the Series A Preferred Stock, then such election shall be deemed to be solely
for "qualifying employer securities" (together, if applicable, with a cash
payment in lieu of fractional shares) with the effect provided above on the
basis of the number and kind of qualifying employer securities receivable by a
holder of the number of shares of Common Stock into which the shares of Series A
Preferred Stock could have been converted pursuant to Subsection 5 of this Part
A immediately prior to such transaction (it being understood that if the kind or
amount of qualifying employer securities receivable in respect of each share of
Common Stock upon such transaction is not the same for each such share, then the
kind and amount of qualifying employer securities deemed to be receivable in
respect of each share of Common Stock for purposes of this proviso shall be the
kind and amount so receivable per share of Common Stock by a plurality of such
shares). The rights of the Series A Preferred Stock as preferred shares of such
successor resulting company shall successively be subject to adjustments
pursuant to Subsection 9 of this Part A after any such transaction as nearly
equivalent to the adjustments provided for by such Subsection prior to such
transaction. The Corporation shall not consummate any such merger, consolidation
or similar transaction unless all the terms of this paragraph 8(A) are complied
with.
(B) In the event that the Corporation shall consummate any consolidation
or merger or similar transaction, however named, pursuant to which the
outstanding shares of Common Stock are by operation of law exchanged for or
changed, reclassified or converted into other shares or securities or cash or
any other property, or any combination thereof, other than any such
consideration which is constituted solely of qualifying employer securities that
are common stock (as referred to in paragraph (A) of this Subsection 8) and cash
payments, if applicable, in lieu of fractional shares, outstanding shares of
Series A Preferred Stock shall, without any action on the part of the
Corporation or any holder thereof (but subject to paragraph (C) of this
Subsection 8), be automatically converted immediately prior to the consummation
of such merger, consolidation or similar transaction into shares of Common Stock
at the conversion rate then in effect so that each share of Series A Preferred
Stock shall, by virtue of such transaction and on the same terms as apply to the
holders of Common Stock, be converted into or exchanged for the aggregate amount
of shares, securities, cash or other property (payable in like kind) receivable
by a holder of the number of shares of Common Stock into which such shares of
Series A Preferred Stock could have been converted immediately prior to such
transaction if such holder of Common Stock failed to exercise any rights of
election as to the kind or amount of shares, securities, cash or other property
receivable upon such transaction (provided that, if the kind or amount of
shares, securities, cash or other property receivable upon such transaction is
not the same for each non-electing share, then the kind and amount of shares,
securities, cash or other property receivable upon such transaction for each
non-electing share shall be the kind and amount so receivable per share by a
plurality of non-electing shares).
(C) In the event the Corporation shall enter into any agreement providing
for any consolidation or merger or similar transaction described in paragraph
(B) of this Subsection 8, then the Corporation shall as soon as practicable
thereafter (and in any event at least ten (10) days before consummation of such
transaction) give notice of such agreement and the material terms
<PAGE>
thereof to each holder of Series A Preferred Stock and each such holder shall
have the right to elect, by written notice to the Corporation, to receive, upon
consummation of such transaction (if and when such transaction is consummated),
out of funds legally available therefor, from the Corporation or the successor
of the Corporation, in redemption and retirement of such Series A Preferred
Stock, in lieu of any cash or other securities which such holder would otherwise
be entitled to receive under paragraph 8(B) of this Part A, a cash payment equal
to the redemption price specified in paragraph (A) of Subsection 6 of this Part
A in effect on the date of the consummation of such transaction plus an amount
equal to all accrued (whether or not accumulated) and unpaid dividends. No such
notice of redemption shall be effective unless given to the Corporation prior to
the close of business of the fifth business day prior to consummation of such
transaction, unless the Corporation or the successor of the Corporation shall
waive such prior notice, but any notice or redemption so given prior to such
time may be withdrawn by notice of withdrawal given to the Corporation prior to
the close of business on the fifth business day prior to consummation of such
transaction.
9. Anti-dilution Adjustments
(A)(1)Subject to the provisions of paragraph 9(E) of this Part A, in the
event the Corporation shall, at any time or from time to time while any of the
shares of the Series A Preferred Stock are outstanding, (i) pay a dividend or
make a distribution in respect of the Common Stock in shares of Common Stock or
(ii) subdivide the outstanding shares of Common Stock into a greater number of
shares, in each case whether by reclassification of shares, recapitalization of
the Corporation (excluding a recapitalization or reclassification effected by a
merger or consolidation to which Subsection 8 of this Part A applies) or
otherwise, then, in such event, the Board of Directors shall, to the extent
legally permissible, declare a dividend in respect of the Series A Preferred
Stock in shares of Series A Preferred Stock (a "Special Dividend") in such a
manner that a holder of Series A Preferred Stock will become a holder of that
number of shares of Series A Preferred Stock equal to the product of the number
of such shares held prior to such event times a fraction (the "Sec. 9(A)
Non-Dilutive Share Fraction"), the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock outstanding immediately before
such event. A Special Dividend declared pursuant to this paragraph 9(A)(1) shall
be effective, upon payment of such dividend or distribution in respect of the
Common Stock, as of the record date for the determination of shareholders
entitled to receive such dividend or distribution (on a retroactive basis), and
in the case of a subdivision shall become effective immediately as of the
effective date thereof. Concurrently with the declaration of the Special
Dividend pursuant to this paragraph 9(A)(1), the Conversion Price, the
Liquidation Price and the Regular Preferred Dividend Rate of all shares of
Series A Preferred Stock shall be adjusted by dividing the Conversion Price, the
Liquidation Price and the Regular Preferred Dividend Rate, respectively, in
effect immediately before such event by the Sec. 9(A) Non-Dilutive Share
Fraction.
(2) The Corporation and the Board of Directors shall each use its best
efforts to take all necessary or appropriate action for declaration of the
Special Dividend provided in paragraph 9(A)(1) of this Part A but shall not be
required to call a special meeting of shareholders in order to implement the
provisions thereof. If for any reason the Board of Directors is precluded from
<PAGE>
giving full effect to the Special Dividend provided in paragraph 9(A)(1) of this
Part A, then no such Special Dividend shall be declared, but instead the
Conversion Price shall automatically be adjusted by dividing the Conversion
Price in effect immediately before the event by the Sec. 9(A) Non-Dilutive Share
Fraction and the Liquidation Price and the Regular Preferred Dividend Rate will
not be adjusted. An adjustment to the Conversion Price made pursuant to this
paragraph 9(A)(2) shall be given effect, upon payment of such a dividend or
distribution, as of the record date for the determination of holders entitled to
receive such dividend or distribution (on a retroactive basis), and in the case
of a subdivision shall become effective immediately as of the effective date
thereof. If subsequently the Board of Directors is able to give full effect to
the Special Dividend as provided in paragraph 9(A)(1) of this Part A, then such
Special Dividend will be declared and other adjustments will be made in
accordance with the provisions of paragraph 9(A)(1) of this Part A and the
adjustment in the Conversion Price as provided in this paragraph 9(A)(2) will
automatically be reversed and nullified prospectively.
(3) Subject to the provisions of paragraph 9(E) of this Part A, in the
event the Corporation shall, at any time or from time to time while any of the
shares of the Series A Preferred Stock are outstanding, combine the outstanding
shares of Common Stock into a lesser number of shares, whether by
reclassification of shares, recapitalization of the Corporation (excluding a
recapitalization or reclassification effected by a merger, consolidation or
other transaction to which Subsection 8 of this Part A applies) or otherwise,
then, in such event, the Conversion Price shall automatically be adjusted by
dividing the Conversion Price in effect immediately before such event by the
Sec. 9(A) Non-Dilutive Share Fraction and the Liquidation Price and the Regular
Preferred Dividend Rate will not be adjusted. An adjustment to the Conversion
Price made pursuant to this paragraph 9(A)(3) shall be given effect immediately
as of the effective date of such combination.
(B)(1)Subject to the provisions of paragraph 9(E) of this Part A, in the
event the Corporation shall, at any time or from time to time while any of the
shares of Series A Preferred Stock are outstanding, issue to holders of shares
of Common Stock as a dividend or distribution, including by way of a
reclassification of shares or a recapitalization of the Corporation, any right
or warrant to purchase shares of Common Stock (but not including as a right or
warrant for this purpose any security convertible into or exchangeable for
shares of Common Stock) for a consideration having a Fair Market Value (as
hereinafter defined) per share less than the Fair Market Value of a share of
Common Stock on the date of issuance of such right or warrant, then, in such
event, the Board of Directors shall, to the extent legally permissible, declare
a dividend in respect of the Series A Preferred Stock in shares of Series A
Preferred Stock (a "Special Dividend") in such a manner that a holder of Series
A Preferred Stock will become a holder of that number of shares of Series A
Preferred Stock equal to the product of the number of such shares held prior to
such event times a fraction (the "Sec. 9(B) Non-Dilutive Share Fraction"), the
numerator of which is the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the maximum number
of shares of Common Stock that could be acquired upon exercise in full of all
such rights and warrants and the denominator of which is the number of shares of
Common Stock outstanding immediately before such issuance of warrants or rights
plus the number of shares of Common Stock which could be purchased at the Fair
Market Value of a share of Common Stock at the time of such issuance for the
maximum
<PAGE>
aggregate consideration payable upon exercise in full of all such rights and
warrants. A Special Dividend declared pursuant to this paragraph 9(B)(1) shall
be effective upon such issuance of rights or warrants. Concurrently with the
declaration of the Special Dividend pursuant to this paragraph 9(B)(1), the
Conversion Price, the Liquidation Price and the Regular Preferred Dividend Rate
of all shares of Series A Preferred Stock shall be adjusted by dividing the
Conversion Price, the Liquidation Price and the Regular Preferred Dividend Rate,
respectively, in effect immediately before such event by the Sec. 9(B)
Non-Dilutive Share Fraction.
(2) The Corporation and the Board of Directors shall each use its best
efforts to take all necessary steps or to take all actions as are reasonably
necessary or appropriate for declaration of the Special Dividend provided in
paragraph 9(B)(1) but shall not be required to call a special meeting of
shareholders in order to implement the provisions thereof. If for any reason the
Board of Directors is precluded from giving full effect to the Special Dividend
provided in paragraph 9(B)(1) of this Part A, then no such Special Dividend
shall be declared, but instead the Conversion Price shall automatically be
adjusted by dividing the Conversion Price in effect immediately before the event
by the Sec. 9(B) Non-Dilutive Share Fraction and the Liquidation Price and the
Preferred Dividend Rate will not be adjusted. An adjustment to the Conversion
Price made pursuant to this paragraph 9(B)(2) of this Part A shall be given
effect upon such issuance of rights or warrants. If subsequently the Board of
Directors is able to give full effect to the Special Dividend as provided in
paragraph 9(B)(1) of this Part A, then such Special Dividend will be declared
and other adjustments will be made in accordance with the provisions of
paragraph 9(B)(1) of this Part A and the adjustment in the Conversion Price as
provided in this paragraph 9(B)(2) will automatically be reversed and nullified
prospectively.
(C) (1) (i) Subject to the provisions of paragraph 9(E) of this Part A, in
the event the Corporation shall, at any time or from time to time while any of
the shares of Series A Preferred Stock are outstanding, issue, sell or exchange
shares of Common Stock (other than pursuant to (x) any right or warrant to
purchase or acquire shares of Common Stock (including as such a right or warrant
any security convertible into or exchangeable for shares of Common Stock), (y)
any rights agreement designated by the Board of Directors, or (z) any employee
or director incentive, compensation or benefit plan or arrangement of the
Corporation or any subsidiary of the Corporation heretofore or hereafter
adopted) at a purchase price per share less than the Fair Market Value of a
share of Common Stock on the date of such issuance, sale or exchange, then, in
such event, the Board of Directors shall, to the extent legally permissible,
declare a dividend in respect of the Series A Preferred Stock in shares of
Series A Preferred Stock (a "Special Dividend") in such a manner that a holder
of Series A Preferred Stock will become the holder of that number of shares of
Series A Preferred Stock equal to the product of the number of such shares held
prior to such event times a fraction (the "Sec. 9(C)(1)(i) Non-Dilutive Share
Fraction"), the numerator of which is the number of shares of Common Stock
outstanding immediately before such issuance, sale or exchange plus the number
of shares of Common Stock so issued, sold or exchanged and the denominator of
which is the number of shares of Common Stock outstanding immediately before
such issuance, sale or exchange plus the number of shares of Common Stock which
could be purchased at the Fair Market Value of a share of Common Stock at the
time of such issuance, sale or exchange for the maximum aggregate consideration
paid therefor.
<PAGE>
(ii) In the event that the Corporation shall, at any time or from time to
time while any Series A Preferred Stock is outstanding, issue, sell or exchange
any right or warrant to purchase or acquire shares of Common Stock (including as
such a right or warrant of any security convertible into or exchangeable for
shares of Common Stock other than pursuant to (x) any employee or director
incentive, compensation or benefit plan or arrangement of the Corporation or any
subsidiary of the Corporation heretofore or hereafter adopted, (y) any rights
agreement designated by the Board of Directors, and (z) any dividend or
distribution on shares of Common Stock contemplated in paragraph (9)(A)(1) of
this Part A for a consideration having a Fair Market Value, on the date of such
issuance, sale or exchange, less than the Non-Dilutive Amount (as hereinafter
defined), then, in such event, the Board of Directors shall, to the extent
legally permissible, declare a dividend in respect of the Series A Preferred
Stock in shares of Series A Preferred Stock (a "Special Dividend") in such a
manner that a holder of Series A Preferred Stock will become the holder of that
number of shares of Series A Preferred Stock equal to the product of the number
of such shares held prior to such event times a fraction (the "Sec. 9(C)(1)(ii)
Non- Dilutive Share Fraction"), the numerator of which is the number of shares
of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock that could be
acquired upon exercise in full of all such rights and warrants and the
denominator of which is the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the number of shares
of Common Stock which could be purchased at the Fair Market Value of a share of
Common Stock at the time of such issuance for the total of (x) the maximum
aggregate consideration payable at the time of the issuance, sale or exchange of
such right or warrant and (y) the maximum aggregate consideration payable upon
exercise in full of all such rights or warrants.
(iii) A Special Dividend declared pursuant to this paragraph 9(C)(1) shall
be effective upon the effective date of such issuance, sale or exchange.
Concurrently with the declaration of the Special Dividend pursuant to this
paragraph 9(C)(1), the Conversion Price, the Liquidation Price and the Regular
Preferred Dividend Rate of all shares of Series A Preferred Stock shall be
adjusted by dividing the Conversion Price, the Liquidation Price and the Regular
Preferred Dividend Rate, respectively, in effect immediately before such event
by the Sec. 9(C)(1)(i) Non- Dilutive Share Fraction or Sec. 9(C)(1)(ii)
Non-Dilutive Share Fraction, as the case may be.
(2) The Corporation and the Board of Directors shall each use its best
efforts to take all necessary steps or to take all actions as are reasonably
necessary or appropriate for declaration of the Special Dividend provided in
paragraph 9(C)(1)(i) or (ii) of this Part A but shall not be required to call a
special meeting of shareholders in order to implement the provisions thereof. If
for any reason the Board of Directors is precluded from giving full effect to
any Special Dividend provided in paragraph 9(C)(1) of this Part A, then no such
Special Dividend shall be declared, but instead the Conversion Price shall
automatically be adjusted by dividing the Conversion Price in effect immediately
before the event by the Sec. 9(C)(1)(i) Non-Dilutive Share Fraction or Sec.
9(C)(1)(ii) Non-Dilutive Share Fraction, as the case may be, and the Liquidation
Price and the Regular Preferred Dividend Rate will not be adjusted. An
adjustment to the Conversion Price made pursuant to this paragraph 9(C)(2) shall
be given effect upon the effective date of such issuance, sale or exchange. If
subsequently the Board of Directors is able to give full effect to the Special
Dividend as provided in paragraph 9(C)(1) of this Part A, then such
<PAGE>
Special Dividend will be declared and other adjustments will be made in
accordance with the provisions of paragraph 9(C)(1) of this Part A and the
adjustment in the Conversion Price as provided in this paragraph 9(C)(2) will
automatically be reversed and nullified prospectively.
(D)(1)Subject to the provisions of paragraph 9(E), in the event the
Corporation shall, at any time or from time to time while any of the shares of
Series A Preferred Stock are outstanding, make an Extraordinary Distribution (as
hereinafter defined of this Part A) in respect of the Common Stock, whether by
dividend, distribution, reclassification of shares or recapitalization of the
Corporation (including capitalization or reclassification effected by a merger
or consolidation to which Subsection 8 of this Part A does not apply) or effect
a Pro Rata Repurchase (as hereinafter defined in this Part A) of Common Stock,
then, in such event, the Board of Directors shall, to the extent legally
permissible, declare a dividend of Series A Preferred Stock (a "Special
Dividend") in such a manner that a holder of Series A Preferred Stock will
become a holder of that number of shares of Series A Preferred Stock equal to
the product of the number of such shares held prior to such event times a
fraction (the "Sec. 9(D) Non-Dilutive Share Fraction"), the numerator of which
is the product of (a) the number of shares of Common Stock outstanding
immediately before such Extraordinary Distribution or Pro Rata Repurchase minus,
in the case of a Pro Rata Repurchase, the number of shares of Common Stock
repurchased by the Corporation multiplied by (b) the Fair Market Value of a
share of Common Stock on the day before the ex-dividend date with respect to an
Extraordinary Distribution which is paid in cash and on the distribution date
with respect to an Extraordinary Distribution which is paid other than in cash,
or on the applicable expiration date (including all extensions thereof) of any
tender offer which is a Pro Rata Repurchase or on the date of purchase with
respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be, and the denominator of which is (i) the product of (x) the number of shares
of Common Stock outstanding immediately before such Extraordinary Distribution
or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a share of
Common Stock on the day before the ex-dividend date with respect to an
Extraordinary Distribution which is paid in cash and on the distribution date
with respect to an Extraordinary Distribution which is paid other than in cash,
or on the applicable expiration date (including all extensions thereof) of any
tender offer which is a Pro Rata Repurchase, or on the date of purchase with
respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be. The
Corporation shall send each holder of Series A Preferred Stock (i) notice of its
intent to make any Extraordinary Distribution and (ii) notice of any offer by
the Corporation to make a Pro Rata Repurchase, in each case at the same time as,
or as soon as practicable after, such offer is first communicated to holders of
Common Stock or, in the case of an Extraordinary Distribution, the announcement
of a record date in accordance with the rules of any stock exchange on which the
Common Stock is listed or admitted to trading. Such notice shall indicate the
intended record date and the amount and nature of such dividend or distribution,
or the number of shares subject to such offer for a Pro Rata Repurchase and the
purchase price payable by the Corporation pursuant to such offer, as well as the
Conversion Price and the number of shares of Common Stock into which a share of
Series A Preferred Stock may be converted at such time. Concurrently with the
Special Dividend paid pursuant to this paragraph 9(D)(1), the Conversion Price,
the Liquidation Price and the Regular Preferred Dividend Rate of all shares of
Series A Preferred Stock shall be adjusted by dividing the Conversion Price, the
<PAGE>
Liquidation Price and the Regular Preferred Dividend Rate, respectively, in
effect immediately before such Extraordinary Distribution or Pro Rata Repurchase
by the Sec. 9(D) Non-Dilutive Share Fraction determined pursuant to this
paragraph 9(D)(1).
(2) The Corporation and the Board of Directors shall each use its best
efforts to take all necessary steps or to take all actions as are reasonably
necessary or appropriate for declaration of the Special Dividend provided in
paragraph 9(D)(1) of this Part A but shall not be required to call a special
meeting of shareholders in order to implement the provisions thereof. If for any
reason the Board of Directors is precluded from giving full effect to the
Special Dividend provided in paragraph 9(D)(1) of this Part A, then no such
Special Dividend shall be declared, but instead the Conversion Price shall
automatically be adjusted by dividing the Conversion Price in effect immediately
before the event by the Sec. 9(D) Non-Dilutive Share Fraction, and the
Liquidation Price and the Regular Preferred Dividend Rate will not be adjusted.
If subsequently the Board of Directors is able to give full effect to the
Special Dividend as provided in paragraph 9(D)(1) of this Part A, then such
Special Dividend will be declared and other adjustments will be made in
accordance with the provisions of paragraph 9(D)(1) of this Part A and the
adjustment in the Conversion Price as provided in this paragraph 9(D)(2) will
automatically be reversed and nullified prospectively.
(E) Notwithstanding any other provision of this Subsection 9, the
Corporation shall not be required to make (i) any Special Dividend or any
adjustment of the Conversion Price, the Liquidation Price or the Regular
Preferred Dividend Rate unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares of Series A
Preferred Stock outstanding or, (ii) if no additional shares of Series A
Preferred Stock are issued, any adjustment of the Conversion Price unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the Conversion Price. Any lesser adjustment shall be carried forward and shall
be made no later than the time of, and together with, the next subsequent
adjustment which, together with any adjustment or adjustments so carried
forward, shall amount to an increase or decrease of at least one percent (1%) of
the number of Series A Preferred Shares outstanding or, if no additional shares
of Series A Preferred Stock are being issued, an increase or decrease of at
least one percent (1%) of the Conversion Price, whichever the case may be.
(F) If the Corporation shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other security of
the Corporation or any rights or warrants to purchase or acquire any such
security, which transaction does not result in an adjustment to the number of
shares of Series A Preferred Stock outstanding or the Conversion Price pursuant
to the foregoing provisions of this Subsection 9, the Board of Directors of the
Corporation may, in its sole discretion, consider whether such action is of such
a nature that some type of equitable adjustment should be made in respect of
such transaction. If in such case the Board of Directors of the Corporation
determines that some type of adjustment should be made, an adjustment shall be
made effective as of such date as determined by the Board of Directors of the
Corporation. The determination of the Board of Directors of the Corporation as
to whether some type of adjustment should be made pursuant to the foregoing
provisions of this paragraph 9(F), and, if so, as to what adjustment should be
made and when, shall be final and binding on the Corporation and all
shareholders of the Corporation. The Corporation shall be entitled to make
<PAGE>
such additional adjustments, in addition to those required by the foregoing
provisions of this Subsection 9, as shall be necessary in order that any
dividend or distribution in shares of capital stock of the Corporation,
subdivision, reclassification or combination of shares of the Corporation or any
recapitalization of the Corporation shall not be taxable to holders of the
Common Stock.
(G) For purposes of this Part A, the following definitions shall apply:
(1) "Extraordinary Distribution" shall mean any dividend or other
distribution to holders of Common Stock (effected while any of the shares of
Series A Preferred Stock are outstanding) of (i) cash or (ii) any shares of
capital stock of the Corporation (other than shares of Common Stock), other
securities of the Corporation (other than securities of the type referred to in
paragraph (B) of this Subsection 9), evidences of indebtedness of the
Corporation or any other person or any other property (including shares of any
subsidiary of the Corporation), or any combination thereof, where the aggregate
amount of such cash dividend or other distribution together with the amount of
all cash dividends and other distributions made during the preceding period of
twelve (12) months, when combined with the aggregate amount of all Pro Rata
Repurchases (for this purpose, including only that portion of the aggregate
purchase price of such Pro Rata Repurchase which is in excess of the Fair Market
Value of the Common Stock repurchased as determined on the applicable expiration
date) (including all extensions thereof) of any tender offer or exchange offer
which is a Pro Rata Repurchase, or the date of purchase with respect to any
other Pro Rata Repurchase which is not a tender offer or exchange offer made
during such period, exceeds twelve and one-half percent (12 1/2%) of the
aggregate Fair Market Value of all shares of Common Stock outstanding on the day
before the ex-dividend date with respect to such Extraordinary Distribution
which is paid in cash and on the distribution date with respect to an
Extraordinary Distribution which is paid other than in cash. The Fair Market
Value of an Extraordinary Distribution for purposes of paragraph (D) of this
Subsection 9 shall be the sum of the Fair Market Value of such Extraordinary
Distribution plus the aggregate amount of any cash dividends or other
distributions which are not Extraordinary Distributions made during such twelve
month period and not previously included in the calculation of an adjustment
pursuant to paragraph (D) of this Subsection 9, but shall exclude the aggregate
amount of regular quarterly dividends declared by the Board of Directors and
paid by the Corporation in such twelve month period.
(2) "Fair Market Value" shall mean, as to shares of Common Stock or any
other class of capital stock or securities of the Corporation or any other
issuer which are publicly traded, the average of the Current Market Prices (as
hereinafter defined in this Part A) of such shares or securities for each day of
the Adjustment Period (as hereinafter defined in this Part A). "Current Market
Price" of publicly traded shares of Common Stock or any other class of capital
stock shall mean the last reported sales price, regular way, or, in case no sale
takes place on such day, the average of the reported closing bid and asked
prices, regular way, in either case as reported on the New York Stock Exchange
Composite Tape or, if such security is not listed or admitted to trading on the
New York Stock Exchange, on the principal national securities exchange on which
such security is listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the NASDAQ National Market
System or, if such security is not quoted on such National Market System, the
average of the closing bid and asked prices on each such day
<PAGE>
in the over-the-counter market as reported by NASDAQ or, if bid and asked prices
for such security on each such day shall not have been reported through NASDAQ,
the average of the bid and asked prices for such day as furnished by any New
York Stock Exchange member firm regularly making a market in such security
selected for such purpose by the board of Directors of the Corporation on each
trading day during the Adjustment Period. "Adjustment Period" shall mean the
period of five consecutive trading days, selected by the Board of Directors of
the Corporation, during the (20) trading days preceding, and including, the date
as of which the Fair Market Value of a security is to be determined. The "Fair
Market Value" of any security which is not publicly traded or of any other
property shall mean the fair value thereof as determined by an independent
investment banking or appraisal firm experienced in the valuation of such
securities or property selected in good faith by the Board of Directors of the
Corporation, or, if no such investment banking or appraisal firm is in the good
faith judgment of the Board of Directors available to make such determination,
as determined in good faith by the Board of Directors of the Corporation.
(3) "Non-Dilutive Amount" in respect of an issuance, sale or exchange by
the Corporation of any right or warrant to purchase or acquire shares of Common
Stock (including any security convertible into or exchangeable for shares of
Common Stock) shall mean the difference between (i) the product of the Fair
Market Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock which could be acquired on such date upon the exercise
in full of such rights or warrants (including upon the conversion or exchange of
all such convertible or exchangeable securities), whether or not exercisable (or
convertible or exchangeable) at such date, and (ii) the aggregate amount payable
pursuant to such right or warrant to purchase or acquire such maximum number of
shares of Common Stock; PROVIDED, HOWEVER, that in no event shall the
Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence,
in the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the Fair Market Value of such security on the
date of the issuance, sale or exchange of such security by the Corporation.
(4) "Pro Rata Repurchase" shall mean any purchase of shares of Common
Stock by the Corporation or any subsidiary thereof, whether for cash, shares of
capital stock of the Corporation, other securities of the Corporation, evidences
of indebtedness of the Corporation or any other person or any other property
(including shares of a subsidiary of the Corporation), or any combination
thereof, effected while any of the shares of Series A Preferred Stock are
outstanding, pursuant to any tender offer or exchange offer subject to Section
13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or any successor provision of law, or pursuant to any other offer available to
substantially all holders of Common Stock; PROVIDED, HOWEVER, that no purchase
of shares by the Corporation or any subsidiary thereof made in open market
transactions shall be deemed a Pro Rata Repurchase. For purposes of this
paragraph 9(G), shares shall be deemed to have been purchased by the Corporation
of any subsidiary thereof "in open market transactions" if they have been
purchased substantially in accordance with the requirements of Rule 10b-18 as in
effect under the Exchange Act on the date shares of Series A Preferred Stock are
initially issued by the Corporation or on such other terms
<PAGE>
and conditions as the Board of Directors of the Corporation shall have
determined are reasonably designed to prevent such purchases from having a
material effect on the trading market for the Common Stock.
(H) Whenever an adjustment increasing the number of shares of Series A
Preferred Stock outstanding is required pursuant to this Part A, the Board of
Directors shall take action as is necessary so that a sufficient number of
shares of Series A Preferred Stock are designated with respect to such increase
resulting from such adjustment. Whenever an adjustment to the Conversion Price,
the Liquidation Price or the Regular Preferred Dividend Rate of the Series A
Preferred Stock is required pursuant hereto, the Corporation shall forthwith
place on file with the transfer agent for the Common Stock and the Series A
Preferred Stock, if there be one, and with the Treasurer of the Corporation, a
statement signed by the Treasurer or any Assistant Treasurer of the Corporation
stating the adjusted Conversion Price, Liquidation Price and Regular Preferred
Dividend Rate determined as provided herein. Such statement shall set forth in
reasonable detail such facts as shall be necessary to show the reason and the
manner of computing such adjustment, including any determination of Fair Market
Value involved in such computation. Promptly after each adjustment to the number
of shares of Series A Preferred Stock outstanding, the Conversion Price, the
Liquidation Price or the Regular Preferred Dividend Rate, the Corporation shall
mail a notice thereof of the then prevailing number of shares of Series A
Preferred Stock outstanding, the Conversion Price, the Liquidation Price and the
Regular Preferred Dividend Rate to each holder of shares of Series A Preferred
Stock.
10. Miscellaneous
(A) All notices referred to in this Part A shall be in writing, and all
notices hereunder shall be deemed to have been given upon the earlier of receipt
thereof or three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms hereof) with postage pre-paid, addressed: (i) if to
the Corporation, to its office at 175 East Old Country Road, Hicksville, New
York 11801 (Attention: Treasurer) or to the transfer agent for the Series A
Preferred Stock, or other agent of the Corporation designated as permitted
hereby or (ii) if to any holder of the Series A Preferred Stock or Common Stock,
as the case may be, to such holder at the address of such holder as listed in
the stock record books of the Corporation (which may include the records of any
transfer agent for the Series A Preferred Stock or Common Stock, as the case may
be) or (iii) to such other address as the Corporation or any such holder, as the
case may be, shall have designated by notice similarly given.
(B) The term "Common Stock" as used in this Part A means the Corporation's
Common Stock, par value $.01 per share, as the same exists at the date of filing
of this Certificate pursuant to Section 805 of the Business Corporation Law of
the State of New York, or any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to without par value, or from without par value
to par value. In the event that, at any time as a result of an adjustment made
pursuant to Subsection 9 of this Part A, the holder of any shares of the Series
A Preferred Stock upon thereafter surrendering such shares for conversion shall
become entitled to receive any shares or
<PAGE>
other securities of the Corporation other than shares of Common Stock, the
anti-dilution provisions contained in Subsection 9 of this Part A shall apply in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock, and the provisions of Subsections 1 through 8 and 10 of
this Part A with respect to the Common Stock shall apply on like or similar
terms to any such other shares or securities.
(C) The Corporation shall pay any and all stock transfer and documentary
stamp taxes that may be payable in respect of any issuance or delivery of shares
of Series A Preferred Stock or shares of Common Stock or other securities issued
on account of Series A Preferred Stock pursuant thereto or certificates
representing such shares or securities. The Corporation shall not, however, be
required to pay any such tax which may be payable in respect to any transfer
involved in the issuance or delivery of shares of Series A Preferred Stock or
Common Stock or other securities in a name other than that in which the shares
of Series A Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery of payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(D) In the event that a holder of shares of Series A Preferred Stock shall
not by written notice designate the name in which shares of Common Stock to be
issued upon conversion of such shares should be registered or to whom payment
upon redemption of shares of Series A Preferred Stock should be made or the
address to which the certificate or certificates representing such shares, or
such payment, should be sent, the Corporation shall be entitled to register such
shares, and make such payment, in the name of the holder of such Series A
Preferred Stock as shown on the records of the Corporation and to send the
certificate or certificates or other documentation representing such shares, or
such payment, to the address of such holder shown on the records of the
Corporation.
(E) The Corporation my appoint, and from time to time discharge and
change, a transfer agent for the Series A Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of Series
A Preferred Stock.
PART B. SERIES AA PREFERRED STOCK
1. Number and Designation of Series. A series consisting initially of
fourteen million five hundred and twenty thousand (14,520,000) shares of the
Preferred Stock of the par value of $25 per share is designated Preferred Stock,
7.95%, Series AA" (hereinafter called the "Series AA Preferred Stock").
<PAGE>
2. Dividend Rate. The dividend rate per annum of the shares of Series AA
Preferred Stock is $1.9875 per share. Dividends shall be calculated on the basis
of a 30-day month and a year of 360 days.
3. Dividend Payment Dates. The dividend payment dates for the shares of
Series AA Preferred Stock are the first days of March, June, September and
December; the initial dividend period for such shares shall commence on the day
when shares are issued and thereafter the dividend periods for such shares shall
be the quarterly periods beginning on such dates commencing September 1, 1998.
4. Optional Redemption. The Series AA Preferred Stock will not be subject
to optional redemption.
5. Mandatory Redemption. Subject to the restrictions set forth in
Subsection 6 of this Part B, the Corporation shall redeem on June 1, 2000, all
of the outstanding shares of Series AA Preferred Stock at $25 per share, plus
accrued and unpaid dividends to the date of redemption. In the case of a
redemption of Series AA Preferred Stock as specified in this Subsection 5, the
Corporation shall take the action and provide the notice specified in paragraph
(d) of Subsection 11 of this Part B.
6. Restrictions on Mandatory Redemption. Unless full cumulative dividends
for all past dividend periods and for the then current dividend period shall
have been paid or declared and set apart for payment on the then outstanding
Series AA Preferred Stock, the Corporation shall not redeem pursuant to
Subsection 5 of this Part B less than all of the then outstanding shares of
Series AA Preferred Stock.
7. Restrictions on Payments on Junior Stock. The Corporation shall not
declare or pay or set apart any dividend for the Common Stock or any other class
of stock ranking junior to the Series AA Preferred Stock, or make any payment on
account of, or set apart money for a sinking or analogous fund for, the
purchase, redemption or other retirement of the Common Stock or any other class
of stock ranking junior to the Series AA Preferred Stock, or make any
distribution in respect thereof, either directly or indirectly, and whether in
cash or property or obligations or stock of the Corporation, unless at the date
of declaration in the case of any such dividend, or at the date of any such
other payment, setting apart or distribution, full cumulative dividends for all
past dividend periods and for the then current dividend period shall have been
paid or declared and set apart for payment on the then outstanding Series AA
Preferred Stock, other than shares of Series AA Preferred Stock previously or
then to be called for redemption.
8. Restrictions on Sinking Fund Payments on Other Stock. The Corporation
shall not redeem or purchase any shares ranking on a parity with the Series AA
Preferred Stock as to assets or dividends, pursuant to any sinking fund
requirement (which terms shall include any analogous requirement) for the
redemption or purchase of such shares, and shall not set apart money for any
such requirement, at any time when the redemption required by Subsection 5 of
this Part B shall be in arrears; except that, at any time when the redemption
required by Subsection 5 of this Part B shall be in arrears and when arrears
exist in respect of any sinking fund or analogous
<PAGE>
requirement for any shares ranking as aforesaid on a parity with the Series AA
Preferred Stock, the Corporation may redeem or purchase for the respective
requirements shares of Series AA Preferred Stock and such other shares, pro
rata, as nearly as practicable, according to the amounts in dollars of the
arrears in the redemptions or purchases required for the respective
requirements.
9. Acquisition of Series AA Preferred Stock. Except as provided in this
Part B, the Corporation may, at its option, purchase, redeem or otherwise
acquire any shares of Series AA Preferred Stock.
10. Redemption Upon Voluntary Dissolution, Liquidation, or Winding Up of
the Corporation. The applicable redemption price payable upon any voluntary
dissolution, liquidation, or winding up of the Corporation as specified in the
second paragraph of paragraph (c) of Subsection 11 of this Part B shall be the
par value of the Series AA Preferred Stock.
11. Other Provisions.
(a) The holders of shares of Series AA Preferred Stock shall be
entitled to receive, if and when declared payable by the Board of Directors out
of assets legally available for the payment of dividends, cumulative cash
dividends at such rate per share and payable quarterly on such dates as shall be
fixed by resolution adopted by the Board of Directors prior to the issuance of
such shares of Series AA Preferred Stock. Dividends on each share of Series AA
Preferred Stock shall commence to accrue on and be cumulative from the first day
of the current dividend period within which such share was issued. If for any
past dividend period or periods dividends shall not have been paid or declared
and set apart for payment upon all outstanding shares of Series AA Preferred
Stock at the rate per annum applicable thereto, the deficiency shall be fully
paid or declared and set apart for payment (at any time without reference to any
payment date) before any dividend shall be declared or paid or set apart for the
Common Stock or any other class of stock ranking junior to the Series AA
Preferred Stock. Accumulations of dividends shall not bear interest. In case the
stated dividends are not paid in full, the shares of Series AA Preferred Stock
shall share ratably with all other series of Preferred Stock ranking on a parity
with the Series AA Preferred Stock in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable on
said shares of Series AA Preferred Stock and all other series of Preferred Stock
ranking on a parity with the Series AA Preferred Stock if all dividends were
declared and paid in full.
(b) The holders of the Series AA Preferred Stock shall not be
entitled to receive any dividends thereon other than the dividends referred to
in paragraph (a) of this Subsection 11.
(c) Upon any involuntary dissolution, liquidation, or winding up of
the Corporation, the holders of shares of Series AA Preferred Stock shall be
entitled to receive out of the assets of the Corporation, the par value of their
shares, plus, in the case of each share, an amount equal to all dividends on
such share accrued and unpaid thereon to the date of payment upon such
dissolution, liquidation or winding up of the Corporation, before any
distribution of
<PAGE>
the assets to be distributed shall be made to the holders of the Common Stock or
any other class of stock ranking junior to the Series AA Preferred Stock.
Upon any voluntary dissolution, liquidation, or winding up of the
Corporation, the holders of shares of Series AA Preferred Stock shall be
entitled to receive out of the assets of the Corporation the then applicable
redemption price of their shares, plus, in the case of each share, an amount
equal to all dividends on such share accrued and unpaid thereon to the date of
payment upon such dissolution, liquidation or winding up of the Corporation,
before any distribution of the assets to be distributed shall be made to the
holders of the Common Stock or any other class of stock ranking junior to the
Series AA Preferred Stock. In case the amounts payable on liquidation are not
paid in full, the shares of all Series AA Preferred Stock and all other series
ranking on a parity with the Series AA Preferred Stock shall share ratably in
any distribution of assets other than by way of dividends in accordance with the
sums which would be payable on such distribution if all sums payable were
discharged in full.
After payment to the holders of Series AA Preferred Stock of the
preferential amounts to which they are entitled upon an involuntary or upon a
voluntary dissolution, liquidation or winding up, as the case may be, as
hereinabove provided in this Part B, the holders of Series AA Preferred Stock,
as such, shall have no right or claim to any of the remaining assets of the
Corporation, either upon any distribution of surplus assets, or upon involuntary
or upon voluntary dissolution, liquidation or winding up.
The sale, lease, exchange, assignment, transfer or conveyance of all
or substantially all the property of the Corporation to, or the merger or
consolidation of the Corporation into or with, any other corporation shall not
be deemed to be an involuntary or a voluntary dissolution, liquidation or
winding up for the purposes of this paragraph (c).
(d) Not less than thirty (30) nor more than sixty (60) days previous
to the date fixed for mandatory redemption pursuant to Subsection 5 of this Part
B, notice of the time and place thereof shall be given to the holders of record
of the Series AA Preferred Stock so to be redeemed, by mail and publication in a
newspaper, printed in the English language and customarily published on each
business day, of general circulation in the Borough of Manhattan, City and State
of New York, in such manner as may be prescribed by the By-laws of the
Corporation or by resolution of the Board of Directors; PROVIDED, that the
accidental failure to mail any such notice to one or more of such holders shall
not affect the validity of such redemption as to the other holders, and that
such notice shall be deemed to have been duly given to any holder of the Series
AA Preferred Stock within the meaning of the foregoing provision when the same
shall have been published as aforesaid and a copy deposited in the United States
mails, postage prepaid, addressed to such holder at his last-known address as it
appears on the books of the Corporation; and, PROVIDED FURTHER, that such notice
shall include a statement to the effect that privileges of conversion or
exchange, if any, not theretofore expiring, will expire at the close of business
on the full business day next preceding the date fixed for redemption. At any
time after notice of redemption has been given in the manner prescribed by the
By-laws of the Corporation or by resolution of the Board of Directors to the
holders of Series AA Preferred Stock so to be redeemed, the Corporation may
deposit funds sufficient for such redemption with a solvent bank
<PAGE>
or trust company having its principal office in the Borough of Manhattan, City
and State of New York and having a combined capital and surplus of at least
$5,000,000 named in such notice payable on the date fixed for redemption, as
aforesaid, and in the amounts aforesaid, to the respective orders of the holders
of the shares of Series AA Preferred Stock so to be redeemed, on endorsement to
the Corporation or otherwise, as may be required, and upon surrender of the
certificates for such shares. Upon the deposit of said money as aforesaid, or,
if no such deposit is made, upon said redemption date (unless the Corporation
defaults in making payment of the redemption price) such holders shall cease to
be shareholders with respect to said shares of Series AA Preferred Stock, and
from and after the making of said deposit, or, if no such deposit is made, after
the redemption date (the Corporation not having defaulted in making the payment
of the redemption price), the said holders shall have no interest in or claims
against the Corporation with respect to said shares of the Series AA Preferred
Stock, except only the right to receive said moneys on the date fixed for
redemption, as aforesaid, from said bank or trust company, or from the
Corporation, as the case may be, without interest thereon, upon endorsement, if
required, and surrender of the certificates as aforesaid and the right to
exercise, on or before the close of business on the full business day next
preceding the date fixed for redemption, privileges of conversion or exchange,
if any, not theretofore expiring. Any moneys deposited by the Corporation as
aforesaid which shall not be required for such redemption because of the
exercise of any such right of conversion or exchange subsequent to the date of
such deposit shall be repaid to the Corporation forthwith. In case the holder of
any Series AA Preferred Stock redeemed as aforesaid shall not, within six (6)
years after said deposit, claim the amount deposited as above stated for the
redemption thereof, the depositary shall, upon demand, pay over to the
Corporation such amount so deposited and the depositary thereupon shall be
relieved from all responsibility to such holder.
Subject to the provisions of this Part B, the Board of Directors
shall have authority to prescribe from time to time the manner in which Series
AA Preferred Stock shall be redeemed and cancelled.
Nothing herein contained in this Part B shall limit or deprive the
Corporation of the right to redeem or purchase any shares of Series AA Preferred
Stock in any other manner now or hereafter permitted by law.
(e) Except as provided in this Part B and except as some provision
of law expressly confers a right to vote regardless of any provision to the
contrary in this Certificate or other certificate filed pursuant to law, the
holders of Series AA Preferred Stock shall not be entitled to any notice of
meetings of shareholders of the Corporation, or to vote, or to any voting rights
whatsoever as shareholders of the Corporation, and are hereby specifically
excluded from the right to vote in a proceeding for authorizing any guaranty
pursuant to Section 908 of the Business Corporation Law, for sale of the
franchises and property pursuant to Section 909 of the Business Corporation Law,
for establishing priorities or creating preferences among the various classes of
stock pursuant to Section 801 of the Business Corporation Law, for consolidation
or merger pursuant to Section 901 of the Business Corporation Law, for voluntary
dissolution pursuant to Section 1001 of the Business Corporation Law, or for
change of name pursuant to the Business
<PAGE>
Corporation Law, or in the election of directors or in any other proceeding or
at any shareholders' meeting.
The foregoing provisions of paragraph (e) of this Subsection 11 are
subject to the following:
(1) So long as any shares of Series AA Preferred Stock are
outstanding, the Corporation shall not without authorization (given in person or
by proxy, in writing or at a meeting duly called for that purpose in accordance
with Section 605 of the Business Corporation Law of the State of New York or as
otherwise permitted by law) by at least two-thirds of the votes entitled to be
cast by the holders of the total number of shares of Series AA Preferred Stock
then outstanding:
(A) amend, alter, change or repeal any of the express terms of
the Series AA Preferred Stock then outstanding in a manner to affect
the holders of such shares adversely otherwise than to increase the
authorized number of shares of Series AA Preferred Stock; or
(B) create or authorize any class of stock having a preference
superior to the preferences of the Series AA Preferred Stock as to
assets or dividends, or create or authorize any security convertible
into shares of stock of any such kind; or
(C) issue any shares of, or ranking on a parity with, the Series
AA Preferred Stock under this Certificate, unless for any twelve (12)
consecutive calendar months within the fifteen (15) calendar months
immediately preceding the calendar month within which such additional
shares shall be issued, the net earnings of the corporation liable for
the payment of interest charges on the Corporation's interest bearing
indebtedness, determined after provision for depreciation and all
taxes, and in accordance with sound accounting practice, shall have
been at least one and one-half (1-1/2) times the aggregate of the
annual interest charges on the interest bearing indebtedness of the
Corporation and annual dividend requirements on all shares of, or
ranking on a parity with, Series AA Preferred Stock to be outstanding
immediately after the proposed issue of such shares of, or ranking on
a parity with, the Series AA Preferred Stock. There shall be excluded
from the foregoing computation, interest charges on all such
indebtedness and dividends on all stock which is to be retired in
connection with the issue of such shares of, or ranking on a parity
with, the Series AA Preferred Stock. Where such shares of, or ranking
on a parity with, the Series AA Preferred Stock are to be issued in
connection with the acquisition of new property, the net earnings of
the property so acquired may be included on a pro forma basis in the
foregoing computation, computed on the same basis as the net earnings
of the Corporation.
Nothing in this clause (C) however shall prevent the
Corporation from issuing shares of, or ranking on a parity with, the Series AA
Preferred Stock in connection with the purchase, redemption or other acquisition
of or any exchange for shares of, or ranking on a parity with, the Series AA
Preferred Stock, if the aggregate amount of annual dividends payable on the
shares to be issued and the aggregate amount payable on such shares in case of
voluntary
<PAGE>
dissolution shall not exceed said respective amounts payable on the shares of,
or ranking on a parity with, the Series AA Preferred Stock which are to be
purchased, redeemed or otherwise acquired.
(2) So long as any shares of Series AA Preferred Stock are
outstanding, the Corporation shall not without authorization (given in person or
by proxy, in writing or at a meeting duly called for that purpose in accordance
with Section 605 of the Business Corporation Law of the State of New York or as
otherwise permitted by law) by a majority of the votes entitled to be cast by
the holders of the total number of shares of Series AA Preferred Stock of the
Corporation then outstanding:
(A) sell, lease, exchange, assign, transfer or convey all or
substantially all of the property or business of the Corporation or
merge or consolidate into or with any other company; PROVIDED,
HOWEVER, that nothing herein contained shall require such
authorization in respect of the merger or consolidation of the
Corporation into or with any other company if the company resulting
from such merger or consolidation will, immediately after such merger
or consolidation, have only such authorized classes of stock and such
outstanding shares of stock as would have been permitted immediately
prior to such merger or consolidation under the provisions hereof
without any further consent of the holders of the Series AA Preferred
Stock, and if each holder of the Series AA Preferred Stock immediately
preceding such merger or consolidation shall receive the same number
of shares, with the same rights and preferences, of the resulting
company. For the purposes of this clause (A) insofar as any earnings
test may be applicable, the earnings, interest charges on debt and
dividend requirements of the merging or consolidating companies shall
be determined on a combined basis; or
(B) increase the authorized number of shares of Series AA
Preferred Stock.
(3) If and when dividends payable on any shares of Series AA
Preferred Stock shall be in default in an amount equivalent to or exceeding four
(4) full quarterly dividends, thereafter and until all dividends on the shares
of Series AA Preferred Stock in default shall have been paid or declared and set
aside for payment, the holders of the shares of Series AA Preferred Stock,
voting separately as a class and regardless of series, shall be entitled to
elect the smallest number of directors necessary to constitute a majority of the
full Board of Directors, and, subject to the provisions of Article IV, Section
5, Part C, Subsection 7 hereof, the holders of the shares of the Common Stock,
voting separately as a class, shall be entitled to elect the remaining directors
of the Corporation, anything herein or in the By-laws to the contrary
notwithstanding. The terms of office of all persons who may be directors of the
Corporation shall terminate upon the election of a majority of the Board of
Directors by the holders of the shares of Series AA Preferred Stock, whether or
not the holders of the shares of the Common Stock shall then have elected the
remaining directors of the Corporation.
(4) If and when all dividends then in default on the shares of
Series AA Preferred Stock then outstanding shall be paid or declared and set
aside for payment (and such dividends shall be declared and paid out of any
funds legally available therefor as soon as
<PAGE>
reasonably practicable), the holders of shares of Series AA Preferred Stock
shall be divested of the special right with respect to the election of directors
provided in paragraph (e)(3) of this Subsection 11, and the voting power, with
respect thereto, shall, subject to the provisions of Article IV, Section 5, Part
C, Subsection 7 hereof, revert to the holders of the shares of the Common Stock;
but always subject to the same provisions for vesting such special right in the
holders of the shares of Series AA Preferred Stock in case of further like
default or defaults in dividends thereon as provided in paragraph (e)(3) of this
Subsection 11. Upon the termination of any such special right upon payment or
setting aside for payment of all accumulated and defaulted dividends on the
shares of Series AA Preferred Stock, the terms of office of all persons who may
been elected directors of the Corporation by vote of the holders of the shares
of Series AA Preferred Stock, as a class, pursuant to such special right shall
forthwith terminate, and the resulting vacancies shall be filled by the vote of
a majority of the remaining directors.
(5) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the shares of Series AA
Preferred Stock, as a class, pursuant to the foregoing provisions of this Part
B, the remaining directors elected by such holders, by affirmative vote of a
majority thereof, or the remaining director so elected if there be but one, may
elect a successor or successors to hold office for the unexpired terms of the
director or directors whose place or places shall be vacant, and such successor
or successors shall be deemed to have been elected by such holders.
(6) Whenever under the provisions of this Part B, the right
shall have accrued to the holders of the shares of Series AA Preferred Stock to
elect directors, the Board of Directors shall within ten (10) days after
delivery to the Corporation at its principal office of a request to such effect
signed by any holder of shares of Series AA Preferred Stock entitled to vote,
call a special meeting of the shareholders to be held within fifty (50) days
from the delivery of such request for the purpose of electing directors (unless
under the provisions of the By-laws of the Corporation as then in effect, an
annual meeting of shareholders of the Corporation is to be held within sixty
(60) days after the vesting in the holders of the Series AA Preferred Stock of
the right to elect directors). At all meetings of shareholders held for the
purpose of electing directors during such time as the holders of the shares of
Series AA Preferred Stock shall have the special right, voting separately and as
a class, to elect directors pursuant hereto, the presence in person or by proxy
of the holders of a majority of the outstanding shares of any other class
entitled to vote at such meeting shall be required to constitute a quorum of
that other class for the election of directors, and the presence in person or by
proxy of the holders of shares representing a majority of the votes entitled to
be cast by the holders of the total number of shares of Series AA Preferred
Stock then outstanding shall be required to constitute a quorum of such class
for the election of directors; PROVIDED, HOWEVER, that the absence of a quorum
of the holders of stock of any such class shall not prevent the election of
directors at any such meeting (or at any government thereof) by the other such
class or classes if the necessary quorum of the holders of stock of such class
or classes is present in person or by proxy at such meeting; in the absence of a
quorum of the holders of stock of any class of stock a majority of those holders
of the stock of such class who are present in person or by proxy shall have
power to adjourn the meeting for the election of the directors to be elected by
such class from time to time without notice other than announcement at the
meeting until a quorum shall be present in person or by proxy, but such
adjournment shall not be made to
<PAGE>
a date beyond the date for the mailing of notice of the next annual meeting of
the Corporation or special meeting in lieu thereof.
(7) Whenever the holders of Series AA Preferred Stock shall be
entitled, as a class, to vote, authorize, consent or otherwise act, they shall
be entitled to cast one-quarter of one vote for each share of Series AA
Preferred Stock held by them.
(f) The holders of shares of Series AA Preferred Stock at any
time outstanding shall have no preemptive or preferential right to subscribe for
or purchase any shares of stock, or rights or options to purchase shares of
stock whether now or hereafter authorized, or any securities convertible into or
exchangeable for shares of stock or into rights or options to purchase shares of
stock of the Corporation of any class.
PART C. SERIES B PREFERRED STOCK
AND
SERIES C PREFERRED STOCK
1. Designations and Numbers of Shares.
(a) CLASS B PREFERRED STOCK. Five hundred and fifty-three thousand
(553,000) shares of the Class B Preferred Stock of the Corporation are
hereby constituted as a series of preferred stock, $100 par value per
share, stated value $100 per share (the "Class B Stated Value"), and
designated as "Class B Preferred Stock" (hereinafter called the "Class B
Preferred Stock").
(b) CLASS C PREFERRED STOCK. One hundred and ninety-seven thousand
(197,000) shares of the Class C Preferred Stock of the Corporation are
hereby constituted as a series of preferred stock, $100 par value per
share, stated value $100 per share (the "Class C Stated Value"), and
designated as "Class C Preferred Stock" (hereinafter called the "Class C
Preferred Stock" and, collectively, with the Class B Preferred Stock, the
"Designated Preferred Stock").
As used herein, the term "Applicable Stated Value" shall mean, with
respect to the Class B Preferred Stock or the Class C Preferred Stock, as
the case may be, the Class B Stated Value or the Class C Stated Value,
respectively. The term "Applicable Dividend Rate" shall mean, with respect
to the Class B Preferred Stock or the Class C Preferred Stock, as the case
may be, 7.07% or 7.17%, respectively.
2. Rank.
Each series of Designated Preferred Stock shall, with respect to
dividend distributions and distributions upon the liquidation, winding up
or dissolution of the Corporation, rank senior to all classes of common
stock of the Corporation, and to each other class or series of capital
stock of the Corporation ranking junior to such series of
<PAGE>
Designated Preferred Stock, whether now or hereafter created (collectively
referred to with the common stock of the Corporation as "Junior
Securities"). Subject to Subsection 9 of this Part C, each series of
Designated Preferred Stock shall, with respect to dividend distributions
and distributions upon the liquidation, winding up or dissolution of the
Corporation, rank on a parity with the other series of Designated
Preferred Stock and any other class or series of capital stock of the
Corporation hereafter created which expressly provides that it ranks on a
parity with each series of Designated Preferred Stock as to dividend
distributions or distributions upon the liquidation, winding up or
dissolution of the Corporation ("Parity Securities"). Subject to
Subsection 9 of this Part C, each series of Designated Preferred Stock
shall, with respect to dividend distributions and distributions upon the
liquidation, winding up or dissolution of the Corporation, rank junior to
each class or series of capital stock of the Corporation hereafter created
which expressly provides that it ranks senior to such series of Designated
Preferred Stock as to dividend distributions or distributions upon the
liquidation, winding up or dissolution of the Corporation ("Senior
Securities").
3. Dividends.
(a) Beginning on the date of issuance of shares of each series of
Designated Preferred Stock, the Holders of the outstanding shares of each
series of Designated Preferred Stock shall be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of such series of
Designated Preferred Stock, at a per annum rate equal to the Applicable
Dividend Rate, payable quarterly. All dividends shall be cumulative,
whether or not the Corporation has earnings, and whether or not such
dividends are declared, on a daily basis from the Designated Preferred
Stock Issue Date and shall be payable quarterly for each Quarterly
Dividend Period, payable ratably per share of each such series
outstanding, in arrears on each Designated Dividend Payment Date and
commencing on the first Designated Dividend Payment Date. Each dividend
shall be payable to the Holders of each series of Designated Preferred
Stock of record as they appear on the stock books of the Corporation on
such record dates, not less than ten (10) nor more than forty-five (45)
days preceding the related Designated Dividend Payment Date, as shall be
fixed by the Board of Directors. Holders of shares of any series of
Designated Preferred Stock shall not be entitled to any dividend in excess
of full cumulative dividends, as herein provided, on the Designated
Preferred Stock; PROVIDED, HOWEVER, that the Corporation's obligation to a
transferee of shares of any series of Designated Preferred Stock arises
only if such transfer, sale or other disposition is made in accordance
with the terms and conditions of this Part C and of Section 8.1 of the
Investor Purchase Agreement. No interest shall be payable in respect of
any dividends on any series of the Designated Preferred Stock which may be
in arrears.
(b) All dividends paid with respect to shares of any series of
Designated Preferred Stock pursuant to paragraph 3(a) of this Part C shall
be paid ratably on such series of Designated Preferred Stock to the
Holders thereof entitled thereto.
<PAGE>
(c) Dividends on account of arrears for any past Dividend Period may
be declared and paid at any time, without reference to any regular
Dividend Payment Date, to Holders of each series of Designated Preferred
Stock of record on such date, not less than ten (10) days nor more than
forty-five (45) days prior to the payment thereof, as may be fixed by the
Board of Directors.
(d) Except as provided in the next sentence, no dividends shall be
declared by the Board of Directors or paid or funds set apart for payment
of dividends by the Corporation on any Parity Securities for any period
unless all cumulative dividends shall have been or contemporaneously are
declared and paid in full, or declared and a sum in cash set apart
sufficient for such payment, on each series of Designated Preferred Stock
for all Dividend Periods terminating on or prior to the date of payment of
such full dividends on such Parity Securities. If dividends are not
declared or paid in full, as afore said, upon, or funds are not set apart
for payment of dividends on, the shares of each series of Designated
Preferred Stock and any Parity Securities, dividends may nonetheless be
declared or paid upon shares of such series of Designated Preferred Stock
and any Parity Securities, but only so long as such dividends are declared
ratably on such series of Designated Preferred Stock so that the amount of
dividends declared per share on the shares of such series of Designated
Preferred Stock and such Parity Securities shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the
shares of such series of Designated Preferred Stock and such Parity
Securities bear to each other.
(e) So long as any shares of any series of Designated Preferred
Stock are outstanding, the Corporation shall not (i) declare, pay or set
apart for payment any dividend on any Junior Securities or make, and shall
not permit any of its subsidiaries to make, any payment on account of, or
set apart for payment money for a sinking or other similar fund for, the
purchase, redemption or other retirement of, any Junior Securities or any
warrants, rights, calls or options exercisable for or convertible into any
Junior Securities or (ii) make any distribution in respect thereof, either
directly or indirectly, and whether in cash, obligations or shares of the
Corporation or other property (other than distributions or dividends in
Junior Securities to the holders of Junior Securities), unless in any such
case referred to in clause (i) or (ii) of this paragraph 3(e) all
cumulative dividends determined in accordance herewith for all Dividend
Periods terminating on or prior to the date of such payment, distribution,
purchase or redemption have been paid in full in cash on the Designated
Preferred Stock.
(f) Dividends payable on shares of any series of Designated
Preferred Stock for any full Quarterly Dividend Period shall be in the
amount of $1.7675 per share with respect to the Series B Preferred Stock
and $1.7925 per share with respect to the Series C Preferred Stock.
Dividends payable on shares of any series of Designated Preferred Stock
for any period less than a full Quarterly Dividend Period, or for the
Initial Dividend Period, shall be computed on the basis of a 360-day year
of twelve 30-day months and the actual number of days elapsed in the
period for which such dividends are payable. If any Designated Dividend
Payment Date occurs on a day that is not a Business Day, any
<PAGE>
accrued dividends otherwise payable on such Designated Dividend Payment
Date shall be paid on the next succeeding Business Day.
(g) Notwithstanding the foregoing provisions of this Subsection 3,
in the event that at any time following the date hereof (whether before or
after redemption of the Series B Preferred Stock or Series C Preferred
Stock) there is for any reason a change in the DRD Rate (including without
limitation any such change enacted after this date, but effective
retroactively) that is effective with respect to any Holder, the
applicable dividend rates on the Designated Preferred Stock shall be
automatically adjusted for each Holder, effective as of the effective date
of such change (or, if later, as of the Closing Date), to the dividend
rate per annum determined by multiplying the applicable dividend rate on
each series of the Designated Preferred Stock applicable immediately prior
to such change by the Adjustment Fraction; PROVIDED, HOWEVER, that any
adjustment to the applicable dividend rates resulting from a change in the
DRD Rate enacted and effective after December 1, 1999 shall not exceed 20
basis points; PROVIDED, FURTHER, HOWEVER, that in no event shall the
applicable dividend rates be reduced below the applicable dividend rates
specified in paragraph 1(b) of this Part C. The Corporation will pay
additional dividends on the Designated Preferred Stock from the effective
date of each such change at the applicable dividend rate as so adjusted
from time to time. If for any reason (e.g., a retroactive effective date)
the effective date of a change in the DRD Rate is prior to one or more
Designated Dividend Payment Dates for which dividend payments were due and
payable on the Designated Preferred Stock, additional dividend payments
shall be payable in the amount by which dividends computed at such
adjusted rate exceeds the dividends actually theretofore paid by the
Corporation on the Designated Preferred Stock for such prior Designated
Dividend Payment Dates. Additional dividends payable by the Corporation
pursuant to the preceding sentence shall be paid on the date fixed by the
Corporation no later than 30 days after the enactment of such change in
the DRD Rate and shall be increased by an amount determined as if interest
were payable on the unpaid amount commencing on the prior Designated
Dividend Payment Dates to which each such additional dividends relate and
ending on the date such additional dividends are paid, at the applicable
dividend rate after giving effect to the Adjustment Fraction.
4. Liquidation Preference.
(a) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the Holders of shares of any
series of Designated Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Corporation available for distribution
to its shareholders, $100 per share of such series of Designated Preferred
Stock, plus an amount in cash equal to accrued and unpaid dividends
thereon to the date of final distribution, before any payment shall be
made or any assets distributed to the holders of any Junior Securities,
including, without limitation, the Common Stock of the Corporation. After
such amount is paid in full, no further distributions or payments shall be
made in respect of such series of Designated Preferred Stock, such series
of Designated Preferred Stock shall no longer be deemed to be outstanding
or be entitled to any other powers, preferences, rights or privileges,
including
<PAGE>
voting rights, and, upon the Corporation's written request, such series of
Designated Preferred Stock shall be surrendered for cancellation to the
Corporation.
(b) If the assets of the Corporation are not sufficient to pay in
full the liquidation payments payable to the Holders of outstanding shares
of each series of Designated Preferred Stock and the holders of all
outstanding shares of Parity Securities, then the holders of all such
shares shall share equally and ratably in such distribution of assets of
the Corporation in accordance with the amounts which would be payable on
such shares if the amount to which the Holders of outstanding shares of
such series of Designated Preferred Stock and the holders of outstanding
shares of all Parity Securities are entitled were paid in full.
(c) Written notice of any liquidation, dissolution or winding up of
the affairs of the Corporation, stating the payment date or dates when and
the place or places where the amounts distributable in such circumstances
shall be payable, shall be given by first class mail, postage prepaid, not
less than thirty (30) days prior to any payment date stated therein, to
the Holders of each series of Designated Preferred Stock at their
respective addresses as the same shall appear on the stock books of the
Corporation.
(d) For the purposes of this Subsection 4 (and subject to Subsection
9 of this Part C), neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Corporation nor the
consolidation or merger of the Corporation with or into one or more
corporations or other entities shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation.
5. Optional Redemption.
(a) The shares of Designated Preferred Stock shall not be redeemable
or otherwise purchased by the Corporation prior to the fifth anniversary
of the Designated Preferred Stock Issue Date. On and after the fifth
anniversary of the Designated Preferred Stock Issue Date, the Corporation
may, at its option, redeem at any time or from time to time, in whole or
in part, in the manner provided in this Subsection 5, any or all of the
shares of the Designated Preferred Stock, at a redemption price equal to
$100 per share plus an amount in cash equal to all accrued and unpaid
dividends thereon to the date of redemption plus the Make-Whole Premium.
(b) In the event of a redemption of only a portion of the then
outstanding shares of the Designated Preferred Stock, the Corporation
shall effect such redemption ratably according to the number of shares of
Designated Preferred Stock held by each Holder of Designated Preferred
Stock.
(c) Not less than twenty (20) days nor more than sixty (60) days
prior to the date fixed for any redemption of the Designated Preferred
Stock, written notice of redemption (the "Redemption Notice") shall be
given by first-class mail, postage prepaid,
<PAGE>
to each Holder of each series of Designated Preferred Stock to be
redeemed, at such Holder's address as the same appears on the stock books
of the Corporation; PROVIDED that neither the failure to give such notice
nor any deficiency therein shall affect the validity of the procedure for
the redemption of any shares of any series of Designated Preferred Stock
to be redeemed except as to the Holder or Holders to whom the Corporation
has failed to give said notice or except as to the Holder or Holders whose
notice was defective. The Redemption Notice shall state: (i) the
redemption price; (ii) whether all or less than all the outstanding shares
of the Designated Preferred Stock are to be redeemed and the total number
of shares of the Designated Preferred Stock being redeemed; (iii) the
number of shares of Designated Preferred Stock held by the Holder being
redeemed; (iv) the date fixed for redemption; (v) that, subject to the
provisions of the Investor Purchase Agreement, the Holder is to surrender
to the Corporation, at the place or places where certificates for shares
of Designated Preferred Stock are to be surrendered for redemption, in the
manner and at the place designated, his certificate or certificates
representing the shares of Designated Preferred Stock to be redeemed; and
(vi) that dividends on the shares of the Designated Preferred Stock to be
redeemed shall cease to accrue on the date fixed for redemption unless the
Corporation defaults in the payment of the redemption price. Such
Redemption Notice shall also include a calculation of the applicable
estimated Make- Whole Premiums due in connection with such redemption
(calculated as if the date of such notice were the date of the
redemption), setting forth the details of such computation. Two Business
Days prior to such redemption, the Corporation shall deliver to each
Holder of each series of Designated Preferred Stock a certificate of a
senior financial officer of the Corporation specifying the calculation of
such Make-Whole Premiums as of the specified redemption date.
(d) Subject to the Investor Purchase Agreement, each Holder of
shares of any series of Designated Preferred Stock called for redemption
shall surrender to the Corporation the certificate or certificates
representing his shares of such series of Designated Preferred Stock to be
redeemed at the place designated in the Redemption Notice, and upon such
surrender the full redemption price for such shares shall be payable in
cash to such Holder, and each surrendered certificate shall be canceled
and retired. In the event that less than all of the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares without cost to the Holder thereof.
(e) In connection with any redemption pursuant to this Subsection 5
or Subsection 6 of this Part C below, unless the Corporation defaults in
the payment in full of the applicable redemption price, dividends on the
shares of each series of Designated Preferred Stock called for redemption
shall cease to accrue on the date fixed for redemption, and the Holders of
such shares shall cease to have any further rights with respect thereto on
the date fixed for redemption, other than the right to receive the
redemption price, without interest.
<PAGE>
6. Mandatory Redemption.
On the Applicable Mandatory Redemption Date (as defined below), all
of the outstanding shares of the applicable series of Designated Preferred
Stock shall be redeemed, at a redemption price equal to $100 per share
plus an amount in cash equal to all accrued and unpaid dividends thereon
to the date of redemption. "Applicable Mandatory Redemption Date" means,
with respect to the Series B Preferred Stock or the Series C Preferred
Stock, the seventh anniversary or the tenth anniversary, respectively, of
the Designated Preferred Stock Issue Date.
7. Voting Rights.
(a) The Holders of shares of each series of Designated Preferred
Stock shall not be entitled or permitted to vote on any matter required or
permitted to be voted upon by the shareholders of the Corporation, except
as otherwise required by law or as set forth below in this Subsection 7 or
in Subsection 9 below.
(b) In the event that the Corporation shall have failed to pay
dividends accumulated on any series of Designated Preferred Stock for any
four (4) consecutive Dividend Periods and such dividends remain unpaid or
shall fail to redeem any series of Designated Preferred Stock on the
Applicable Mandatory Redemption Date, then the number of directors of the
Corporation shall be increased by two and the Holders of outstanding
shares of the Designated Preferred Stock, voting as a class, shall be
entitled to elect such two additional directors. Such voting right shall
continue until such time as all accumulated dividends on each series of
Designated Preferred Stock have been paid or such series of Designated
Preferred Stock has been redeemed, as the case may be. Within ten (10)
days after such voting power shall have become so vested in the Designated
Preferred Stock, the Board of Directors of the Corporation shall call a
special meeting of the Holders of Designated Preferred Stock for the
purpose of electing the two directors, at the place, upon the notice and
at the time provided by the Corporation's By-Laws for a special meeting of
shareholders. In lieu of holding such meeting, the Holders of record of a
majority of the total number of outstanding shares of Designated Preferred
Stock may, by action taken by written consent as permitted by law and the
Certificate of Incorporation and By-laws of the Corporation, elect such
additional directors. In the event of a vacancy in the case of a director
elected by the Holders of Designated Preferred Stock (unless at the time
such vacancy occurs all accumulated dividends on each series of Designated
Preferred Stock shall have been paid in full), the remaining director
elected by the Holders of Designated Preferred Stock (or appointed to fill
a vacancy by a director so elected) shall appoint a successor to fill such
vacancy or, if no director elected by the Holders of Designated Preferred
Stock (or appointed to fill a vacancy by a director so elected) remains,
the vacancies shall be filled by election at a special meeting of the
Holders of Designated Preferred Stock or by written consent of the Holders
of record of a majority of the total number of outstanding shares of
Designated Preferred Stock, as permitted by law and the Certificate of
Incorporation and By-laws of the Corporation. Either of the two additional
directors may be removed at any time with cause by, and shall not be
removed
<PAGE>
otherwise than by, the Holders of Designated Preferred Stock. The
directors elected by the Holders of Designated Preferred Stock shall serve
until the next annual meeting of the shareholders of the Corporation or
until their successors shall be elected and shall qualify; PROVIDED,
HOWEVER, that whenever during the term of office of the directors so
elected, all accumulated dividends on each series of Designated Preferred
Stock shall have been paid or such series of Designated Preferred Stock
has been redeemed, as the case may be, the term of office of such
directors shall forthwith terminate and the number of directors of the
Corporation shall be decreased by two. The foregoing right to elect
directors upon the failure of the Corporation to redeem any series of
Designated Preferred Stock shall be in addition to all other rights and
remedies available to the Holders of Designated Preferred Stock upon such
failure.
(c) In any case in which the Holders of shares of Designated
Preferred Stock shall be entitled to vote pursuant to this Subsection 7 or
pursuant to applicable law, each Holder of shares of Designated Preferred
Stock shall be entitled to one vote for each share of Designated Preferred
Stock held.
8. Conversion or Exchange.
The Holders of shares of each series of Designated Preferred Stock
shall not have any rights or obligations to convert such shares into or exchange
such shares for shares of any other class or classes or of any other series of
any class or classes of capital stock of the Corporation or any other securities
of the Corporation.
9. Restrictions.
So long as any shares of any series of the Designated Preferred
Stock are outstanding, the Corporation shall not without authorization (given in
person or by proxy, in writing or at a meeting duly called for that purpose in
accordance with Section 605 of the Business Corporation Law of the State of New
York or as otherwise permitted by law) by at least two-thirds of the votes
entitled to be cast by the Holders of the total number of shares of each series
of Designated Preferred Stock then outstanding:
(a) amend, alter, change or repeal any of the express terms of any
series of the Designated Preferred Stock then outstanding in any manner
that would adversely affect the Holders of such shares;
(b) create or authorize any class of stock having a preference
superior to the preferences of any series of Designated Preferred Stock as
to assets or dividends, or create or authorize any security convertible
into shares of stock of any such kind; or
(c) sell, lease, exchange, assign, transfer or convey all or
substantially all of the property or business of the Corporation or merger
or consolidate into or with any other Person; PROVIDED, HOWEVER, that
nothing herein contained shall require such authorization in respect of
the merger, consolidation, sale, lease, exchange, assignment, transfer or
<PAGE>
conveyance of all or substantially all of the assets of the Corporation if
(i) the Person which survives such merger, consolidation, sale, lease,
exchange, assignment, transfer or conveyance of assets is, immediately
after such merger, consolidation or sale of assets, a solvent corporation
organized in the United States of America and have only such authorized
classes of stock and such outstanding shares of stock as would have been
permitted immediately prior to such merger, consolidation, sale, lease,
exchange, assignment, transfer or conveyance under the provisions hereof
without any further consent of the Holders of the Designated Preferred
Stock; and (ii) each Holder of the Designated Preferred Stock immediately
preceding such merger or consolidation shall receive the same number of
shares, with the same rights and preferences of the resulting company.
10. Definitions.
The following terms shall have the meanings set forth below for
purposes of this Part C:
"Adjustment Fraction" means the following percentage:
1 - ((1 - DRD) X 0.4)
1 - ((1 - DRDn) x 0.4)
where: DRD = the DRD Rate immediately before the change in the DRD
Rate DRDn = the DRD Rate immediately after the change in the
DRD Rate.
For purposes of the preceding sentence all DRD Rates shall be expressed in
decimal form. The Adjustment Fraction will be rounded to three decimal
places with rounding up if the fourth decimal place is 0.0005 or higher,
and rounding down otherwise.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day other than Saturday, Sunday or a day on
which banking institutions in the City of New York are authorized by law,
regulation or executive order to remain closed.
"Certificate of Incorporation" means the Corporation's Certificate
of Incorporation, as amended from time to time.
"Corporation" means this corporation.
"Designated Dividend Payment Date" means each August 1 , November 1,
February 1, and May 1 following the Designated Preferred Stock Issue Date.
"Designated Preferred Stock Issue Date" means the date on which the
Designated Preferred Stock is originally issued by the Corporation.
<PAGE>
"Discounted Value" means, with respect to any shares of any series
of Designated Preferred Stock, the amount obtained by discounting all
Remaining Scheduled Payments with respect to such shares of such series of
Designated Preferred Stock from their respective scheduled due dates to
the Optional Redemption Date, in accordance with accepted financial
practice and at a discount factor (applied on the same periodic basis as
that on which dividends with respect to such series of Designated
Preferred Stock are payable) equal to the Reinvestment Yield with respect
to the Applicable Stated Value of such shares of Designated Preferred
Stock.
"Dividend Period" means the Initial Dividend Period and, thereafter,
each Quarterly Dividend Period.
"Domestic Corporation" means a corporation organized under the laws
of the United States or any State.
"DRD Rate" means the percentage of dividends received by a Domestic
Corporation from another Domestic Corporation that the recipient Domestic
Corporation is entitled to deduct for United States federal income tax
purposes pursuant to Section 243 of the Internal Revenue Code of 1986, as
amended, or any successor provision, without regard to the degree of
ownership in the payor Domestic Corporation and without regard to any
generally applicable limitations on such deduction.
"Holder" means a Person in whose name a share of Designated
Preferred Stock is registered.
"Initial Dividend Period" means the dividend period commencing on
the Designated Preferred Stock Issue Date and ending on the day before the
first Designated Dividend Payment Date to occur thereafter.
"Investor Purchase Agreement" means the Investor Securities Purchase
Agreement dated as of May 15, 1998 among Long Island Lighting Corporation
and certain Holders of the Designated Preferred Stock.
"Make-Whole Premium" means, with respect to any shares of any series
of Designated Preferred Stock, an amount equal to the excess, if any, of
(a) the Discounted Value of the Remaining Scheduled Payments with respect
to such shares of Designated Preferred Stock over (b) the Applicable
Stated Value of such shares of such series of Designated Preferred Stock;
PROVIDED that the Make-Whole Premium may in no event be less than zero.
"Optional Redemption Date" means, with respect to the any share of
any series of Designated Preferred Stock, the date on which the
Corporation redeems such share in accordance with paragraph 5(a) of this
Part C.
<PAGE>
"Person" means any individual, corporation, partnership, joint
venture, association, limited liability company, joint-stock company,
trust, unincorporated organization or government or agency or political
subdivision thereof (including any subdivision or ongoing business of any
such entity or substantially all of the assets of any such entity,
subdivision or business).
"Quarterly Dividend Period" shall mean each of the quarterly periods
ending on the last day of July, October, January and April of each year.
"Redemption Date" means, with respect to any shares of any series of
Designated Preferred Stock, the date on which such shares of such series
of Designated Preferred Stock are redeemed by the Corporation.
"Reinvestment Yield" means, with respect to the Applicable Stated
Value of any shares of any series of Designated Preferred Stock, 0.5% over
the yield to maturity implied by (a) the yields reported, as of 10:00 A.M.
(New York City time) on the second Business Day preceding the Optional
Redemption Date with respect to such Applicable Stated Value, on the
display designated as "Page 678" on the Dow Jones Markets Service (or such
other display as may replace Page 678 on Dow Jones Markets Service) for ac
tively traded U.S. Treasury securities having a maturity equal to the
Remaining Life of such Applicable Stated Value as of such Optional
Redemption Date, or (b) if such yields are not reported as of such time or
the yields reported as of such time are not ascertainable, the Treasury
Constant Maturity Series Yields reported, for the latest day for which
such yields have been so reported as of the second Business Day preceding
the Optional Redemption Date with respect to such Applicable Stated Value,
in Federal Reserve Statistical Release H.15 (519) (or any comparable
successor publication) for actively traded U.S. Treasury securities having
a constant maturity equal to the Remaining Life of such Applicable Stated
Value as of such Optional Redemption Date. Such implied yield will be
determined, if necessary, by (i) converting U.S. Treasury bill quotations
to bond-equiva lent yields in accordance with accepted financial practice
and (ii) interpolating linearly between (A) the actively traded U.S.
Treasury security with the duration closest to and greater than the
Remaining Life and (B) the actively traded U.S. Treasury security with the
duration closest to and less than the Remaining Life.
"Remaining Life" means, with respect to the Applicable Stated Value
of any shares of Designated Preferred Stock, the number of years
(calculated to the nearest one-twelfth year) that will elapse between the
Optional Redemption Date with respect to such Stated Value and the
Applicable Mandatory Redemption Date.
"Remaining Scheduled Payments" means, with respect to any shares of
any series of Designated Preferred Stock, the payment of the Applicable
Stated Value of such shares of such series of Designated Preferred Stock
and dividends thereon that would be due after the Optional Redemption Date
with respect to such Applicable Stated Value if no payment of such
Applicable Stated Value were made prior to the Applicable Mandatory
Redemption Date; PROVIDED that if such Optional Redemption Date is not a
date on which dividends are
<PAGE>
due to be made under the terms hereof, then the amount of the next
succeeding dividend payment will be reduced by the amount of accrued
dividends to such Optional Redemption Date and required to be paid on such
Optional Redemption Date.
"Stated Value" means with respect to each share of any series of
Designated Preferred Stock, $100."
FIFTH: The foregoing amendments to the Certificate of Incorporation were
duly adopted by a Unanimous Written Consent of the Board of Directors of the
Corporation and by a Unanimous Written Consent of the shareholders of the
Corporation, in accordance with Section 803 of the New York Business Corporation
Law.
<PAGE>
IN WITNESS WHEREOF, the undersigned officers of the Corporation have
signed this Certificate of Amendment and each affirms that the statements made
herein are true under the penalties of perjury.
Dated: May 26, 1998
MARKETSPAN CORPORATION
By: /S/ WILLIAM J. CATACOSINOS
------------------------------
Name: Dr. William J. Catacosinos
Title: Chief Executive Officer
By: /S/ KATHLEEN A. MARION
--------------------------
Name: Kathleen Marion
Title: Secretary
July 31, 1998
William J. Catacosinos
c/o MarketSpan Corporation
175 East Old Country Road
Hicksville, NY 11801
Dear Dr. Catacosinos:
The letter agreement (the "Agreement") confirms our understanding
and agreement with respect to your retirement from MarketSpan Corporation (the
"Company") and its affiliates as follows:
RETIREMENT. Effective as of July 31, 1998 (the "Retirement
Date"), you will retire from the Company and its affiliates. You hereby resign,
effective as of the Retirement Date, from the position of Chief Executive
Officer of the Company and all other positions and directorships that you hold
with the Company and any of its affiliates; your position as Chairman of the
Board of Directors of the Company; as an officer and employee of the Company and
its affiliates; and as a member of the Board of Directors (and any subcommittees
thereof) and any similar governing body of the Company and its affiliates on
which you currently serve as a member.
FULL SATISFACTION.
You hereby acknowledge and agree that except for the items listed
below you will not be entitled to any compensation or benefits from the Company,
its affiliates, or the Long Island Lighting Company ("LILCO") (or any of their
respective predecessors or successors), including, without limitation, any other
severance or termination benefits. The Company for itself and its successors and
assigns hereby acknowledges and agrees that you are entitled to and will receive
the following:
payment of the accrued, but unpaid portion, of your annual base salary
through the Retirement Date;
continued coverage under the Company's welfare benefit
programs for employees and executives until May 29, 2003 (the fifth anniversary
of the date of your termination of employment with LILCO) pursuant to Section
2(B) of the Long Island Lighting Company Executive Employment Agreement dated as
of August 4, 1995 between you and LILCO (the "Change of Control Agreement"), the
provisions of which Section 2(B) are hereby incorporated by reference into this
Agreement;
the Company's payment, on your behalf, of the Gross-Up Payment
and other payments described in, and determined in the manner set forth in,
Paragraph 4 below;
<PAGE>
2
your existing rights to benefits, under the Company's tax
qualified retirement plans, Retirement Income Restoration Plan, Supplemental
Death and Retirement Benefits Plan (as to which the Company agrees to maintain
the insurance contract currently in place or, in the event the Company adopts a
group residual insurance program ("GRIP") for its executives, the Company shall
simultaneously provide you with the option of obtaining your existing insurance
benefit through GRIP), group health plan and group life insurance plan; and
the Company's performance of the obligations set forth in Paragraph 3
below.
INDEMNIFICATION.
Section 7.5 of the Amended and Restated Agreement and Plan of
Exchange and Merger dated as of June 26, 1997 ("Section 7.5" and the "Merger
Agreement") and Article XIV of the Company's Certificate of Incorporation
("Article XIV") are hereby incorporated into this Agreement by reference and
shall continue in full force and effect for your benefit.
Without intending any limitation on the scope of Section 7.5
and Article XIV, the Company agrees that (i) Section 7.5 of the Merger Agreement
shall extend to and include actions or omissions occurring after the Effective
Time (as defined in the Merger Agreement), and (ii) Section 7.5 and Article XIV
shall extend to and cover all actions, investigations or proceedings presently
or hereafter brought, or threatened to be brought against you with respect to or
relating in whole or in part to (x) any act or omission (or disclosure with
respect thereto) in connection with the combination reflected by the Merger
Agreement and/or the transactions involving LILCO and LIPA, which combination
and transactions were consummated on May 28, 1998, and/or (y) any compensation
or benefits (or disclosures with respect thereto) that were or are received by
you or any other officer, director or employee from or on behalf of the Company
or its affiliates, LILCO or its affiliates, or any of its or their respective
successors or assigns, including without limitation, any severance, retirement,
incentive, change of control, bonus or contract benefits or payments.
Reference is made to the Executive Employment Agreements Trust
dated as of March 20, 1987 between LILCO and Clarence Goldberg as Trustee (the
"Trust"), which covers all former LILCO directors, officers or employees who had
entered into Executive Employment Agreements. The Company hereby consents and
agrees that any funds up to the amounts not covered by insurance due to
deductible and/or self insured retention and otherwise available in the Trust
may be used to discharge the Company's indemnification obligations to you or any
other of such directors, officers or employees to the extent not otherwise
covered by insurance. Nothing herein shall be construed as requiring the Company
to contribute any additional funds to the Trust or to limit the Company's
obligations hereunder should such funds in the Trust be insufficient.
Reference is made to Section 7.5(b) of the Merger Agreement,
which requires the Company, for a period of six years after the Effective Time,
to either maintain in effect or obtain certain insurance policies with respect
to the obligations of the Company set forth in Section 7.5. The Company agrees
that the coverage of those policies shall include the obligations of the Company
set forth in this Paragraph 3 as well as in Section 7.5, for a period of six
years from the Retirement Date.
<PAGE>
3
The Company hereby represents and warrants that: (i) the
provisions of this Paragraph 3 have been duly authorized by the Company; and
(ii) pursuant to this Paragraph 3 the Board has duly authorized advancement of
reasonable expenses incurred or to be incurred in your defense of any action,
investigation or proceeding presently or hereafter brought or threatened to be
brought against you, subject only to receipt of your undertaking to repay such
amounts as and to the extent required by law, which undertaking is being
furnished simultaneously herewith.
The Company agrees that the sole applicable standard of
conduct that has to be met by you, for purposes of indemnification under Section
7.5, Article XIV and this Paragraph 3, is the standard established pursuant to
Section 721 of the New York Business Corporation Law as presently in effect.
The Company agrees to use its best efforts to provide you with
notice of actions, investigations and proceedings involving you.
GROSS-UP PAYMENT.
The provisions of Section 2(G) of the Change of Control
Agreement ("Section 2(G)") are hereby incorporated into this Agreement by
reference and shall continue in full force and effect; PROVIDED that,
notwithstanding the provisions of Section 2(G), the Company's obligation with
respect to the Gross-Up Payment (as defined in Section 2(G)) shall be satisfied
by the Company's payment of the Gross-Up Payment directly to the Internal
Revenue Service on your behalf. You agree that notwithstanding the provisions of
Section 2(G), the Company shall make no initial Gross-Up Payment.
In the event that the Excise Tax (as defined in Section 2(G))
is subsequently finally determined to be greater than or less than the amount
referred to in Paragraph 4(a) above, the provisions of the second paragraph of
Section 2(G)(i) and of Section 2G(ii) of the Change of Control Agreement shall
apply to any recalculation and payment of the Gross-Up Payment.
You agree to promptly notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of any additional amount pursuant to Paragraph 4(b)
above. You shall not pay such claim prior to the expiration of the 30-day period
following the date on which you give such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). Upon receipt by the Company of such notice, the Company shall pay such
claim prior to the expiration of such period unless the Company notifies you in
writing prior to the expiration of such period that it desires to contest such
claim.
If the Company so notifies you, you will:
give the Company any information reasonably requested by the Company
relating to such claim;
take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting
<PAGE>
4
legal representation but only with respect to such claim, by an attorney
selected by the Company and reasonably acceptable to you;
cooperate with the Company in good faith in order
effectively to contest such claim and permit the Company to take such
steps as the Company reasonably deems necessary to effectively contest
such claim; and
permit the Company to participate in any proceedings relating to such
claim;
PROVIDED, however, that the Company shall bear and pay directly all reasonable
costs and expenses (including without limitation, legal fees, accounting fees,
additional interest and penalties) incurred in connection with any such contest,
as well as any reasonable costs and expenses incurred by you in the course of
your cooperation, and shall indemnify and hold you harmless, on an after-tax
basis, for any Excise Tax or income tax (including interest and penalties with
respect thereto) finally imposed.
CONFIDENTIAL INFORMATION. You agree that you shall hold in
confidence and not directly or indirectly disclose or use or copy or make lists
of any confidential information or proprietary data of the Company or its
affiliates or LILCO (including their respective predecessors), except to the
extent disclosure is authorized in writing pursuant to authorization by the
Board of Directors of the Company or required by any court or administrative
agency, or called for by a subpoena or document request issued in litigation.
The Company agrees that it shall hold in confidence your personnel and
compensation records, except to the extent disclosure is authorized by you in
writing or required by any court or administrative agency, or called for by a
subpoena or document request issued in litigation. Confidential information or
proprietary data shall not include any information known generally to the
public.
BOOKS AND RECORDS. The Company agrees to provide you with a
copy of (a) your employment records maintained by LILCO, and (b) your employment
records maintained by the Company. The Company also agrees to make available to
you and/or your counsel all books and records of LILCO and/or MarketSpan which
you reasonably require for defense of any actions or proceedings, or for
response to any investigations.
PUBLIC ANNOUNCEMENTS. The Company agrees that a press release
will be issued concerning your retirement in a form reasonably acceptable to
you. The Company and you represent and agree that neither party (including their
respective agents) will make or solicit any comments, statements, or the like to
the media or to others that are or may be considered to be derogatory,
detrimental or disparaging to the good name or business reputation of either
party or their respective agents.
RELEASE. Each party acknowledges that the Satisfaction and
Release between you and LILCO dated May 28, 1998, is binding upon the Company
and its successors and assigns, and you and your heirs, administrators,
successors and assigns. The Company, for itself and its successors and assigns,
subsidiaries and affiliates (collectively, the "Releasors") hereby releases and
forever discharges you and your heirs, administrators, successors and assigns
from any and all obligations,
<PAGE>
5
claims, demands, suits and actions of every kind that the Releasors or any of
one them now has or may have against you by reason of any matter, cause or thing
whatsoever from the beginning of the world to the day of the date of this
Agreement, excepting the obligations of this Agreement and those provisions and
agreements incorporated herein by reference. You for yourself and your heirs,
administrators, successors and assigns hereby release and forever discharge the
Company, and its subsidiaries, affiliates, successors and assigns (collectively,
the "Releasees") from any and all obligations, claims, demands, suits and
actions of every kind that you now have or may have against the Releasees or any
of them by reason of any matter, cause or thing whatsoever from the beginning of
the world to the day of the date of this Agreement, excepting the obligations of
this Agreement and those provisions and agreements incorporated herein by
reference.
SETTLEMENTS. The Company shall make best efforts to ensure
that any settlements made by the Company of any action proceeding or
investigation in any way related to you, shall include a release of all claims
against you.
MISCELLANEOUS. For a period of twelve months following the
Retirement Date, the Company agrees to provide you with (a) an office at the
Company's executive office at 175 East Old Country Road, Hicksville, New York,
which office shall be comparable to that currently in use by a senior executive
of the Company, (b) the services of a secretary, and (c) unrestricted use of the
automobile and security driver which you are currently using (with any
replacement which may be required). In addition, the Company will maintain
security at your home at least equal to that presently provided for a period of
no more than twelve months from the Retirement Date. The Company agrees to pay
upon presentation of invoices for the reasonable attorneys' fees and expenses
incurred by you in the negotiation and preparation of this Agreement.
EQUITABLE RELIEF. Each party acknowledges and agrees that the
remedies available at law for a breach or threatened breach of any of the
provisions of this Agreement calling for performance other than the payment of
money (including without limitation Paragraphs 5, 6 and 10) would be inadequate
and, in recognition of this fact, both parties agree that, in the event of a
breach or threatened breach, in addition to any remedies at law, each party
shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order or permanent injunction or any other
equitable remedy that may be available.
NO ADMISSION OF LIABILITY. Nothing herein shall constitute or be deemed to
constitute an admission of liability by you or by the Company.
SEVERABILITY. The provisions of this Agreement shall be
regarded as divisible, and if any of said provision or any part hereof are
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remainder of such provisions or parts hereof
and the applicability thereof shall not be affected thereby.
AMENDMENT. This Agreement may not be amended or modified except by written
instrument executed by you and the Company.
<PAGE>
6
GOVERNING LAW. This Agreement and the rights and obligations, hereunder
shall be governed and construed in accordance with the laws of the State of New
York.
NOTICES. All notices hereunder shall be in writing and deemed
properly given if delivered and receipted or if mailed by registered mail,
return receipt requested or by recognized overnight service. Notices to the
Company shall be directed to the Corporate Secretary at the Company's
headquarters offices in Hicksville, New York. Notices to you shall be directed
to your home address at 222 Cleft Road, Mill Neck, New York 11765. Either party
may designate, by written notice, another address or addresses for such notices.
ENTIRE AGREEMENT/COUNTERPARTS. This Agreement is binding upon
the Company and its successors and assigns, and upon you and your heirs,
administrators, successors and assigns. This Agreement, together with the
specific contract provisions and plans expressly incorporated by reference
herein, constitutes the entire agreement between the parties relating to the
subject matter hereof. All other agreements between you and the Company or its
affiliates or LILCO (or any of their respective predecessors) relating to your
employment or the termination of your employment are hereby void and of no
further force and effect; PROVIDED that the Satisfaction and Release dated May
28, 1998 between you and LILCO shall remain in effect and shall be binding upon
the Company. This Agreement may be executed in counterparts, each of which shall
constitute an original and which together shall constitute a single instrument.
AUTHORITY. The Company hereby represents and warrants that the
Execution of this Agreement has been duly authorized by the Board of Directors
of the Company, and a resolution to that effect shall be delivered to you
forthwith on the Retirement Date.
<PAGE>
7
If this letter correctly sets forth your understanding of our
agreement with respect to the foregoing matters, please so indicate by signing
below on the line provided for your signature.
Very truly yours,
MARKETSPAN CORPORATION
By /s/ Robert B. Catell
- -----------------------
Name: Robert B. Catell
Title: Chairman and Chief Executive Officer
Reviewed, approved and agreed as of the date hereof:
/s/ William J. Catacosinos
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This Schedule contains summary financial information extracted from the
Statement of Income, Balance Sheet and Statement of Cash Flows, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,753,722
<OTHER-PROPERTY-AND-INVEST> 111,884
<TOTAL-CURRENT-ASSETS> 2,870,201
<TOTAL-DEFERRED-CHARGES> 357,109
<OTHER-ASSETS> 468,358
<TOTAL-ASSETS> 7,561,274
<COMMON> 1,759
<CAPITAL-SURPLUS-PAID-IN> 2,892,124
<RETAINED-EARNINGS> 889,117
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,783,000
363,000
85,000
<LONG-TERM-DEBT-NET> 1,938,033
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,392,241
<TOT-CAPITALIZATION-AND-LIAB> 7,561,274
<GROSS-OPERATING-REVENUE> 582,615
<INCOME-TAX-EXPENSE> (60,461)
<OTHER-OPERATING-EXPENSES> 445,211
<TOTAL-OPERATING-EXPENSES> 384,750
<OPERATING-INCOME-LOSS> 197,865
<OTHER-INCOME-NET> 83,790
<INCOME-BEFORE-INTEREST-EXPEN> 114,075
<TOTAL-INTEREST-EXPENSE> 76,825
<NET-INCOME> 37,250
11,216
<EARNINGS-AVAILABLE-FOR-COMM> 26,034
<COMMON-STOCK-DIVIDENDS> 90,353
<TOTAL-INTEREST-ON-BONDS> 66,792
<CASH-FLOW-OPERATIONS> (349,619)
<EPS-PRIMARY> $0.19
<EPS-DILUTED> $0.19
</TABLE>
